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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
______________
FORM 10-KSB
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2003
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
Commission File Number 0-10039
______________
eB2B COMMERCE, INC.
(Name of Small Business Issuer in its Charter)
______________
New Jersey 22-2267658
(State or Other Juris- (I.R.S. Employer
diction of Incorporation) Identification No.)
665 Broadway
New York, NY 10012
(Address of Principal Executive Offices)
Issuer's Telephone Number: (212) 477-1700
______________
Securities registered under Section 12(b) of the Exchange Act:
None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, par value $.0001 per share
(Title of Class)
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 [ ] No [X]
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ ]
Issuer's revenues for fiscal year ended December 31, 2003: $4,013,000
As of September 30, 2004, the aggregate market value of our company's
common stock (based upon the closing sales price on such date) of the Registrant
held by non-affiliates was $ 26,826
Number of shares of our company's common stock outstanding at September
30, 2004: 8,467,461
Transitional Small Business Disclosure Format: Yes [ ] No [X]
PART I
Item 1. Description of Business
General
We are a provider of business-to-business transaction management services
designed to simplify trading between buyers and suppliers.
We use proprietary software to automate, integrate, and enable an electronic
trading process to take place between business partners. Our technology platform
allows these partners to 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 not limited to,
purchase orders, purchase order acknowledgments, advanced
shipping notices and invoices. in any data format,
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 assist businesses
that wish to build, operate or outsource the transaction management of their
business-to-business trading partner relationships and infrastructure.
Recent Developments
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 interest of its
shareholders to discontinue its operations rather than continue to fund its
working capital needs and operating losses. For the years ended December 31,
2003 and 2002, the Company's discontinued operations contributed net sales of
$-0- and $1,105,000 respectively.
On April 14, 2004 the Company filed an 8-K disclosing that the Company's Senior
Secured Convertible Noteholders had declared the Company in default on its
interest payments of approximately $432,000 and as a result was demanding
acceleration of $3,200,000, the face value of the Senior Secured notes, plus
accrued interest. As the Company had insufficient cash to satisfy the claims of
its Noteholders, good faith negotiations ensued to resolve the issue to the
benefit of the Company's shareholders.
2
On October 27, 2004 the Company filed for reorganization under Chapter 11 of the
U.S. Bankruptcy Code in the Southern District of New York.
In the Plan filed with the Court , the Senior Convertible Notes, (i) an
aggregate principal amount of $2,000,000 due in January 2007, and (ii) an
aggregate principal amount of $1,200,000 due beginning in July 2007 will be
exchanged for most of the assets of the Company. The remaining Bac-Tech note
will also be extinguished in exchange for a consideration by the Senior
Convertible noteholders.
The report of our independent auditors on our financial statements as of and for
the year ended December 31, 2003 contains an unqualified report with an
explanatory paragraph which states that our recurring losses from operations and
negative cash flows from operations plus the fact that we have initiated a
Chapter 11 proceeding, raise substantial doubt about our ability to continue as
a going concern.
No assurance can be given that the Plan will be confirmed or, that if it is
confirmed, the shareholders of the Company will receive anything of value in
exchange for their shares.
Under our Plan of reorganization, a new Board of Directors will be constituted
by a Plan Sponsor, who will purchase the remaining assets of eB2B Commerce, Inc.
not exchanged in satisfaction of secured and unsecured claims. Shareholders of
eB2B Commerce, Inc. are expected to receive newly issued shares in a
reconstituted eB2B Commerce, Inc. We anticipate the Company pursuing a different
line of business in the future. Investors may secure a copy of the Disclosure
Statement in the bankruptcy case at the Bankruptcy Court's Internet site at
www.nysb.uscourts.gov, Chapter 11 Case Number 04-16926(CB).
On December 8, 2004, the Securities and Exchange Commission filed an objection
to the Disclosure Statement and Plan with the Court, as did the United States
Trustee on November 19, 2004. The bases for the objections were that the company
had not disclosed fully the future business and plan of eB2B Commerce, and that
under our plan the Company was in effect liquidating its assets and therefore
was not able to seek a discharge in bankruptcy. The Company disagrees with this
interpretation of the plan, in that under its plan, the Company sought to give
all financially affected parties the maximum recovery possible while fully
discharging its debt to the Senior Secured Noteholders. Without the Plan Sponsor
and the sale of the corporate shell, it is likely that creditors and
shareholders will receive little or no recovery under the plan. A hearing on the
Disclosure Statement will be held on December 15, 2004 where we anticipate that
this objection will be addressed by the court.
History and Organization
DynamicWeb Enterprises, Inc. was incorporated in the state of New Jersey on July
26, 1979.
eB2B Commerce, Inc. was incorporated in the state of Delaware on November 6,
1998.
On April 18, 2000, eB2B Commerce, Inc., a Delaware corporation, merged with and
into DynamicWeb Enterprises, Inc., a New Jersey corporation and a SEC
registrant. The surviving company changed its name from DynamicWeb Enterprises,
Inc. to eB2B Commerce, Inc. Pursuant to the agreement and plan of merger between
DynamicWeb and former eB2B, the shareholders of DynamicWeb retained their shares
in our company, while the shareholders of former eB2B received shares, or
securities convertible into shares, of common stock of our company representing
approximately 89% of our equity, on a fully diluted basis. At the time of the
merger, (i) DynamicWeb was engaged in the provision of services and software
that facilitated business-to-business e-commerce between buyers and sellers of
direct goods and (ii) former eB2B was a development stage company formed to
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provide Internet-based business-to-business e-commerce services for
manufacturers and retailers to conduct cost-effective electronic commerce
transactions. Prior to the merger, former eB2B primarily devoted its operations
to recruiting and training of employees, development of its business strategy,
design of a business system to implement its strategy, and development of
business relationships with retailers and suppliers.
The April 2000 merger was accounted for as a reverse acquisition, a "purchase
business combination" in which former eB2B was the accounting acquirer and
DynamicWeb was the legal acquirer. The management of former eB2B remained as our
management. As a result of the April 2000 merger, (i) the financial statements
of former eB2B are our historical financial statements; (ii) the results of our
operations include the results of DynamicWeb after the date of the merger; (iii)
acquired assets and assumed liabilities were recorded at their estimated fair
market value at the date of the merger; (iv) all references to our financial
statements apply to the historical financial statements of former eB2B prior to
the April 2000 merger and to our consolidated financial statements subsequent to
the April 2000 merger; (v) any reference to former eB2B applies solely to eB2B
Commerce, Inc., a Delaware corporation, and its financial statements prior to
the merger, and (vi) our year-end is December 31, that of the accounting
acquirer, former eB2B.
On February 22, 2000, prior to the April 2000 acquisition of DynamicWeb
Enterprises, former eB2B completed its acquisition of Netlan Enterprises, Inc.
and its subsidiaries. At the time of the acquisition, Netlan was engaged in
website development for clients and software and other technical training for
clients. Pursuant to the agreement and plan of merger, Netlan's stockholders
exchanged 100% of their common stock for 8,334 shares of our common stock.
Additionally, 13,334 shares of our common stock were issued, placed into an
escrow account, and released to certain former shareholders of Netlan upon
successful completion of escrow requirements. The purchase price of the Netlan
acquisition was approximately $5,230,000. We recorded approximately $4,896,000
of goodwill and approximately $334,000 of other intangibles in connection with
this transaction.
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, we 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 in 2004 and 2005. In
connection with the acquisition, we employed the two Bac-Tech stockholders for a
period of three years. Robert Bacchi now serves as our chief operating officer
and Michael Dodier is no longer employed by eB2B. Bac-Tech offered comprehensive
EDI and web-based services to a portfolio of nationally known suppliers.
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Industry Background
Businesses are increasingly seeking to improve their operating efficiency with
other businesses through electronically automated and integrated solutions.
Electronic Data Interchange, or EDI, is a specific form of business-to-business
electronic commerce, consisting of a standard protocol for electronic
transmission of data between a company and a third party. EDI has existed for
over twenty years. It is a very expensive technology to both implement and
maintain and is, therefore, typically utilized by the largest companies. In an
EDI transaction, the computers of the buyer and the supplier communicate and
exchange the relevant information using an agreed-upon or standard format. Until
recently, companies that wanted to conduct business electronically were required
to have a special type of computer network called a value-added computer network
or "VAN". For a significant fee, a VAN, often managed by a separate third party,
was responsible for the guaranteed exchange of business documents between
trading partners.
The emergence of the Internet as an alternative means of managing the
transactional flow of business-to-business document exchange has revolutionized
the way businesses operate and interact with their trading partners. The
Internet, coupled with a new breed of software solutions called Web Services,
has created technology that supports highly efficient channels of communication.
Expensive solutions and VAN connectivity charges are no longer necessities for
conducting EDI transactions. This development gives small and medium-sized
buyers and suppliers access to the same efficiencies associated with traditional
EDI systems. In addition, the combination of the Internet and Web Services
enable buyers and suppliers of all sizes to electronically exchange business
documents and interact with a greater number of potential trading partners. New
opportunities are created for expanding business reach and growing revenue.
Companies of all sizes in virtually all industries can realize potentially
significant return on investment by using these new, affordable technologies to
gain efficiencies throughout their supply chains.
Faced with the challenges of a recessionary economic environment, companies are
now trying to justify existing, sometimes large, investments made in older
supply chain or EDI-based systems and evaluating conversion alternatives.
Decision-makers are interested in creating measurable operating efficiencies
while achieving quick return on investment (ROI), which are the primary benefits
of this new generation of solutions.
Our Business
We use our software and professional services expertise to provide simple,
affordable, high ROI solutions for trading between business partners.
The Company believes that the vast majority of both domestic and international
trading transactions and the related transfer of documents are still conducted
via phone, fax and mail. Included in our potential market are over 100,000
retailers and over 2 million suppliers, who transact over $1 trillion in annual
purchases.
We are primarily an Applications Services Provider for our customers, enabling
them to effectively manage their trading relationships with minimal additional
investment in owned platforms or software. Our products and services include:
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o Trading Hubs (or Private Exchanges), where we provide services
to automate a customer's existing business relationships.
Through our technology, we provide a dedicated platform for
large buyers or large suppliers to transfer business documents
electronically via traditional EDI and the Internet to their
small and medium-sized trading partners. We provide the
Web-based application, accessible through any Web-browser, and
the enablement services to contact, market, register, and
activate trading partners.
o Trade Gateway, which is our generic exchange for small and
medium-size, suppliers, and a growing number of large
retailers. Through our technology, we provide an environment
where business documents can be exchanged with many partners
from a single, secure environment, without the need for a user
to access multiple Websites or trading environments.
o EDI Outsourcing, where we work with a specific partner to
facilitate the exchange of data, in any of a variety of
formats and communication methods, with a targeted partner or
partners. We act as the EDI department of our customer's
business.
o End-to-End Integration, where we facilitate the movement of
trading or supply chain information directly into our
customer's back-end Accounting, Enterprise Resource Planning,
Logistics, Warehouse Management, or other system without human
intervention.
We augment our business with professional services, which provides consulting
expertise to our client base. Our consultants work both within our normal
operation and may also reside remotely at an EDI enabled retailer or supplier
with the objective of providing EDI expertise that does not exist on-site.
We believe that our products and services provide the following advantages to
trading partners:
Benefit to Suppliers
o Higher revenue by interacting with more buyers
o Significant reduction in order processing costs
o Reduced customer service costs
o Significant reduction in error rates
o Increased inventory turnover and decreased order-to-delivery
cycle time
o Improved purchasing history and buying pattern information
o Increased ability to project demand cycles
o Predictable, low monthly payments
Benefit to Buyers
o Significant reduction in order management costs
o Substantially more convenient and efficient ordering
o Significant cost and efficiency gains via electronic invoicing
o Real-time information exchange, with access to order status,
shipment timing and inventory availability
o Improved product information via online catalog access
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o Faster delivery
o Significant reduction in order error rates
o Access to broader base of suppliers
Markets and Marketing
The marketing goals of our Transaction Processing and related services business
unit have been to:
1) attract and retain buyers and suppliers in the following vertical
industries:
o chain drug
o retail
o telecommunications
o consumer electronics
2) build alliances with technology companies and other partners
VERTICAL MARKETS
These sizeable industries are characterized by certain operating inefficiencies.
Our management believes that increasing margin pressures, a need to increase
technological sophistication, and a low or average penetration of EDI make our
chosen industries attractive vertical markets for their transaction processing
and related services.
Key clients in the chain drug vertical include Rite Aid Corporation, Duane
Reade, and Eckerd. In the retail vertical, Toys "R" Us and Party City are our
predominant customers. In the telecommunications vertical, customers include
Verizon and USA Wireless, and in the consumer electronics vertical, Best Buy is
our leading account. For the years ended December 31, 2003 and 2002, 21% and 25%
of our revenues, respectively, were derived from Toys "R" Us.
ALLIANCES AND PARTNERSHIPS
We believe that alliances with technology firms and other partnerships will be
integral to our success. Joint marketing or sales programs with alliance
partners would be intended to gain broader access to large and mid-size
companies, enabling us to add connections to many of their small and
medium-sized suppliers. Currently, the Company is a Progress Independent System
Vendor (ISV), participating in the Progress Corporation's ASPEN program, whereby
the Company may advantageously remarket Progress software under a revenue
sharing arrangement to an unlimited number of customers.
The Company entered a Strategic Service Partner Agreement in July 2003 with a
leading Enterprise Resource Planning software vendor, Epicor Corporation, to
provide its EDI services to Epicor's Vantage and Vista product groups. While we
expect additional partnership agreements to be concluded during 2004, there can
be no assurance that the Company will be successful in this regard.
7
While our sales focus is primarily directed toward specific targeted vertical
markets, our proprietary software was built to operate across many industries
without requiring significant enhancements. This will allow us to easily expand
into additional vertical markets in the future.
We market and sell our services through a direct sales force in the United
States of America and indirectly through partnerships and reseller arrangements.
To extend our vertical market reach and increase sales opportunities in the
vertical industries we have selected, we participate in a small number of
national trade shows.
As of December 31, 2003, we supported electronic trading for approximately 1,500
supply organizations. As of December 31, 2003, we were processing in excess of
340,000 transactions per quarter representing over $1.4 billion of annual
purchasing volume.
Competition
Business-to-business electronic commerce is a rapidly evolving industry.
Competition is intense and is expected to increase in the future. EDI products
and services may become commodities in the near future.
Our competition is primarily made of a number of companies public and private
who have gained either product or market traction using similar techniques.
Publicly traded competitors in related markets include AdvantE Corporation,
Neoforma, Inc., and The viaLink Company. Privately held competitors include
Automated Data Exchange (ADX), GXS (a divestiture of General Electric), and SPS
Commerce, for which minimal financial information is available.
We believe that additional competition may come from large retailers and
suppliers themselves, who may create their own proprietary solutions to automate
the exchange of business documents, thereby reducing our target universe. We
believe it will ultimately prove to be an inefficient use of resources on their
parts and too complicated for each trading partner to access multiple discrete
trading sites, as compared to using our services.
Intellectual Property
Our success depends on our ability to maintain the proprietary aspects of our
technology and operate without infringing the proprietary rights of others. We
rely on a combination of trade secrets and copyright law, as well as contractual
restrictions, to protect the proprietary aspects of our technology. We protect
the source code for our proprietary software, documentation and other written
materials under trade secret and copyright law.
We also seek to protect our intellectual property by requiring employees and
consultants with access to proprietary information to execute confidentiality
agreements with us and by restricting access to our source code.
Due to rapid technological change, our management believes that factors such as
the technological and creative skills of our personnel and consultants, new
product developments and enhancements to existing services are equally as
important as the various legal protections of our technology to establish and
maintain a technology leadership position.
8
Government Regulation
Our services enable buyers and suppliers to transmit documents to their trading
partners over dedicated and public telephone lines. These transmissions are
governed by regulatory policies establishing charges and terms for
communications. Our management believes that we are in compliance with
applicable regulations.
Due to the increasing popularity and use of the Internet, we might be subject to
increased regulation. Such laws may regulate issues such as user privacy,
defamation, network access, pricing, taxation, content, quality of products and
services, and intellectual property and infringement.
These laws could expose us to liability, materially increase the cost of
providing services, and decrease the growth and acceptance of the Internet in
general, and access to the Internet over cable systems.
Product Development
Our product development efforts for our proprietary software are directed toward
the development of new complementary services and the enhancement and expansion
of the capabilities of existing services. Product development expenses were
approximately $506,000 and $1,217,000 for the years ended December 31, 2003 and
2002, respectively. We continue to make the product development expenditures
that management believes are necessary to rapidly deliver new features and
functions. As of December 31, 2003, six employees were engaged in product
development activities. When necessary, based on specific customer needs to
rapidly deliver new features and functions, we may hire consultants who take
part in product development activities. In accordance with American Institute of
Certified Public Accountants Statement of Position 98-1, "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use", the Company
capitalizes some of these costs. They are amortized over a period of two years.
Personnel
As of December 31, 2003, we employed 18 full-time employees, and 7 employees
compensated on an hourly basis, which may be equivalent to full-time. Many of
our employees are highly skilled, with advanced degrees. Our continued success
depends upon our ability to continue to attract and retain highly skilled
employees. We have never had a work stoppage, and none of our employees are
represented by a labor organization. We consider our employee relations to be
good.
Item 2. Description of Property
We operate out of a single facility in New York, New York. The following table
sets forth information on our property:
Principal Address Square Footage Owned/Leased Purpose
----------------- -------------- ------------ -------
665 Broadway 5,000 Leased Corporate
New York, NY 10012 Headquarters Offices
9
The lease for our premises at 665 Broadway, which was assumed as part of the
Bac-Tech acquisition in January 2002, expires in February 2008. It calls for
annual rent payments of $95,614, in monthly payments of $7,968 through February
28, 2002; and payments of $98,482 in monthly payments of $8,207 through February
28, 2003 with annual rent escalating approximately five percent per annum
thereafter through February 28, 2008.
Item 3. Legal Proceedings
We are party to certain legal proceedings and claims, which arise in the
ordinary course of business. In the opinion of our management, the amount of
ultimate liability with respect to these actions may materially affect our
financial position, results of operations and cash flows.
In October 2000, Cintra Software & Services Inc. commenced a civil action
against our company in New York Supreme Court, New York County. The complaint
alleges that we acquired certain software from Cintra upon the authorization of
our former Chief Information Officer. Cintra is seeking damages of approximately
$856,000. We have filed an answer denying the material allegations of the
complaint. There has been no additional activity in 2003. We believe that we
have meritorious defenses to the allegations made in the complaint and intend to
vigorously defend the action.
On August 14, 2004, the Company received notice from the legal representative of
the Company's Senior Secured Noteholders indicating their intention to
accelerate payment of $3,200,000 of Senior Secured Convertible Notes issued in
our January 2002 and July 2002 financings, as a result of the Company's default
on its interest payments. At December 31, 2003, the Company owed the Noteholders
$377,000, which it was unable to pay.
At September 30, 2004, the Company owed the Noteholders interest in the amount
of $544,762. As a result of the Company's continued inability to satisfy the
interest owed in cash or shares of the Company's stock, the Company reached
agreement with its Noteholders to pursue a restructuring under Chapter 11 of the
U.S. Bankruptcy Code. As stated earlier, on October 27, 2004 the case was begun
in the U. S. Bankruptcy Court in the Southern District of New York.
Simultaneously with the filing of the case, a Plan of reorganization was also
filed, to effectuate satisfaction of this default on terms beneficial to the
Company's other creditors and shareholders.
The Company had also received notice from the legal representative of one of the
Bac-Tech principals to accelerate payment of $300,000 on a Promissory Note
related to the January 2002 acquisition of Bac-Tech, which is secured by the
Intellectual Property related to the acquisition. As of December 31, 2003, the
Company had obligation to pay the aforementioned party $100,000 on January 1,
2004, which it was unable to pay. This claim was settled and mutual releases
signed in August 2004. Under the terms of the settlement, a one-time discounted
payment satisfied the Promissory Note in full.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of our stockholders, through the solicitation
of proxies or otherwise, during 2003.
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PART II
Item 5. Market for Common Equity and Related Stockholder Matters
Our common stock had been quoted on the Nasdaq SmallCap Market under the symbol
"EBTB" since August 15, 2000 and through August 26, 2002. After that time, our
common stock was quoted on the Over-the-Counter Bulletin Board maintained by the
National Association of Securities Dealers. Since September 21, 2004, our common
stock has traded on the "Pink Sheets" under "penny stock" rules, due to our
delinquency in filing this Form 10-K for Calendar Year 2003 and subsequent SEC
financial reports, pending negotiations with our Senior Secured Noteholders. The
volume of trading in our common stock has been limited during the periods it has
not been on the Nasdaq SmallCap Market and the closing sale prices reported may
not be indicative of the value of our common stock or the existence of an active
trading market for shares of eB2B Commerce, Inc.
The following table sets forth the high and low closing sale prices for our
common stock for the periods indicated as adjusted for the 1 for 15 reverse
stock split effected January 10, 2002:
Quarter Ended High Low
------------- ---- ---
March 31, 2002.......................... $3.62 $ .96
June 30, 2002........................... 1.25 .11
September 30, 2002...................... .16 .10
December 31, 2002....................... .11 .03
March 31, 2003.......................... .08 .03
June 30, 2003........................... .12 .04
September 30, 2003...................... .11 .04
December 31, 2003....................... .09 .03
As of September 30, 2004, we have approximately 706 record holders of our common
stock.
The Company has a significant number of shares of common stock
underlying its derivative securities, as follows (excluding stock options):
Aggregate No.
Exercise or Of
Conversion Price Underlying
Security Per Share ($) Shares
------------------------------------- ---------------- -----------
Series A Preferred Stock 2.33 2,500
Series B Preferred Stock 6.14 3,575,000
Series C Preferred Stock .49 17,789,000
Original Bridge Warrants .101 9,483,000
Merger & Advisory Warrants 31.05 117,000
Credit Line Warrants 1.40 218,000
Series C Agent Warrants - Common 1.20 1,397,000
December 2001 Bridge Warrants .88 364,000
January 2002 Investor Warrants 1.43 1,593,000
January 2002 Agent Warrants 1.19 212,000
Series B Investor Warrants 5.23 1,376,000
Series B Agent Warrants 5.23 1,355,000
Other Warrants .20 - 58.65 377,000
January 2002 Convertible Notes .101 22,405,000
July 2002 Financing Convertible Notes .101 11,881,000
-----------
Total 72,144,500
===========
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We have never paid cash dividends on our capital stock and do not anticipate
paying cash dividends in the foreseeable future. We currently intend to retain
any future earnings for reinvestment in our business. Any future determination
to pay cash dividends will be at the discretion of our board of directors and
will be dependent upon our financial condition, results of operations, capital
requirements and other relevant factors.
Item 6. Management's Discussion and Analysis or Plan of Operation
Forward Looking Statements
The statements contained in this Form 10-KSB 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, and the Private
Securities Litigation Reform Act of 1995, which contain uncertainty and risk and
reflect the current views of eB2B Commerce, Inc. (the "Company") with respect to
current events and financial performance. You can identify these statements by
forward-looking words such as "may," "will," "expect," "intend," "anticipate,"
"believe," "estimate," "plan," "could," "should," and "continue" or similar
words. These forward-looking statements may also use different phrases. Such
forward-looking statements are and will be, as the case may be, subject to many
risks, uncertainties and factors relating to the Company's operations and
business environment which may cause the actual results of the Company to be
materially different from any future results, express or implied, by such
forward-looking statements. Factors that could cause actual results to differ
materially from these forward-looking statements include, but are not limited
to, the following: the ability of the Company to continue as a going concern;
the ability of the Company to obtain and maintain any necessary financing for
operations and other purposes, whether debtor-in-possession financing or other
financing; the Company's ability to obtain court approval with respect to
motions in the Chapter 11 proceeding prosecuted by it from time to time; the
ability of the Company to develop, prosecute, confirm and consummate one or more
plans of reorganization with respect to the Chapter 11 proceedings; risks
associated with third parties seeking and obtaining court approval to terminate
or shorten the exclusivity period for the Company to propose and confirm one or
more plans of reorganization, for the appointment of a Chapter 11 trustee or to
convert the cases to Chapter 7 cases; the ability of the Company to obtain and
maintain normal terms with vendors and service providers; the Company's ability
to maintain contracts that are critical to its operations; the potential adverse
impact of the Chapter 11 proceedings on the Company's liquidity or results of
operations; the ability of the Company to operate pursuant to the terms of its
financing facilities (particularly the financial covenants); the ability of the
Company to fund and execute its reorganization plan during the Chapter 11
proceedings and in the context of a plan of reorganization and thereafter; the
ability of the Company to attract, motivate and/or retain key executives and
associates; the ability of the Company to attract and retain customers; the
ability of the Company to maintain satisfactory labor relations; economic
conditions; labor costs; financing availability and costs; insurance costs;
competitive pressures on pricing and on demand; and other risks and
uncertainties listed from time to time in the Company's reports to the SEC.
There may be other factors not identified above of which the Company is not
currently aware that may affect matters discussed in the forward-looking
statements, and may also cause actual results to differ materially from those
discussed. The Company assumes no obligation to update such estimates to reflect
actual results, changes in assumptions or changes in other factors affecting
such estimates other than as required by law. Similarly, these and other
factors, including the terms of any reorganization plan ultimately confirmed,
can affect the value of the Company's various pre-petition liabilities, common
stock and/or other equity securities. Accordingly, the Company urges that the
appropriate caution be exercised with respect to existing and future investments
in any of these liabilities and/or securities.
12
All forward-looking statements made in this Form 10-KSB that are attributable to
us or persons acting on our behalf are expressly qualified in their entirety by
the factors listed below in the section captioned Risk Factors and other
cautionary statements included in this Form 10-KSB.
General
This item should be read with the financial statements and accompanying notes,
included elsewhere in this Form 10-KSB. 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 and 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 to eB2B
Commerce, Inc. from DynamicWeb Enterprises, Inc. and assumed the accounting
history of the former eB2B Commerce, Inc. (the Delaware corporation).
Overview
We are a provider of business-to-business electronic commerce (e-commerce)
products and services designed to enable trading partners to exchange business
documents electronically. In doing so, the process of ordering, managing,
tracking, warehousing, and invoicing goods and services is made more efficient
for our customers.
We provide access via the Internet and other communications methods to our
proprietary software, which is maintained on our hardware and on hosted
hardware.
We develop, market, and support products and services that allow us to enable
small and mid-size companies to participate in electronic trading via
Internet-based software, which we call Supplier Enablement services.
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.
The Company's business is comprised of four principal products/services as
follows:
o Trading Hubs (or Private Exchanges) - which is a dedicated
trading portal for a large buyer or supplier to communicate
electronically with its trading partners
o Trade Gateway - which is an open, Web-enabled electronic
trading network for suppliers to reach a growing number of
buyers in retail, healthcare, telecommunications, and other
industries
o e-Commerce Outsourcing - which develops, maintains, and
integrates e-Commerce applications for buyers and suppliers on
a fully outsourced basis
o Professional Services - which provides software consulting and
development services to large enterprises.
13
Years Ended December 31, 2003 and 2002
REVENUES
Revenue for the year ended December 31, 2003 increased approximately $520,000 or
15% to $4,013,000 compared to $3,493,000 for the year ended December 31, 2002.
Revenue from core transaction processing was $3,063,000, an increase of
$828,000, or 37%, compared to $2,235,000 in 2002. This increase was offset by
either a decline or zero growth in the non-core pieces of our transaction
processing business, which were part of various prior acquisitions, including
the following: (i) a $2,000 increase in professional services to $860,000 in
2003 compared to $858,000 in the similar period of 2002, as a result of
continuing cost containment measures by a key customer; (ii) anticipated
contraction of a legacy EDI outsourcing business acquired from DynamicWeb, which
decreased approximately $197,000, or 78%, during 2003 to $55,000 from the
$252,000 recognized in 2002; and (iii) anticipated decline in other professional
services to legacy customers of $103,000 in 2003 to $35,000 from the $138,000
recognized in 2002
COST OF REVENUES
Cost of revenue consists primarily of (i) salaries and benefits for employees
providing technical support, (ii) salaries and benefits of personnel and
consultants providing consulting services to clients and (iii) communication and
hosting expenses associated with the transmittal and hosting of our transaction
data. Total cost of revenue for the year ended December 31, 2003 amounted to
$844,000, compared to $1,215,000 for the year ended December 31, 2002, a
decrease of approximately $371,000 or 31%. This decrease was primarily a result
of renegotiated rates for telecommunications and remote hosting services, as
well as lower salary and benefit costs for professional services personnel.
OPERATING EXPENSES AND COST CONTROLS
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 for the year ended
December 31, 2003 amounted to $216,000 as compared to $500,000 for the year
ended December 31, 2002, a decrease of $284,000 or 57%. The decrease is chiefly
associated with the contraction of sales and marketing salaries implemented in
2002 and continued in 2003, and the commitment of most of the Company's
resources to supporting existing large customers and the development of their
Trading hubs, rather than pursuing new customers.
Product development costs mainly represent payments to outside contractors and
personnel and related costs associated with the development of our technological
infrastructure necessary to process transactions, including the amortization of
certain capitalized costs. Product development costs were approximately $506,000
for the year ended December 31, 2003 as compared to $1,217,000 for the year
ended December 31, 2002, a decrease of $711,000 or 58%. The product development
expenses in 2003 consist entirely of amortization of capitalized software
development costs. We capitalize qualifying computer software costs incurred
during the application development stage. Accordingly, we anticipate that
product development expenses will fluctuate from year to year as various
milestones in the development cycle are reached and future versions are
implemented.
14
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 years ended December 31, 2003 and
2002, total general and administrative expenses amounted to $1,832,000 and
$5,089,000, respectively, representing an decrease of $3,216,000 or 63%. The
decrease is attributable to the impact of the restructuring plan implemented in
2001 and 2002, and further reduction in personnel and sales and marketing
expenses during 2003.
During the year ended December 31, 2003, stock-based compensation expense
amounted to $31,000 as compared to $12,000 for the year ended December 31, 2002,
an increase of $19,000 or 158%. The increase was due to employee stock options
granted during 2003.
Net interest expense, inclusive of deferred financing costs, during the year
ended December 31, 2003 was approximately $661,000 as compared to $601,000 for
the year ended December 31, 2002. The increase was attributable to a full year's
interest expense from the Company's July 2002 Senior Secured Convertible Notes
compared to six months in 2002.
NET INCOME
Net income for the year ended December 31, 2003 was $128,000, compared to a net
loss of $9,011,000 for the year ended December 31, 2002, an improvement of
$9,139,000 or 101%. Before the impact of settlements of outstanding payables
from discontinued operations, loss was $32,000. There were no impairment charges
to goodwill in 2003. Excluding a one-time decrease in expense due to settlement
of a liability with IW Holdings, net loss would have been $447,000.
Net income per share was $ 0.01 on a fully diluted basis, for the year ended
December 31,2003. compared to $ (4.67) per share on a fully diluted basis for
the year ended December 31, 2002. Excluding income (loss) from discontinued
operations, the Company showed neither loss nor gain on a fully diluted basis
for the year ending December 31, 2003, compared to $ (4.14) per share on a fully
diluted basis for the year ending December 31, 2002.
Liquidity and Capital Resources
As of December 31, 2003, our principal source of liquidity was approximately
$146,000 of cash and cash equivalents.
As of December 31, 2003, we had a negative working capital position of
$4,797,000. Excluding deferred revenue of $265,000, which represents projects
that we expected to complete in the first and second quarter of 2004, we had a
negative working capital balance of $4,532,000. These projects were in fact
completed during the first half of 2004.
The Company has significant long-term liabilities including Senior Convertible
Notes in the aggregate principal amounts of $3,200,000, with interest of
$544,762 through September 30, 2004; notes issued to creditors in the amount of
$262,500 with interest of $50,532 through September 30, 2004, and remaining
notes issued in connection with the acquisition of Bac-Tech of $300,000,
$100,000 of which was payable January 1, 2004. The Company has not paid this
amount.
15
On October 27, 2004 the Company filed for reorganization under Chapter 11 of the
U.S. Bankruptcy Code in the Southern District of New York.
In the Plan filed with the Court , the Senior Convertible Notes, (i) an
aggregate principal amount of $2,000,000 due in January 2007, and (ii) an
aggregate principal amount of $1,200,000 due beginning in July 2007 will be
exchanged for most of the assets of the Company. The remaining Bac-Tech note
will also be extinguished in exchange for a consideration by the Senior
Convertible noteholders.
The report of our independent auditors on our financial statements as of and for
the year ended December 31, 2003 contains an unqualified report with an
explanatory paragraph which states that our recurring losses from operations and
negative cash flows from operations plus the fact that we have initiated a
Chapter 11 proceeding, raise substantial doubt about our ability to continue as
a going concern.
Under our Plan of reorganization, a new Board of Directors will be constituted
by a Plan Sponsor, who will purchase the remaining assets of eB2B Commerce, Inc.
not exchanged in satisfaction of secured and unsecured claims. Shareholders of
eB2B Commerce, Inc. are expected to receive newly issued shares in a
reconstituted eB2B Commerce, Inc. We anticipate the Company pursuing a different
line of business in the future. Investors may secure a copy of the Disclosure
Statement in the bankruptcy case at the Bankruptcy Court's Internet site at
www.nysb.uscourts.gov, Chapter 11 Case Number 04-16926(CB).
Since our inception on November 6, 1998, we have incurred significant operating
losses, net losses and negative cash flows from operations, due in large part to
the start-up and development of our operations and the development of
proprietary software and technological infrastructure for our platform to
process transactions.
There can be no assurance that the Court will approve our Plan, that the Company
will continue to exist, or exist as an Internet e-Commerce business, our that
the Company will be re-listed on the OTC Bulletin Board. There also can be no
assurance that revenue will improve, that expenses will not increase, that net
losses will be reduced or that we will generate positive cash flow from
operations.
Historically, we have funded our losses and capital expenditures through
borrowings and the net proceeds of prior securities offerings. From inception
through December 31, 2003, net proceeds from private sales of securities and
issuance of Convertible notes totaled approximately $39 million.
CASH FLOW
Net cash used in continuing operating activities totaled approximately $297,000
for the year ended December 31, 2003, compared to net cash used in continuing
operating activities of approximately $1,449,000 for the year ended December 31,
2002. Net cash used in continuing operating activities for the year ended
December 31, 2003 resulted primarily from (i) the $32,000 net loss from
continuing operations and (ii) a $910,000 use of cash from operating assets and
liabilities, offset by (iii) an aggregate of $771,000 of non-cash charges
consisting primarily of depreciation, amortization, stock-based compensation
expense, non-cash interest expense and the gain on settlement of liabilities.
Net cash used in operating activities for the year ended December 31, 2002
resulted primarily from (i) the $7,984,000 net loss from continuing operations
and (ii) an $864,000 use of cash from operating assets and liabilities, offset
by (iii) an aggregate of $7,395,000 of non-cash charges consisting primarily of
depreciation, amortization stock-based compensation expense, impairment of
goodwill and restructuring charges.
16
Net cash used in investing activities totaled approximately $351,000 for the
year ended December 31, 2003 as compared to net cash used by investing
activities of approximately $731,000 for the same period in 2002. Net cash used
in investing activities for the year ended December 31, 2003 resulted from (i)
the purchase of capital assets for $12,000, and (ii) $339,000 in product
development costs consisting of fees of outside contractors and capitalized
salaries. Net cash used in investing activities for the year ended December 31,
2002 resulted from (i) the acquisition of Bac-Tech Systems, Inc., including net
cash outlays of $250,000, and (ii) $477,000 in product development costs
consisting of fees of outside contractors and capitalized salaries.
Net cash provided by financing activities totaled approximately $225,000 for the
year ended December 31, 2003, compared to approximately $735,000 for the year
ended December 31, 2002. On April 29, 2003, we drew down the remaining portion
of our funds escrowed from our July 2002 private placement financing and during
2003 and paid $50,000 on other borrowings. On July 15, September 11, and
November 4, 2002, the Company drew down aggregate proceeds of $900,000 from its
July 2002 financing, and during 2002 paid $165,000 for capital lease obligations
and other borrowings.
Critical Accounting Policies
High-quality financial statements require rigorous application of high-quality
accounting policies. Management believes the following represent our critical
accounting policies. 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 this Form 10-KSB.
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
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 revenue.
17
Critical Accounting Estimates
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, there is also
judgment involved in determining whether long-lived assets 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 and long-lived 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 and
long-lived assets and goodwill for impairment using the guidance of applicable
accounting literature.
RISK FACTORS
You should carefully consider the risks and uncertainties described below, as
well as the discussion of risks and other information contained or incorporated
by reference in this Form 10-KSB. Additional risks and uncertainties not
presently known to us or that we currently deem immaterial may also impair our
business operations.
If any of the following risks actually occur, our business, financial condition
or operating results could be materially adversely affected. In such case, the
trading price of our common stock could decline and you may lose part or all of
your investment.
Risks Relating to Our Business
We filed for protection under Chapter 11 of the U. S. Bankruptcy Code in the
Southern District of New York on October 27, 2004.
As part of the filing, we filed a Plan of reorganization with the Court. Under
the Plan, Senior Secured Noteholders will receive most of the assets of the
Company in exchange for their Debt and interest obligations. We anticipate that
a reconstituted Board of Directors will look for another line of business in
which to redirect the company. According to the plan, we expect that 7 per cent
of the reissued stock of the corporation will go to common and preferred
shareholders of eB2B Commerce, Inc. Unsecured creditors of the Company are
expected to receive between 50 and 70 per cent of their unsecured claims.
On December 8, 2004, the Securities and Exchange Commission filed an objection
to the Disclosure Statement and Plan with the Court, as did the United States
Trustee on November 19, 2004. The bases for the objections were that the company
had not disclosed fully the future business and plan of eB2B Commerce, and that
18
under our plan the Company was in effect liquidating its assets and therefore
was not able to seek a discharge in bankruptcy. The Company disagrees with this
interpretation of the plan, in that under its plan, the Company sought to give
all financially affected parties the maximum recovery possible while fully
discharging its debt to the Senior Secured Noteholders. Without the Plan Sponsor
and the sale of the corporate shell, it is likely that creditors and
shareholders will receive little or no recovery under the plan. A hearing on the
Disclosure Statement will be held on December 15, 2004 where we anticipate that
this objection will be addressed by the court.
We are in default of our Senior Secured Notes, totaling $3.2 million plus
$544,762 in accrued interest, a Note to a creditor for $262,500 plus $36,750 in
accrued interest, and a Promissory Note for the purchase of Bac-Tech systems,
for $300,000.
Our Senior Secured Noteholders have demanded acceleration of their repayment of
principal plus interest, which we are unable to pay. As a result we have agreed
to restructure the Company under in U.S. Bankruptcy Court to effect a settlement
of their claims, and maximize benefit to our creditors and shareholders.
We have a limited operating history, have incurred significant losses and can
give no assurance that we can ever sustain profitability.
We have a limited operating history in the business-to-business electronic
commerce industry. We had no revenues and incurred a net loss attributable to
common stockholders of $37,562,000 for the year ended December 31, 1999, which
amount is inclusive of a deemed dividend on preferred stock of $29,442,000. For
the year ended December 31, 2000, we generated revenues of $5,468,000 and
incurred a net loss attributable to common stockholders of $41,335,000. For the
year ended December 31, 2001, we generated revenues from continuing operations
of $4,333,000, and incurred a net loss of $73,494,000, inclusive of a goodwill
impairment charge of $43,375,000. For the year ended December 31, 2002, we
generated revenues from continuing operations of $3,493,000, incurred a net loss
of $9,011,000, inclusive of an impairment charge of $2,732,000, and our
accumulated deficit was $161,519,000 at December 31, 2002. For the year ended
December 31, 2003, we generated revenues from continuing operations of
$4,013,000, had net income of $128,000 and our accumulated deficit was
$161,382,000.
We cannot give assurances that we will sustain profitability. Sales are expected
to increase due to the increasing number of companies joining the Trade Gateway.
Among other things, to achieve profitability, we must market and sell
substantially more services, hire and retain qualified and experienced employees
and be able to manage our expected growth. We may not be successful in these
efforts.
We received a "going concern" opinion from our Independent Auditors and may need
additional capital, which, if not obtained, could require us to cease
operations.
As of December 31, 2003, we had approximately $146,000 in cash to fund operating
and working capital requirements. We anticipate generating positive cash flow
from ongoing operations on a recurring basis in 2004, although there can be no
assurance in this regard.
As of December 31, 2003, we had a negative working capital position of
$4,797,000. Excluding deferred revenue of $265,000, which represents projects
that we expect to complete in the first and second quarters of 2004, we had a
19
negative working capital balance of $4,532,000. There can be no assurance that
we will be successful in reducing our liabilities. If we are unsuccessful in
reducing these liabilities and do not sustain revenues and cash collections to
$950,000 and $900,000 per quarter, respectively, we are unlikely to have the
capital to fund our operations through 2004.
The report of our independent auditors on our financial statements as of and for
the year ended December 31, 2003 contains an unqualified report with an
explanatory paragraph which states that our recurring losses from operations and
negative cash flows from operations in addition to our bankruptcy filing under
Chapter 11 raise substantial doubt about our ability to continue as a going
concern.
Our business model may not be successful.
Our business-to-business electronic commerce model is based on the general
activity in trading hubs for the purchase and sale of goods between buyers and
suppliers. While we have signed several participants into our networks, none of
the participants are required to conduct a minimum level of business. If our
business strategy is flawed or if we fail to execute our strategy effectively,
our business, operating results and financial condition will be substantially
harmed. The success of our business model will depend upon a number of factors,
including:
o the willingness of our customers to continue to use the
services during and after the Chapter 11 process
o the addition of significantly more buyers and suppliers in our
trading hubs
o an increased volume of transactions conducted by buyers and
suppliers;
o our ability to maintain customer satisfaction;
o our ability to upgrade, develop and maintain the technology
necessary for our operations;
o the introduction of new or enhanced services by our
competitors;
o the pricing policies of competitors;
o our ability to attract personnel with Internet industry
expertise; and
o the satisfactory performance, reliability and availability of
our systems and network infrastructure.
We must enroll a significant number of additional buyers and suppliers in our
trading communities in order to achieve and maintain profitability.
As of December 31, 2003, we connected approximately 1,500 supplier organizations
within our trading communities. We currently anticipate that the number of
buyers and suppliers would have to increase to approximately 2,000 on an annual
basis in order for us to achieve sustained profitability. This represents added
suppliers provided by our existing sponsors and by new hub sponsors, which need
to be sold our services. Based on historical results, we estimate that we can
sign and implement these suppliers to our service with appropriate sales and
20
marketing investment. However, we have been constrained by our cash position and
unable to make those investments in 2004. If we are unable to increase either
the number of buyers or suppliers, the overall value of the trading hubs would
be diminished, which could harm our business, operating results and financial
condition.
The loss of one or a small number of customers could substantially reduce our
revenues.
In the year ended December 31, 2003, one customer accounted for approximately
21% of our total revenue. In the year ended December 31, 2002, this customer
accounted for approximately 25% of our total revenue. We expect a decline in
professional services revenues from the customer and, therefore, expect that
such percentage will decline over the long-term. If this customer were to
substantially reduce or stop its use of our services, our business, operating
results and financial condition would be harmed.
Principal customers in our transaction processing and related services include
Toys "R" Us, Eckerd Drug, Rite Aid, Verizon, Best Buy, Ross Products Division of
Abbott Laboratories, USA Wireless, and Duane Reade. Generally, we do not have
any long-term contractual commitments from any of our current customers, and
customers may terminate their contracts with us with short periods of advance
notice and without significant penalty. As a result, we cannot assure that any
of our current customers will continue to use our services in future periods. In
April of 2004, Eckerd Drug was sold to in two parts to Jean Coutu of Montreal,
Canada and CVS Corporation, of Woonsocket, RI. At the present time, we
anticipate minor changes to the scope of services with this customer, as vendor
lists are reviewed and consolidated. However, if Jean Coutu or CVS move this
business to another provider, or move the business in-house, our business,
operating results, and financial condition will be harmed.
Our contracts provide the ability for a customer to terminate its contract with
us if we voluntarily or involuntarily enter into a bankruptcy, reorganization,
or merger transaction. Because we filed for reorganization on October 27, 2004,
our major customers could terminate their contracts. While we do not anticipate
the loss of any of our major customers throughout the process, a loss of one of
more of our large customers would seriously harm our business and financial
condition.
The Internet-based business-to-business industry is highly competitive and we
may not attain sufficient market share to succeed.
The market for Internet-based, business-to-business electronic commerce
solutions is extremely competitive and has low barriers to entry. Our
competition is expected to intensify as current competitors expand their service
offerings and new competitors -- including larger, more established companies
with more resources -- enter the market. The evolution of technology in our
market is rapid and we must adapt to remain competitive. Given our financial and
cash condition, we may not be able to secure the capital required to compete
successfully against current or future competitors and such competitive
pressures could harm our business, operating results or financial condition.
Our competition is primarily made of indirect horizontal competitors, which are
focused on similar services but not in specific or multiple vertical industries.
Others are focused in vertical markets unrelated to those pursued by us.
Publicly traded competitors include AdvantE Corporation, Neoforma, Inc., and The
viaLink Company. Privately held competitors include Automated Data Exchange
(ADX), GXS (a divestiture of General Electric), and SPS Commerce, for which
minimal public information is available.
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We believe that competition may develop from EDI/electronic commerce companies,
technology/software development companies, retailer purchasing organizations,
and leading industry manufacturers. Further, large retailers and suppliers are
capable of creating their own technology platform to automate the exchange of
business documents with their small and medium-sized trading partners, thereby
reducing the number of customers in our target markets. We believe it will prove
to be an inefficient use of resources for each large retailer to build a
technology platform for its internal use and too complicated for each trading
partner to access many discrete trading sites, as compared to using our
services.
The failure to secure our intellectual property rights could compromise the
value of our services and result in a loss of business.
To protect our proprietary products, we rely on a combination of copyright,
trade secret and trademark laws, as well as contractual provisions relating to
confidentiality and related matters. We also rely on common law protection
relating to unfair business practices. A major portion of our software is
licensed from Interworld Corporation, a division of J-Net Enterprises, and has
been modified by us to perform the tasks specific to our business. Such software
is run on our computers, thereby avoiding third party access. Our software
license agreement was renegotiated in July of 2003, and calls for a payment of
quarterly royalties to IW Holdings of 10% of all transaction revenue generated
using the IW software and 7.5% of all maintenance revenue associated with
suppliers using the IW software. IW Holdings may terminate the agreement at any
time for our failure to pay royalties within a timeframe approved by IW
Holdings, or its parent company's management, in their sole discretion. The
inability to use the IW software would seriously affect our business, operating
results, and financial condition.
Despite our efforts to protect our proprietary rights, unauthorized parties may
attempt to copy aspects of our products or to obtain and use information that we
regard as proprietary. Moreover, we cannot assure you that our means of
protecting our proprietary rights will be adequate or that competitors will not
independently develop similar or superior technology.
We may not have federal trademark protection for our name and therefore may not
be able to adequately address third party infringement.
Our principal trademark is "eB2B", for which we sought a federal registration.
The United States Patent and Trademark Office ("USPTO") issued an initial
objection to the registration application based upon the descriptiveness of the
trademark. We have filed a response with the USPTO challenging the objection,
which response was denied by the USPTO. We subsequently withdrew our
application. There can be no assurance that the mark can be adequately protected
against any third party infringement, which could adversely affect our business.
We have not made filings in any states with respect to obtaining state trademark
protection.
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We are dependent on one data center.
We operate our primary data center at Savvis' Internet Data Center facility in
Jersey City, New Jersey. This data center operates twenty-four hours a day,
seven days a week, and is connected to the Internet and the electronic data
interchange networks via AT&T and IBM Global Network. The data center consists
primarily of servers, storage subsystems, and other peripheral technology to
provide on-line, batch and back-up operations. Customers' data is backed-up
daily and stored off-site. We rely on Savvis to provide us with Internet
capacity, security personnel and fire protection, and to maintain the
facilities, power and climate control necessary to operate our servers.
Additionally, we rely on redundant subsystems, such as multiple fiber trunks
from multiple sources, fully redundant power on the premises and multiple
back-up generators. If Savvis or other telecommunications providers fail to
adequately host or maintain our servers, or experience trunk line failures, our
services could be disrupted and our business and operating results could be
significantly harmed. We can make no assurances regarding our recourse against
Savvis in the event of such failure.
Certain legal risks and uncertainties relating to our services could subject us
to claims for damages.
In the course of our business, we will be exposed to certain legal risks and
uncertainties relating to information transmitted in transactions conducted by
our customers. The services provided to customers may include access to
confidential or proprietary information. Any unauthorized disclosure of such
information could result in a claim against us for substantial damages. From
time to time, some of our suppliers may submit inaccurate pricing or other
catalog information. Even though such inaccuracies may not be caused by us and
are not within our control, we could be exposed to legal liability. Although we
believe that we have implemented and will continue to implement adequate
policies to prevent disclosure of confidential or inaccurate information, claims
alleging such matters may still be brought against us. Any such claim may be
time-consuming and costly and may harm our business and financial condition. We
maintain insurance for many of the risks encountered in our business, however,
there can be no assurance that the claims will be substantially covered by our
insurance.
Our resources may be adversely effected by the costs and any damage awards
resulting from current and possible future litigation.
In October 2000, Cintra Software & Services Inc. commenced a civil action
against us in New York Supreme Court, New York County. The complaint alleges
that we acquired certain software from Cintra upon the authorization of our
former Chief Information Officer. Cintra is seeking damages of approximately
$856,000. We have filed an answer denying the material allegations of the
complaint. We believe we have meritorious defenses to the allegations made in
the complaint and intend to defend the action vigorously.
More generally, some of our engagements involve the design and development of
customized e-commerce systems that are important to our clients' businesses.
Failure or inability to meet a client's expectations in the performance of
services could result in a diminished business reputation or a claim for
substantial damages regardless of which party is responsible for such failure.
In addition, the services provided to clients may provide us with access to
confidential or proprietary client information. Although we have policies in
place to prevent such client information from being disclosed to unauthorized
parties or used inappropriately, any unauthorized disclosure or use could result
in a claim against us for substantial damages. Contractual provisions attempting
to limit such damages may not be enforceable in all instances or may otherwise
fail to protect us from liability.
23
In addition, there is always the possibility that our shareholders will blame us
for taking an alleged inappropriate action that causes the loss of their
investment. In the past, following periods of volatility in the market price of
a company's securities, class action litigation often has been instituted
against a company experiencing stock price declines. Similar litigation, if
instituted against us, could result in substantial costs and a diversion of our
management's attention and resources. As a result, your investment in our stock
may become illiquid and you may lose your entire investment.
Risks Relating to Our Common Stock
The holders of securities issued in our private placements have significant
voting control and influence over our company.
As a group, on December 31, 2003 our current Noteholders beneficially owned
approximately 59.9%, on a fully diluted basis, of our outstanding voting stock.
If they vote together, the Noteholders will be able to exercise significant
influence over all matters requiring shareholder approval, including the
election of directors. The interests of our Noteholders may conflict with the
interests of our other shareholders. In addition, holders of Series B preferred
stock, as well as related warrants, as of December 31, 2003, had the ability to
obtain 5,163,000 shares of common stock. Holders of Series C preferred stock, as
well as related warrants, issued in our April/May 2001 private placement, as of
December 31, 2003, had the ability to obtain 18,373,000 shares of our common
stock. Holders of our 7% senior subordinated secured convertible notes, as well
as related warrants, issued in our December 2001 and January 2002 financings,
had the ability to obtain 31,559,000 shares of our common stock. All of the
holders of such notes, except for one, also own Series C preferred stock and
many of the holders of Series C preferred stock also own Series B preferred
stock. A significant portion of the holders of interest of these notes also own
the aforementioned securities. As a result, if such holders choose to act
together, they could assert significant influence over our company. With regard
to the Noteholders of our January and July 2002 financings, Robert Priddy has
been delegated the Investor Representative, which in effect, consolidates
Noteholder interests in a single entity authorized to act on their behalf.
We do not anticipate paying dividends on our common stock.
We have never paid dividends on our common stock and we do not anticipate paying
dividends in the foreseeable future. We intend to reinvest any funds that might
otherwise be available for the payment of dividends in further development of
our business.
A significant number of common shares underlie our convertible securities, and
we have a significant number of warrants and options outstanding.
The exercise of options and warrants and conversion of convertible securities
may dilute the percentage ownership of our shareholders and the potential or
actual exercise or conversion has negatively affected, and may continue to
negatively affect, the price of our common stock and may impede our ability to
raise capital.
A substantial number of our shares of common stock underlie outstanding shares
of convertible preferred stock, convertible notes and outstanding options and
warrants. As of December 31, 2003, there are outstanding shares of convertible
preferred stock and convertible notes to purchase an aggregate of approximately
24
57,325,000 shares of our common stock and options and warrants to purchase an
aggregate of approximately 41,769,000 shares of our common stock. If a
significant number of these options or warrants were exercised, or a significant
amount of preferred stock or notes was converted to common stock, the percentage
ownership of our common stock would be materially diluted. For example, if all
outstanding options and warrants were exercised and if all convertible
securities were converted to common stock as of December 31, 2003, there would
have been approximately 2.6% more common stock outstanding at such time. We
believe that the potential exercise or conversion may have an adverse impact on
the price of our common stock and therefore on our ability to raise capital. The
actual conversion or exercise of convertible securities, and the sale of the
underlying common stock into the open market, could further substantially
negatively affect the price of our common stock.
There is potential exposure to us in that certain shares of common stock
underlying our preferred stock have been sold prior to the effective date of a
registration statement, which we have filed, but which is not yet effective.
From December 2, 2000 until January 11, 2001, certain shares of our common
stock, which were issued by virtue of conversion of shares of preferred stock,
were sold by our shareholders in the open market. Such shareholders believed
that their shares were registered pursuant to a previous registration statement
of ours. The Securities and Exchange Commission has advised us of their opinion
that such shares were not covered by the prior registration statement. While we
believe that such sales were made in conformance with applicable securities laws
and regulations, a different determination may result in our having liability.
Commencing January 25, 2001, we advised such converting shareholders to resell
their shares pursuant to Rule 144 promulgated under the Securities Act of 1933.
We estimate that approximately 195,534 shares of our common stock were issued to
such shareholders on or prior to January 11, 2001. Such shares may have
potentially been sold in the open market on or prior to January 11, 2001, at
prices that may have ranged from $7.50 to $18.75 per share. It is possible that
the selling security holders will seek to include us in any action for recission
taken against them by third parties who purchased the common stock. The measure
of damages could be the purchase price paid, plus interest. We are unable to
assess the amount of damages, in the event that there is any liability.
Because of the decline in the market price of our common stock relative to the
stock prices at the time of our prior securities offerings, our common
shareholders have been significantly diluted due to preferences included in our
outstanding preferred shares and warrants.
We have a substantial number of outstanding shares of convertible preferred
stock, a significant amount of convertible notes and a substantial number of
outstanding warrants to purchase shares of our common stock. The preferred
shareholders and convertible note holders are entitled to an adjusted conversion
price, which results in their receiving additional shares of common stock upon
conversion, if we raise capital at a price below the then current conversion
price or market price. Similarly, many of our warrant holders are entitled to a
reduced exercise price on their warrants if we raise capital at a price below
the then current exercise price or market price. The number of shares of common
stock underlying these shares of preferred stock and warrants have significantly
increased as a result of the offering price for our securities in our private
financings concluded in 2001, January 2002, and July 2002. If we raise
additional capital at a price below these amounts, our common shareholders'
percentage of ownership will be further diluted by the additional common stock
required to underlie the preferred shares, convertible notes and warrants.
25
The price of our common stock is volatile, which could result in substantial
losses for investors.
Our stock price has been and is likely to continue to be volatile. For example,
from January 1, 2002 through December 31, 2003, our common stock traded as high
as $22.50 per share and as low as $.03 per share (which prices reflect a 1 for
15 reverse stock split effected in January 2002). Since the filing of our
Chapter 11, eB2B stock has consistently traded below one cent.
Volatility in the future may be due to a variety of factors, including:
o unanticipated events in bankruptcy
o volatility of stock prices of Internet and electronic commerce
companies generally;
o variations in our operating results and/or our revenue growth
rates;
o o
o market conditions in the industry generally;
o announcements of additional business combinations in the
industry or by us;
o issuances or the potential issuances of additional shares;
o additions or departures of key personnel; and
o general economic conditions.
Since our shares have become a "penny stock", and trade on the "Pink Sheets", it
may be more difficult for investors to sell their shares.
The SEC has adopted rules that regulate broker-dealer practices in connection
with transactions in "penny stocks". Penny stocks generally are equity
securities with a price of less than $5.00, other than securities registered on
national securities exchanges or quoted on Nasdaq, provided that current price
and volume information with respect to transactions in such securities is
provided by the exchange or system.
o Prior to transactions in such stocks, a broker-dealer is
required to:
o deliver a standardized risk disclosure document that
provides information about penny stocks and the
nature and level of risks in the penny stock market;
o provide the customer with current bid and offer
quotations for the penny stock;
o explain the compensation of the broker-dealer and its
salesperson in the transaction;
o provide monthly account statements showing the market
value of each penny stock held in the customer's
account; and
o make a special written determination that the penny
stock is a suitable investment for the purchase and
receive the purchaser's written agreement to the
transaction.
Since September 21, 2004, our common stock has traded on the "Pink Sheets" under
"penny stock" rules, due to our delinquency in filing this Form 10-K for
Calendar Year 2003 and subsequent SEC financial reports.
26
Item 7. Financial Statements
eB2B Commerce, Inc.
Index to Consolidated Financial Statements
Page
----
Independent Auditors' Report 28
Consolidated Balance Sheet as of December 31, 2003 29
Consolidated Statements of Operations for the years ended
December 31, 2003 and 2002 30
Consolidated Statements of Stockholders' Equity (Deficit) for the
years ended December 31, 2003 and 2002 31-32
Consolidated Statements of Cash Flows for the years ended
December 31, 2003 and 2002 33
Notes to the Consolidated Financial Statements 34
27
INDEPENDENT AUDITORS' REPORT
To eB2B Commerce, Inc.
We have audited the accompanying consolidated balance sheet of eB2B
Commerce, Inc. (the "Company") as of December 31, 2003, and the related
consolidated statements of operations, stockholders' deficit and cash flows for
the years ended December 31, 2003 and 2002. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public
Company Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of eB2B Commerce, Inc.
as of December 31, 2003, and the results of its operations and its cash flows
for the years ended December 31, 2003 and 2002 in conformity with U.S. generally
accepted accounting principles.
The accompanying financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has experienced significant losses from
continuing operations and negative cash flows from operations, which raises
substantial doubt about its ability to continue as a going concern. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
/s/ MILLER, ELLIN & COMPANY, LLP
New York, New York
April 1, 2004, except for the fourth
and fifth paragraph of Note 1 and
Note 17 dated December 8, 2004
28
eB2B COMMERCE, INC.
CONSOLIDATED BALANCE SHEET
(in thousands, except share and per share data)
DECEMBER 31, 2003
ASSETS
Current Assets
Cash and cash equivalents $ 146
Accounts receivable, net of allowance of $200 587
Debt financing costs, net of accumulated amortization of $186 279
Other current assets 9
----------
Total Current Assets 1,021
Property and equipment, net 9
Product development costs, net of accumulated amortization of $5,823 265
Intangible assets, net of accumulated amortization of $2,933 149
Other assets 35
----------
Total assets $ 1,479
==========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities
Accounts payable $ 841
Accrued expenses and other current liabilities 1,057
Current maturities of long-term debt 3,289
Deferred revenue 265
Current liabilities of discontinued operations 87
----------
Total current liabilities 5,539
----------
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;
2,003,674 shares issued and outstanding --
Preferred stock, convertible Series C - $.0001 par value; 1,750,000 shares authorized;
661,390 shares issued and outstanding --
Common stock - $.0001 par value; 200,000,000 shares authorized;
4,544,672 shares issued and outstanding
4
Additional paid-in capital 157,318
Accumulated deficit (161,382)
----------
Total stockholders' deficit (4,060)
----------
Total liabilities and stockholders' deficit $ 1,479
==========
See accompanying notes to consolidated financial statements.
29
eB2B COMMERCE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share data)
Years Ended December 31,
----------------------------
2003 2002
------------ ------------
Revenue $ 4,013 $ 3,493
------------ ------------
Costs and Expenses:
Cost of revenue 844 1,215
Marketing and selling 216 500
Amortization of product development costs 506 1,217
Amortization of other intangibles 489 974
General and administrative 1,873 5,089
Restructuring credit -- (655)
Settlement of licensing liability (575) --
Impairment of goodwill and other intangibles -- 2,524
Stock-based compensation expense 31 12
------------ ------------
Total costs and expenses 3,384 10,876
------------ ------------
Income (loss) from continuing operations before interest and other expenses, net
629 (7,383)
Interest and other expenses, net (661) (601)
------------ ------------
Loss from continuing operations
(32) (7,984)
Income (loss) from discontinued operations
160 (1,027)
------------ ------------
Net income (loss) $ 128 $ (9,011)
============ ============
Net income (loss) per common and common equivalent share:
Basic:
Loss per common share from continuing operations $ (0.01) $ (4.14)
Income (loss) per common share from discontinued operations 0.05 (0.53)
------------ ------------
Net income (loss) per common $ 0.04 $ (4.67)
============ ============
Diluted
Loss per common share from continuing operations $ -- $ (4.14)
Income (loss) per common share from discontinued operations 0.01 (0.53)
------------ ------------
Net income (loss) per common $ 0.01 $ (4.67)
============ ============
Weighted average number of common shares outstanding:
Basic 3,518,388 1,926,786
============ ============
Diluted 25,790,653 1,926,786
============ ============
See accompanying notes to consolidated financial statements.
30
eB2B COMMERCE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
(in thousands, except share and per share data)
Preferred Stock Preferred Stock Preferred Stock Preferred Stock
Series A Series B Series C Series D
------------------------ ------------------------ ------------------------ -----------------------
Shares Amount Shares Amount Shares Amount Shares Amount
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance at
January 1, 2002 7 $ -- 2,477,053 $ -- 763,125 $ -- -- $ --
Acquisition of Bac-Tech 95,000 --
Conversion of Series B
Preferred -- -- (265,378) -- -- -- --
Conversion of Series C
preferred stock (30,250) -- -- --
Conversion of Series D
preferred stock (95,000) --
Issuance of common stock
to settle vendor and other
obligations -- -- -- -- -- -- -- --
Forfeiture of warrants -- -- -- -- -- -- -- --
Amortization of stock
based compensation -- -- -- -- -- -- -- --
Private placement -- -- -- -- -- -- --
Net loss -- -- -- -- -- -- -- --
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance at
December 31, 2002 7 -- 2,211,675 -- 732,875 -- -- --
Conversion of Series B
Preferred -- -- (208,001) -- -- -- -- --
Conversion of Series C
preferred stock -- -- -- -- (71,485) -- -- --
Issuance of common stock
to settle vendor and other
obligations -- -- -- -- -- -- -- --
Stock based compensation -- -- -- -- -- -- -- --
Private placement -- -- -- -- -- -- --
Net income -- -- -- -- -- -- -- --
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance at
December 31, 2003 7 $ -- 2,003,674 $ -- 661,390 $ -- -- $ --
========== ========== ========== ========== ========== ========== ========== ==========
See accompanying notes to consolidated financial statements.
31
eB2B COMMERCE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
(CONTINUED)
(in thousands, except share and per share data)
Common Stock Additional Unearned
--------------------------- Paid-in stock Accumulated Total
Shares Amount Capital based comp Deficit Deficit
------------ ------------ ------------ ------------ ------------ ------------
Balance at January 1, 2002 1,603,137 -- 155,905 (768) (152,499) 2,638
Acquisition of Bac-Tech 200,000 -- 1,240 -- -- 1,240
Conversion of Series B Preferred 279,143 -- -- -- -- --
Conversion of Series C preferred
stock 622,914 -- -- -- -- --
Conversion of Series D preferred
stock 333,334 -- -- -- -- --
Issuance of common stock to settle
vendor and other obligations 14,942 -- (365) -- -- (365)
Forfeiture of warrants -- -- (756) 756 -- --
Amortization of stock based
compensation -- -- 12 -- 12
Private placement -- -- 1,263 -- -- 1,263
Net Loss -- -- -- -- (9,011) (9,011)
------------ ------------ ------------ ------------ ------------ ------------
Balance at December 31, 2002 3,053,470 -- 157,287 -- (161,510) (4,223)
Conversion of Series B Preferred 331,970 -- -- -- -- --
Conversion of Series C preferred
stock 989,217 -- -- -- -- --
Issuance of common stock to settle
vendor and other obligations 170,015 -- 4 -- -- 4
Stock based compensation -- 31 -- -- 31
Net income -- -- -- -- 128 128
------------ ------------ ------------ ------------ ------------ ------------
Balance at December 31, 2003 4,544,672 -- 157,322 -- (161,382) (4,060)
============ ============ ============ ============ ============ ============
See accompanying notes to consolidated financial statements.
32
eB2B COMMERCE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands, except share and per share data)
For the Years Ended
December 31,
----------------------------
2003 2002
------------ ------------
Cash flows from operating activities:
Net loss from continuing operations $ (32) $ (7,984)
Adjustments to reconcile net loss from continuing operations to
net cash used in operating activities:
Impairment of goodwill and other intangibles -- 2,524
Depreciation and amortization 1,071 4,330
Provision for doubtful accounts 27 108
Stock-based compensation expense 31 12
Non-cash interest expense 422 421
Gain on settlement of liabilities (780) --
Changes in operating assets and liabilities:
Accounts receivable (6) 209
Other current assets 45 135
Other assets 15 --
Accounts payable 229 (139)
Accrued expenses and other liabilities (718) (35)
Deferred revenue (475) 466
Lease termination cost and other restructuring costs -- (610)
Other liabilities -- (890)
------------ ------------
Net cash used in operating activities (171) (1,453)
------------ ------------
Cash flows from investing activities:
Acquisition of Bac-Tech Systems, Inc., net -- (250)
Purchases of property and equipment (12) (4)
Product development expenditures (339) (477)
------------ ------------
Net cash used in investing activities (351) (731)
------------ ------------
Cash flows from financing activities:
Payments on borrowings (50) (44)
Proceeds from borrrowings and issuance of convertible notes 275 900
Payment of capital lease obligations -- (121)
------------ ------------
Net cash provided by financing activities 225 735
------------ ------------
Net cash used in continuing operations (297) (1,449)
------------ ------------
Net cash used in discontinued operations (18) (188)
------------ ------------
Net change in cash and cash equivalents (315) (1,637)
Cash and equivalents - beginning of period 461 2,098
------------ ------------
Cash and equivalents - end of period $ 146 $ 461
============ ============
See accompanying notes to consolidated financial statements
33
eB2B COMMERCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002
NOTE 1. ORGANIZATION AND PLAN OF OPERATIONS
eB2B Commerce, Inc. (the "Company") utilizes proprietary software to
provide a technology platform for buyers and suppliers to transfer business
documents via the Internet and other methods 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 continuing operations 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
deficit and negative cash flows from operations, management enacted a plan for
the Company, which includes various cost cutting measures commenced 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.
On April 14, 2004 the Company filed an 8-K disclosing that the
Company's Senior Secured Convertible Noteholders had declared the Company in
default on its interest payments of approximately $432,000 and as a result were
demanding acceleration of $3,200,000, the face value of the Senior Secured
notes, plus accrued interest. As the Company had insufficient cash to satisfy
the claims of its Noteholders, good faith negotiations ensued to resolve the
issue to the benefit of the Company's shareholders. Due to the uncertainty that
resulted from the declared default, the Company delayed the filing of its annual
report for the year ended December 31, 2003.
On October 27, 2004, the Company filed for reorganization under Chapter
11 of the U.S. Bankruptcy Code in the Bankruptcy Court of the Southern District
of New York. Under the Plan of reorganization, and after the primary current
business and certain net assets are exchanged in satisfaction of certain secured
noteholder claims, a new Board of Directors will be constituted by a Plan
sponsor. It is anticipated that the above-mentioned exchange of the primary
current business to the secured noteholders and certain of its net assets will
result in continued business operations under a newly formed private company.
Therefore, because the existing business is expected to continue operating as a
newly formed private company, these financial statements do not include any
adjustments that might be necessary should the business be unable to continue as
a going concern.
The Securities and Exchange Commission has filed an objection to the
Disclosure Statement and Plan with the Court, as has the United States
Bankruptcy Trustee. The bases for the objections were that the Company had not
disclosed fully the future business and plan of eB2B Commerce, and that under
the plan the Company was in effect liquidating its assets and therefore was not
able to seek a discharge in bankruptcy. The Company disagrees with this
interpretation of the plan, in that under its plan, the Company sought to give
all financially affected parties the maximum recovery possible while fully
discharging its debt to the Senior Secured Noteholders. Without the Plan Sponsor
and the sale of the corporate shell, it is likely that creditors and
shareholders will receive little or no recovery under the plan. A hearing on the
Disclosure Statement will be held where it is anticipated that these objections
will be addressed by the Court. Because the outcome of the hearing is not known,
these financial statements do not reflect any adjustments should the business be
unable to continue under the plan described above.
34
NOTE 2. BASIS OF PRESENTATION AND OTHER MATTERS
On April 18, 2000, eB2B Commerce, Inc., a Delaware corporation
("eB2B"), merged with and into DynamicWeb Enterprises, Inc., a New Jersey
corporation and an SEC registrant ("DWeb"), with the surviving company using the
name "eB2B Commerce, Inc." (the "Company"). Pursuant to the Agreement and Plan
of Merger between eB2B and DWeb (the "Merger"), the shareholders of DWeb
retained their shares in DWeb, while the shareholders of eB2B received shares,
or securities convertible into shares, of common stock of DWeb representing
approximately 89% of the equity of the Company, on a fully diluted basis. The
transaction was accounted for as a reverse acquisition.
The reverse acquisition was accounted for as a "purchase business
combination" in which eB2B was the accounting acquirer and DWeb was the legal
acquirer. The management of eB2B remained the management of the Company. As a
result of the reverse acquisition, (i) the financial statements of eB2B are the
historical financial statements of the Company; (ii) the results of the
Company's operations include the results of DWeb after the date of the Merger;
(iii) the acquired assets and assumed liabilities of DWeb were recorded at their
estimated fair market value at the date of the Merger; (iv) all references to
the financial statements of the "Company" apply to the historical financial
statements of eB2B prior to the Merger and to the consolidated financial
statements of the Company subsequent to the Merger; (v) any reference to eB2B
applies solely to eB2B Commerce, Inc., a Delaware corporation, and its financial
statements prior to the Merger, and (vi) the Company's year-end is December 31,
that of the accounting acquirer, eB2B.
All significant inter-company balances and transactions have been
eliminated in consolidation.
NOTE 3. DISCONTINUED OPERATIONS
As discussed in Note 1, in September 2002, the Company ceased providing
training and educational services to its clients. Accordingly, the related
results of operations and cash flows have been reflected as discontinued
operations in the accompanying consolidated financial statements. For the year
ended December 31, 2002, the Company's discontinued operations contributed net
sales of $1,105,000. During 2003, the Company realized a $160,000 gain through
the settlement of related outstanding liabilities. As of December 31, 2003,
there were no assets relating to this segment, and its liabilities totaled
$87,000.
NOTE 4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements, and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates. Significant estimates made by management include, but are not limited
to, the allowance for doubtful accounts and the valuation of intangible assets.
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, and monthly hosting fees are recognized on
a straight-line basis over the term of the contract with the customer. Deferred
income includes amounts billed for implementation and hosting fees, which have
not been earned.
For related consulting arrangements on a time-and-materials basis,
revenue is recognized as services are performed and costs are incurred in
accordance with the billing terms of the contract. Revenues from related fixed
price consulting arrangements are recognized using the percentage-of-completion
method, unless the extent of progress toward completion cannot be reliably
determined. Progress towards completion is measured using efforts-expended
method based upon management estimates. To the extent that efforts expended and
costs to complete cannot be reasonably estimated, revenues are deferred until
the contract is completed. The Company does not have a history of incurring
losses on these types of contracts. If the Company were to incur a loss, a
provision for the estimated loss on the uncompleted contract would be recognized
in the period in which such loss becomes probable and estimable. Billings in
excess of revenue recognized are included in deferred income.
Revenue from training and client educational services was recognized
upon the completion of the seminar and was based upon class attendance. If a
seminar began in one period and was completed in the next period, the Company
recognized revenue based on the percentage of completion method for the
applicable period.
35
Cash and Cash Equivalents
Cash and cash equivalents include cash, money market investments and
other highly liquid investments with original maturities of three months or
less.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation
and amortization, and are depreciated or amortized using the straight-line
method over the following estimated useful lives:
Computer and communications equipment........ 2 to 3 years
Purchased software........................... 2 years
Office equipment and furniture............... 4 to 5 years
Leasehold improvements....................... Shorter of useful life
or lease term
Intangible Assets
In 2002, the Company adopted the provisions of Statement of Financial
Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets."
This Statement provides that goodwill and intangible assets with indefinite
lives should no longer be amortized, but should be reviewed at least annually,
for impairment. In accordance with the adoption of SFAS No. 142, beginning
January 1, 2002, the Company ceased amortizing its existing net goodwill of
$1,558,000, resulting in the exclusion of $1,248,000 of amortization during
2002. In December 2002, the Company recorded an impairment charge of $2,524,000
to reduce goodwill to zero.
Impairment of Long-Lived Assets
In 2002, the Company adopted the provisions of SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets." The Company's
long-lived assets, including property and equipment, are reviewed for impairment
whenever events or changes in circumstances indicate that the net carrying
amount may not be recoverable. When such events occur, the Company measures
impairment by comparing the carrying value of the long-lived asset to the
estimated undiscounted future cash flows expected to result from use of the
assets and their eventual disposition. If the sum of the expected undiscounted
future cash flows were less than the carrying amount of the assets, the Company
would recognize an impairment loss. The impairment loss, if determined to be
necessary, would be measured as the amount by which the carrying amount of the
asset exceeds the fair value of the asset.
Product Development
In accordance with the provisions of Statement of Position ("SOP")
98-1, "Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use", the Company capitalizes qualifying computer software costs
incurred during the application development stage. All other costs incurred in
connection with internal use software are expensed as incurred. The useful life
assigned to capitalized product development expenditures is based on the period
such product is expected to provide future utility to the Company. The Company
is amortizing product development costs over 24 months. Amortization of product
development costs was approximately $506,000 and $1,217,000 for the years ended
December 31, 2003 and 2002, respectively. The Company believes that the
remaining unamortized product development costs at December 31, 2003 will
provide future benefits to any continuing business operations.
Income Taxes
The Company records income taxes using the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and the tax effect of net operating loss carry-forwards. A valuation
allowance is recorded against deferred tax assets if it is more likely than not
that such assets will not be realized.
Fair Value of Financial Instruments
The carrying value of cash and cash equivalents, accounts receivable,
accounts payable, deferred income and the current portion of long-term debt
approximate fair value due to the short maturities of such instruments. The
carrying value of the long-term debt and capital lease obligations approximate
fair value based on current rates offered to the Company for debt with similar
collateral and guarantees, if any, and maturities.
36
Concentration of Credit Risk
Financial instruments that potentially subject the Company to
concentrations of credit risk are cash and cash equivalents and accounts
receivable. Cash and cash equivalents are deposited with high credit quality
financial institutions. The Company's accounts receivable are derived from
revenue earned from customers located in the United States of America and are
denominated in U.S. dollars.
Portions of the Company's accounts receivable balances are settled
either through customer credit cards or electronic fund transfers. The Company
maintains an allowance for doubtful accounts based upon the estimated
collectibility of accounts receivable. The Company recorded provisions
(additions) to the allowance of $79,408 and $137,000, respectively, and
write-offs (deductions) against the allowance of $52,800 and $153,000 during the
years ended December 31, 2003 and 2002, respectively.
In the years ended December 31, 2003 and 2002, one customer accounted
for approximately 21% and 25%, respectively, of the Company's revenue. As of
December 31, 2003 and 2002, the same customer accounted for approximately 15%
and 33% of accounts receivable, respectively. In addition, a second customer
accounted for 17% of accounts receivable at December 31, 2003.
Net Earnings (Loss) per Common Share
In accordance with SFAS No. 128, "Earnings Per Share," basic net
earnings or loss per common share ("Basic EPS") is computed by dividing the net
earnings or loss attributable to common shareholders by the weighted-average
number of common shares outstanding. Diluted net earnings or loss per common
share ("Diluted EPS") is computed by dividing the net earnings or loss
attributable to common shareholders by the weighted-average number of common
shares and dilutive common share equivalents and convertible securities then
outstanding. SFAS No. 128 requires the presentation of both Basic EPS and
Diluted EPS on the face of the Company's Consolidated Statements of Operations.
There were 20,389,362 and 11,993,114 stock options and warrants excluded from
the computation of Diluted EPS for the years ended December 31, 2003 and 2002,
respectively, as their effect on the computation of Diluted EPS would have been
anti-dilutive. Additionally, for the years ended December 31, 2003 and 2002,
respectively, there were 2,665,071 and 2,944,557 shares of our Convertible
Preferred Stock outstanding, convertible into 21,366,507 and 17,418,670 shares
of the Company's Common Stock. In addition, the Company had debt outstanding
which was convertible into 34,286,000 and 9,845,806 shares at December 31, 2003
and 2002, respectively. Similarly, these shares were not "assumed converted" as
the effect on the computation of Diluted EPS would also have been anti-dilutive.
The following table sets forth the computation of basic and dilutive
per share information:
(In thousands)
----------------------------
2003 2002
------------ ------------
Numerator:
----------
Loss from continuing operations $ (32) $ (7,984)
Income (loss) from discontinued operations 160 (1,027)
------------ ------------
Numerator for basic and diluted income (loss) per share
attributable to common shareholders $ 128 $ (9,011)
============ ============
Denominator:
------------
Basic per share information - weighted-average shares
outstanding 3,518,388 1,926,756
============ ============
Denominator for basic and diluted per share information -
weighted-average shares outstanding 25,790,653 1,926,786
============ ============
Stock-Based Compensation
The Company accounts for stock-based compensation in accordance with
the provision of SFAS No. 148, "Accounting for Stock-Based Compensation -
Transition and Disclosure - an amendment of SFAS No. 123." This Statement amends
SFAS No. 123, "Accounting for Stock-Based Compensation," to provide alternative
methods of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. In addition, this Statement
37
amends the disclosure requirements of SFAS No. 123 to require prominent
disclosures in both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect of the method
used on reported results. The Company has adopted the provisions of SFAS No. 148
prospectively from January 1, 2003. Prior to 2003, the Company accounted for
stock-based employee compensation under the recognition and measurement
provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees," and related Interpretations.
Stock-based compensation cost of approximately $31,000 is reflected in
the accompanying Statement of Operations for the year ended December 31, 2003,
as a result of the grant, on March 17, 2003, of an aggregate of 766,000 stock
options to the Company's employees. The following table illustrates the effect
on net earnings (loss) per share as if the fair value method had been applied to
all outstanding and unvested awards in each year presented:
(In thousands, except
per share amounts)
----------------------------
2003 2002
------------ ------------
Net earnings (loss), as reported $ 128 $ (9,011)
Add: Stock-based compensation expense included
in reported net earnings (loss) 31 --
Deduct: Stock-based compensation expense determined
under the fair value method (31) (693)
------------ ------------
Pro Forma $ 128 $ (9,704)
============ ============
Net earnings (loss) per share:
As reported:
Basic $ 0.04 $ (4.67)
Diluted $ 0.01 $ (4.67)
Pro forma:
Basic $ 0.04 $ (5.03)
Diluted $ 0.01 $ (5.03)
The fair value of stock options used to compute pro forma net loss and
net loss per common share disclosures is the estimated fair value at grant date
using the Black-Scholes pricing model with the following assumptions:
Years ended December 31,
------------------------------------------
Weighted-Average Assumptions 2003 2002
- ---------------------------- ------------------- ---------------------
Dividend yield...................................... 0% 0%
Expected volatility................................. 274% 80%
Risk-free interest rate............................. 2.2% 2.2%
Expected life....................................... 5 years 3 years
New Accounting Pronouncements
Effective January 1, 2003, the Company adopted SFAS No. 145,
"Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement
No. 13, and Technical Corrections." SFAS No. 145 requires gains and losses on
extinguishments of debt to be classified as income or loss from continuing
operations, rather than as an extraordinary item as previously required.
Extraordinary treatment is required for certain extinguishments as provided in
APB No. 30. SFAS No. 145 also amends SFAS No. 13 to require that certain
modifications to capital leases be treated as a sale-leaseback, and to modify
the accounting for subleases when the original lessee remains a secondary
obligor. The Company has adopted this Statement and has determined that it does
not have, nor is it expected to have, a material impact on its financial
position or results of operations.
38
Effective January 1, 2003, the Company adopted SFAS No. 146,
"Accounting for Costs Associated with Exit or Disposal Activities," which
addresses financial accounting and reporting for costs associated with exit or
disposal activities, and nullifies EITF Issue No. 94-3, "Liability Recognition
for Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)." SFAS No. 146 requires
that a liability for a cost associated with an exit or disposal activity be
recognized when the liability is incurred. This Statement did not have a
material impact the Company's financial position or results of operations in
2003, nor is it expected to have a material impact on the Company's financial
position or results of operations.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement
133 on Derivative Instruments and Hedging Activities." SFAS No. 149 clarifies
under what circumstances a contract with an initial net investment meets the
characteristics of a derivative as discussed in SFAS No. 133. It also specifies
when a derivative contains a financing component that requires special reporting
in the Consolidated Statement of Cash Flows. SFAS No. 149 amends certain other
existing pronouncements in order to improve consistency in reporting these types
of transactions. The new guidance is effective for contracts entered into or
modified after June 30, 2003, and for hedging relationships designated after
June 30, 2003. SFAS No. 149 did not and is not expected to have a material
effect on the Consolidated Financial Statements.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity." SFAS
150 establishes standards for how an issuer classifies and measures financial
instruments with characteristics of both liabilities and equity. It requires
that an issuer classify a financial instrument within its scope as a liability.
SFAS 150 was effective for financial instruments entered into or modified after
May 31, 2003, and otherwise is effective at the beginning of the first interim
period beginning after June 15, 2003. The adoption of this Statement did not
have, nor is it expected to have, a material impact on the Company's financial
position or results of operations.
In December 2003, the FASB issued FIN No. 46, "Consolidation of
Variable Interest Entities." Application of this Interpretation is required in a
company's financial statements for interests in variable interest entities
("VIES") that are considered special-purpose entities for the year ended
December 31, 2003. The Company has determined that the provisions of this
Interpretation did not have, nor is it expected to have, material impact on its
financial position or results of operations.
In December 2003, the FASB issued FASB Staff Position 106-1,
"Accounting and Disclosure Requirements Related to the Medicare Prescription
Drug, Improvement and Modernization Act of 2003," which introduces a
prescription drug benefit under Medicare, as well as a federal subsidy to
sponsors of retiree health care benefit plans that provide a benefit that is at
least actuarially equivalent to Medicare. As the Company does not have a
post-retirement drug plan, the Company has determined the Staff Position does
not have a material impact on its financial position or results of operations.
In December 2003, the FASB revised FASB Statement No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits." This Statement
requires additional disclosures about the assets, obligations, cash flows, and
net periodic benefit cost of defined benefit pension plans and other defined
benefit postretirement plans. The Statement requires that this information be
provided separately for pension plans and for other postretirement benefit
plans. The Company has adopted this Statement and has determined that it does
not have, nor is it expected to have, a material impact on its financial
position or results of operations.
Reclassification
Certain prior year amounts have been reclassified to conform to the
current year presentation.
NOTE 5. RECENT ACQUISITIONS
Bac-Tech Systems, Inc.
On January 2, 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 September 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,
initially payable in three equal installments on May 1, 2003, January 1, 2004
and January 1, 2005, of which $594,000 is included in current maturities of
long-term debt, in the accompanying condensed consolidated balance sheet after
discounting these notes using the Company's estimated borrowing rate of 15
percent.
39
The Company has accounted for this acquisition using the purchase
method of accounting and determined that the final purchase price of $1,990,000
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; (iv) a three year
non-interest bearing note with a face value of $600,000 and a net present value
of $457,000 assuming the Company's effective borrowing rate; and (v) $43,000 in
closing costs and other items.
The following is a summary of the allocation of the purchase price of
the Bac-Tech acquisition (in thousands):
Purchase price ........................................ $ 1,947
Acquisition costs ..................................... 43
------------
Total purchase price .................................. $ 1,990
============
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)
Historical net assets acquired ........................ 9
Identifiable intangible assets ........................ 807
Goodwill .............................................. 1,174
------------
Total purchase price .................................. $ 1,990
============
The Company estimated that the identifiable intangible assets include
(i) customer list of $188, which was estimated to have a useful life of three
years; (ii) Bac-Tech technology of $475, which was estimated to have a useful
life of two years; and (iii) below market lease for office space, which was
estimated at $144 and had a remaining life of six years, the remainder of the
lease term.
Since the acquisition of Bac-Tech occurred on January 2, 2002, the
results of operations of the Company for the year ended December 31, 2002,
include the results of operations of Bac-Tech.
NOTE 6. INTANGIBLE ASSETS
Intangible assets consist of a customer list acquired in April January
2002 having a fair value of $188 and the assumption of the Company's current
lease at below market rates aggregating $144,000. Aggregate amortization expense
for intangibles for the years ended December 31, 2003 and 2002 was approximately
$489,000 and $974,000, respectively.
Net intangible assets at December 31, 2003 consist of the following:
Customer list $ 63
Below market lease 86
---------
$ 149
=========
Amortization expense for 2004 is estimated to be $149.
The Company believes that the remaining intangible assets continue to
provide future value to anticipated future business operations.
NOTE 7. RESTRUCTURING
To address the loss from continuing operations and negative cash flows
from operations, management enacted a restructuring plan for the Company. During
2000, 2001, 2002, and 2003, the Company reduced discretionary spending in
selling, marketing, general and administrative areas.
40
In 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 charges and reversals
recognized (in thousands):
Amounts Paid
Writeoff as of Balance at
Restructuring of Leasehold December 31, 2002 December 31,
Charges Improvements 2002 Reversals 2002 and 2003
------------ ------------ ------------ ------------ ------------
Lease termination $ 1,765 $ 162 $ (948) $ (655) $ --
Severance for 40 employees 1,145 -- (1,145) -- --
Contract termination settlement 418 -- (418) -- --
------------ ------------ ------------ ------------ ------------
Total charges $ 3,328 $ 162 $ (2,511) $ (655) $ --
============ ============ ============ ============ ============
NOTE 8. PROPERTY AND EQUIPMENT
Property and equipment consist of the following as of December 31, 2003
(in thousands):
Computer and communications equipment ...... $ 2,452
Purchased software ......................... 2,568
Office equipment and furniture ............. 793
------------
5,812
Accumulated depreciation and amortization... (5,803)
------------
$ 9
============
As of December 31, 2003 the cost of assets under capital leases,
principally computer and communications equipment was approximately $725,000.
The depreciation expense for 2003 and 2002 was $92,000 and $1,845,000,
respectively.
NOTE 9. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consist of the following
as of December 31, 2003 (in thousands):
Accrued professional fees ......................... $ 85
Accrued compensation and related costs ............ 25
Accrued purchases and sub-contractors costs ....... 192
Accrued interest .................................. 413
Current maturities of capital lease obligations ... 57
Other ............................................. 266
----------
$ 1,038
==========
During December 2001, the Company renegotiated a potential $1,200,000
liability with a creditor. 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. The Company had approximately $590,000 recorded in accrued software
development costs as of December 31, 2002 to cover the potential cash shortfall
to this vendor.
On July 8, 2003, the Company further amended the agreement 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
41
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 $575,000. As of December 31,
2003, there were no accrued software development costs.
NOTE 10. FINANCINGS AND LONG-TERM DEBT
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 to purchase an aggregate of 266,670 shares of the Company's
common stock at a price of $1.80 per share, prior to adjustment for dilutive
financings. These warrants were valued at $218,875 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 and is being charged to interest expense
over the life of the debt commencing in 2002. In connection with this 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 placement fee and indirect fees are being amortized and charged to interest
expense over the life of the debt.
In January 2002, these 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 are convertible
into an aggregate of 934,922 shares of common stock at a price of $2.42 per
share, prior to adjustment for dilutive financings. The holders of the Bridge
Notes also received, in exchange for the Bridge Notes, warrants to purchase
826,439 shares of common stock at a price of $2.90 per share, prior to
adjustment for dilutive financings. The Company also issued warrants to purchase
165,289 shares of common stock at a price of $2.90 per share to its placement
agent in connection with the issuance of the 7% Notes. The warrants issued to
the placement agent and to the investors were valued in January 2002 using the
Black-Scholes model and is being charged to interest expense over the life of
the debt. The proceeds of these financings were used to fund (i) operating and
working capital needs and (ii) the $250,000 upfront cash portion of the Bac-Tech
acquisition, further discussed in Note 5
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.
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, including $275,000 held in escrow at December 31, 2002, were
$1,175,000 and was 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.
In connection with the July 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 relevant escrow agreement (the "Escrow Agreement"). On the
closing of the Financing, proceeds of $350,000 were released to the Company and
the remaining proceeds were 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 balance of $275,000 at December 31,
2002. In April 2003, the $275,000 held in escrow was released. The proceeds were
used to pay for negotiated reduced liabilities and working capital.
The July Notes are secured by substantially all of the assets of the
Company.
At December 31, 2003, amounts due under long-term debt agreements
consisted of:
42
Bac-Tech acquisition notes $ 594
7% notes 1,482
July notes 1,175
Line of credit 38
------------
$ 3,289
============
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.
The Company has an available line of credit with a commercial bank in
the amount of $165,000 personally guaranteed by an officer and former officer of
the Company. Interest is calculated at 1% over prime. The Bank's interest rate
at December 31, 2003 was 5%. Interest expense for the years ended December 31,
2003 and 2002 was $2,000 and $7,000, respectively. As of December 31, 2003,
$38,000 was outstanding.
NOTE 11. COMMITMENTS AND CONTINGENCIES
Leases and Other Commitments
During 2002, the Company assumed a lease for office space in connection
with the acquisition of BacTech. The new lease expires in 2008.
Future minimum rental commitments under non-cancelable leases as of
December 31, 2003 are as follows (in thousands):
Year Ending December 31,
------------------------
2004............................... $ 114
2005............................... 118
2006............................... 121
2007............................... 125
2008............................... 21
----------
Total $ 499
==========
Employment Agreements
The Company maintains employment agreements with two of its officers.
These employment agreements provide for (i) minimum aggregate annual base
salaries of $505,000 and (ii) minimum bonuses totaling $50,000 for each year of
employment of these two individuals. The bonuses were waived for 2003 and 2002.
Litigation
The Company is party to certain legal proceedings and claims, which
arise in the ordinary course of business. In the opinion of management, the
amount of an ultimate liability with respect to these actions will not
materially affect the Company's financial position, results of operations or
cash flows.
In October 2000, Cintra Software & Services Inc. commenced a civil
action against the Company in New York Supreme Court, New York County. The
complaint alleges that the Company acquired certain software from Cintra upon
the authorization of the Company's former Chief Information Officer. Cintra is
seeking damages of approximately $856,000. The Company has filed an answer
denying the material allegations of the complaint. The Company believes it has
meritorious defenses to the allegations made in the complaint and intends to
vigorously defend the action.
NOTE 12. PREFERRED STOCK
In April 1999, eB2B authorized 2,000 shares of Series A Convertible
Preferred Stock ("Series A") with a par value of $.0001 per share, and issued
300 shares of Series A for $300,000. Each share of Series A is convertible into
the number of shares of common stock by dividing the purchase price for the
Series A by the conversion price in effect resulting in approximately 26,600
shares of Company common stock. The Series A have anti-dilution provisions,
which can change the conversion price in certain circumstances if additional
shares of common stock were to be issued by the Company. The holders have the
right to convert the shares of Series A at any time into common stock. Upon
liquidation, dissolution or winding up of the Company, the holders of the Series
43
A are entitled to receive $1,000 per share plus any accrued and unpaid dividends
before distributions to any holder of the Company's common stock. As of December
31, 2003, 293 shares of Series A had been converted into 25,980 shares of
Company common stock.
In December 1999, eB2B authorized 4.0 million shares of Series B
Convertible Preferred Stock ("Series B") with a par value of $.0001 per share,
and issued approximately 3.3 million shares for $33.0 million in gross proceeds
($29.4 million in net proceeds), in a private placement conducted by eB2B. Each
share of Series B is convertible into the number of shares of common stock that
results from dividing the purchase price by the conversion price per share in
effect, which resulted in 1,066,667 shares of Company common stock valued at
$124.4 million based on the average quoted market price of DWeb's common stock.
As this value was significantly greater than the net proceeds received in the
private placement of Series B preferred stock, the net proceeds received were
allocated to the convertible feature and amortized as a deemed dividend on
preferred stock. The Series B have anti-dilution provisions, which can change
the conversion price in certain circumstances if additional securities were to
be issued by the Company. The holders have the right to convert the shares of
Series B at any time into common stock. Upon liquidation, dissolution or winding
up of the Company, the holders of the Series B are entitled to receive $10.00
per share plus any accrued and unpaid dividends before distributions to any
holder of the Company's common stock. As of December 31, 2003, 1,896,682 shares
of Series B had been converted into 918,023 shares of Company common stock. At
December 31, 2003, giving effect to anti-dilution adjustments, each share of
Series B Preferred Stock was convertible into 1.79 shares of common stock.
In the event the Company declares a cash dividend on the common stock,
the Company will at the same time, declare a dividend to the Series A, B and C
stockholders equal to the dividend which would have been payable if the Series
A, B and C stock had been converted into common stock. The holders of the Series
A, B and C are entitled to one vote for each share of the Company's common stock
into which such share of Series A, B and C is then convertible. In addition,
upon any liquidation of the Company, holders of shares of Series A and Series B
shall be entitled to payment of the purchase price before distributions to any
holder of the Company's common stock. Series C holders are entitled to a payment
of the purchase price plus a 33% premium before and distributions to any holder
of the Company's common stock.
The Series C preferred stock currently has weighted average
anti-dilution protection and a liquidation preference. This Series could be
automatically converted by the Company into common stock in certain
circumstances. As of December 31, 2003, giving effect to anti-dilution
adjustments, each share of Series C Preferred Stock was convertible into 27.05
shares of common stock.
In connection with the Company's acquisition of Bac-Tech, eB2B
authorized 95,000 shares of Series D Convertible Preferred Stock ("Series D")
with a par value of $0.001 per share and issued the 95,000 shares to the two
stockholders of Bac-Tech with a value of $775,000. The Series D, inclusive of
any accrued dividend, is automatically convertible into an aggregate of 333,334
shares of common stock. In November 2002, the Series D was converted into
333,334 shares of common stock.
NOTE 13. COMMON STOCK AND WARRANTS
On April 18, 2000, the number of shares of DWeb's common stock issuable
under existing warrants agreements became warrants to purchase shares of the
Company's common stock. As of December 31, 2003, 27,384, shares of common stock
were issuable under such warrants.
In 2001, the Company's former provider of a line of credit was issued
warrants to purchase 204,172 shares of Company common stock at $2.21 per share
for a period of five years in consideration of the availability of a line of
credit (adjusted for subsequent anti-dilution events).
The following table summarizes the status of warrants at December 31,
2003:
Warrants exercisable and outstanding
------------------------------------------------------------------
Weighted average
Range of exercise Number of shares (in remaining life (in
price per share thousands) years)
--------------------- -------------------- ------------------
Original Bridge Warrants $0.101 9,483 2.8
Merger & Advisory Warrants 31.05 117 0.8
Credit Line Warrants 1.40 218 2
Series C Agent Warrants - Preferred 1.20 1,397 2.3
2001 Bridge Warrants 0.88 364 1
Investor Warrants 1.43 1,593 1
Agent Warrants 1.19 212 1
Series B Investor Warrants 5.23 1,376 1
Series B Agent Warrants 5.23 1,355 1
Other 0.20 - 58.65 377 3.3
--------------------
Total 16,492
====================
See Note 17 regarding potential uncertainty related to outstanding
warrants.
44
NOTE 14. STOCK OPTION AND DEFINED CONTRIBUTION PLANS
Stock options plans
The Company has stock-based compensation plans under which outside
directors, certain employees and consultants received stock options and other
equity-based awards. The shareholders of the Company approved the 2000 Stock
Option Plan (the "Plan"). Stock options under the Plan are generally granted
with an exercise price equal to 100% of the market value of a share of common on
the date of the grant, have 10 year terms and vest within 2 to 4 years from the
date of the grant. Subject to customary antidilution adjustments and certain
exceptions, the total number of shares of common stock authorized for option
grants under the Plan was approximately 8 million at December 31, 2003.
Presented below is a summary of the status of the Company employee and
director stock options and the related transactions for the years ended December
31, 2003 and 2002:
Weighted Average
Shares Exercise Price
(in thousands) Per Share
------------ ------------
Options outstanding at December 31, 2001 .... 8,608 $ 2.32
Granted/assumed .......................... 3,283 0.21
Exercised ................................ -- --
Forfeited/expired ........................ (8,039) 2.32
------------ ------------
Options outstanding at December 31, 2002 .... 3,852 0.21
Granted/assumed .......................... 766 0.10
Exercised ................................ -- --
Forfeited/expired ........................ (739) 0.21
------------ ------------
Options outstanding at December 31, 2003 .... 3,879 $ 0.21
============ ============
The following table summarizes information about stock options
outstanding and exercisable as of December 31, 2003:
Options Outstanding Options Exercisable
----------------------------------------------------- --------------------------------------
Weighted- Weighted- Weighted-
Average Average Average
Range of Outstanding Remaining Exercise Exercisable Exercise
Exercise Prices (in thousands) Contractual Life Price (in thousands) Price
---------------------------------------------------------------------------- --------------------------------------
$0.10 - $0.19 3,483 8.5 $ 0.11 3,483 $ 0.11
$3.45 121 7.0 $ 3.45 121 $ 3.45
$7.95 - $8.25 267 6.5 $ 8.10 267 $ 8.10
$48.75 9 5.5 $48.75 9 $48.75
45
See Note 17 regarding potential uncertainty related to outstanding
options.
Defined contribution plan
The Company has a defined contribution savings plan (the "Plan"), which
qualifies under Section 401(k) of the Internal Revenue Code. Participants may
contribute up to 20%, of their salary, subject to a limitation set by Internal
Revenue Service regulations. The Plan provides for discretionary contributions
to be made by the Company as determined by its Board of Directors. During the
years ended December 31, 2003 and 2002, the Company has not made any
contributions to the Plan.
NOTE 15. INCOME TAXES
The components of the net deferred tax asset as of December 31, 2003
consists of the following (in thousands):
Deferred tax assets:
Net operating loss carryforwards .... $ 13,946
Stock-based compensation ............ 8,212
Other miscellaneous ................. 600
------------
22,758
Valuation allowance ................. (22,758)
------------
Net deferred tax asset .............. $ --
============
Deferred income taxes reflect the net effects of temporary differences
between carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. In assessing the
realizability of deferred tax assets, management considers whether it is more
likely than not that some portion or all of the deferred tax assets will not be
realized. The ultimate realization of deferred tax assets is dependent upon the
generation of future taxable income during the periods in which temporary
differences representing net future deductible amounts become deductible. Due to
the uncertainty on the Company's ability to realize the benefit of the deferred
tax assets, the deferred tax assets are fully offset by a valuation allowance at
December 31, 2003.
As of December 31, 2003, the Company had approximately $35 million of
net operating loss (NOL) carryforwards for federal income tax purposes. The NOL
carryforwards expire in various years ranging from 2019 to 2023. During 2000,
the Company may have experienced an ownership change as that term is defined in
Section 382 of the Internal Revenue Code. Under that section, when there is an
ownership change, the pre-ownership-change loss carryforwards are subject to an
annual limitation which could reduce or defer the utilization of these losses.
Therefore, the Company's pre-ownership change tax losses may be severely limited
and may expire without being utilized.
The provision for income taxes differs from the amount computed by
applying the statutory federal income tax rate to income before provision for
income taxes. The sources and tax effects of the differences are as follows (in
thousands):
Year Ended December 31,
----------------------------
2003 2002
------------ ------------
Federal income tax, at statutory rate ..................................... $ 44 $ (3,064)
State income tax, net of federal benefit .................................. 10 (721)
Non-deductible expenditures, including goodwill impairment and other ...... 193 3,080
Change in valuation allowance ............................................. (247) 705
------------ ------------
Income taxes, as recorded ................................................. $ -- $ --
============ ============
NOTE 16. RELATED PARTIES
The Chief Operating Officer and a Managing Director of a securities
firm, that has in the past provided financial advisory services to the Company
(the "Financial Advisor"), are directors 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 certain of the
Company's financings, the Financial Advisor received a cash fee in the amount of
$200,000 during 2002 and was issued warrants in 2002 to purchase 165,289 shares
of Company common stock with an exercise price of $2.40 for a period of two
years prior to adjustment for dilutive financings. 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, prior to
46
adjustment for dilutive financings. 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 former Chairman of the Board $100,000 during
the year ended December 31, 2002, 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.
NOTE 17. SUBSEQUENT EVENTS
On April 14, 2004 the Company's Senior Secured Convertible Noteholders
had declared the Company in default on its interest payments of approximately
$432,000 and as a result were demanding acceleration payment of the $3,200,000
Senior Secured notes, plus accrued interest. As the Company had insufficient
cash to satisfy the claims of its Noteholders, good faith negotiations ensued to
resolve the issue to the benefit of the Company's shareholders.
On October 27, 2004, the Company filed for reorganization under Chapter
11 of the U.S. Bankruptcy Code in the Bankruptcy Court of the Southern District
of New York. The Company simultaneously filed a Plan of reorganization with the
Court, to effect an agreement, subject to consideration and approval by the
Court, to settle its claims with its Senior Secured Convertible Noteholders, as
well as to provide some recovery to its unsecured creditors and shareholders.
The Company had also received notice from the legal representative of
one of the Bac-Tech principals to accelerate payment of $300,000 on a Promissory
Note related to the January 2002 acquisition of Bac-Tech, which is secured by
the Intellectual Property related to the acquisition. As of December 31, 2003,
the Company had an obligation to pay the aforementioned party $100,000 on
January 1, 2004, which it was unable to pay. This claim was settled and mutual
releases signed in August 2004. Under the terms of the settlement, a one-time
discounted payment of $60,000 satisfied the Promissory Note in full.
On December 8, 2004, the Securities and Exchange Commission filed an
objection to the Disclosure Statement and Plan with the Court, as did the United
States Trustee on November 19, 2004. The bases for the objections were that the
Company had not disclosed fully the future business and plan of eB2B Commerce,
and that under our plan the Company was in effect liquidating its assets and
therefore was not able to seek a discharge in bankruptcy. The Company disagrees
with this interpretation of the plan, in that under its plan, the Company sought
to give all financially affected parties the maximum recovery possible while
fully discharging its debt to the Senior Secured Noteholders. Without the Plan
Sponsor and the sale of the corporate shell, it is likely that creditors and
shareholders will receive little or no recovery under the plan.
Under the Company's Plan of reorganization under Chapter 11 of the U.S.
Bankruptcy Code, it is anticipated that any outstanding options and warrants
agreements, as well as any employment agreements with the Company's officers,
will be terminated.
Item 8. Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
47
PART III
Item 9. Directors and Executive Officers of the Registrant
Executive officers and directors
The following table sets forth certain information regarding our directors and
executive officers:
Name Age Position
- ---- --- --------
Richard S. Cohan* 51 Chairman of the Board of Directors and
Chief Executive Officer
Robert Bacchi 48 Chief Operating Officer
- ------------------
* Member of Audit Committee
Richard S. Cohan joined our company in May 2001 as president and chief operating
officer. In July 2001, he became chief executive officer of our company, and
relinquished his position as chief operating officer. He has been a director
since May 2002, and Chairman of the Board since June 2003. Mr. Cohan served as
senior vice president of WebMD, a health information technology company, from
June 1998 to January 2001. He was also president of The Health Information
Network Company, an e-health consortium of major New York health insurers and
associations of which WebMD was the managing partner, from 1998 to 2001. Prior
to joining WebMD, Mr. Cohan spent 18 years at National Data Corporation, with
various titles including executive vice president, Healthcare.
Robert Bacchi joined our company in January 2002 as chief operating officer
following our acquisition of Bac-Tech Systems, Inc., a privately-held New York
City based e-commerce company. Mr. Bacchi founded Bac-Tech in 1981 and served as
its President since such date.
The above director will hold office until the next annual meeting of the
stockholders and until their successors have been duly elected and qualified.
All of the above executive officers serve at the discretion of our board of
directors.
Commonwealth Associates, L.P. currently has the right to designate two members
of our board of directors, but have no designees at this time. The holders of
our Series B preferred stock, voting as a class, have the right to designate one
member of our board of directors, and have no designee at this time. When the
holders of the Series B preferred stock no longer have the right to designate a
director, Commonwealth shall receive the right to designate such member.
Commonwealth's right to designate this third member of the board and one of its
two other designees shall expire when the Series C preferred stock has converted
into shares of common stock or there is otherwise less than 20% of the
originally issued shares of Series C preferred stock outstanding.
Section 16(a) Beneficial Ownership Reporting Compliance
Based solely upon a review of Forms 3, 4 and 5 and amendments to these forms
furnished to us, all parties subject to the reporting requirements of Section
16(a) of the Exchange Act filed on a timely basis all such required reports with
respect to transactions during our year ended December 31, 2003.
48
Section 16(a) ("Section 16(a)") of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), requires executive officers and directors and
persons who beneficially own more than ten percent (10%) of the Company's common
stock to file initial reports of ownership on Form 3 and reports of changes in
ownership on Form 4 with the Securities and Exchange Commission and any national
securities exchange on which the Company's securities are registered.
Item 10. Executive Compensation
The following table provides information concerning the annual and long-term
compensation earned or paid to our chief executive officer and to each of our
most highly compensated named executive officers other than the chief executive
officer, whose compensation exceeded $100,000 during 2003.
Annual Compensation Long-Term Compensation
---------------------------- -----------------------------
Name and Number of Securities
Principal Position Year Salary Bonus Underlying Options (#)
- --------------------------------------- -------------- ------------ --------- -----------------------------
Richard S. Cohan 2003 $228,948 $ 0 0
Chairman and Chief Executive Officer 2002 $201,068 $40,000 1,150,000
2001 $114,086 $ 8,333 200,000
Robert Bacchi 2003 $160,049 $ 0
Chief Operating Officer 2002 $151,104 $ 0 633,333
49
Option Grants in 2003
No individual grants of stock were made to our named executive officers in 2003.
No stock options were exercised in 2003.
Aggregated Option Exercises in 2003 and Year End Values
The following table provides information concerning the value of unexercised
options owned by each of our named executive officers at December 31, 2003. No
stock options were exercised in 2003.
Number of Securities Value of Unexercised
Underlying Options In-the-Money Options (1)
-------------------------------------------- ------------------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
--------------------- ----------------- ------------------------ ------------------ ------------------
Richard S. Cohan 652,779 720,555 0 0
Robert Bacchi 322,222 311,111 0 0
(1) Based on closing price of our common stock as reported on Nasdaq on
December 31, 2003.
Employment Agreements
Our company and Richard S. Cohan, our chief executive officer and president, are
parties to an employment agreement, dated May 4, 2001. The initial term of the
agreement expires on May 3, 2004, but the agreement automatically renews for
successive one-year terms unless terminated by either party prior to renewal.
The agreement provides for an annual base salary of $175,000 with a minimum
annual bonus of $50,000. In 2002, the Board of Directors increased Mr. Cohan's
annual salary to $250,000 and changed the minimum guaranteed bonus to a
contingent bonus of up to 50% of base salary dependent upon the achievement of
certain defined operating parameters. Mr. Cohan has voluntarily opted for a
salary level of $225,000. Mr. Cohan was also granted options to purchase 133,334
shares of common stock pursuant to our amended 2000 stock option plan. In the
event Mr. Cohan's employment is terminated, for reason other than "cause" (as
defined in the agreement), including the resignation of Mr. Cohan for good
reason, the termination of Mr. Cohan's employment for our own convenience or
upon Mr. Cohan's death or disability, the agreement provides that we are
required to pay Mr. Cohan an amount equal to his annual base salary and bonus
for a period of six months following the date of the event that resulted in the
termination of employment and his options shall accelerate and immediately vest
as provided in the agreement.
In connection with the acquisition of their company Bac-Tech Systems, Inc., our
company entered into an employment agreement, dated January 2, 2002, with Robert
Bacchi pursuant to which he was employed as our chief operating officer. The
initial term of the agreement expires on January 1, 2005, but the agreement
automatically renews for successive one-year terms unless terminated by either
party prior to renewal. The employment agreement provides for an annual base
salary of $165,000 and Mr. Bacchi was also granted options to purchase 33,334
shares of common stock pursuant to our amended 2000 stock option plan. Mr.
Bacchi's salary was increased to $175,000 on January 3, 2004. If Mr. Bacchi is
terminated without cause or for our convenience or in the event of his death or
50
disability at any time, he or his estate would be entitled to his base salary
for a period of six months from termination. In January 2004, Mr. Bacchi's
salary was increased by the Board to $175,000.
Provisions of Our Charter and By-Laws
Our amended and restated certificate of incorporation provides that we will
indemnify any person who is or was our director, officer, employee or agent to
the fullest extent permitted by the New Jersey Business Corporation Act, and to
the fullest extent otherwise permitted by law. The New Jersey law permits a New
Jersey corporation to indemnify its directors, officers, employees and agents
against liabilities and expenses they may incur in such capacities in connection
with any proceeding in which they may be involved, unless a judgment or other
final adjudication adverse to the director, officer, employee or agent in
question establishes that his or her acts or omissions (a) were in breach of his
or her duty of loyalty (as defined in the New Jersey law) to our company or our
stockholders, (b) were not in good faith or involved a knowing violation of law
or (c) resulted in the receipt by the director, officer, employee or agent of an
improper personal benefit.
Pursuant to our amended and restated certificate of incorporation and the New
Jersey law, no director or officer of our company will be personally liable to
us or to any of our stockholders for damages for breach of any duty owed to us
or our stockholders, except for liabilities arising from any breach of duty
based upon an act or omission (i) in breach of such director's or officer's duty
of loyalty (as defined in the New Jersey law) to us or our stockholders, (ii)
not in good faith or involving a knowing violation of law or (iii) resulting in
receipt by such director or officer of an improper personal benefit.
In addition, our bylaws include provisions to indemnify our officers and
directors and other persons against expenses, judgments, fines and amounts
incurred or paid in settlement in connection with civil or criminal claims,
actions, suits or proceedings against such persons by reason of serving or
having served as officers, directors, or in other capacities, if such person
acted in good faith, and in a manner such person reasonably believed to be in or
not opposed to our best interests and, in a criminal action or proceeding, if he
or she had no reasonable cause to believe that his/her conduct was unlawful. The
termination of any action, suit or proceeding by judgment, order, settlement,
conviction or upon a plea of nolo contendere or its equivalent will not, of
itself, create a presumption that the person did not act in good faith and in a
manner which he or she reasonably believed to be in or not opposed to our best
interests or that he or she had reasonable cause to believe his or her conduct
was unlawful. Indemnification as provided in the bylaws will be made only as
authorized in a specific case and upon a determination that the person met the
applicable standards of conduct.
Item 11. Security Ownership of Certain Beneficial Owners and Management
The following table shows the common stock owned by our current
directors and named executive officers, by persons known by us to beneficially
own, individually, or as a group, more than 5% of our outstanding common stock
as of December 31, 2003 and all of our current directors and executive officers
as a group. Included as shares beneficially owned are shares of convertible
preferred stock, which preferred shares have the equivalent voting rights of the
underlying common shares. Such preferred shares are included to the extent of
the number of underlying shares of common stock. Also included are shares of
common stock underlying convertible notes.
51
Beneficial Percent of Percent of
Name and Address Ownership of Common Common Stock
of Beneficial Owner (1) Capital Stock (2) Stock (3) On a Fully Diluted Basis (4)
- ----------------------- ----------------- --------- ----------------------------
Richard S. Cohan 306,354 (5) 2.2% 0.4%
Robert Bacchi 516,040 (6) 3.8% 0.6%
Robert Priddy (7) 15,670,202 (8) 53.7% 18.7%
Stephen J. Warner (9) 11,594,688 (10) 46.4% 13.8%
Edmund H. Shea, Jr. (11) 9,596,511 (12) 41.8% 11.5%
Chesed Congregations of America (13) 5,563,747 (14) 32.9% 6.6%
Michael S. Falk (15) 10,203,067 (16) 43.3% 12.3%
All directors and officers as a group 755,727 6.0% 1.0%
(2 persons)
(1) The address of each person who is a 5% holder, except as otherwise
noted, is c/o eB2B Commerce, Inc., 665 Broadway, New York, New York
10012.
(2) Except as otherwise noted, each individual or entity has sole voting
and investment power over the securities listed. Includes ownership of
only those options and warrants that are exercisable within 60 days of
December 31, 2003.
(3) The ownership percentages in this column for each person listed in this
table are calculated assuming the exercise of all options and warrants
held by such person exercisable within 60 days of the date of December
31, 2003 and conversion of all convertible notes held by such person
convertible within such time period and giving effect to the shares of
common stock held by such person.
(4) The ownership percentages in this column are calculated for each person
listed in this table on a fully diluted basis, assuming the exercise of
all options (regardless if exercisable within 60 days) and warrants,
held by such person and all of our other securityholders and conversion
of all preferred stock and convertible notes held by such person and
all of our other securityholders.
(5) Includes 3,273 shares of common stock and (i) 247,585 shares underlying
convertible notes and (ii) 55,556 shares underlying options.
(6) In addition to 257,404 shares of common stock (including 80,000 shares
owned by family members) includes (i) 247525 shares underlying
convertible notes and (ii) 11,111 shares underlying options
(7) The address of Mr. Priddy is 3291 Buffalo Drive, Suite 8, Las Vegas,
Nevada 89129.
(8) Mr. Priddy may be deemed to be the beneficially owner of (i) 4,286221
shares of common stock beneficially owned by RMC Capital, LLC ("RMC"),
of which Mr. Priddy is a manager and principal member, (ii) 246,085
shares of common stock underlying warrants, (iii) 1,734,961 shares of
common stock underlying convertible preferred stock, and (iv) 9,405,936
shares of common stock underlying convertible notes. RMC's beneficial
holdings include 8,342 shares of common stock and 4,152,659 shares of
common stock underlying convertible preferred stock.
(9) The address of Mr. Warner is One N. Clematis Street, West Palm Beach,
Florida 33401.
(10) Includes 3,673,905 shares underlying convertible preferred stock, and
7,920,778 shares underlying convertible notes owned by Alpine Venture
Capital Partners L.P. Mr. Warner is the chief executive officer of
Crossbow Ventures Inc., the management company for Alpine Venture
Capital Partners L.P.
(11) The address of Mr. Shea is 655 Brea Canyon Road, Walnut, California
91789.
52
(12) In addition to 66,731 shares of common stock, includes 3,092,350 shares
underlying convertible notes, (ii) 1,793 shares underlying warrants,
and (iii) 6,435,637 shares underlying convertible notes.
(13) The address of Chesed Congregations of America is One State Street
Plaza, New York, New York 10004.
(14) Includes 2,048,913 shares of common stock and 3,514,834 shares
underlying convertible notes.
(15) The address of Mr. Falk is c/o Commonwealth Associates, L.P., 830 Third
Avenue, New York, New York 10022.
(16) In addition to the aggregate of 2,408,862 shares beneficially owned by
Commonwealth Associates L.P., which may be deemed to be beneficially
owned by Mr. Falk, Mr. Falk's holdings include 12,056 shares of common
stock, and the right to acquire (i) 1,921,837 shares underlying
warrants and options, and (ii) 38,038shares underlying convertible
preferred stock. In his capacity as chairman and controlling equity
owner of Commonwealth Associates Management Corp., Mr. Falk shares
voting and dispositive power with respect to the securities
beneficially owned by Commonwealth Associates L.P. and may be deemed to
be the beneficial owner of such securities. In addition, Mr. Falk (i)
as sole member of the general partner of ComVest Venture Partners, LP,
Mr. Falk may be deemed to own the 3,788,376 shares underlying warrants
owned by such entity, and (ii) as a manager and principal member of
ComVest Capital Partners, LLC, Mr. Falk may be deemed to beneficially
own the 2,033,898 shares beneficially owned by such entity, which is
inclusive of 53700 shares underlying warrants and 1,980,198 underlying
convertible preferred notes. With respect to the entities mentioned in
this note, Mr. Falk may be deemed to share indirect voting and
dispositive power with respect to such entities' shares and may
therefore be deemed to be the beneficial owner of such securities.
(17) The address of Commonwealth Associates, L.P. is 830 Third Avenue, New
York, New York 10022.
(18) The address for ComVest Capital Management LLC is 830 Third Avenue, New
York, New York 10022.
(19) Commonwealth Associates, L.P.'s holding includes 26,341 shares of
common stock, 8,861 shares underlying convertible preferred stock and
2,373,661 shares underlying warrants and unit purchase options.
53
Item 12. Certain Relationships and Related Transactions
In January 2002, we issued Commonwealth (and its designees) for
providing services as the placement agent in the private placement of
convertible notes and warrants, five year warrants to purchase 165,288 shares of
our common stock at an exercise price of $2.42 per share.
All of the above share numbers for our common stock have been adjusted
to reflect the one-for-fifteen reverse stock split effected in January 2002, but
do not reflect anti-dilution adjustments subsequent to their issuance.
Commonwealth currently beneficially owns a significant amount of our
voting securities, and currently has two designees on our Board of Directors.
54
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
Registrant has caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
December 15, 2004 eB2B Commerce, Inc.
By: /s/ RICHARD S. COHAN
----------------------------------------
Richard S. Cohan
Chairman and Chief Executive Officer
(Principal Executive,
Financial and Accounting Officer)
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the Registrant and in the capacities and
on the dates indicated.
December 15, 2004 By /s/ RICHARD S. COHAN
------------------------------------
Richard S. Cohan
Director
55
CERTIFICATIONS
I, Richard S. Cohan, certify that:
1. I have reviewed this annual report on Form 10-KSB of eB2B Commerce,
Inc.;
2. Based on my knowledge, this annual 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 periods
covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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 annual 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 annual report (the "Evaluation Date");
and
c. Presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrants' 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
annual 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: December 15, 2004 /s/ RICHARD S. COHAN
----------------------------------
Richard S. Cohan
Chief Executive Officer and
President (Principal Executive and
Financial Officer)
56
Item 13. Exhibits and Reports on Form 8-K
Number Description
- ------ -----------
2.1 Agreement and Plan of Merger by and between eB2B Commerce, Inc.
and DynamicWeb Enterprises, Inc., dated December 1, 1999, and as
amended, dated February 29, 2000 (incorporated by reference to
Exhibit 2.1 and Exhibit 2.2 filed with the Registrant's
Registration Statement on Form S-4 filed on January 24, 2000 and
amended on March 20, 2000 ("Form S-4")).
2.2 Agreement and Plan of Merger by and between eB2B Commerce, Inc.,
Netlan Merger Corporation and Netlan Enterprises, Inc., dated
February 22, 2000 (incorporated by reference to Exhibit 2.5 filed
with the Registrant's Form S-4).
2.3 Agreement and Plan of Merger among eB2B Commerce, Inc., Bac-Tech
Systems, Inc., Robert Bacchi and Michael Dodier, dated as of
January 2, 2002 (incorporated by reference to Exhibit 2.1 as filed
with the Registrant's Form 8-K, dated January 2, 2002).
3.1 Certificate of Incorporation, as filed with the Secretary of State
of New Jersey on August 7, 1979 together with subsequently filed
Amendments and Restatements through April 2001, inclusive of terms
and designations for Series A and Series B preferred stock
(incorporated by reference to Exhibits 3.1.1 through Exhibit
3.1.13 filed with the Registrant's Form S-4) and Amendments filed
from May 2001 through January 2002, inclusive of terms and
designations of Series C and Series D preferred stock.
3.2 Bylaws adopted August 7, 1979 including all subsequently filed
Amendments and Restatements (incorporated by reference to Exhibit
3.2.1 through Exhibit 3.2.4 filed with the Registrant's Form S-4).
3.3 Bylaw Amendment Adopted October 9, 2003 (incorporated by reference
to Item 6, Exhibit 3.2.3 Amendment Adopted October 9, 2003 to
Bylaws of Registrant, of Registrant's Form 10-QSB for the
quarterly period ended September 30, 2003).
10.1 Employment Agreement between Richard S. Cohan and eB2B Commerce,
Inc., dated effective as of May 4, 2001 (incorporated by reference
to Amendment No. 1 to the Registrant's Registration Statement on
Form SB-2).
10.2 Form of Series A Preferred Stock Subscription Agreement
(incorporated by reference to Amendment No. 1 to the Registrant's
Registration Statement on Form SB-2) and schedule related thereto
(incorporated by reference to Exhibit 10.5 filed with the
Registrant's Annual Report on Form 10-KSB for the year ended
December 31, 2001 ("2001 Form 10-KSB").
10.3 Form of Unit Subscription Agreement relating to Series B preferred
stock and warrants (incorporated by reference to Amendment No. 1
to the Registrant's Registration Statement on Form SB-2) and
schedule related thereto (incorporated by reference to Exhibit
10.6 as filed with the Registrant's 2001 Form-KSB).
10.4 Form of Unit Subscription Agreement relating to convertible notes
and warrants issued in April/May 2001 (incorporated by reference
to Amendment No. 1 to the Registrant's Registration Statement on
Form SB-2) and schedule related thereto (incorporated by reference
to Exhibit 10.7 as filed with the Registrant's 2001 Form 10-KSB).
10.5 Form of Unit subscription relating to convertible notes and
warrants issued in December 2001 and schedule related thereto
(incorporated by reference to Exhibit 10.8 as filed with the
Registrant's 2001 Form-10KSB).
10.6 Form of Unit Subscription Agreement relating to convertible notes
and warrants issued in January 2002 and schedule related thereto
(incorporated by reference to Exhibit 10.9 as filed with the
Registrant's 2001 Form-10-KSB).
- --------------------------------------------------------------------------------
57
10.7 Form of 7% Senior Subordinated Secured Convertible Note
(incorporated by refrence to Exhibit 10.10 as filed with the
Registrant's 2001 Form-KSB).
10.8 Software License Agreement between InterWorld Corporation and
eChannel Ventures Inc., dated December 11, 1998, Addendum thereto
dated September 30, 1999, Letter Agreement amending the Addendum,
dated February 21, 2001, Amendment No. 1, dated April 12, 2001 and
Amendment No. 2, dated December 24, 2001(incorporated by reference
to Exhibit 10.11 as filed with the Registrant's 2001 Form KSB).
10.9 eB2B Commerce, Inc. 2000 Stock Option Plan, as amended through
January 16, 2003.
10.10 Promissory Note, dated January 2, 2002, issued by eB2B Commerce,
Inc. in favor of Robert Bacchi (incorporated by reference to
Exhibit 10.1 as filed with the Registrant's Form 8-K, dated
January 2, 2002).
10.11 Promissory Note, dated January 2, 2002, issued by eB2B Commerce,
Inc. in favor of Michael Dodier (incorporated by reference to
Exhibit 10.2 as filed with the Registrant's Form 8-K, dated
January 2, 2002).
10.12 Security Agreement, dated January 2, 2002, between eB2B Commerce,
Inc. and each of Robert Bacchi and Michael Dodier (incorporated by
reference to Exhibit 10.3 as filed with the Registrant's Form 8-K,
dated January 2, 2002).
10.13 Registration Rights Agreement, dated January 2, 2002, between eB2B
Commerce, Inc. and each of Robert Bacchi and Michael Dodier
(incorporated by reference to Exhibit 10.4 as filed with the
Registrant's Form 8-K, dated January 2, 2002).
10.14 Employment Agreement, dated January 2, 2002, between eB2B
Commerce, Inc., and Robert Bacchi (incorporated by reference to
Exhibit 10.5 as filed with the Registrant's Form 8-K, dated
January 2, 2002).
10.15 Employment Agreement, dated January 2, 2002, between eB2B
Commerce, Inc. and Michael Dodier (incorporated by reference to
Exhibit 10.6 as filed with the Registrant's Form 8-K, dated
January 2, 2002).
10.16 Non-Competition Agreement, dated January 2, 2002, between eB2B
Commerce, Inc. and Robert Bacchi (incorporated by reference to
Exhibit 10.7 as filed with Registrant's Form 8-K, dated January 2,
2002).
10.17 Non-Competition Agreement, dated January 2, 2002, between eB2B
Commerce, Inc. and Michael Dodier (incorporated by reference to
Exhibit 10.8 as filed with Registrant's Form 8-K, dated January 2,
2002).
10.18 Form of Subscription Agreement relating to promissory notes issued
in each of July 2002, September 2002, and November 2002 and
schedule related thereto.
10.19 Form of 7% Senior Subordinated Secured Promissory Note issued each
as of July 15, 2002, September 11, 2002, and November 4, 2002 and
schedule related thereto.
10.20 General Security Agreement, dated July 11, 2002, between eB2B
Commerce, Inc. and Robert Priddy, as Investor Representative.
10.21 Software License Agreement between InterWorld Corporation and
eChannel Ventures Inc., dated December 11, 1998 Amendment No. 3
dated July 8, 2003 (incorporated by reference to Exhibit 10.1 as
filed with the Registrant's Form 8-K, dated July 8, 2003)
99.1 Certification pursuant to 18 U.S.C. S1350 as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
58
RIDER to EXHIBITS FOR FORM 10-KSB
Reports on Form 8-K.
During the fourth quarter of 2003, we filed no Form 8-Ks.
Rider 14
Item 14. 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-KSB, that our disclosure controls and procedures under Rule 13a-14 of the
Securities Exchange Act of 1934 are effective to ensure that information we
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.
Subsequent to our evaluation, there were no significant changes in
internal controls or other factors that could significantly affect these
internal controls.
59