U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-QSB
Quarterly Report under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended March 31, 2004
Commission file number 10039
eB2B COMMERCE, INC.
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(Exact name of small business issuer as specified in its charter)
NEW JERSEY 22-2267658
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
665 BROADWAY
NEW YORK, NY 10012
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(Address of Principal Executive Offices)
(212) 477-1700
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(Issuer's telephone number, including area code)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports) and (2) has been
subject to such filing requirements for the past 90 days. YES [X] NO [ ]
As of September 30, 2004, there were 8,467,461 shares of Common Stock, $0.0001
par value per share, of the registrant outstanding.
Transitional Small Business Disclosure format Yes No X
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
eB2B COMMERCE, INC.
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
March 31, 2004
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(Unaudited)
ASSETS
Current Assets
Cash and cash equivalents $ 214
Accounts receivable, net of allowance of $199 462
Deferred financing costs, net of accumulated amortization of $209 256
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Total Current Assets 932
Property and equipment, net 11
Product development costs, net of accumulated amortization of $5,883 293
Intangibles assets, net of accumulated amortization of $3,015 67
Other assets 35
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Total assets $ 1,338
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LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities
Accounts payable $ 742
Accrued expenses and other current liabilities 1,120
Current maturities of long-term debt 3,357
Deferred revenue 271
Current liabilities of discontinued operations 87
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Total current liabilities 5,577
Long-term debt, less current maturities -
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Total liabilities 5,577
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Commitments and contingencies
Stockholders' Deficit
Preferred stock, convertible Series A - $.0001 par value; 2,000 shares
authorized; 7 shares issued and outstanding -
Preferred stock, convertible Series B - $.0001 par value; 4,000,000 shares
authorized; 1,983,674 shares issued and outstanding -
Preferred stock, convertible Series C - $.0001 par value; 1,750,000 shares
authorized; 524,506 shares issued and outstanding -
Common stock - $.0001 par value; 200,000,000 shares authorized; 8,467,461
shares issued and outstanding 8
Additional paid-in capital 157,314
Accumulated deficit (161,561)
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Total stockholders' deficit (4,239)
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Total liabilities and stockholders' deficit $ 1,338
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See accompanying notes to consolidated financial statements.
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eB2B COMMERCE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Three Months Ended
March 31
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2004 2003
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Revenue $ 833 $ 1,031
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Costs and Expenses:
Cost of revenue 176 300
Marketing and selling 34 125
Amortization of product development costs 60 128
Amortization of other intangibles 82 242
General and administrative 489 465
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Total costs and expenses 841 1,260
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Loss from continuing operations before interest and other expenses, net (8) (229)
Interest and other expenses, net (171) (163)
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Loss from continuing operations (179) (392)
Loss from discontinued operations - (23)
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Net Loss $ (179) $ (415)
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Net loss per common and common equivalent share:
Basic and Diluted:
Loss per common share from continuing operations $ (0.03) $ (0.13)
Loss per common share from discontinued operations - (0.01)
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Loss per common $ (0.03) $ (0.13)
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Weighted average number of common shares outstanding: 6,495,984 3,128,439
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See accompanying notes to consolidated financial statements.
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eB2B COMMERCE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
For the Three Months Ended
March 31
2004 2003
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Cash flows from operating activities:
Net loss from continuing operations $ (179) $ (392)
Adjustments to reconcile net loss from continuing operations
to net cash provided by (used in) operating activities:
Depreciation and amortization 145 412
Provision for doubtful accounts 4 -
Non-cash interest expense 170 106
Changes in operating assets and liabilities:
Accounts receivable 121 194
Other current assets 9 29
Accounts payable (99) (197)
Accrued expenses and other liabilities (3) (22)
Deferred revenue 6 (240)
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Net cash provided by (used in) operating activities 174 (110)
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Cash flows from investing activities:
Purchases of property and equipment (5) -
Product development expenditures (88) (91)
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Net cash used in investing activities (93) (91)
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Cash flows from financing activities:
Payments on borrowings (13) (9)
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Net cash used by financing activities (13) (9)
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Net cash provided by (used in) continuing operations 68 (210)
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Net cash used in discontinued operations - (23)
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Net change in cash and cash equivalents 68 (233)
Cash and equivalents - beginning of period 146 461
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Cash and equivalents - end of period $ 214 $ 228
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Supplemental disclosure of cash flow information
Cash paid for interest $ - $ 2
Non-cash investing and financing activities:
Remeasurement of settlement obligation $ - $ 4
See accompanying notes to consolidated financial statements.
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eB2B COMMERCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1. ORGANIZATION AND LIQUIDITY PLANS
eB2B Commerce, Inc. (the "Company") utilizes proprietary software to
provide a technology platform for buyers and suppliers to transfer business
documents via the Internet 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 and its quarterly reports for March 31, 2004,
June 30, 2004, and September 30, 2004.
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
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Disclosure Statement will be held where it is anticipated that these objections
will be raised. 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.
NOTE 2. BASIS OF PRESENTATION
The accompanying quarterly financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of
America.
In the opinion of management, all material adjustments, consisting of
normal recurring adjustments, considered necessary for a fair presentation have
been included in the accompanying unaudited condensed consolidated financial
statements. All significant intercompany balances and transactions have been
eliminated in consolidation and certain other prior period balances have been
reclassified to conform to the current period presentation. The accompanying
unaudited condensed consolidated financial statements are not necessarily
indicative of full year results.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with accounting principles generally accepted
in the United States of America have been condensed or omitted pursuant to such
rules and regulations; however, management believes that the disclosures are
adequate to make the information presented not misleading. This report should be
read in conjunction with the audited consolidated financial statements and
footnotes therein included in the Company's Annual Report on Form 10-KSB for the
fiscal year ended December 31, 2003.
NOTE 3. DISCONTINUED OPERATIONS
In September 2002, the Company discontinued its Training and Educational
Services business segment. The Company was unable to find a buyer for this
business segment and determined that it was in the best interests of its
shareholders to discontinue its operations rather than continue to fund its
working capital needs and operating losses. Accordingly, the related results of
operations and cash flows have been reflected as discontinued operations in the
accompanying consolidated financial statements. For the three months ended March
31, 2004 and 2003, the Company's discontinued operations contributed net sales
of $0 and $0, respectively. As of March 31, 2004, there were no assets relating
to this segment, and its liabilities totaled $87,000.
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NOTE 4. ACCOUNTING FOR STOCK BASED COMPENSATION
Effective January 1, 2003, the Company adopted the fair value recognition
provisions of Statement of Financial Accounting Standards ("FAS") No. 123,
"Accounting for Stock-Based Compensation", prospectively to all employee awards
granted, modified, or settled after January 1, 2003. Prior to 2003, the Company
accounted for stock-based employee compensation under the recognition and
measurement provisions of APB Opinion No. 25, "Accounting for Stock Issued to
Employees," and related Interpretations. No stock-based compensation cost is
reflected in the three months ended March 31, 2004 as no awards were granted
during the period. Stock-based compensation cost of approximately $31,000 is
reflected in the accompanying Statement of Operations for the three months ended
March 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 income (loss) and income (loss) per share as if
the fair value based method had been applied to all outstanding and unvested
awards in each period.
Three Months Ended
March 31,
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2004 2003
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Loss from continuing operations, as reported $ (179) $ (392)
Add: Stock-base compensation expense included in reported net loss - 31
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Deduct: Total stock-based employee compensation expense determined under
fair value based method for all awards - (31)
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Pro forma loss from continuing operations, net of tax $ (179) $ (392)
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Income (loss) from discontinued operations, as reported $ - $ (23)
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Deduct: Total stock-based employee compensation expense determined under
fair value based method for all awards - -
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Pro forma income (loss) from discontinued operations, net of tax $ - $ (23)
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Net loss, as reported $ (179) $ (415)
Deduct: Total stock-based employee compensation expense determined under
fair value based method for all awards - -
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Pro forma net loss $ (179) $ (415)
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Income (loss) per share:
Income (loss) from continuing operations - as reported $ (0.03) $ (0.12)
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Income (loss) from continuing operations - pro forma $ (0.03) $ (0.12)
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Income (loss) from discontinued operations - as reported $ - $ (0.01)
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Income (loss) from discontinued operations - pro forma $ - $ (0.01)
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Net income (loss) - as reported $ (0.03) $ (0.13)
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Net income (loss) - pro forma $ (0.03) $ (0.13)
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Weighted average number of common shares outstanding 6,495,984 3,128,439
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NOTE 5. NET INCOME (LOSS) PER COMMON SHARE
Basic net loss per common share is computed by dividing net loss by the
weighted-average number of common shares outstanding during the period. Diluted
earnings per share is computed using the weighted-average number of common and
dilutive common-equivalent shares outstanding during the period. Dilutive
common-equivalent shares consist of shares that would be issued upon the
exercise of stock options and warrants (computed using the treasury stock
method).
Options and warrants to purchase 20,389,362 shares of common stock, and
preferred shares or long term debt convertible into 55,652,507 shares of common
stock for the three months ended March 31, 2004 were not included in diluted
earnings per share as their effect would be anti-dilutive. Options and warrants
to purchase 26,229,826 shares of common stock, and preferred shares or long term
debt convertible into 50,437,000 shares of common stock for the three months
ended March 31, 2003, respectively were not included in diluted loss per share
because they would have been antidilutive.
NOTE 6. ADDITIONAL PAID-IN CAPITAL
During December 2001, the Company renegotiated a potential $1,200,000
liability with a creditor relating to the licensing of software. The Company had
previously issued 145,986 shares of common stock to this party for amounts then
owing. The Company had agreed that in the event this party received gross
proceeds less than the amount originally owed, the Company would reimburse this
party for the shortfall. In December 2001, this agreement was amended whereby
the creditor agreed to be issued up to 266,667 shares of the Company's common
stock to offset any deficiency, and to the extent this amount is insufficient,
the creditor would be paid one-half the remaining balance in cash no earlier
than April 2003, with the other half forgiven.
At March 31, 2003, the Company remeasured its potential liability under the
agreement. As a result of the remeasurement, the Company reduced its liability
by $4,000 and increased additional paid-in capital as of March 31, 2003.
NOTE 7 - SUBSEQUENT EVENT
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.
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 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.
On November 1, 2004, the Court entered an order approving Interim
Debtor-In-Possession financing in an amount not to exceed $120,000. Enable
Corporation, a Florida corporation, is providing the Company with up to $300,000
in Debtor-In-Possession financing. The Court approved the financing in final
form on November 22, 2004, and the Company now has full access to the $300,000
in Debtor-In-Possession loan facility.
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
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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.
On December 15, 2004, the Court approved the Company's revised Disclosure
Statement and set a confirmation hearing date of January 26, 2005 regarding the
Company's Plan. The Company anticipates meeting with the SEC and U.S. Trustee to
try and resolve their objections prior to the hearing.
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).
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Forward Looking Statements
Certain of the statements contained herein should be considered "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995, which 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
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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.
Forward-looking statements are only estimates or predictions and cannot be
relied upon. We can give you no assurance that future results will be achieved.
Actual events or results may differ materially as a result of risks facing us or
actual results differing from the assumptions underlying such statements. These
risks and assumptions could cause actual results to vary materially from the
future results indicated, expressed or implied in the forward-looking statements
included in this Form 10-QSB. We disclaim any obligation to update information
contained in any forward-looking statement.
General
The following discussion and analysis should be read with the financial
statements and accompanying notes, included elsewhere in this form 10-QSB. It is
intended to assist the reader in understanding and evaluating our financial
position.
On April 18, 2000, eB2B Commerce, Inc., a Delaware corporation, merged with
DynamicWeb, which is a New Jersey corporation, which was the surviving legal
entity. Following the merger, although the merged company maintained the
corporate and legal identity of DynamicWeb, we changed our name from DynamicWeb
Enterprises, Inc. to eB2B Commerce, Inc. and assumed the accounting history of
the former eB2B Commerce, Inc. (i.e. the Delaware corporation).
Overview
We are a provider of business-to-business transaction management services
designed to simplify trading partner integration, automation and collaboration.
We use proprietary software to provide services that enable more efficient
trading to take place between business partners. Our technology platform allows
business partners to electronically initiate, communicate, and respond to
business documents, regardless of the differences in the partners' respective
computer systems.
Through our service offerings and technology, we:
o receive business documents including, but are not limited to, purchase
orders, purchase order acknowledgments, advanced shipping notices and
invoices in any data format,
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,
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o alert the partners to time-critical information.
We provide access to our services via the Internet and traditional
communications methodologies. Our software is maintained on both on-site
hardware and remotely hosted hardware.
We also provide professional services and consulting services to tailor our
software to our customers' specific needs with regard to automating the
customers' transactions with their suppliers, as well as to businesses that wish
to build, operate or outsource the transaction management of their
business-to-business trading partner relationships and infrastructure.
In some instances, we provide access to our software to third-party
software vendors as resellers, who use our solutions to meet their customers'
requirements in this area.
Impact of Critical Accounting Policies
The SEC issued Financial Reporting Release No. 60, "Cautionary Advice
Regarding Disclosure About Critical Accounting Policies" ("FRR 60"), suggesting
companies provide additional disclosure and commentary on those accounting
policies considered most critical. FRR 60 considers an accounting policy to be
critical if it is important to our financial condition and results, and requires
significant judgment and estimates on the part of management in its application.
Management believes the following represent our critical accounting policies as
contemplated by FRR 60. For a summary of all of our significant accounting
policies, including the critical accounting policies discussed below, see the
Notes to the Financial Statements included in our Form 10-KSB for the year ended
December 31, 2003.
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 income.
Accounting for Business Combinations and Intangible Assets
The judgments made in determining the estimated fair value and expected
useful lives assigned to each class of assets and liabilities acquired can
significantly impact net income. For example, different classes of assets will
have useful lives that differ--the useful life of a customer list may not be the
same as the other intangible assets, such as patents, copyrights, or to other
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assets, such as software licenses. Consequently, to the extent a longer-lived
asset (e.g., patents) is ascribed greater value than to a shorter-lived asset
with a definitive life (e.g. customer lists and software licenses) there may be
less amortization recorded in a given period. Furthermore, determining the fair
value of certain assets and liabilities acquired is judgmental in nature and
often involves the use of significant estimates and assumptions. One of the
areas that requires more judgment in determining fair values and useful lives is
intangible assets. While there were a number of different methods used in
estimating the value of the intangibles acquired, there were two approaches
primarily used: discounted cash flow and market multiple approaches. Some of the
more significant estimates and assumptions inherent in the two approaches
include: projected future cash flows (including timing); discount rate
reflecting the risk inherent in the future cash flows; perpetual growth rate;
determination of appropriate market comparables; and the determination of
whether a premium or a discount should be applied to comparables. The value of
our intangible assets is exposed to future adverse changes if our company
experiences decline in operating results or experiences significant negative
industry or economic trends or if future performance is below historical trends.
We periodically review intangible assets for impairment using the guidance of
applicable accounting literature.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2004
Total revenue for the first quarter ended March 31, 2004 was $833,000,
compared to $1,031,000 for the same period in 2003, a decrease of $198,000, or
19%. Compared to revenue of $946,000 for the fourth quarter of 2003, total
revenue decreased by $113,000, or 12%. The decrease in overall and sequential
revenue was attributable to the anticipated contraction of the Company's
professional services consulting business, and other non-core legacy lines of
business, as well as timing of completion and revenue recognition of several
large projects.
In the three-month periods ended March 31, 2004 and 2003, one customer
accounted for approximately 22% and 23% of our total revenue, respectively. No
other customer accounted for 10% or more of our total revenue for the respective
periods.
Cost of revenue consists primarily of salaries and benefits for employees
providing technical support as well as salaries of personnel and consultants
providing consulting services to clients. Total cost of revenue for the
three-month periods ended March 31, 2004 and 2003 amounted to $176,000 and
$300,000, respectively, a decrease of $124,000 or 41% percent. The decrease was
a result of fewer professional services hours used during the quarter.
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 decreased
by $91,000, or 73%, to $34,000 for the three months ended March 31, 2004, from
the $125,000 for the three months ended March 31, 2003, due to a reduction in
headcount and a decrease in travel and related expenses, since the Company was
focused on generating revenue from existing customers.
Product development expenses mainly represent amortization of capitalized
software development costs and related costs associated with the development of
our intellectual property and technology infrastructure necessary to capture and
process transactions. Product development expenses were approximately $60,000
and $128,000 for the three-month periods ended March 31, 2004 and 2003,
respectively. The decrease of $68,000, or 53%, was primarily attributable to a
stabilized technology platform in 2003, resulting in less development expense
capitalized in prior periods and subsequent reduction in amortization in 2004.
We capitalize qualifying computer software costs incurred during the application
development stage. Accordingly, we anticipate that product development expenses
will fluctuate from quarter to quarter as various milestones in the development
are reached and future versions of our software are implemented.
-12-
General and administrative expenses consist primarily of employee salaries
and related expenses for executives, administrative and finance personnel, as
well as other consulting, legal and professional fees and, to a lesser extent,
facility and communication costs. During the three-month periods ended March 31,
2004 and 2003, total general and administrative expenses amounted to $489,000
and $465,000, respectively, an increase of $24,000, or 5%. The increase is
mainly attributable to (i) a benefit of approximately $99,000 in the three month
period ended in March 31, 2003 not found in the same period in 2004 due to the
settlement of various liabilities with a healthcare provider and various
investor relations vendors and, (ii) offset by a decrease in salary and wages
and related costs of approximately $70,000 in the three months period ended
March 31, 2004, due to headcount reduction taken by the Company in prior
periods.
Amortization of other intangibles are non-cash charges associated with the
DynamicWeb, and Bac-Tech business combination. Amortization expense was $82,000
and $242,000 for the three-month periods ended March 31, 2004 and 2003,
respectively. The decrease of $160,000 is due to the completion of amortization
of the DynamicWeb intangibles.
Interest and other expenses, net amounted to an expense of $171,000 for the
three-month period ended March 31, 2004 compared to $163,000 for the same
three-month period in 2003. The higher interest expense for the first quarter
2004 is a result of additional non-cash interest expense from the $300,000
Senior Secured Note held in escrow and drawn on April 30, 2003.
Net loss in the first quarter of 2004 was $179,000, or $(0.03) per share,
compared to a net loss of $415,000, or ($0.14) per share, for the same period
last year, representing an improvement of $236,000.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2004, our principal source of liquidity was approximately
$214,000 of cash and cash equivalents. As of March 31, 2004, we had a negative
working capital position of $4,645,000.
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.
Currently, we are dependent on our month-to-month collection activity as
well as our best efforts in anticipating expenses in order to continue
operations. Any unexpected shortfall in collections or unanticipated major
expense could cause us to scale back our operations or cause us to suspend or
cease operations.
On April 14, 2004 our Senior Secured Convertible Noteholders gave the
Company notice that as a result of its default on interest due, the Noteholders
demanded acceleration of their entire Senior Secured Convertible Debt in the
aggregate amount of $3,200,000. The Company was unable to satisfy the claims of
its Noteholders due to its cash position.
In order to effectuate a settlement with its Noteholders and after
exhausting its external options for curing the default on its notes, the Company
filed for bankruptcy protection under Chapter 11.
-13-
Prior to the filing, the Company had taken actions to cure its default,
improve its cash position and fund any remaining operating losses including:
o Additional cost reduction measures, which had reduced annual salaries,
benefits or other operating expenses by approximately $30,000 per
month,
o Discussions aimed at securing additional capital, through commercial
banking, investment banking, and receivables financing channels, which
did not result in additional funds being available to the Company,
o Discussions with potential sale or merger partners of the Company,
none of which resulted in a firm offer being made for the sale of the
Company, its assets, or a potential merger.
o Discussions with secured and unsecured creditors regarding the
Company's financial status.
The Company released an 8-K on April 14, 2004 disclosing that the Senior
Secured Noteholders were accelerating their notes, and that negotiations would
ensue. As a result of the negotiations, the Company's 10-KSB for calendar 2003,
along with this and subsequent 10-QSB filings were delayed, pending resolution.
An agreement was tentatively reached with the Noteholders that the Company would
seek relief under Chapter 11 of the U.S. Bankruptcy Code. 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.
On November 1, 2004, the Court entered an order approving Interim
Debtor-In-Possession financing in an amount not to exceed $120,000. Enable
Corporation, a Florida corporation, is providing the Company with up to $300,000
in Debtor-In-Possession financing. The Court approved the financing in final
form on November 22, 2004, and the Company now has full access to the $300,000
in Debtor-In-Possession loan facility.
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.
On December 15, 2004, the Court approved the Company's revised Disclosure
Statement and set a confirmation hearing date of January 26, 2005 regarding the
Company's Plan. The Company anticipates meeting with the SEC and U.S. Trustee to
try and resolve their objections prior to the hearing.
We generated $68,000 of cash from continuing operations for the
three-months ended March 31, 2004, as compared to cash used in continuing
operations for the same period in 2003 of $233,000.
-14-
Net cash provided by continuing operating activities totaled approximately
$174,000 for the three-months ended March 31, 2004 as compared to $110,000 in
cash used for the same period in 2003. Net cash provided by continuing operating
activities for the three-month period resulted primarily from (i) $34,000 source
of cash from operating assets and liabilities, (ii) the $179,000 net loss from
continuing operations and (iii) an aggregate of $319,000 of non-cash charges
consisting primarily of depreciation, amortization, provision for doubtful
accounts and non-cash interest expense. Net cash used in operating activities
for the three-months ended March 31, 2003, resulted primarily from (i) the
$392,000 net loss from continuing operations and (ii) a $236,000 use of cash
from operating assets and liabilities, offset by (iii) an aggregate of $518,000
of non-cash charges consisting primarily of depreciation, amortization,
stock-based compensation expense, and non-cash interest expense.
Net cash used in investing activities totaled approximately $93,000, for
the three months ended March 31, 2004, of which $88,000 was related to
investments in product development and $5,000 to capital expenditures. Net cash
used by investing activities for the same period in 2003 was approximately
$91,000, of which the entire amount was related to product development.
Net cash used in financing activities for the quarter ended March 31, 2004
resulted from (i) payments of borrowings totaling $25,000. Net cash used in
investing activities for the quarter ended March 31, 2003 resulted from (i)
payments of borrowings totaling $9,000.
The Company has entered into various financing and commercial commitments.
The Company's Senior Notes is carried on its financial statements net of
discounts of $715,591 at March 31, 2004. Following is a summary of required cash
obligations, all due in the current period since they have been called:
Year Ended March 31,
--------------------------------------------------------------
2004 2005 2006 2007 2008
---------- ---------- ---------- ---------- ----------
Senior Notes $4,037,500 $ - $ - $ - $ -
Operating leases 582,346 - - - -
Capital leases 78,202 - - - -
---------- ---------- ---------- ---------- ----------
$4,698,048 $ - $ - $ - $ -
========== ========== ========== ========== ==========
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ITEM 3 - CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures.
Our principal executive and financial officer has reviewed and evaluated
the effectiveness of our disclosure controls and procedures (as defined in Rules
13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934 (the "Exchange
Act")), as of a date within ninety days before the filing of this quarterly
report. Based on that evaluation, such officer has concluded that our current
disclosure controls and procedures are effective to ensure that information
required to be disclosed by us in reports that we file or submit under the
Exchange Act is recorded, processed, summarized, and reported within the time
periods specified in the Commission's rules and forms.
Changes in internal controls.
There have not been any significant changes in our internal controls or in
other factors that could significantly affect these controls subsequent to the
date of their evaluation. There were no significant deficiencies or material
weakness in the internal controls, and therefore no corrective actions were
taken.
-16-
PART II. OTHER INFORMATION
ITEM 3. DEFAULT ON SENIOR SECURITIES, CHAPTER 11 FILING, APPROVAL OF
DEBTOR-IN-POSSESION FINANCING, SEC OBJECTION, CONFIRMATION HEARING
According to the terms of its January 2002 5-year, 7%, subordinated senior
secured notes, the Company was obligated to begin making interest payments each
quarter, in cash or registered shares of company stock, beginning March 2002. To
date, the Company has paid no cash interest and because we do not have an
effective registration statement covering the applicable shares, we are in
default in the approximate amount of $238,000, representing interest payments
for March, June, September, and December of 2002, as well as March, June,
September, and December 2003, as well as March, June, and September of 2004. As
of September 30, 2004, the total amount of indebtedness equals $2,262,500 plus
unpaid interest of $435,532.
Because of the amount owing on the January 2002 notes, it is likely that we
are in a cross-default position regarding our July 2002 notes, which limit the
amount of indebtedness the Company may incur. The total amount of the July 2002
notes is $1,200,000. Similarly to the January 2002 notes, interest has not been
paid in September or December 2002, March, June, September or December of 2003,
as well as March, June, or September 2004. As of September 30, 2004, the total
amount of indebtedness equals $1,200,000 plus unpaid interest of $159,762.
On April 14, 2004 the Investor Representative of the holders of both
January and July 2002 notes informed the Company that a quorum of investors had
authorized the Investor Representative to accelerate the notes according to
their terms, and demand payment of the entire $3,200,000 of principal plus
interest, or surrender the assets of the Company according to the terms of the
agreement. In the ensuing period, negotiations were held to resolve the
situation. A tentative agreement was reached in October 2004, providing that the
Noteholders would extinguish their debt and interest in exchange for the
operating assets of the Company under a Chapter 11 reorganization and Court
approval of a Plan of reorganization. Such filing and Plan was made with the
U.S. Bankruptcy Court in the Southern District of New York, Bankruptcy Case
Number 04-16926(CB) on October 27, 2004.
On November 1, 2004, the Court entered an order approving Interim
Debtor-In-Possession financing in an amount not to exceed $120,000. Enable
Corporation, a Florida corporation that is providing the Company with up to
$300,000 in Debtor-In-Possession financing, provided the financing. The Court
approved the financing in final form on November 22, 2004, and the Company now
has full access to the $300,000 in Debtor-In-Possession financing.
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.
-17-
On December 15, 2004, the Court approved the Company's revised Disclosure
Statement and set a confirmation hearing date of January 26, 2005 regarding the
Company's Plan. The Company anticipates meeting with the SEC and U.S. Trustee to
try and resolve their objections prior to the hearing.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
31. Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
32. Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
The Company did not file any Form 8-K's during this period.
-18-
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
eB2B Commerce, Inc.
-------------------
(Registrant)
December 29, 2004 By: /s/ Richard Cohan
- ----------------- ---------------------------
Chief Executive Officer and President
(Principal financial officer)
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