U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-QSB
Quarterly Report under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended September 30, 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)
September 30, 2004
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(Unaudited)
ASSETS
Current Assets
Cash $ 314
Accounts receivable, net of allowance of $200 558
Deferred financing costs, net of accumulated amortization of $256 209
Other current assets 14
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Total Current Assets 1,095
Property and equipment, net 29
Product development costs, net of accumulated amortization of $6,003 262
Other assets 35
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Total assets $ 1,421
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LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities
Accounts payable $ 609
Accrued expenses and other current liabilities 1,185
Current maturities of long-term debt 3,152
Deferred revenue 265
Current liabilities of discontinued operations 87
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Total current liabilities 5,298
Long-term debt, less current maturities --
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Total liabilities 5,298
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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 1
Additional paid-in capital 157,321
Accumulated deficit (161,199)
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Total stockholders' deficit (3,877)
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Total liabilities and stockholders' deficit $ 1,421
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See accompanying notes to consolidated financial statements.
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eB2B COMMERCE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Three Months Ended Nine Months Ended
September 30 September 30
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2004 2003 2004 2003
------------ ------------ ------------ ------------
Revenue $ 990 $ 823 $ 2,876 $ 3,067
------------ ------------ ------------ ------------
Costs and Expenses:
Cost of revenue 184 156 527 459
Marketing and selling 16 43 63 189
Amortization of product development costs 60 64 180 246
Amortization of other intangibles -- 83 149 407
General and administrative 721 550 1,796 1,851
Gain on settlement of licensing liability -- -- -- (566)
Gain on settlement of Note Payable and vendor liability (474) -- (474) --
------------ ------------ ------------ ------------
Total costs and expenses 507 896 2,241 2,586
------------ ------------ ------------ ------------
Income (loss) from continuing operations 483 (73) 635 481
before interest and other expenses, net
Interest and other expenses, net (138) (165) (452) (496)
------------ ------------ ------------ ------------
Income (loss) from continuing operations 345 (238) 183 (15)
Loss from discontinued operations -- -- -- (6)
------------ ------------ ------------ ------------
Net income (loss) $ 345 $ (238) $ 183 $ (21)
============ ============ ============ ============
Net income (loss) per common and common equivalent share:
Basic:
Income (loss) per common share from continuing operations $ 0.04 $ (0.08) $ 0.02 $ (0.00)
Loss per common share from discontinued operations -- -- -- (0.00)
------------ ------------ ------------ ------------
Net income (loss) per common $ 0.04 $ (0.08) $ 0.02 $ (0.01)
============ ============ ============ ============
Diluted
Income (loss) per common share from continuing operations $ 0.01 $ (0.08) $ 0.01 $ (0.00)
Loss per common share from discontinued operations -- -- -- (0.00)
------------ ------------ ------------ ------------
Net income (loss) per common $ 0.01 $ (0.08) $ 0.01 $ (0.01)
============ ============ ============ ============
Weighted average number of common shares outstanding:
Basic 8,467,461 3,157,416 7,810,302 3,149,936
============ ============ ============ ============
Diluted 26,216,125 3,157,416 25,548,386 3,149,936
============ ============ ============ ============
See accompanying notes to consolidated financial statements.
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eB2B COMMERCE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
Nine Months Ended September 30
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2004 2003
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Cash flows from operating activities:
Net income (loss) from continuing operations $ 183 $ (15)
Adjustments to reconcile net income (loss) from continuing
operations to net cash provided by (used in) operating activities:
Depreciation and amortization 340 750
Provision for doubtful accounts 83 --
Non-cash interest expense 451 316
Gain on settlement of licensing liability -- (566)
Gain on settlement of Note Payable and vendor liability (474) --
Changes in operating assets and liabilities:
Accounts receivable (54) 225
Other current assets (5) 50
Other assets -- 15
Accounts payable 2 (314)
Accrued expenses and other current liabilities (52) (120)
Deferred revenue -- (465)
------------ ------------
Net cash provided by (used in) operating activities 474 (124)
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Cash flows from investing activities:
Purchases of property and equipment (31) --
Product development expenditures (177) (262)
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Net cash used in investing activities (208) (262)
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Cash flows from financing activities:
Payments on borrowings (98) (37)
Proceeds from long-term debt -- 275
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Net cash (used in) provided by financing activities (98) 238
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Net cash provided by (used in) continuing operations 168 (148)
------------ ------------
Net cash used in discontinued operations -- (36)
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Net change in cash 168 (184)
Cash - beginning of period 146 461
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Cash - end of period $ 314 $ 277
============ ============
Supplemental disclosure of cash flow information
Cash paid for interest $ -- $ 2
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 included various cost cutting measures commenced in 2001.
Management also took the following actions:
o Raised additional capital.
o Pursued negotiations with its remaining unsecured creditors.
o Investigated 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
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
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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 and nine months
ended September 30, 2004 and 2003, the Company's discontinued operations
contributed net sales of $0 and $0, respectively. As of September 30, 2004,
there were no assets relating to this segment, and its liabilities totaled
$87,000.
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 and nine months ended September 30, 2004 as no awards
were granted during those periods. No stock-based compensation cost is reflected
in the three months ended September 30, 2003, 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 nine months ended September
30, 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.
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Three Months Ended Nine Months Ended
September 30, September 30,
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2004 2003 2004 2003
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Income (loss) from continuing operations, as reported $ 345 $ (238) $ 183 $ (15)
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 income (loss) from continuing operations, net of tax $ 345 $ (238) $ 183 $ (15)
============== ============== ============== ==============
Income (loss) from discontinued operations, as reported $ -- $ -- $ -- $ (6)
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all awards -- -- -- --
-------------- -------------- -------------- --------------
Pro forma income (loss) from discontinued operations,
net of tax $ -- $ -- $ -- $ (6)
============== ============== ============== ==============
Net income (loss), as reported $ 345 $ (238) $ 183 $ (21)
Add: Stock-base compensation expense included in reported
net loss -- -- -- 31
-------------- -------------- -------------- --------------
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all awards -- -- -- (31)
-------------- -------------- -------------- --------------
Pro forma net income (loss) $ 345 $ (238) $ 183 $ (21)
============== ============== ============== ==============
Basic:
Income (loss) per share:
Income (loss) from continuing operations - as reported $ 0.04 $ (0.08) $ 0.02 $ (0.00)
============== ============== ============== ==============
Income (loss) from continuing operations - pro forma $ 0.04 $ (0.08) $ 0.02 $ (0.00)
============== ============== ============== ==============
Income (loss) from discontinued operations - as reported $ -- $ -- $ -- $ (0.00)
============== ============== ============== ==============
Income (loss) from discontinued operations - pro forma $ -- $ -- $ -- $ (0.00)
============== ============== ============== ==============
Net income (loss) - as reported $ 0.04 $ (0.08) $ 0.02 $ (0.00)
============== ============== ============== ==============
Net income (loss) - pro forma $ 0.04 $ (0.08) $ 0.02 $ (0.00)
============== ============== ============== ==============
Diluted:
Income (loss) per share:
Income (loss) from continuing operations - as reported $ 0.01 $ (0.08) $ 0.01 $ (0.00)
============== ============== ============== ==============
Income (loss) from continuing operations - pro forma $ 0.01 $ (0.08) $ 0.01 $ (0.00)
============== ============== ============== ==============
Income (loss) from discontinued operations - as reported $ -- $ -- $ -- $ (0.00)
============== ============== ============== ==============
Income (loss) from discontinued operations - pro forma $ -- $ -- $ -- $ (0.00)
============== ============== ============== ==============
Net income (loss) - as reported $ 0.01 $ (0.08) $ 0.01 $ (0.01)
============== ============== ============== ==============
Net income (loss) - pro forma $ 0.01 $ (0.08) $ 0.01 $ (0.01)
============== ============== ============== ==============
Weighted average number of common shares outstanding:
Basic 8,467,461 3,157,416 7,810,302 3,149,936
============== ============== ============== ==============
Diluted 26,216,125 3,157,416 25,548,386 3,149,936
============== ============== ============== ==============
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NOTE 5. NET INCOME PER COMMON SHARE
Basic net income 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 and nine months ended September 30, 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 and nine months ended September 30, 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 AND OTHER 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.
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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.
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
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
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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,
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.
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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
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
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experiences decline in operating results or experiences significant negative
industry or economic trends or if future performance is below historical trends.
We periodically review intangible assets for impairment using the guidance of
applicable accounting literature.
RESULTS OF OPERATIONS
THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 2004 AND 2003
Total revenue for the third quarter ended September 30, 2004 was $990,000,
compared to $823,000 for the same period in 2003, an increase of $167,000, or
20%. Compared to revenue of $1,053,000 for the second quarter of 2004, total
revenue decreased by $63,000, or 6%. Revenue for the nine-month periods ended
September 30, 2004 and 2003 amounted to $2,876,000 and $3,067,000, respectively,
a decrease of $191,000, or 6%. The year-over-year increase for the three-month
period ended September 30, 2004 was primarily attributable to the timing of
completed large projects, for which revenue is recognized based on completion
and ramp up of a large customer on the Company's Trade Gateway platform, which
more than offset decreased revenue due to the Company's reduction in marketing
and selling. The sequential decrease in revenue and the year-over-year decrease
in revenue for the nine-month period ended September 30, 2004 were caused by
reduced IT spending by the Company's largest client and the Company's reduction
in marketing and selling expenses, as it focused on generating revenue from
existing relationships.
In the nine-month periods ended September 30, 2004 and 2003, one customer
accounted for approximately 15% and 22% of our total revenue, respectively. No
other customer accounted for 10% or more of our total revenue for the respective
periods.
Cost of revenue consists primarily of salaries and benefits for employees
providing technical support as well as salaries of personnel and consultants
providing consulting services to clients. Total cost of revenue for the
three-month periods ended September 30, 2004 and 2003 amounted to $184,000 and
$156,000, respectively, an increase of $28,000 or 18% percent. The increase was
a result of increased professional services hours used during the three-months
period ended September 30, 2004. For the nine-month periods ended September 30,
2004 and 2003, cost of revenue was $527,000 and $459,000, respectively. The
increase of $68,000, or 15%, was a result of increased professional services
hours used during the nine-month period ended September 30, 2004.
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
to $16,000, or 62%, for the three months ended September 30, 2004, from the
$43,000 for the three months ended September 30, 2003. For the nine-month
periods ended September 30, 2004 and 2003, marketing and selling expense was
$63,000 and $189,000 respectively. For the nine-month periods ended September
30, 2004, marketing and selling expenses decreased $126,000, or 67%. The
decreases in both the three and nine months periods ended September 2004 were
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 $64,000 for the three-month periods ended September 30, 2004 and 2003,
respectively. The decrease of $4,000, or 6%, was primarily attributable to
decreased technology platform investments in prior periods resulting in a
decrease in amortization in the quarter. Product development expense for the
nine-month periods ending September 2004 and 2003 were $180,000 and $246,000
respectively. The decrease of $66,000 or 27% was primarily attributable to a
stabilized technology platform, resulting in less development expense
capitalized in prior periods and subsequent reduction in amortization in the
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current period. 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.
General and administrative expenses consist primarily of employee
salaries and related expenses for executives, administrative and finance
personnel, as well as other consulting, legal and professional fees and, to a
lesser extent, facility and communication costs. During the three-month periods
ended September 30, 2004 and 2003, total general and administrative expenses
amounted to $721,000 and $550,000, respectively, an increase of $171,000, or
31%. During the nine-months periods ended September 30, 2004 and 2003, total
general and administrative expenses amounted to $1,796,000 and $1,851,000,
respectively. The $55,000 or 3% decrease for the nine-month period in 2004 is
mainly attributable to (i) a $82,000 increase in health insurance and investor
relations expenses due to the settlement of various liabilities with a
healthcare provider and various investor relations vendors in the nine-month
period ended 2003, (ii) an increase of $84,000 in temporary help, consulting
expenses and commissions (iii) a $49,000 increase in bad debt write-off, and
(iv) more than offset by a decrease in salary and wages, salary related costs
and telecom costs of approximately $270,000.
Amortization of other intangibles are non-cash charges associated with
the DynamicWeb and Bac-Tech business combinations. Amortization expense was $0
and $83,000 for the three-month periods ended September 30, 2004 and 2003,
respectively. For the nine-month periods ending September 30, 2004 and 2003,
amortization expense was $149,000 and $407,000, respectively. The decrease in
amortization expenses in both periods is primarily related to the completion of
amortization of the DynamicWeb and Bac-Tech intangibles.
Interest and other expenses, net amounted to an expense of $138,000 for
the three-month period ended September 30, 2004 compared to $165,000 for the
three-month period ended September 30, 2003. The $27,000 or 17% decrease in
non-cash interest expense was primarily related to the completion of the
amortization of the Bac-Tech Note Payable discount in the three-month period
ending March 31, 2004, resulting in a more favorable year-over-year comparison.
For the nine-month period ended September 30, 2004 and September 30, 2003
interest and other expenses were $452,000 and $496,000, respectively. The
$44,000 decrease is due to the completion of the amortization of the Bac-Tech
Note Payable discount in the three-month period ending March 31, 2004, partially
offset by the additional non-cash interest expense from the $300,000 Senior
Secured Note held in escrow and drawn on April 30, 2003.
A one-time adjustment of $566,000 was recorded during the three-month
period ending June, 30, 2003 as a result of settling a licensing liability with
eB2B's largest creditor.
A one-time, non-cash gain of $474,000 was recorded during the three-month
period ending September 30, 2004 to reflect the settlement of a $300,000 Note
Payable and a $259,000 vendor liability for $60,000 and $25,000, respectively.
Net income in the three-month period ended September 30, 2004 was
$345,000, or $0.04 per share, compared to a net loss of $238,000, or ($0.08) per
share, for the same period last year. Excluding the $474,000 non-cash gain, the
three-month period ended September 30, 2004 results in a $129,000 net loss, or
($0.02) per share. For the nine-month period ended September 30, 2004, net
income was $183,000, or $0.02 per share compared to a net loss of $21,000, or
$0.00 per share for the same period in 2003. Excluding the non-cash gain, the
nine-month period ending September 30, 2004 results in a $291,000 net loss, or
($0.04) per share. Excluding the $566,000 adjustment, the nine-month period
ended September 30, 2003 results in a $587,000 net loss, or ($0.19) per share.
The improvement in net income/loss is a combined result of the changes discussed
above.
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LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2004, our principal source of liquidity was
approximately $314,000 of cash. As of September 30, 2004, we had a negative
working capital position of $4,203,000.
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.
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, whose principal shareholders are also holders of the Company's
Senior Secured Convertible Notes, provided the Interim Debtor-In-Possession
financing and 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 financing. See Part II,
Item 3 for more details.
We generated $168,000 of cash from continuing operations for the
nine-months ended September 30, 2004, as compared to cash used in continuing
operations for the same period in 2003 of $148,000.
Net cash provided by continuing operating activities totaled
approximately $474,000 for the nine-months ended September 30, 2004 as compared
to $124,000 in cash used for the same period in 2003. Net cash provided by
continuing operating activities for the nine-month period resulted primarily
from (i) the $183,000 in net income from continuing operations, (ii) $109,000
use of cash from operating assets and liabilities (including $25,000 used to
settle a vendor liability), and (iii) an aggregate of $874,000 of non-cash
charges consisting primarily of depreciation, amortization, provision for
doubtful accounts and non-cash interest expense, less a $474,000 non-cash gain
due to the settlement of a Note Payable and vendor liability. Net cash used in
operating activities for the nine-months ended September 30, 2003, resulted
primarily from (i) the $15,000 net loss from continuing operations and (ii) a
$609,000 use of cash from operating assets and liabilities, offset by (iii) an
aggregate of $1,066,000 of non-cash charges consisting primarily of
depreciation, amortization and non-cash interest expense, less the adjustment
from a $566,000 creditor settlement.
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Net cash used in investing activities totaled approximately $208,000, for
the nine months ended September 30, 2004, of which $177,000 was related to
investments in product development and $31,000 to capital expenditures. Net cash
used by investing activities for the same period in 2003 was approximately
$262,000, of which the entire amount was related to product development.
Net cash used in financing activities for the quarter ended September 30,
2004 resulted from payments of borrowings totaling $98,000, of which $60,000 was
the cash used in connection with the Note Payable settlement. Net cash provided
by financing activities for the quarter ended September 30, 2003 resulted from
(i) payments of borrowings totaling $37,000, and (ii) $275,000 from the draw
down of the remaining funds in escrow from the July 2002 financing.
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 $585,484 at September 30, 2004. Following is a summary of
required cash obligations, all due in the current period since they have been
called:
Year Ended September 30,
--------------------------------------------------------------
2004 2005 2006 2007 2008
---------- ---------- ---------- ---------- ----------
Senior Notes $3,737,500 $ -- $ -- $ -- $ --
Operating leases 413,500 -- -- -- --
Capital leases -- -- -- -- --
---------- ---------- ---------- ---------- ----------
$4,151,000 $ -- $ -- $ -- $ --
========== ========== ========== ========== ==========
ITEM 3 - CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures.
Our principal executive and financial officer has reviewed and evaluated
the effectiveness of our disclosure controls and procedures (as defined in Rules
13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934 (the "Exchange
Act")), as of a date within ninety days before the filing of this quarterly
report. Based on that evaluation, such officer has concluded that our current
disclosure controls and procedures are effective to ensure that information
required to be disclosed by us in reports that we file or submit under the
Exchange Act is recorded, processed, summarized, and reported within the time
periods specified in the Commission's rules and forms.
Changes in internal controls.
There have not been any significant changes in our internal controls or
in other factors that could significantly affect these controls subsequent to
the date of their evaluation. There were no significant deficiencies or material
weakness in the internal controls, and therefore no corrective actions were
taken.
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PART II. OTHER INFORMATION
ITEM 3. DEFAULT ON SENIOR SECURITIES, 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, whose principal shareholders are also holders of the Company's
Senior Secured Convertible Notes, provided the Interim Debtor-In-Possession
financing and 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 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.
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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
A form 8-K was filed on April 14, 2004 to report 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.
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SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
eB2B Commerce, Inc.
-------------------
(Registrant)
January 5, 2005 By: /s/ RICHARD COHAN
- --------------- -------------------------------------
Chief Executive Officer and President
(Principal financial officer)
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