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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-KSB
|X| ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2002
OR
|_| TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 0-10039
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eB2B COMMERCE, INC.
(Name of Small Business Issuer in its Charter)
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New Jersey 22-2267658
(State or Other Juris- (I.R.S. Employer
diction of Incorporation) Identification No.)
665 Broadway
New York, NY 10012
(Address of Principal Executive Offices)
Issuer's Telephone Number: (212) 477-1700
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Securities registered under Section 12(b) of the Exchange Act:
None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, par value $.0001 per share
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes |X| No |_|
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. |_|
Issuer's revenues for fiscal year ended December 31, 2002: $3,493,000
As of March 13, 2003, the aggregate market value of our company's common
stock (based upon the closing sales price on such date) of the Registrant held
by non-affiliates was $126,297
Number of shares of our company's common stock outstanding at March 13,
2003: 3,157,431
Transitional Small Business Disclosure Format: Yes |_| No |X|
1
PART I
Item 1. Description of Business
General
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 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.
In some instances, we provide access to our software to third-party
software vendors as resellers, who use our solutions to meet their customers'
requirements in this area. We may also allow certain of these customers to take
delivery of our proprietary software on a licensed basis to support our services
remotely.
Recent Developments
In September 2002, the Company discontinued its Training and Educational
Services business segment. The Company was unable to find a buyer for this
business segment and determined that it was in the best interest of its
shareholders to discontinue its operations rather than continue to fund its
working capital needs and operating losses. For the years ended December 31,
2002 and 2001, the Company's discontinued operations contributed net sales of
$1,105,000 and $2,483,000 respectively.
2
History and Organization
DynamicWeb Enterprises, Inc. was incorporated in the state of New Jersey
on July 26, 1979.
eB2B Commerce, Inc. was incorporated in the state of Delaware on November
6, 1998.
On April 18, 2000, eB2B Commerce, Inc., a Delaware corporation, merged
with and into DynamicWeb Enterprises, Inc., a New Jersey corporation and a SEC
registrant. The surviving company changed its name from DynamicWeb Enterprises,
Inc. to eB2B Commerce, Inc. Pursuant to the agreement and plan of merger between
DynamicWeb and former eB2B, the shareholders of DynamicWeb retained their shares
in our company, while the shareholders of former eB2B received shares, or
securities convertible into shares, of common stock of our company representing
approximately 89% of our equity, on a fully diluted basis. At the time of the
merger, (i) DynamicWeb was engaged in the provision of services and software
that facilitated business-to-business e-commerce between buyers and sellers of
direct goods and (ii) former eB2B was a development stage company formed to
provide Internet-based business-to-business e-commerce services for
manufacturers and retailers to conduct cost-effective electronic commerce
transactions. Prior to the merger, former eB2B primarily devoted its operations
to recruiting and training of employees, development of its business strategy,
design of a business system to implement its strategy, and development of
business relationships with retailers and suppliers.
The April 2000 merger was accounted for as a reverse acquisition, a
"purchase business combination" in which former eB2B was the accounting acquirer
and DynamicWeb was the legal acquirer. The management of former eB2B remained as
our management. As a result of the April 2000 merger, (i) the financial
statements of former eB2B are our historical financial statements; (ii) the
results of our operations include the results of DynamicWeb after the date of
the merger; (iii) acquired assets and assumed liabilities were recorded at their
estimated fair market value at the date of the merger; (iv) all references to
our financial statements apply to the historical financial statements of former
eB2B prior to the April 2000 merger and to our consolidated financial statements
subsequent to the April 2000 merger; (v) any reference to former eB2B applies
solely to eB2B Commerce, Inc., a Delaware corporation, and its financial
statements prior to the merger, and (vi) our year-end is December 31, that of
the accounting acquirer, former eB2B.
On February 22, 2000, prior to the April 2000 acquisition of DynamicWeb
Enterprises, former eB2B completed its acquisition of Netlan Enterprises, Inc.
and its subsidiaries. At the time of the acquisition, Netlan was engaged in
website development for clients and software and other technical training for
clients. Pursuant to the agreement and plan of merger, Netlan's stockholders
exchanged 100% of their common stock for 8,334 shares of our common stock.
Additionally, 13,334 shares of our common stock were issued, placed into an
escrow account, and released to certain former shareholders of Netlan upon
successful completion of escrow requirements. The purchase price of the Netlan
acquisition was approximately $1.6 million. We recorded approximately $4,896,000
of goodwill and approximately $334,000 of other intangibles in connection with
this transaction.
In January 2002, we acquired Bac-Tech Systems, Inc., a New York
City-based, privately held e-commerce business, through a merger. Pursuant to
the merger agreement, we paid an aggregate of $250,000 in cash and issued an
aggregate of 200,000 shares of common stock and 95,000 shares of Series D
preferred stock to the two stockholders of Bac-Tech. In November 2002, the
Series D preferred stock automatically converted into an aggregate of 333,334
shares of common stock. The Company also issued secured notes to the Bac-Tech
3
stockholders in the aggregate amount of $600,000, payable in three equal annual
installments in 2003, 2004, and 2005. In connection with the acquisition, we
employed the two Bac-Tech stockholders for a period of three years. Robert
Bacchi now serves as our chief operating officer and Michael Dodier now serves
as Executive Vice President-Sales. Bac-Tech offers comprehensive EDI and
web-based services to a portfolio of nationally known suppliers, including
O-Cedar Brands, Peregrine Outfitters, Schott Glass and Ross Products, a division
of Abbott Labs.
Industry Background
Businesses are increasingly seeking to improve their operating efficiency
with other businesses through electronically automated and integrated solutions.
Electronic Data Interchange, or EDI, is a specific form of business-to-business
electronic commerce, consisting of a standard protocol for electronic
transmission of data between a company and a third party. EDI has existed for
over twenty years. It is a very expensive technology to both implement and
maintain and is, therefore, typically utilized by the largest companies. In an
EDI transaction, the computers of the buyer and the supplier communicate and
exchange the relevant information using an agreed-upon or standard format. Until
very recently, companies that wanted to conduct business electronically were
required to have a special type of computer network called a value-added
computer network or "VAN". For a significant fee, a VAN, often managed by a
separate third party, was responsible for the guaranteed exchange of business
documents between trading partners.
The emergence of the Internet as an alternative means of managing the
transactional flow of business-to-business document exchange has revolutionized
the way businesses operate and interact with their trading partners. The
Internet, coupled with a new breed of software solutions called Web Services,
has created technology that supports highly efficient channels of communication
and collaboration. Expensive solutions and VAN connectivity charges are no
longer necessities for conducting EDI transactions. This development gives small
and medium-sized buyers and suppliers access to the same efficiencies associated
with traditional EDI systems. In addition, the combination of the Internet and
Web Services enable buyers and suppliers of all sizes to electronically exchange
business documents and interact with a greater number of potential trading
partners. New opportunities are created for expanding business reach and growing
revenue. Companies of all sizes in virtually all industries can realize
potentially significant return on investment by using these new, affordable
technologies to gain efficiencies throughout their supply chains.
Faced with the challenges of rapid technological change, companies are now
trying to justify existing, sometimes large, investments made in older supply
chain or EDI-based systems and evaluating conversion alternatives.
Decision-makers are interested in creating measurable operating efficiencies
while achieving quick return on investment (ROI), which are the primary benefits
of this new generation of solutions.
Business Overview
We use our proprietary software and professional services expertise in EDI
and supply chain automation to provide simple, affordable, high ROI solutions
for trading between business partners.
4
The Company believes that currently less than 25% of all transactions
between businesses in the United States of America are done with document
transfer via EDI. The other 75% plus of transactions and the related transfer of
documents are conducted via phone, fax and mail. This is our target market.
Included in this market are over 100,000 retailers and over 2 million suppliers,
who transact over $1 trillion in annual purchases.
We provide services to automate currently existing business relationships.
The simplicity of conducting electronic automated transactions using our
services can help create additional business among the trading partners, but it
is not intended as a marketplace solution in that we do not intend to create new
relationships for trading partners through our technology platform.
We are primarily an Applications Services Provider for our customers,
enabling them to effectively manage their trading relationships with minimal
additional investment in platforms or software. Our products and services
include:
o Trading Hubs or Private Exchanges, where we provide services to
automate currently existing business relationships. Through our
technology, we provide a dedicated platform for large buyers or
large suppliers to transfer business documents via traditional EDI
and the Internet to their small and medium-sized trading partners.
We provide the Web-based application, accessible through any
Web-browser, and the enablement services to contact, market,
register, and activate trading partners.
o Trade Gateway, which is our generic exchange for small and
medium-size, suppliers, and a growing number of large retailers.
Through our technology, we provide an environment where business
documents can be exchanged with many partners from a single, secure
environment, without the need for a user to access multiple Websites
or trading environments.
o EDI Outsourcing, where we work with a particular partner to
facilitate the exchange of data, in any of a variety of formats and
communication methods, with a targeted partner or partners. We act
as the EDI department to our customer's business.
o End-to-End Integration, where we facilitate the movement of trading
or supply chain information directly into the customer's back-end
Accounting, Enterprise Resource Planning, Logistics, Warehouse
Management, or other back-end system without human intervention.
o Enterprise Solution Original Equipment Manufacturer, in which we
work with an Accounting, Enterprise Resource Planning, Logistics, or
Warehouse Management partner to fully integrate our software with
our partner's application, creating a seamless solution to be resold
to our partner's customers.
We augment our products and services with professional services, which
provides consulting expertise to our 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. As such, our consultants
work both within our daily operation and may also reside remotely on-site at an
EDI enabled retailer or supplier with the objective of providing EDI expertise
that does not exist on-site.
5
We believe that our products and services provide the following advantages
to trading partners:
Benefit to Suppliers
o Higher revenue by interacting with more buyers
o Significant reduction in order processing costs
o Reduced customer service costs
o Significant reduction in data transmission error rates
o Increased inventory turnover and decreased order-to-delivery cycle
time
o Improved purchasing history and buying pattern information
o Increased ability to project demand cycles
o Predictable, low monthly payments
Benefit to Buyers
o Significant reduction in order management costs
o Substantially more convenient and efficient ordering
o Real-time information exchange, with access to order status,
shipment timing and inventory availability
o Improved product information via online catalog access
o Faster delivery
o Significant reduction in order error rates
o Access to broader base of suppliers
We provide a complete solution, tailored for each customer and designed
specifically for our business processes. By leveraging our expertise in EDI,
business to business transaction management and document exchange, application
development, and Internet networking, we are able to provide a suite of services
that facilitate the transfer of business documents among trading partners.
Markets and Marketing
The marketing goals of our Transaction Processing and related services
business unit have been to:
1) attract and retain buyers and suppliers principally in the following
vertical industries:
o chain drug,
o toys,
o general retail,
o telecommunications, and
o consumer electronics, and
2) build alliances with technology companies and other partners
VERTICAL MARKETS
These sizeable industries are characterized by certain operating
inefficiencies. Our management believes that increasing margin pressures, a need
to increase technological sophistication, and a low or average penetration of
6
EDI make our chosen industries attractive vertical markets for their transaction
processing and related services.
Key clients in the chain drug vertical include Rite Aid Corporation, Duane
Reade, and Eckerd. In the toys vertical, Toys "R" Us is our predominant
customer. In the general retail vertical, our customers include Linens `N
Things, O'Cedar and Disney. In the telecommunications vertical, customers
include USA Wireless, Verizon Communications and Verizon Wireless, and in the
consumer electronics vertical, customers include Best Buy, Circuit City and
Handspring. For the years ended December 31, 2002 and 2001, 25% and 21% of our
revenues, respectively, were derived from Toys "R" Us. It is expected that the
Toys "R" Us business will decrease slightly in 2003 from 2002 levels.
ALLIANCES AND PARTNERSHIPS
We anticipate that alliances with technology firms and other partnerships
will continue to be integral to our success and increased effort will be made in
pursuing these relationships. In order to leverage our current direct sales
force and add new revenue streams, we expect to establish alliances with other
firms that have an established presence in either our existing vertical markets
or new ones. Likely companies for us to partner with would include software and
services firms selling enterprise software or other back-end processing
applications and buying groups, consulting organizations, and associations that
play a key role in influencing buying behavior. Joint marketing or sales
programs with alliance partners would be intended to gain broader access to
large and mid-size companies, enabling us to add connections to many of their
small and medium-sized suppliers. Reciprocal reseller relationships would
generate royalty revenue to us for each sale made, potentially including a
portion of ongoing recurring revenue as well. Currently, the Company is a
Progress Independent System Vendor, participating in the Progress Corporation's
ASPEN program, whereby the Company may advantageously remarket Progress software
under a revenue sharing arrangement to an unlimited number of customers. The
Company has partnered with a number of Enterprise Resource Planning software
vendors, including Daly Commerce, Cutsey Systems, and Epicor Software
Corporation to provide its EDI solutions and services on an informal basis.
While we expect additional partnership agreements to be formalized in 2003,
there can be no assurance that the Company will be successful in this regard.
While our sales focus is primarily directed toward specific targeted
vertical markets, our proprietary software was built to operate across many
industries without requiring significant enhancements. This will allow us to
more easily expand into additional vertical markets in the future.
We market and sell our services through a direct sales force in the United
States of America and indirectly through partnerships and reseller arrangements.
To extend our vertical market reach and increase sales opportunities in the
vertical industries we have selected, we participate in a small number of
national trade shows.
As of December 31, 2002, we connected approximately 200 retail
organizations and 1,100 supply organizations to their trading partners. As of
December 31, 2002, we were processing in excess of 200,000 transactions per
quarter representing almost $1 billion of purchasing volume.
7
Competition
Business-to-business electronic commerce is a rapidly evolving industry.
Competition is intense and is expected to increase in the future. Our management
believes that we provide a well-differentiated service in the
business-to-business electronic commerce area, where a small to medium-sized
retailer can process transactions with multiple suppliers, and small to
medium-sized suppliers can process transactions with multiple retailers. This
capability is augmented by our expertise in end-to-end integration with existing
systems, and an EDI outsourcing solution.
Our competition is primarily made of indirect horizontal competitors,
which are focused on similar services but not in specific or multiple vertical
industries. Others are focused in vertical markets unrelated to those pursued by
us. Major publicly traded competitors include AdvantE Corporation, Neoforma,
Inc., and The viaLink Company. Major privately held competitors include
Automated Data Exchange (ADX), GXS (a divestiture of General Electric), and SPS
Commerce, for which minimal public information is available on their efforts to
date.
Also, we believe that competition may develop from EDI/electronic commerce
companies, technology/software development companies, retailer purchasing
organizations, and leading industry manufacturers. Further, large retailers and
suppliers can create their own technology platform to automate the exchange of
business documents with their small and medium-sized trading partners, thereby
reducing the number of customers in our target markets. We believe it will prove
to be an inefficient use of resources for each large retailer to build a
technology platform for its internal use and too complicated for each trading
partner to access many discrete trading sites, compared to using our services.
Intellectual Property
Our success depends on our ability to maintain the proprietary aspects of
our technology and operate without infringing the proprietary rights of others.
We rely on a combination of trademarks, trade secrets and copyright law, as well
as contractual restrictions, to protect the proprietary aspects of our
technology. We seek to protect the source code for our proprietary software,
documentation and other written materials under trade secret and copyright law.
We also seek to protect our intellectual property by requiring employees
and consultants with access to proprietary information to execute
confidentiality agreements with us and by restricting access to our source code.
Due to rapid technological change, our management believes that factors
such as the technological and creative skills of our personnel and consultants,
new product developments and enhancements to existing services are equally as
important as the various legal protections of our technology to establish and
maintain a technology leadership position.
Government Regulation
Our services enable buyers and suppliers to transmit documents to their
trading partners over dedicated and public telephone lines. These transmissions
are governed by regulatory policies establishing charges and terms for
communications. Our management believes that we are in compliance with
applicable regulations.
8
Due to the increasing popularity and use of the Internet, we might be
subject to increased regulation. Such laws may regulate issues such as user
privacy, defamation, network access, pricing, taxation, content, quality of
products and services, and intellectual property and infringement.
These laws could expose us to liability, materially increase the cost of
providing services, and decrease the growth and acceptance of the Internet in
general, and access to the Internet over cable systems.
Product Development
Our product development efforts for our proprietary software are directed
toward the development of new complementary services and the enhancement and
expansion of the capabilities of existing services. Product development expenses
(exclusive of stock-based compensation) were approximately $1,217,000 and
$2,024,000 for the years ended December 31, 2002 and 2001, respectively. We
continue to make the product development expenditures that management believes
are necessary to rapidly deliver new features and functions. As of December 31,
2002, six employees were engaged in product development activities. When
necessary, based on specific customer needs to rapidly deliver new features and
functions, we may hire consultants who take part in product development
activities. In accordance with American Institute of Certified Public
Accountants Statement of Position 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use", the Company capitalizes some
of these costs. They are amortized over a period of two years.
Personnel
As of December 31, 2002, we employed 23 full-time employees, and 5
employees compensated on an hourly basis, which may be equivalent to full-time.
Many of our employees are highly skilled, with advanced degrees. Our continued
success depends upon our ability to continue to attract and retain highly
skilled employees. We have never had a work stoppage, and none of our employees
are represented by a labor organization. We consider our employee relations to
be good.
Item 2. Description of Property
We operate out of a single facility in New York, New York. The following
table sets forth information on our property:
Principal Address Square Footage Owned/Leased Purpose
----------------- -------------- ------------ -------
665 Broadway 5,000 Leased Corporate Headquarters
New York, NY 10012 Offices
The lease for our premises at 665 Broadway, which was assumed as part of
the Bac-Tech acquisition in January 2002, expires in February 2008. It calls for
annual rent payments of $95,614, in monthly payments of $7,968 through February
28, 2002; and payments of $98,482 in monthly payments of $8,207 through February
28, 2003 with annual rent escalating approximately five percent per annum
thereafter through February 28, 2008.
9
Item 3. Legal Proceedings
We are party to certain legal proceedings and claims, which arise in the
ordinary course of business. In the opinion of our management, the amount of an
ultimate liability with respect to these actions will not materially affect our
financial position, results of operations or cash flows.
In October 2000, Cintra Software & Services Inc. commenced a civil action
against our company in New York Supreme Court, New York County. The complaint
alleges that we acquired certain software from Cintra upon the authorization of
our former Chief Information Officer. Cintra is seeking damages of approximately
$856,000. We have filed an answer denying the material allegations of the
complaint. There has been no additional activity in 2002. We believe that we
have meritorious defenses to the allegations made in the complaint and intend to
vigorously defend the action.
In March 2001, a former employee commenced a civil action against our
company and two members of our management in New York Supreme Court, New York
County, seeking, among other things, compensatory damages in the amount of $1.0
million and additional punitive damages of $1.0 million for alleged defamation
in connection with his termination, as well as a declaratory judgment concerning
his alleged entitlement to stock options to purchase 5,000 shares of our common
stock. We subsequently filed a motion to dismiss, which was granted as to the
defamation action on January 7, 2002. The entire matter was settled in February
2003 for less than $2,000 and an option to purchase 5,000 shares of eB2B stock
at an exercise price of $67.50 per share.
In December 2001, a former officer of ours commenced a civil action
against our company in New York Supreme Court, New York County, seeking $85,000,
plus liquidated damages, attorneys' fees and costs, for alleged bonuses owing to
her. We subsequently filed a motion to dismiss this action. We disputed this
claim and after defending the action, the entire matter was settled in January
2003 for $15,000.
The Company is not currently a party to any other material legal
proceeding.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of our stockholders, through the solicitation
of proxies or otherwise, during the fourth quarter of 2002.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
Our common stock had been quoted on the Nasdaq SmallCap Market under the
symbol "EBTB" since August 15, 2000 through August 26, 2002. After such time,
our common stock was quoted on the Over-the-Counter Bulletin Board maintained by
the National Association of Securities Dealers. The volume of trading in our
common stock has been limited during the periods it has not been on the Nasdaq
SmallCap Market and the closing sale prices reported may not be indicative of
the value of our common stock or the existence of an active trading market for
shares of eB2B Commerce, Inc.
10
The following table sets forth the high and low closing sale prices for
our common stock for the periods indicated as adjusted for the 1 for 15 reverse
stock split effected January 10, 2002:
Quarter Ended High Low
------------- ---- ---
March 31, 2001 ..................................... $22.50 $15.90
June 30, 2001 ...................................... 4.50 2.85
September 30, 2001 ................................. 1.65 1.35
December 31, 2001 .................................. 2.25 1.50
March 31, 2002 ..................................... 3.62 .96
June 30, 2002 ...................................... 1.25 .11
September 30, 2002 ................................. .16 .10
December 31, 2002 .................................. .11 .03
As of March 15, 2003, we have approximately 4,075 record holders of our
common stock.
The Company has a significant number of shares of common stock underlying
its derivative securities, as follows (excluding stock options):
Exercise or
Conversion Price Aggregate No. Of
Security Per Share ($) Underlying Shares
------------------------------------- ---------------- -----------------
Series A Preferred Stock 2.33 3,000
Series B Preferred Stock 6.14 3,985,000
Series C Preferred Stock .49 15,137,000
Original Bridge Warrants .101 8,935,000
Merger & Advisory Warrants 31.05 124,000
Credit Use Warrants 2.21 204,000
Series C Investor Warrants 1.65 5,527,000
Series C Agent Warrants - Preferred .49 1,659,000
Series C Agent Warrants - Common 1.65 829,000
December 2001 Bridge Warrants 1.10 396,000
January 2002 Investor Warrants 1.85 1,229,000
January 2002 Agent Warrants 1.54 246,000
Series B Investor Warrants 5.75 1,434,000
Series B Agent Warrants 5.75 1,418,000
Other Warrants .20 - 58.65 377,000
January 2002 Convertible Notes .101 22,401,000
July 2002 Financing Convertible Notes .101 8,911,000
-----------------
Total 72,815,000
=================
We have never paid cash dividends on our capital stock and do not
anticipate paying cash dividends in the foreseeable future. We currently intend
to retain any future earnings for reinvestment in our business. Any future
determination to pay cash dividends will be at the discretion of our board of
directors and will be dependent upon our financial condition, results of
operations, capital requirements and other relevant factors.
Item 6. Management's Discussion and Analysis or Plan of Operation
11
Forward Looking Statements
The statements contained in this Form 10-KSB that are not historical facts
may be "forward-looking statements," as defined in Section 27A of the Securities
Act and Section 21E of the Securities Exchange Act of 1934, that contain risks
and uncertainty. Such statements can be identified by the use of forward-looking
terminology such as "estimates," "projects," "anticipates," "expects,"
"intends," "believes," or the negative of each of these terms or other
variations thereon or comparable terminology or by discussions of strategy that
involve risks and uncertainties. Although we believe that our expectations are
reasonable within the bounds of our knowledge of our business operations, there
can be no assurance that actual results will not differ materially from our
expectations. The uncertainties and risks include, among other things, our
plans, beliefs and goals, estimates of future operating results, our limited
operating history, the ability to raise additional capital, if needed, the risks
and uncertainties associated with rapidly changing technologies such as the
Internet, the risks of technology development and the risks of competition that
can cause actual results to differ materially from those in the forward-looking
statements.
Forward-looking statements are only estimates or predictions and 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-KSB.
All forward-looking statements made in this Form 10-KSB that are
attributable to us or persons acting on our behalf are expressly qualified in
their entirety by the factors listed below in the section captioned Risk Factors
and other cautionary statements included in this Form 10-KSB. 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-KSB. It is
intended to assist the reader in understanding and evaluating our financial
position.
On April 18, 2000, eB2B Commerce, Inc., a Delaware corporation, merged
with DynamicWeb, which is a New Jersey corporation and which was the surviving
legal entity. Following the merger, although the merged company maintained the
corporate and legal identity of DynamicWeb, we changed our name to eB2B
Commerce, Inc. from DynamicWeb Enterprises, Inc. and assumed the accounting
history of the former eB2B Commerce, Inc. (the Delaware corporation).
Overview
We are a provider of business-to-business transaction management services
designed to simplify trading partner integration, automation and collaboration.
We use proprietary software to provide a technology platform for large buyers
and large suppliers to transfer business documents via the Internet to their
small and medium-sized trading partners. These documents include, but are not
limited to, purchase orders, purchase order acknowledgments, advanced shipping
notices and invoices.
12
We provide access via the Internet to our proprietary software, which is
maintained on our hardware and on hosted hardware.
In some instances, we will allow customers who are also resellers of our
services to take delivery of our proprietary software on a licensed basis. We
also offer professional services, which provide consulting and technical
expertise to the same client base, as well as to other businesses that prefer to
operate or outsource the transaction management and document exchange of their
business-to-business relationships.
In January 2002, we acquired Bac-Tech Systems, Inc., a New York City-based
privately held e-commerce business, through a merger. Pursuant to the merger
agreement, the Company paid an aggregate of $250,000 in cash and issued an
aggregate of 200,000 shares of common stock and 95,000 shares of Series D
preferred stock to the two stockholders of Bac-Tech. In November 2002, the
Series D preferred stock automatically converted into an aggregate of 333,334
shares of common stock. We also issued non-interest bearing secured notes to the
Bac-Tech stockholders in the aggregate amount of $600,000, payable in three
equal installments on May 1, 2003, January 1, 2004 and January 1, 2005, which is
included as long term debt in the accompanying condensed consolidated balance
sheet. We accounted for this acquisition using the purchase method of accounting
and determined the total purchase price to be $1,990,000, which consisted of (i)
cash of approximately $250,000; (ii) 200,000 shares of our common stock at a
price of $2.33 for total consideration of $465,000; (iii) 95,000 shares of
Series D Preferred stock valued at $775,000; (iv) a three year non-interest
bearing notes, present valued at $457,000 utilizing our estimated borrowing rate
of 15 percent; and (v) $43,000 in closing costs and other items.
As a result of the acquisition of Bac-Tech Systems, our financial
condition and results of operations were significantly different during the
years ended December 31, 2002 and 2001. Therefore, we believe that the results
of operations for 2002 may not be comparable in certain respects to the results
of operations for 2001. Furthermore, our limited operating history makes the
prediction of future operating results very difficult. We believe that
period-to-period comparisons of operating results should not be relied upon as
predictive of future performance. Our prospects must be considered in light of
the risks, expenses and difficulties encountered by companies at an early stage
of development, particularly companies in new and rapidly evolving markets. We
may not be successful in addressing such risks and difficulties.
As a result of continuing operating losses, negative cash flows, working
capital constraints, and the inability to sell the business as of September 30,
2002, we discontinued our Training and Client Educational Services business
segment. As a result, the financial results from all current period periods have
been restated to reflect this business segment as a discontinued operation and
the Company now has one business segment, Transaction Processing and related
services.
13
Impact of Critical Accounting Policies
The SEC has recently issued Financial Reporting Release No. 60,
"Cautionary Advice Regarding Disclosure About Critical Accounting Policies"
("FRR 60"), suggesting companies provide additional disclosure and commentary on
those accounting policies considered most critical. FRR 60 considers an
accounting policy to be critical if it is important to our financial condition
and results, and requires significant judgment and estimates on the part of
management in its application. Management believes the following represent our
critical accounting policies as contemplated by FRR 60. For a summary of all of
our significant accounting policies, including the critical accounting policies
discussed below, see the Notes to the Financial Statements included in this Form
10-KSB.
Revenue Recognition
Revenue from transaction processing is recognized on a per transaction
basis when a transaction occurs between a buyer and a supplier. The fee is based
on the volume of transactions processed during a specific period, typically one
month. Revenue from related implementation, if any, annual subscription and
monthly hosting fees are recognized on a straight-line basis over the term of
the contract with the customer. Deferred income includes amounts billed for
implementation, annual subscription and hosting fees, which have not been
earned. For related consulting arrangements on a time-and-materials basis,
revenue is recognized as services are performed and costs are incurred in
accordance with the terms of the contract. Revenues from related fixed-price
consulting or large project arrangements are recognized using either the
contract completion or percentage-of-completion method. The revenue recognized
from fixed price consulting arrangements is based on the
percentage-of-completion method if management can accurately allocate (i) the
ongoing costs to undertake the project relative to the contracted price and
projected margin; and (ii) the degree of completion at the end of the applicable
accounting period. Otherwise, revenue is recognized upon customer acceptance of
the completed project. Fixed-price consulting arrangements are mainly short-term
in nature and we do not have a history of incurring losses on these types of
contracts. If we were to incur a loss, a provision for the estimated loss on the
uncompleted contract would be recognized in the period in which such loss
becomes probable and estimable. Billings in excess of revenue recognized are
included in deferred revenue.
Accounting for Business Combinations, Goodwill, and Other Intangible Assets
The judgments made in determining the estimated fair value and expected useful
lives assigned to each class of assets and liabilities acquired can
significantly impact net income. For example, different classes of assets will
have useful lives that differ--the useful life of a customer list may not be the
same as the other intangible assets, such as patents, copyrights, or to other
assets, such as software licenses. Consequently, to the extent a longer-lived
asset (e.g., patents) is ascribed greater value or a greater part of the
purchase price is allocated to goodwill, which is no longer amortized, than to a
shorter-lived asset with a definitive life (e.g. customer lists and software
licenses) there may be less amortization recorded in a given period.
Furthermore, there is also judgment involved in determining whether goodwill and
other intangibles are impaired. Determining the fair value of certain assets and
liabilities acquired is judgmental in nature and often involves the use of
significant estimates and assumptions. One of the areas that requires more
judgment in determining fair values and useful lives is intangible assets. While
there were a number of different methods used in estimating the value of the
intangibles acquired, there were two approaches primarily used: discounted cash
flow and market multiple approaches. Some of the more significant estimates and
assumptions inherent in the two approaches include: projected future cash flows
14
(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
and goodwill for impairment using the guidance of applicable accounting
literature. In 2002, we adopted new rules for measuring the impairment of
goodwill and certain intangible assets. The estimates and assumptions described
have impacted the amount of impairment recognized under the new accounting
standard.
Years Ended December 31, 2002 and 2001
Revenue for the year ended December 31, 2002 decreased approximately
$840,000 or 19% to $3,493,000 as compared to $4,333,000 for the year ended
December 31, 2001. Revenue from core transaction processing was $2,574,000, an
increase $103,000, or 4%, as compared to $2,471,00 in 2001. This increase was
offset by a decline in non-core pieces of our overall transaction processing
business, which were part of various acquisitions, including the following: (i)
a $544,000 reduction in professional services to $858,000 in 2002 compared to
$1,402,000 in the similar period in the prior year as a result of certain cost
containment measures by a key customer; (ii) elimination of a web design
business, which consisted of $286,000 in revenues for 2001, and (iii)
anticipated continued contraction of a legacy outsourced EDI business acquired
from DynamicWeb, representing approximately $103,000 of the decline in revenue
during 2002. Revenues were generally adversely affected due to a slower economy
and reduced marketing expenditures.
Cost of revenue consists primarily of (i) salaries and benefits for
employees providing technical support, (ii) salaries and benefits of personnel
and consultants providing consulting services to clients and (iii) communication
and hosting expenses associated with the transmittal and hosting of our
transaction data. Total cost of revenue for the year ended December 31, 2002
amounted to $1,215,000, as compared to $1,754,000 for the year ended December
31, 2001, a decrease of approximately $539,000 or 31%. This decrease was a
result of (i) lower revenues and (ii) cancellation of duplicate web hosting
facilities and value-added network data charges, resulting in $610,000 in cost
savings for 2002.
Marketing and selling expenses consist primarily of employee salaries,
benefits and commissions, and the costs of promotional materials, trade shows
and other sales and marketing programs. Marketing and selling expenses
(exclusive of stock-based compensation) for the year ended December 31, 2002
amounted to $500,000 as compared to $1,657,000 for the year ended December 31,
2001, a decrease of $1,157,000 or 70%. The decrease is chiefly associated with
the reorganization plan implemented by us prior to and during 2001 by which we
(i) eliminated approximately $125,000 in monthly salaries and benefits on a
recurring basis and (ii) reduced or eliminated expenses related to trade shows
and other marketing programs, saving approximately $106,000 in 2002.
Product development costs mainly represent payments to outside contractors
and personnel and related costs associated with the development of our
technological infrastructure necessary to process transactions, including the
amortization of certain capitalized costs. Product development costs (exclusive
of stock-based compensation) were approximately $1,217,000 for the year ended
December 31, 2002 as compared to $2,024,000 for the year ended December 31,
2001, a decrease of $807,000 or 40%. This is attributable to a nonrecurring
reduction of these costs of $220,000 as a result of a settlement agreement with
a large vendor. The product development expenses in 2002 consists entirely of
15
amortization of capitalized software development costs offset by the $220,000
for the vendor settlement discussed above; whereas during 2001, in addition to
amortization, we expensed approximately $910,000 in relation with costs chiefly
associated with the transition of certain of our existing customers to our new
technology platform. We capitalize qualifying computer software costs incurred
during the application development stage. Accordingly, we anticipate that
product development expenses will fluctuate from year to year as various
milestones in the development are reached and future versions are implemented.
General and administrative expenses consist primarily of employee salaries
and related expenses for executives, administrative and finance personnel, as
well as other consulting, legal and professional fees and, to a lesser extent,
facility and communication costs. During the years ended December 31, 2002 and
2001, total general and administrative expenses amounted to $5,089,000 and
$10,103,000, respectively, representing a decrease of $5,014,000 or 50%. The
decrease is attributable to: (i) the termination of the lease at 757 Third
Avenue in the fourth quarter of 2001 which was reflected as a restructuring
charge and resulted in quarterly savings of $285,000; (ii) a reduction of
salaries and benefits of approximately $570,000 per quarter as a result of the
cost cutting measures implemented by us during 2001 and 2002; (iii) reduction of
fees paid to outside contractors by approximately $210,000 per quarter; and (iv)
lower legal expenses in 2002 by $520,000.
As a result of the reorganization plan implemented, we recorded a total
restructuring charge of $3,327,000 in 2001. This restructuring charge consisted
of (i) lease termination costs of $1,765,000; (ii) severance totaling $1,145,000
and (iii) contract termination costs of $417,000. During 2002, the Company
settled with its landlord at its prior executive offices at 757 Third Avenue in
New York City, resulting in an early termination of the lease relating to these
premises and this restructuring was finalized. The amount by which the estimated
restructuring charge taken in 2001 exceeded the actual restructuring costs to
terminate this lease, as determined in 2002, in the amount of $655,000, was
reversed into income in the restructuring caption during the second quarter of
2002
Amortization of goodwill and other intangibles are non-cash charges
associated with the DynamicWeb, Netlan, and Bac-Tech business combinations. For
the years 2002 and 2001, amortization expense was $974,000 and $9,789,000,
respectively. The decrease of $8,815,000 for 2002 is due to the implementation
of SFAS No. 142 during 2002. SFAS No. 142 eliminated amortization of goodwill
and certain intangibles with indefinite lives and requires an annual impairment
test of their carrying value. During the year ended December 31, 2001, we
recorded amortization expense of $9,536,000 related to goodwill, which would not
have been amortized under SFAS No. 142. During 2002, $1,248,000 of amortization
of goodwill would have been recorded.
Based upon our history of recurring operating losses and our market
capitalization being less than our stockholders' equity as of September 30,
2001, we assessed the carrying value of goodwill and other intangibles and
determined that such value may not be recoverable. The impairment loss was
measured as the amount by which the carrying amount of the goodwill and other
intangibles exceeds the fair value of the assets, calculated utilizing the
discounted future cash flows. In accordance with this policy, the Company
recorded impairment charges of $43,375,000 in 2001.
Goodwill related to Bac-Tech, DWeb and Netlan was tested for impairment in
the third quarter of 2002, after our annual forecasting process. Due to the
discontinuance of our Training and Educational Services reporting unit and a
change in economic conditions, operating profits and cash flows were lower than
expected in the fourth quarter of 2002. Based on that trend, the earnings
forecast for the future was revised. In December 2002, a goodwill impairment
loss of $2,732,000 was recognized. The fair value of these reporting units was
estimated using the expected present value of future cash flows.
16
During the year ended December 31, 2002, stock-based compensation expense
amounted to $12,000 as compared to $1,922,000 for the year ended December 31,
2001, a decrease of $1,910,000 or 99%. During the second quarter of 2000, the
Company recorded a one-time charge of approximately $8.8 million related to
warrants to purchase 88,667 shares of our common stock, which vested upon the
completion of the April 18, 2000 merger. The deferred stock compensation is
principally being amortized over the vesting periods of the related options and
warrants contingent upon continued employment of the respective option or
warrant holders. The vesting period of the options and warrants ranges
principally from two to four years. The balance of unearned stock-based
compensation was reduced to zero at December 31, 2002 due to a forfeiture of
warrants.
We define Earnings Before Interest, Taxes, Depreciation and Amortization
("EBITDA") as net income (loss) adjusted to exclude: (i) provision (benefit) for
income taxes, (ii) interest income and expense, (iii) depreciation, amortization
and impairment charges of long-lived assets, (iv) stock-based compensation, and
(v) restructuring charges.
EBITDA is discussed because management considers it an important indicator
of the operational strength and performance of its business based in part on the
significant level of non-cash expenses recorded by us to date, coupled with the
fact that these non-cash items are managed at the corporate level. EBITDA,
however, should not be considered an alternative to operating or net income as
an indicator of our performance, or as an alternative to cash flows from
operating activities as a measure of liquidity, in each case determined in
accordance with accounting principles generally accepted in the United States of
America. For a reconciliation of EBITDA and Net Loss, see Note 16 to the
financial statements in this Form 10-KSB. Also see Liquidity and Capital
Resources for a discussion of cash flow information.
For the year ended December 31, 2002, EBITDA was a loss of $2,300,000 as
compared to a loss of $8,123,000 for the year ended December 31, 2001, a
decrease of $5,823,000 or 72%. The improvement in EBITDA during 2002 is a result
of the cost savings from the restructuring discussed above, particularly in
general and administrative expenses and marketing. The substantial improvement
in EBITDA during 2002 is also a result of reversing the excess restructuring
charge of $655,000 into income during the second quarter of 2002.
Net interest expense, inclusive of deferred financing costs, during the
year ended December 31, 2002 was approximately $601,000 as compared to
$3,302,000 for the year ended December 31, 2001. The substantial reduction was
attributable to the conversion of previously issued $7.5 million convertible
promissory notes into Series C Preferred Stock during 2001.
Net loss for the year ended December 30, 2002 was $9,011,000 as compared
to $73,494,000 for the year ended December 31, 2001, a decrease of $64,483,000
or 88%. Before the impairment charges to goodwill of $2,732,000 and $43,375,000
recorded in 2002 and 2001, respectively, net loss was $11,743,000 for the year
ended December 31, 2002, compared to $30,119,000 for the year ended December 31,
2001, an improvement of $18,376,000 or 61%.
17
Liquidity and Capital Resources
As a result of the significant cost cutting measures carried out in 2001
and 2002, our ongoing quarterly cash expenses more closely approximate our
quarterly revenues. Although we reported negative cash flows from operations and
an EBITDA loss for the year ended December 31, 2002, we were EBITDA positive
during the fourth quarter of 2002. We also expect to report positive EBITDA
results in the first quarter of 2003 due to the completion of the integration of
our operations with Bac-Tech Systems, Inc. and the fact that a number of major
projects will be completed during the quarter, with deferred revenue to be taken
into income.
At our current quarterly expense rates we require approximately $975,000
in quarterly revenues and cash collections, to report positive EBITDA and cash
flow from operations. To the extent our quarterly revenues and cash collections
are below this amount, we are prepared to take additional actions, including
further cost reduction measures. In the event we experience an unexpected
decline in monthly revenue, we plan on further scaling back our operations.
Reference is made to "Risk Factors" for a description of certain risks that may
affect the achievement of our objectives and results discussed herein.
As of December 31, 2002, our principal source of liquidity was
approximately $461,000 of cash and cash equivalents. Additionally, the Company
may have access to the remaining $300,000 of the $1.2 million raised in the
financing completed in July 2002. The $300,000 is currently in escrow and the
Company believes it will satisfy the criteria necessary to draw down the funds.
As of December 31, 2002, we had a negative working capital position of
$3,233,000. Excluding deferred revenue of $740,000, which represents projects
that we expect to complete in the first quarter of 2003, and net current
liabilities of discontinued operations, we had a negative working capital
balance of $2,228,000. The negative working capital position does not reflect
the anticipated reduction in liabilities from settlements reached with unsecured
vendors totaling $1,109,000. There can be no assurance that we will be
successful in further reducing these liabilities. If we are unsuccessful in
reducing these liabilities and do not see an increase in revenues and cash
collections to the previously mentioned levels or cannot raise additional
capital, we are unlikely to have the capital to fund our operations through
2003.
At December 31, 2002, we accrued approximately $594,000 potentially owing
to a creditor, which is included in accrued liabilities. We had previously
issued shares of our common stock to this party for payment of obligations then
owing, and had agreed that in the event it received gross proceeds from the sale
of these shares less than the amount originally owing of $1,200,000, then we
would issue additional shares to cover the shortfall. In December 2001, we
amended our agreement with this creditor whereby the creditor agreed to be
issued up to 266,667 shares of our common stock to offset any deficiency, and to
the extent such amount is insufficient, then to be paid one-half of the
remaining balance in cash no earlier than April 2003, with the other one-half to
be forgiven.
In addition, the Company has significant long-term liabilities including
Convertible Notes in the aggregate principal amounts of $2,900,000 and notes
issued in connection with the acquisition of Bac-Tech of $600,000. Of such
Convertible Notes, (i) an aggregate principal amount of $2 million becomes due
in January 2007, and (ii) an aggregate principal amount of $900,000 becomes due
beginning in July 2007. The notes issued in the Bac-Tech acquisition become due
in one-third increments during each of May 2003, January 2004, and January 2005.
We are currently in negotiations with the holders of the Bac-Tech notes to defer
the May 2003 payment date for at least one year. The Convertible Notes are
secured by all the assets of the Company. In the event we are successful in
achieving positive EBITDA on a recurring basis, then we anticipate that the
Convertible Notes will either be converted or refinanced. We may also, depending
on facts and circumstances, seek a sale of our company.
18
The report of our independent auditors on our financial statements as of
and for the year ended December 31, 2002 contains an unqualified report with an
explanatory paragraph which states that our recurring losses from operations and
negative cash flows from operations raise substantial doubt about our ability to
continue as a going concern.
In 2002, we initiated the following actions to improve our cash position
and fund our operating losses:
o Our staff was reduced by eight employees in the year ended December
31, 2002 resulting in annual savings of $1,015,000 in salaries and
benefits;
o As a result of our inability to sell the business, we discontinued
our training and client educational services business segment to,
preserve capital;
o We settled unsecured vendor obligations totaling $1,384,000 for
approximately $275,000 which will be disbursed in various
increments through June 2003. The Company continues to pursue
negotiations with its remaining unsecured creditors.
o We determined to raise additional capital, in which respect, we
entered into a private financing in July 2002, resulting in gross
proceeds of $350,000 to the Company and $850,000 of gross proceeds
being placed in escrow, to be released to the Company upon achieving
certain parameters. We received additional proceeds from escrow of
$275,000 in each of September and November of 2002. Accordingly, as
of December 31, 2002, we have received a total of $900,000 from this
financing, with $300,000 remaining in escrow.
o We are also taking aggressive steps to renegotiate old contracts and
existing liabilities.
o In the second quarter of 2002, we entered into an agreement to
terminate 22,000 square feet of leased space in New York City that
we previously used for our corporate headquarters and back office
operations. This action reduced our monthly rental cost by
approximately $100,000 per month including certain utilities. To
terminate the lease, we surrendered a letter of credit of
approximately $1.2 million securing this lease and granted the
landlord 240,000 warrants to purchase our common stock at a per
share price of $0.101. The warrants were valued at $13,190 using the
Black-Scholes model assuming an expected life of three years,
volatility of 85 percent, and a risk free borrowing rate of 4.5
percent. During the year ended December 31, 2001, we recorded a
restructuring charge of $1,765,000 to account for the estimated
costs to terminate the lease. During the three-month period ended
September 30, 2002, we reversed $655,000, which is the portion this
restructuring charge that we over-estimated in excess of the actual
lease termination costs.
Management believes our current cash resources, the anticipated draw down
from escrow of the remaining proceeds of the July 2002 financing, together with
the improvement of our working capital as a result of the previously mentioned
actions, will be sufficient to continue operations through 2003 and thereafter
if our operations are cash flow positive, as anticipated.
If positive cash flow from operations is not generated, revenue growth
does not materialize as planned, or there are unanticipated expenses, we may
seek additional capital in order to fund our internal growth. There can be no
19
assurances provided that any additional funding will be concluded, or that, if
concluded, will be concluded on acceptable terms or be adequate to accomplish
our goals.
We anticipate spending approximately $0.6 million on capital expenditures
over the next twelve months, primarily on capitalized product development costs.
Since our inception on November 6, 1998, we have incurred significant
operating losses, net losses and negative cash flows from operations, due in
large part to the start-up and development of our operations and the development
of proprietary software and technological infrastructure for our platform to
process transactions. We expect that our net losses will continue as we
implement our growth strategy. There can be no assurance that revenue will
improve, that expenses will not increase in 2003, that net losses will be
reduced or that we will generate positive cash flow from operations in 2003.
Historically, we have funded our losses and capital expenditures through
borrowings and the net proceeds of prior securities offerings. From inception
through December 31, 2002, net proceeds from private sales of securities and
issuance of convertible notes totaled approximately $39 million.
In July 2002, we initially closed a private placement of five-year 7%
senior subordinated secured notes, which are convertible into shares of our
common stock at the conversion price of $0.101 per share (the closing price of
the common stock on the trading day prior to the closing). Ten persons or
entities, consisting of certain of our significant investors, and members of our
management, purchased these notes. The gross proceeds of this transaction are
intended to be used for working capital and general corporate purposes. These
notes contain full ratchet anti-dilution protection in certain events, including
the issuances of shares of stock at less than market price or the applicable
conversion price. These notes along with the $2,000,000 of notes issued in the
January 2002 private placement are secured by substantially all of our assets.
The security interest with respect to the notes issued in the July 2002
financing is senior in right to the security interest created with respect to
the notes issued in January 2002. In connection with the July 2002 financing,
all subscription proceeds were held in escrow by an escrow agent for the benefit
of the holders of these notes pending our acceptance of subscriptions and shall
be disbursed as provided in the escrow agreement. On the closing of this
financing, proceeds of $350,000 were released to us and the remaining proceeds
were held in escrow. As provided in our escrow agreement, the remaining proceeds
will be disbursed as directed by the representative of the holders of these
notes, or, upon our request, after reducing our liabilities, existing as of June
18, 2002, through negotiation with creditors. In this respect, the retained
proceeds may be released in one-third increments provided that liabilities are
reduced by defined parameters. As of December 31, 2002, we have received
$900,000 from the escrow. We believe that we have satisfied the criteria whereby
we can draw on the remaining $300,000 in escrow. This financing triggered
anti-dilution provisions affecting the conversion price of the Company's notes
issued in January 2002 (the 7% Notes as defined below), Series B preferred stock
and Series C preferred stock and the exercise price of and number of shares
issuable under various outstanding warrants.
Net cash used in continuing operating activities totaled approximately
$1,453,000 for the year ended December 31, 2002 as compared to net cash used in
continuing operating activities of approximately $12,836,000 for the year ended
December 31, 2001. Net cash used in continuing operating activities for the year
ended December 31, 2002 resulted primarily from (i) the $7,984,000 net loss from
continuing operations and (ii) a $1,519,000 use of cash from operating assets
and liabilities, offset by (iii) an aggregate of $421,000 of non-cash charges
consisting primarily of depreciation, amortization, stock-based compensation
expense, non-cash interest expense and the impairment of goodwill, (iv) a
reversal of $655,000 of restructuring charges. Net cash used in operating
activities for the year ended December 31, 2001 resulted primarily from (i) the
$72,649,000 net loss from continuing operations and (ii) a $990,000 use of cash
20
from operating assets and liabilities, offset by (iii) an aggregate of
$6,975,000 of non-cash charges consisting primarily of depreciation,
amortization stock-based compensation expense, impairment of goodwill and
restructuring charges.
Net cash used in investing activities totaled approximately $731,000 for
the year ended December 31, 2002 as compared to net cash provided by investing
activities of approximately $2,291,000 for the same period in 2001. Net cash
used in investing activities for the year ended December 31, 2002 resulted from
(i) the acquisition of Bac-Tech Systems, Inc., including net cash outlays of
$250,000, and (ii) $477,000 in product development costs consisting of fees of
outside contractors and capitalized salaries. Net cash provided by investing
activities for the year ended December 31, 2001 resulted from (i) the purchase
of capital assets for $596,000, and (ii) $1,695,000 in product development costs
consisting of fees of outside contractors and capitalized salaries.
Net cash provided by financing activities totaled approximately $735,000
for the year ended December 31, 2002 as compared to approximately $5,851,000 for
the year ended December31, 2001. On May 2, 2001, we completed our $7.5 million
financing. In connection with that financing, we paid a cash fee amounting to
$750,000 and incurred direct expenses, principally legal and accounting fees,
aggregating $309,000. On March 1, 2001, we made a $250,000 quarterly payment on
our term loan. In addition, we paid the $2.0 million outstanding balance of the
loan in full on April 2, 2001 using cash held in the custodial cash account.
Impact of New Accounting Pronouncements
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." For most companies, SFAS No. 145 will require gains and losses on
extinguishments of debt to be classified as income or loss from continuing
operations, rather than as an extraordinary item as previously required.
Extraordinary treatment will be required for certain extinguishments as provided
in APB Opinion No. 30. SFAS No. 145 also amends SFAS No. 13 to require that
certain modifications to capital leases be treated as a sale-leaseback, and to
modify the accounting for sub-leases when the original lessee remains a
secondary obligor. We have adopted the provisions of SFAS No. 145 in the first
quarter of 2003. Any gain or loss on extinguishments of debt that was classified
as an extraordinary item in prior periods presented that does not meet the
criteria in APB Opinion No. 30 for classification as an extraordinary item shall
be reclassified. Early application of the provisions of this statement related
to the recission of SFAS No. 4 is encouraged. Accordingly, the reversal of
certain restructuring charges $655,000 during 2002 has been accounted for in
accordance with SFAS No. 145.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associates with Exit or Disposal Activities," which addresses financial
accounting and reporting for costs associated with exit or disposal activities,
and nullifies Emerging Issues Task Force Issue No. 94-3, "Liability Recognition
for Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)." SFAS No. 146 requires
that a liability for a cost associated with an exit or disposal activity be
recognized when the liability is incurred. The requirements of SFAS No. 146
apply prospectively to activities that are initiated after December 31. 2002
and, as a result, we cannot reasonably estimate the impact of adopting these new
rules until and unless we undertake relevant activities in future periods.
In November 2002, the FASB issued Interpretation ("FIN") No. 45
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others," which clarifies the required
disclosures to be made by a guarantor in their interim and annual financial
statements about its obligations under certain guarantees that it has issued.
21
FIN No. 45 also requires a guarantor to recognize, at the inception of the
guarantee, a liability for the fair value of the obligation undertaken. The
Company is required to adopt the disclosure requirements of FIN No. 45 for
financial statements ending December 31, 2002. We are required to adopt and,
accordingly, have adopted prospectively the initial recognition and measurement
provisions of FIN No.45 for guarantees issued or modified after December 31,
2002 and, as a result, we cannot reasonable estimate the impact of adopting
these new rules until and unless it undertakes relevant activities in future
periods.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure - an amendment of SFAS No.
123." This Statement amends SFAS No. 123, "Accounting for Stock-Based
Compensation", to provide alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation. In addition, this Statement amends the disclosure requirements of
SFAS No. 123 to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. We are
adopting the provisions of SFAS No. 148 prospectively from January 1, 2003. The
adoption of SFAS No. 148 is not expected to have a material impact on our
financial position or results of operations.
In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable
Interest Entities," which clarifies the application of Accounting Research
Bulletin No. 51, "Consolidated Financial Statements," relating to consolidation
of certain entities. First, FIN No. 46 will require identification of our
participation in variable interests entities ("VIEs"), which are defined as
entities with a level of invested equity that is not sufficient to fund future
activities to permit them to operate on a stand alone basis, or whose equity
holders lack certain characteristics of a controlling financial interest. For
entities identified as VIEs, FIN No. 46 sets forth a model to evaluate potential
consolidation based on an assessment of which party to the VIE, if any, bears a
majority of the exposure to its expected losses, or stands to gain from a
majority of its expected returns. FIN No. 46 also sets forth certain disclosures
regarding interests in VIEs that are deemed significant, even if consolidation
is not required. We are required to adopt the provisions of FIN No. 46 for VIEs
created after January 31, 2003. As we do not participate in VIEs, we do not
anticipate that the provisions of FIN No. 46 will have a material impact on our
financial position or results of operations.
22
RISK FACTORS
You should carefully consider the risks and uncertainties described below,
as well as the discussion of risks and other information contained or
incorporated by reference in this Form 10-KSB. Additional risks and
uncertainties not presently known to us or that we currently deem immaterial may
also impair our business operations.
If any of the following risks actually occur, our business, financial
condition or operating results could be materially adversely affected. In such
case, the trading price of our common stock could decline and you may lose part
or all of your investment.
DynamicWeb was incorporated on July 26, 1979 in the State of New Jersey,
and has been engaged in electronic commerce since 1996. On April 18, 2000, eB2B
Commerce, Inc., a Delaware corporation, merged with and into DynamicWeb in a
reverse acquisition, and our name was changed at that time from DynamicWeb
Enterprises, Inc. to eB2B Commerce, Inc. In that the security holders of former
eB2B received the majority of the voting securities of the combined company,
former eB2B was deemed to be the accounting acquirer. Accordingly, the financial
results discussed in Risk Factors and throughout this Form 10-KSB prior to April
18, 2000 are those of former eB2B, unless otherwise specified.
Risks Relating to Our Business
We have a limited operating history, have incurred significant losses and can
give no assurance that we can ever attain profitability.
We have a limited operating history in the business-to-business electronic
commerce industry. We had no revenues and incurred a net loss attributable to
common stockholders of $37,562,000 for the year ended December 31, 1999, which
amount is inclusive of a deemed dividend on preferred stock of $29,442,000. For
the year ended December 31, 2000, we generated revenues of $5,468,000 and
incurred a net loss attributable to common stockholders of $41,335,000. For the
year ended December 31, 2001, we generated revenues from continuing operations
of $4,333,000, and incurred a net loss of $73,494,000, inclusive of a goodwill
impairment charge of $43,375,000. For the year ended December 31, 2002, we
generated revenues from continuing operations of $3,493,000, incurred a net loss
of $9,011,000, inclusive of an impairment charge of $2,732,000, and our
accumulated deficit was $161,519,000 at December 31, 2002.
We cannot give assurances that we will soon make a profit or that we will
ever make a profit. Sales are expected to increase due to the increasing number
of companies joining our trading communities. Among other things, to achieve
profitability, we must market and sell substantially more services, hire and
retain qualified and experienced employees and be able to manage our expected
growth. We may not be successful in these efforts. Our business plan currently
contemplates that we achieve positive EBITDA (earnings before interest, taxes,
depreciation and amortization) on a recurring basis at some point in 2003. There
can be no assurance that positive EBITDA can be achieved in this timeframe or at
all, and all of the risk factors described herein may negatively affect our
operating results. We expect to have substantial non-cash expenses that we
exclude when determining EBITDA, including depreciation of software assets,
amortization of intangibles other than goodwill and stock-based compensation
expenses. EBITDA also excludes amortization of software development costs, which
23
we capitalize and amortize over a period of two years. Accordingly, we do not
expect to report net income as determined by generally accepted accounting
principles in 2003.
We received a "going concern" opinion from our Independent Auditors and may need
additional capital, which, if not obtained, could require us to cease
operations.
As of December 31, 2002, we had approximately $461,000 in cash and
available escrowed capital of $300,000 available to fund operating and working
capital requirements. Due to the significant cost cutting measures and the
settlement of certain outstanding obligations for shares rather than cash, or at
reduced amounts, carried in 2001 and 2002 and based upon current expectations,
we anticipate generating positive cash flow from ongoing operations on a
recurring basis in 2003, although there can be no assurance in this regard.
As of December 31, 2002, we had a negative working capital position of
$3,233,000. Excluding deferred revenue of $740,000, which represents projects
that we expect to complete in the first quarter of 2003, and net current
liabilities of discontinued operations; we had a negative working capital
balance of $2,228,000. There can be no assurance that we will be successful in
reducing our liabilities. If we are unsuccessful in reducing these liabilities
and do not see an increase in revenues and cash collections to $975,000 and
$1,050,000 per quarter, respectively, we are unlikely to have the capital to
fund our operations through 2003.
In addition, the Company has significant long-term liabilities including
Convertible Notes in the aggregate principal amounts of $2.9 million and notes
issued in connection with the acquisition of Bac-Tech of $600,000. The
Convertible Notes are secured by all the assets of the Company.
The report of our independent auditors on our financial statements as of
and for the year ended December 31, 2002 contains an unqualified report with an
explanatory paragraph which states that our recurring losses from operations and
negative cash flows from operations raise substantial doubt about our ability to
continue as a going concern.
In the event that contemplated revenue levels are not achieved or if
expenses are greater than anticipated, or if we are faced with any significant
unanticipated working capital or capital expenditure requirements in the near
future, we may need additional financing. We may not be able to obtain such
additional financing, or, if available, the terms of the financing may not be
favorable to our shareholders or us. Such inability to raise additional
financing would have a material adverse effect on our business, prospects,
operating results and financial condition and may require us to cease
operations. Further, if we issue equity securities, shareholders may experience
substantial dilution or the new equity securities may have rights and
preferences senior to our common stock and outstanding preferred stock.
Our business model is unproven and may not be successful.
Our business-to-business electronic commerce model is based on the general
activity in trading communities for the purchase and sale of goods between
buyers and suppliers. While we have signed several participants into our
networks, none of the participants are required to conduct a minimum level of
business. If our business strategy is flawed or if we fail to execute our
strategy effectively, our business, operating results and financial condition
will be substantially harmed. We do not have substantial experience in
developing and operating trading communities. The success of our business model
will depend upon a number of factors, including:
24
o the addition of significantly more buyers and suppliers in our
trading communities, particularly those who already conduct business
among themselves;
o an increased volume of transactions conducted by buyers and
suppliers;
o our ability to maintain customer satisfaction;
o our ability to upgrade, develop and maintain the technology
necessary for our operations;
o the introduction of new or enhanced services by our competitors;
o the pricing policies of competitors;
o our ability to attract personnel with Internet industry expertise;
and
o the satisfactory performance, reliability and availability of our
systems and network infrastructure.
If we do not succeed in expanding market acceptance for Internet
business-to-business electronic commerce our operations will be negatively
effected.
Our future revenues and any future profits depend upon the widespread
acceptance and use of the Internet as an effective medium of
business-to-business electronic commerce, particularly as a medium to perform
goods procurement and fulfillment functions in our targeted markets. If the use
of the Internet in electronic commerce in such markets does not grow or if it
grows more slowly than expected, our business will suffer. A number of factors
could prevent such growth, including:
o Internet electronic commerce is at an early stage and buyers may be
unwilling to shift their transmission of business documents from
traditional methods to electronic methods;
o Internet electronic commerce may not be perceived as offering a cost
saving to users;
o the necessary network infrastructure for substantial growth in usage
of the Internet may not be adequately developed;
o increased governmental regulation or taxation may adversely affect
the viability of electronic commerce;
o any shift from flat rate pricing to usage based pricing for Internet
access may adversely impact the viability of the business models;
o insufficient availability of telecommunication services or changes
in telecommunication services could result in slower response times;
o technical difficulties; and
25
o concerns regarding the security of electronic commerce transactions.
We must enroll a significant number of additional buyers and suppliers in our
trading communities in order to achieve and maintain profitability.
As of December 31, 2002, we connected approximately 200 retail
organizations and 1,100 supplier organizations within our trading communities.
We currently anticipate that the number of buyers and suppliers would have to
increase to approximately 1,800 on an annual basis in order for us to achieve
sustained profitability without carrying out additional operating expense
reductions or without increases in other types of revenue, including our
training center and transaction revenues from professional services and
consulting operations. Over the last several months, we have added approximately
3,000 suppliers as potential customers to our backlog. This represents supplier
lists provided by retailers on our service, which need to be sold our services.
We estimate that we can sign and implement between 15% and 30% of these
suppliers to our service in 2003 based upon our historical results. Our business
model depends in large part on our ability to create a network effect of buyers
and suppliers. Buyers may not perceive value in the communities if there is an
insufficient number of major suppliers within the communities. Similarly,
suppliers may not be attracted to the network trading communities if there is an
insufficient number of major buyers within the communities. If we are unable to
increase either the number of buyers or suppliers, we will not be able to
benefit from any network effect. As a result, the overall value of the trading
communities would be diminished, which could harm our business, operating
results and financial condition.
The loss of one or a small number of customers could substantially reduce our
revenues.
In the year ended December 31, 2002, one customer accounted for
approximately 25% of our total revenue. In the year ended December 31, 2001,
this customer accounted for approximately 21% of our total revenue. We expect a
slight decline in revenues from the customer and, therefore, expect that such
percentage will decline over the long-term. If this customer were to
substantially reduce or stop its use of our services, our business, operating
results and financial condition would be harmed. Principal customers in our
transaction processing and related services include Toys "R" Us, Rite Aid,
Verizon, Best Buy, Ross Products Division of Abbott Laboratories, O'Cedar
Corporation, USA Wireless, and Duane Reade. Generally, we do not have any
long-term contractual commitments from any of our current customers, and
customers may terminate their contracts with us with short periods of advance
notice and without significant penalty. As a result, we cannot assure that any
of our current customers will continue to use our services in future periods.
The Internet-based business-to-business industry is highly competitive and we
may not attain sufficient market share to succeed.
The market for Internet-based, business-to-business electronic commerce
solutions is extremely competitive and has low barriers to entry. Our
competition is expected to intensify as current competitors expand their service
offerings and new competitors -- including larger, more established companies
with more resources -- enter the market. The evolution of technology in our
market is rapid and we must adapt to remain competitive. We may not be able to
compete successfully against current or future competitors and such competitive
pressures could harm our business, operating results or financial condition.
26
Our competition is primarily made of indirect horizontal competitors,
which are focused on similar services but not in specific or multiple vertical
industries. Others are focused in vertical markets unrelated to those pursued by
us. Major publicly traded competitors include AdvantE Corporation, Neoforma,
Inc., and The viaLink Company. Major privately held competitors include
Automated Data Exchange (ADX), GXS (a divestiture of General Electric), and SPS
Commerce, for which minimal public information is available on their efforts to
date.
Also, we believe that competition may develop from EDI/electronic commerce
companies, technology/software development companies, retailer purchasing
organizations, and leading industry manufacturers. Further, large retailers and
suppliers can create their own technology platform to automate the exchange of
business documents with their small and medium-sized trading partners, thereby
reducing the number of customers in our target markets. We believe it will prove
to be an inefficient use of resources for each large retailer to build a
technology platform for its internal use and too complicated for each trading
partner to access many discrete trading sites, compared to using our services.
The failure to secure our intellectual property rights could compromise the
value of our services and result in a loss of business.
To protect our proprietary products, we rely on a combination of
copyright, trade secret and trademark laws, as well as contractual provisions
relating to confidentiality and related matters. We also rely on common law
protection relating to unfair business practices. Our primary software is
licensed from InterWorld Corporation, a division of J-Net Enterprises, and has
been modified by us to perform the tasks specific to our business. Such software
is run on our computers, thereby avoiding third party access. Our software
license agreement with InterWorld Corporation, dated as of December 11, 1998, as
amended, grants us a non-exclusive, non-transferable license to use certain
software on a designated platform for (i) internal data processing at designated
locations, and (ii) enabling on-line users to access information about, and to
order electronically, products and services offered through our web site. The
agreement requires us to pay InterWorld a non-refundable net fee of $2,200,000,
which amount has been paid in full through a combination of cash and shares of
our common stock. Additionally, to the extent our annual revenue exceeds
$250,000,000 through the use of the software, we are obligated to pay InterWorld
..01% of the overage as an additional license fee and .08% of the overage as an
additional support and maintenance fee. This agreement may be terminated by
InterWorld at any time for our failure to pay any license fees within fifteen
days of receipt of notification that payment is past due or by either party if
the other party fails to cure a material breach of any term of the agreement
within sixty days of receipt of notice. Despite our efforts to protect our
proprietary rights, unauthorized parties may attempt to copy aspects of our
products or to obtain and use information that we regard as proprietary.
Moreover, we cannot assure you that our means of protecting our proprietary
rights will be adequate or that competitors will not independently develop
similar or superior technology.
27
We may not have federal trademark protection for our name and therefore may not
be able to adequately address third party infringement.
Our principal trademark is "eB2B", for which we had been seeking a federal
registration. The United States Patent and Trademark Office ("USPTO") issued an
initial objection to the registration application based upon the descriptiveness
of the trademark. We have filed a response with the USPTO challenging the
objection, which response was denied by the USPTO. We subsequently withdrew our
application. There can be no assurance that the mark can be adequately protected
against any third party infringement, which could adversely affect our business.
We have not made filings in any states with respect to obtaining state trademark
protection.
We are dependent on one data center.
We operate our primary data center at Exodus Communications' Internet Data
Center facility in Jersey City, New Jersey. This data center operates
twenty-four hours a day, seven days a week, and is connected to the Internet and
the electronic data interchange networks via AT&T and IBM Global Network. The
data center consists primarily of servers, storage subsystems, and other
peripheral technology to provide on-line, batch and back-up operations.
Customers' data is backed-up daily and stored off-site. We rely on Exodus
Communications to provide us with Internet capacity, security personnel and fire
protection, and to maintain the facilities, power and climate control necessary
to operate our servers. Additionally, we rely on redundant subsystems, such as
multiple fiber trunks from multiple sources, fully redundant power on the
premises and multiple back-up generators. If Exodus Communications or other
telecommunications providers fail to adequately host or maintain our servers, or
experience trunk line failures, our services could be disrupted and our business
and operating results could be significantly harmed. We can make no assurances
regarding our recourse against Exodus Communications in the event of such
failure.
In September 2001, Exodus Communications publicly announced that it filed
voluntary petitions for reorganization under Chapter 11 of the United States
Bankruptcy Code. In January 2002, Exodus Communications announced that the
proposed sale of a substantial portion of its business and assets (including
those portions that conduct business with us) to Cable & Wireless PLC was
approved by the bankruptcy court. The sale was consummated during 2002, and to
date, normal services have continued to be provided. There can be no assurance
that Exodus Communications or a successor can effectively provide and manage the
aforementioned infrastructure and services in a reliable fashion.
Certain legal risks and uncertainties relating to our services could subject us
to claims for damages.
In the course of our business, we will be exposed to certain legal risks
and uncertainties relating to information transmitted in transactions conducted
by our customers. The services provided to customers may include access to
confidential or proprietary information. Any unauthorized disclosure of such
information could result in a claim against us for substantial damages. In
addition, our services include managing the collection and publication of
catalog content. The failure to publish accurate catalog content could deter
users from participating in trading communities, damage our business reputation
and potentially expose us to legal liability. From time to time, some of our
suppliers may submit inaccurate pricing or other catalog information. Even
though such inaccuracies may not be caused by us and are not within our control,
we could be exposed to legal liability. Although we believe that we have
implemented and will continue to implement adequate policies to prevent
28
disclosure of confidential or inaccurate information, claims alleging such
matters may still be brought against us. Any such claim may be time-consuming
and costly and may harm our business and financial condition. We maintain
insurance for many of the risks encountered in our business, however, there can
be no assurance that the claims will be substantially covered by our insurance.
Our resources may be adversely effected by the costs and any damage awards
resulting from current and possible future litigation.
In October 2000, Cintra Software & Services Inc. commenced a civil action
against us in New York Supreme Court, New York County. The complaint alleges
that we acquired certain software from Cintra upon the authorization of our
former Chief Information Officer. Cintra is seeking damages of approximately
$856,000. We have filed an answer denying the material allegations of the
complaint. We believe we have meritorious defenses to the allegations made in
the complaint and intend to defend the action vigorously.
More generally, some of our engagements involve the design and development
of customized e-commerce systems that are important to our clients' businesses.
Failure or inability to meet a client's expectations in the performance of
services could result in a diminished business reputation or a claim for
substantial damages regardless of which party is responsible for such failure.
In addition, the services provided to clients may provide us with access to
confidential or proprietary client information. Although we have policies in
place to prevent such client information from being disclosed to unauthorized
parties or used inappropriately, any unauthorized disclosure or use could result
in a claim against us for substantial damages. Contractual provisions attempting
to limit such damages may not be enforceable in all instances or may otherwise
fail to protect us from liability.
In addition, there is always the possibility that our shareholders will
blame us for taking an alleged inappropriate action that causes the loss of
their investment. In the past, following periods of volatility in the market
price of a company's securities, class action litigation often has been
instituted against a company experiencing stock price declines. Similar
litigation, if instituted against us, could result in substantial costs and a
diversion of our management's attention and resources. As a result, your
investment in our stock may become illiquid and you may lose your entire
investment.
We may be faced with a significant non-operative stock and cash liability.
During 2001, we issued one of our vendors an aggregate of 145,986 shares
of currently unregistered common stock in lieu of the $1,200,000 balance due
this vendor for software license fees. In the event that within two years this
vendor receives gross proceeds (less brokerage commissions) of less than
$1,200,000 from selling its shares in the open market, we agreed to issue this
vendor additional shares of common stock in an amount equal to the difference
between gross proceeds (less brokerage commissions) received by this vendor from
the sale of the shares of common stock and the balance due to it divided by the
average closing price of the common stock for the five trading days ending on
the last sale date, up to a maximum of 266,667 shares of common stock. If the
maximum number of shares is insufficient to pay the balance due this vendor, we
have agreed to pay this vendor in cash, no earlier than April 2003, an amount
equal to one-half of the remaining balance (with the remaining one-half to be
forgiven). Fluctuations in the market price of the common stock will increase or
decrease the actual cash payment we will be required to pay and, accordingly, we
may be faced with a significant non-operative stock and cash liability. As of
December 31, 2002, we have accrued approximately $590,000 relating to the
29
potential cash shortfall for this amount in short term liabilities as the cash
short fall could be triggered within 12 months.
Risks Relating to Our Common Stock
Our directors and executive officers have significant control and influence over
our company and holders of securities issued in our private placements may also
have significant influence.
As a group, on December 31, 2002 our current directors and executive
officers beneficially owned a substantial portion of our outstanding voting
stock. If they vote together, the directors and executive officers will be able
to exercise significant influence over all matters requiring shareholder
approval, including the election of directors. The interests of our directors
and executive officers may conflict with the interests of our other
shareholders. Commonwealth Associates, L.P., a placement agent for our December
1999, April/May 2001, December 2001 and January 2002 private placements, and the
beneficial owner of a significant portion of our common stock as of December 31,
2002, has designated two members of our board of directors and may have the
right to designate a third in the future. In addition, holders of Series B
preferred stock, as well as related warrants, as of December 31, 2002, had the
ability to obtain 5,419,000 shares of common stock. Holders of Series C
preferred stock, as well as related warrants, issued in our April/May 2001
private placement, as of December 31, 2002, had the ability to obtain 20,664,000
shares of our common stock. Holders of our 7% senior subordinated secured
convertible notes, as well as related warrants, issued in our December 2001 and
January 2002 financings, had the ability to obtain 24,026,000 shares of our
common stock. All of the holders of such notes, except for one, also own Series
C preferred stock and many of the holders of Series C preferred stock also own
Series B preferred stock. A significant portion of the holders of interest of
these notes also owns the aforementioned securities. As a result, if such
holders choose to act together, they could assert significant influence over our
company.
We do not anticipate paying dividends on our common stock.
We have never paid dividends on our common stock and we do not anticipate
paying dividends in the foreseeable future. We intend to reinvest any funds that
might otherwise be available for the payment of dividends in further development
of our business.
The exercise of options and warrants and conversion of convertible securities
may dilute the percentage ownership of our shareholders and the potential or
actual exercise or conversion has negatively affected, and may continue to
negatively affect, the price of our common stock and may impede our ability to
raise capital.
A substantial number of our shares of common stock underlie outstanding
shares of convertible preferred stock, convertible notes and outstanding options
and warrants. As of December 31, 2002, there are outstanding shares of
convertible preferred stock and convertible notes to purchase an aggregate of
approximately 50,770,000 million shares of our common stock and options and
warrants to purchase an aggregate of approximately 25,712,000 million shares of
our common stock. If a significant number of these options or warrants were
exercised, or a significant amount of preferred stock or notes was converted to
common stock, the percentage ownership of our common stock would be materially
diluted. For example, if all outstanding options and warrants were exercised and
if all convertible securities were converted to common stock as of December 31,
30
2002, there would have been approximately 2.605% more common stock outstanding
at such time. We believe that the potential exercise or conversion may have an
adverse impact on the price of our common stock and therefore on our ability to
raise capital. The actual conversion or exercise of convertible securities, and
the sale of the underlying common stock into the open market, could further
substantially negatively affect the price of our common stock.
There is potential exposure to us in that certain shares of common stock
underlying our preferred stock have been sold prior to the effective date of a
registration statement, which we have filed, but which is not yet effective.
From December 2, 2000 until January 11, 2001, our shareholders in the open
market sold certain shares of our common stock, which were issued by virtue of
conversion of shares of preferred stock. Such shareholders believed that their
shares were registered pursuant to a previous registration statement of ours.
The Securities and Exchange Commission has advised us of their opinion that the
prior registration statement did not cover such shares. While we believe that
such sales were made in conformance with applicable securities laws and
regulations, a different determination may result in our having liability.
Commencing January 25, 2001, we advised such converting shareholders to resell
their shares pursuant to Rule 144 promulgated under the Securities Act of 1933.
We estimate that approximately 195,534 shares of our common stock were issued to
such shareholders on or prior to January 11, 2001. Such shares may have
potentially been sold in the open market on or prior to January 11, 2001, at
prices that may have ranged from $7.50 to $18.75 per share. It is possible that
the selling security holders will seek to include us in any action for recission
taken against them by third parties who purchased the common stock. The measure
of damages could be the purchase price paid, plus interest. We are unable to
assess the amount of damages, in the event that there is any liability.
Because of the decline in the market price of our common stock relative to the
stock prices at the time of our prior securities offerings, our common
shareholders have been significantly diluted due to preferences included in our
outstanding preferred shares and warrants.
We have a substantial number of outstanding shares of convertible
preferred stock, a significant amount of convertible notes and a substantial
number of outstanding warrants to purchase shares of our common stock. The
preferred shareholders and convertible note holders are entitled to an adjusted
conversion price, which results in their receiving additional shares of common
stock upon conversion, if we raise capital at a price below the then current
conversion price or market price. Similarly, many of our warrant holders are
entitled to a reduced exercise price on their warrants if we raise capital at a
price below the then current exercise price or market price. The number of
shares of common stock underlying these shares of preferred stock and warrants
have significantly increased as a result of the offering price for our
securities in our private financings concluded in 2001, January 2002, and July
2002. If we raise additional capital at a price below these amounts, our common
shareholders' percentage of ownership will be further diluted by the additional
common stock required to underlie the preferred shares, convertible notes and
warrants.
The price of our common stock is volatile, which could result in substantial
losses for investors.
Our stock price has been and is likely to continue to be volatile. For
example, from January 1, 2002 through December 31, 2002, our common stock traded
as high as $22.50 per share and as low as $.03 per share (which prices reflect a
1 for 15 reverse stock split effected in January 2002).
31
Volatility in the future may be due to a variety of factors, including:
o volatility of stock prices of Internet and electronic commerce
companies generally;
o variations in our operating results and/or our revenue growth rates;
o changes in securities analysts' estimates of our financial
performance, or for the performance of our industry as a whole;
o announcements of technological innovations;
o the introduction of new products or services by us or our
competitors;
o change in market valuations of similar companies;
o market conditions in the industry generally;
o announcements of additional business combinations in the industry or
by us;
o issuances or the potential issuances of additional shares;
o additions or departures of key personnel; and
o general economic conditions.
The stock market has experienced extreme price and volume fluctuations
that have particularly affected the market prices of securities of
Internet-related companies. These fluctuations may adversely affect the market
price of our common stock.
We trade on the Over the Counter Bulletin Board and may ultimately trade on the
less liquid "pink sheets."
Since August 17, 2002, our common stock is traded on the Over the Counter
bulletin board under the symbol "EBTB.OB", having been delisted from the Nasdaq
SmallCap Market on that date. Nasdaq has published its initial requirements for
BBX, the proposed successor market to the Over the Counter bulletin board. The
BBX is scheduled to become operative in late 2003. There are a number of initial
and ongoing fees to participate in the BBX. Should the Company opt not to
participate on the BBX exchange, the Company would become a "Pink Sheet" stock.
As such:
o Our investors would find it more difficult to dispose of their
shares in the Company,
o It will become more difficult to obtain market prices on the shares
of our stock, and
o There will be a potentially larger spread between bid and asked
prices, created a less favorable trading environment for our
shareholders.
Our shares could become a "penny stock", in which case it would be more
difficult for investors to sell their shares.
32
The SEC has adopted rules that regulate broker-dealer practices in
connection with transactions in "penny stocks". Penny stocks generally are
equity securities with a price of less than $5.00, other than securities
registered on national securities exchanges or quoted on Nasdaq, provided that
current price and volume information with respect to transactions in such
securities is provided by the exchange or system. Prior to a transaction in a
penny stock, a broker-dealer is required to:
o deliver a standardized risk disclosure document that provides
information about penny stocks and the nature and level of risks in
the penny stock market;
o provide the customer with current bid and offer quotations for the
penny stock;
o explain the compensation of the broker-dealer and its salesperson in
the transaction;
o provide monthly account statements showing the market value of each
penny stock held in the customer's account; and
o make a special written determination that the penny stock is a
suitable investment for the purchase and receive the purchaser's
written agreement to the transaction.
These requirements may have the effect of reducing the level of trading
activity in the secondary market for a stock that becomes subject to the penny
stock rules.
33
Item 7. Financial Statements
eB2B Commerce, Inc.
Index to Consolidated Financial Statements
Page
----
Independent Auditors' Reports 35-36
Consolidated Balance Sheet as of December 31, 2002 37
Consolidated Statements of Operations for the years ended
December 31, 2002 and 2001 38
Consolidated Statements of Stockholders' Equity (Deficit)
for the years ended December 31, 2002 and 2001 39-40
Consolidated Statements of Cash Flows for the years ended
December 31, 2002 and 2001 41-42
Notes to the Consolidated Financial Statements 43
34
INDEPENDENT AUDITORS' REPORT
To eB2B Commerce, Inc.:
We have audited the accompanying consolidated balance sheet of eB2B
Commerce, Inc. (the "Company") as of December 31, 2002, and the related
consolidated statements of operations, stockholders' deficit and cash flows for
the year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit. The consolidated financial statements
of the Company for the year ended December 31, 2001 were audited by other
auditors whose report dated April 15, 2002, on those consolidated financial
statements included an explanatory paragraph describing conditions that raised
substantial doubt about the Company's ability to continue as a going concern.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the 2002 financial statements referred to above present
fairly, in all material respects, the financial position of eB2B Commerce, Inc.
as of December 31, 2002, and the results of its operations and its cash flows
for the year then ended in conformity with accounting principles generally
accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has experienced significant losses from
operations and negative cash flows from operations, which raises substantial
doubt about its ability to continue as a going concern. The financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.
As discussed in Note 4 to the financial statements, the Company changed
its method of accounting for goodwill in 2002, as required by the provisions of
Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets."
/s/ MILLER, ELLIN & COMPANY, LLP
New York, New York
March 28, 2003
35
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
eB2B Commerce, Inc.:
We have audited the accompanying consolidated statements of operations,
stockholders' equity and cash flows of eB2B Commerce, Inc. (the "Company") for
the year ended December 31, 2001. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the results of the Company's operations and its cash flows
for the year ended December 31, 2001 in conformity with accounting principles
generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company's recurring losses from
operations and negative cash flows from operations raise substantial doubt about
its ability to continue as a going concern. Management's plans concerning these
matters are also described in Note 1. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
/s/ DELOITTE & TOUCHE, LLP
New York, New York
April 15, 2002
36
eB2B COMMERCE, INC.
CONSOLIDATED BALANCE SHEET
(in thousands, except share and per share data)
DECEMBER 31, 2002
ASSETS
Current Assets
Cash and cash equivalents ...................................... $ 461
Accounts receivable (net of allowance of $173) ................ 608
Other current assets ........................................... 54
---------
Total current assets ......................................... 1,123
Property and equipment, net ....................................... 73
Product development costs, net of accumulated
amortization of $5,317 ......................................... 432
Deferred financing costs, net of accumulated amortization of $93 .. 372
Other intangibles, net of accumulated amortization of $2,444 ...... 638
Other assets ...................................................... 50
---------
Total assets ............................................... $ 2,688
=========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities
Accounts payable ............................................... $ 1,396
Accrued expenses and other current liabilities ................. 1,775
Current maturities of long-term debt ........................... 180
Deferred revenue ............................................... 740
Current liabilities of discontinued operations ................. 265
---------
Total current liabilities .................................... 4,356
Long-term debt, less current maturities ........................ 2,555
---------
Total liabilities .......................................... 6,911
---------
Commitments and contingencies
Stockholders' Deficit
Preferred stock, convertible Series A - $.0001
par value; 2,000 shares authorized; 7
shares issued and outstanding ............................... --
Preferred stock, convertible Series B - $.0001
par value; 4,000,000 shares authorized;
2,211,675 shares issued and outstanding ..................... --
Preferred stock, convertible Series C - $.0001
par value; 1,750,000 shares authorized;
732,875 shares issued and outstanding ....................... --
Common stock - $.0001 par value; 200,000,000
shares authorized; 3,053,470 issued and
outstanding ................................................. --
Additional paid-in capital ..................................... 157,287
Accumulated deficit ............................................ (161,510)
---------
Total stockholders' deficit .................................. (4,223)
---------
Total liabilities and stockholders' deficit ................ $ 2,688
=========
See accompanying notes to consolidated financial statements. All share and per
share amounts have been adjusted to reflect the 1 for 15 reverse split completed
in January 2002.
37
eB2B COMMERCE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share data)
YEAR ENDED DECEMBER 31,
--------------------------
2002 2001
----------- -----------
Revenue ........................................................................... $ 3,493 $ 4,333
----------- -----------
Costs and expenses:
Cost of revenue ................................................................ 1,215 1,754
Marketing and selling (exclusive of stock-based compensation expense of
$-0- and $469 for the years ended December 31, 2002 and 2001,
respectively) ................................................................ 500 1,657
Product development costs (exclusive of stock-based compensation expense of
$-0- and $9 for the years ended December 31, 2002 and 2001, respectively) .... 1,217 2,024
General and administrative (exclusive of stock-based compensation expense
of $12 and $1,444 for the years ended December 31, 2002 and 2001,
respectively) ................................................................ 5,089 10,103
Amortization of goodwill and other intangibles ................................. 974 9,789
Stock-based compensation expense ............................................... 12 1,922
Restructuring charge (recovery) ................................................ (655) 3,327
Impairment of goodwill and other intangible assets ............................. 2,524 43,375
----------- -----------
Total costs and expenses ..................................................... 10,876 73,951
----------- -----------
Loss from continuing operations before other income (expense) ................ (7,383) (69,618)
Interest income .............................................................. -- 172
Interest expense (including deferred financing costs of $423 and $3,178
in 2002 and 2001, respectively) .......................................... (601) (3,203)
----------- -----------
Net loss from continuing operations .......................................... (7,984) (72,649)
Net loss from discontinued operations ........................................ (1,027) (845)
----------- -----------
Net loss ..................................................................... $ (9,011) $ (73,494)
=========== ===========
Per share data - Basic and diluted:
Loss from continuing operations ................................................ $ (4.14) $ (58.20)
Loss from discontinued operations .............................................. (0.53) (0.68)
----------- -----------
Net loss per share ............................................................. $ (4.67) $ (58.88)
=========== ===========
Weighted average number of common shares outstanding .............................. 1,926,786 1,248,164
=========== ===========
See accompanying notes to consolidated financial statements. All share and per
share amounts have been adjusted to reflect the 1 for 15 reverse stock split in
January 2002.
38
eB2B COMMERCE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(in thousands, except share and per share data)
Preferred Stock Preferred Stock Preferred Stock Preferred Stock
Series A Series B Series C Series D
-------------------- --------------------- -------------------- --------------------
Shares Amount Shares Amount Shares Amount Shares Amount
--------- --------- ---------- --------- --------- --------- --------- ---------
Balance at January 1, 2001 7 $ -- 2,803,198 $ -- -- $ -- -- $ --
Conversion of Series B Preferred -- -- (326,145) -- -- -- -- --
Private placement -- -- -- -- -- -- -- --
Conversion of convertible notes -- -- -- -- 763,125 -- -- --
Amortization of unearned
stock-based compensation -- -- -- -- -- -- -- --
Unearned stock-based
compensation -- -- -- -- -- -- -- --
Issuance of stock in lieu of interest
payment on convertible notes -- -- -- -- -- -- -- --
Issuance of common stock to settle
vendor and other obligations -- -- -- -- -- -- -- --
Other issuances of common stock -- -- -- -- -- -- -- --
Net Loss -- -- -- -- -- -- -- --
--------- --------- ---------- --------- --------- --------- --------- ---------
Balance at December 31, 2001 7 -- 2,477,053 -- 763,125 -- -- --
Acquisition of Bac-Tech Systems, Inc. 95,000 --
Conversion of Series B Preferred Stock -- -- (265,378) -- -- -- --
Conversion of Series C Preferred Stock (30,250) -- -- --
Conversion of Series D Preferred Stock (95,000) --
Issuance of common stock to settle
vendor and other obligations -- -- -- -- -- -- -- --
Forfeiture of warrants -- -- -- -- -- -- -- --
Amortization of stock based
compensation -- -- -- -- -- -- -- --
Private placement -- -- -- -- -- -- --
Net loss -- -- -- -- -- -- -- --
--------- --------- ---------- --------- --------- --------- --------- ---------
Balance at December 31, 2002 7 $ -- 2,211,675 $ -- 732,875 $ -- -- $ --
========= ========= ========== ========= ========= ========= ========= =========
See accompanying notes to Consolidated Financial Statements. All share and per
share amounts have been adjusted to reflect the 1 for 15 reserve stock split
completed in January 2002.
39
eB2B COMMERCE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(CONTINUED)
(in thousands, except share and per share data)
Total
Common Stock Additional Unearned Stockholders'
--------------------- Paid-in Stock - Based Accumulated Equity
Shares Amount Capital Compensation Deficit (Deficit)
--------- --------- --------- ------------ --------- ---------
Balance at January 1, 2001 1,025,604 -- $ 144,459 $ (2,368) $ (79,005) $ 63,086
Conversion of Series B Preferred 146,728 -- -- -- -- --
Private placement -- -- 7,884 -- -- 7,884
Conversion of convertible notes -- -- 1,531 -- -- 1,531
Amortization of unearned stock-based
compensation -- -- -- 1,922 -- 1,922
Unearned stock-based compensation -- -- 322 (322) -- --
Issuance of stock in lieu of interest
payment on convertible notes 30,339 -- 85 -- -- 85
Issuance of common stock to settle
vendor and other obligations 398,738 -- 1,624 -- -- 1,624
Other issuances of common stock 1,728 -- -- -- -- --
Net Loss -- -- -- -- (73,494) (73,494)
--------- --------- --------- --------- --------- ---------
Balance at December 31, 2001 1,603,137 -- 155,905 (768) (152,499) 2,638
Acquisition of Bac-Tech Systems, Inc. 200,000 -- 1,240 -- -- --
Conversion of Series B Preferred Stock 279,143 -- -- -- -- --
Conversion of Series C preferred Stock 622,914 -- -- -- -- --
Conversion of Series D preferred Stock 333,334 -- -- -- -- --
Issuance of common stock to settle
vendor and other obligations 14,942 -- (365) -- -- (365)
Forfeiture of warrants -- -- (756) 756
Amortization of stock based
compensation -- -- 12 12
Private placement -- -- 1,263 -- -- 1,263
Net loss -- -- -- -- (9,011) (9,011)
--------- --------- --------- --------- --------- ---------
Balance at December 31, 2002 3,053,470 $ -- $ 157,287 $ -- $(161,510) $ (4,223)
========= ========= ========= ========= ========= =========
See accompanying notes to Consolidated Financial Statements. All share and per
share amounts have been adjusted to reflect the 1 for 15 reserve stock split
completed in January 2002.
40
eB2B COMMERCE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
YEAR ENDED DECEMBER 31,
----------------------
2002 2001
------- --------
Cash flows from operating activities:
Net loss from continuing operations $(7,984) $(72,649)
Adjustments to reconcile net loss from continuing
operations to net cash used in operating activities:
Impairment of goodwill and other intangibles 2,524 40,088
Depreciation and amortization 4,330 13,693
Provision for doubtful accounts 108 --
Stock-based compensation expense 12 1,922
Non-cash interest expense 421 3,120
Changes in operating assets and liabilities
Accounts receivable 209 537
Other current assets 135 --
Accounts payable (139) (242)
Accrued expenses and other liabilities (35) (1,459)
Deferred revenue 466 --
Lease termination and other restructuring costs (610) 1,894
Other liabilities (890) 260
------- --------
Net cash used in operating activities (1,453) (12,836)
------- --------
Cash flows from investing activities:
Acquisition of Bac-Tech Systems, Inc., net (250) --
Purchases of property and equipment (4) (596)
Product development expenditures (477) (1,695)
------- --------
Net cash used in investing activities (731) (2,291)
------- --------
Cash flows from financing activities:
Proceeds from borrowings and issuance of convertible notes 900 6,466
Payments on borrowings (44) (2,250)
Proceeds from bridge notes, net -- 1,743
Payment of capital lease obligations (121) (108)
------- --------
Net cash provided by financing activities 735 5,851
------- --------
Net cash used in continuing operations (1,449) (9,276)
------- --------
Net cash provided by (used in) discontinued operations (188) 3,165
------- --------
Net change in cash and cash equivalents (1,637) (6,111)
Cash and cash equivalents - beginning of year 2,098 8,209
------- --------
Cash and cash equivalents - end of year $ 461 $ 2,098
======= ========
See accompanying notes to consolidated financial statements. All share and per
share amounts have been adjusted to reflect the 1 for 15 reverse stock split
completed in January 2002.
41
eB2B COMMERCE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
(In thousands)
YEAR ENDED DECEMBER 31,
-----------------------
2002 2001
--------- ---------
Supplemental disclosures of cash flow information:
Cash paid during the year for interest $ 189 $ 136
Non-cash investing and financing activities:
Issuance of note payable to settle liabilities 262 --
Remeasurement of settlement obligation 365 --
Common and preferred stock issued in connection with acquisition 1,240 --
Forfeiture of warrants 756 --
Issuance of long-term note in connection with acquisition 458 --
Issuance of warrants with convertible debt 750 4,434
Beneficial conversion with issuance of convertible debt 512 434
Common stock issued to settle liabilities -- 2,081
See accompanying notes to consolidated financial statements. All share and per
share amounts have been adjusted to reflect the 1 for 15 reverse stock split
completed in January 2002.
42
eB2B COMMERCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001
NOTE 1. ORGANIZATION AND PLAN OF OPERATIONS
eB2B Commerce, Inc. (the "Company") utilizes proprietary software to
provide a technology platform for buyers and suppliers to transfer business
documents via the Internet to their small and medium-sized trading partners.
These documents include, but are not limited to, purchase orders, purchase order
acknowledgements, advanced shipping notices and invoices. The Company provides
access via the Internet to its proprietary software, which is maintained on its
hardware and on hosted hardware. The Company also offers professional services,
which provide consulting expertise to the same client base, as well as to other
businesses that prefer to operate or outsource the transaction management and
document exchange of their business-to-business relationships. In addition,
until it discontinued these operations as of September 30, 2002, the Company
provided authorized technical education to its client base, and also designed
and delivered custom computer and Internet-based training seminars.
Since its inception, the Company has experienced significant losses from
operations and negative cash flows from operations, which raises substantial
doubt about its ability to continue as a going concern.
To ensure the success of the Company, and to address the continuing loss
from operations and negative cash flows from operations, management enacted a
plan for the Company, which includes various cost cutting measures implemented
during 2001 and continuing into 2002 as follows:
o Entering into agreements to settle approximately $425,000 in
severance and other contractual obligations through the issuance of
shares of common stock during the fourth quarter of 2001 and the
restructuring of a current accrued liability of $262,500 through the
issuance of a five year 7% senior subordinated secured convertible
note during January 2002.
o Raising gross proceeds of $2,000,000 in December 2001 through the
sale of convertible notes and warrants.
o Settlement of certain liabilities in December 2001 for approximately
$400,000 less than what was previously owed. During 2002, the
Company settled unsecured vendor obligations totaling $766,000 for
approximately $178,000, which were disbursed in various increments
through March 2003. The Company continues to pursue negotiations
with its remaining unsecured creditors.
o Savings of approximately $475,000 in monthly cash expenses as a
result of a restructuring plan initiated during the second quarter
of 2001, which included principally staffing reductions and
discretionary spending reductions in selling, marketing, general and
administrative expenses. The Company reduced its staff by nine
employees in the year ended December 31, 2002 resulting in annual
savings of $1,015,000 in salaries and benefits;
o Discontinuing its training and educational services business segment
as of September 30, 2002; and
o Raising additional capital by means of a private financing of
convertible notes in July 2002, resulting in gross proceeds of
$350,000 to the Company and $950,000 of gross proceeds being placed
in escrow, to be released to the Company upon achieving certain
parameters. In September 2002 and November 2002, the Company met
these parameters and drew down on an additional $275,000 on each
such date so that $300,000 remains in the escrow account as of
December 31, 2002.
The Company believes that its current cash resources, the anticipated
drawdown from escrow of the remaining proceeds of the July 2002 financing,
together with the improvement of working capital as a result of the previously
mentioned actions, will be sufficient to continue operations through 2003 and
thereafter if operations are cash flow positive, as anticipated.
43
NOTE 2. BASIS OF PRESENTATION AND OTHER MATTERS
On April 18, 2000, eB2B Commerce, Inc., a Delaware corporation ("eB2B"),
merged with and into DynamicWeb Enterprises, Inc., a New Jersey corporation and
an SEC registrant ("DWeb"), with the surviving company using the name "eB2B
Commerce, Inc." (the "Company"). Pursuant to the Agreement and Plan of Merger
between eB2B and DWeb (the "Merger"), the shareholders of DWeb retained their
shares in DWeb, while the shareholders of eB2B received shares, or securities
convertible into shares, of common stock of DWeb representing approximately 89%
of the equity of the Company, on a fully diluted basis. The transaction was
accounted for as a reverse acquisition.
The reverse acquisition was accounted for as a "purchase business
combination" in which eB2B was the accounting acquirer and DWeb was the legal
acquirer. The management of eB2B remained the management of the Company. As a
result of the reverse acquisition, (i) the financial statements of eB2B are the
historical financial statements of the Company; (ii) the results of the
Company's operations include the results of DWeb after the date of the Merger;
(iii) the acquired assets and assumed liabilities of DWeb were recorded at their
estimated fair market value at the date of the Merger; (iv) all references to
the financial statements of the "Company" apply to the historical financial
statements of eB2B prior to the Merger and to the consolidated financial
statements of the Company subsequent to the Merger; (v) any reference to eB2B
applies solely to eB2B Commerce, Inc., a Delaware corporation, and its financial
statements prior to the Merger, and (vi) the Company's year-end is December 31,
that of the accounting acquirer, eB2B.
All significant inter-company balances and transactions have been
eliminated in consolidation.
NOTE 3. DISCONTINUED OPERATIONS
As discussed in Note 1, in September 2002, the Company 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 years
ended December 31, 2002 and 2001, the Company's discontinued operations
contributed net sales of $1,105,000 and $2,483,000, respectively. As of December
31, 2002, there were no assets relating to this segment, and only the
liabilities appear on the Company's balance sheet.
NOTE 4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements, and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates. Significant estimates made by management include, but are not limited
to, the allowance for doubtful accounts and the valuation of intangible assets.
Revenue Recognition
Revenue from transaction processing is recognized on a per transaction
basis when a transaction occurs between a buyer and a supplier. The fee is based
either on the volume of transactions processed during a specific period,
typically one month, or calculated as a percentage of the dollar volume of the
purchase related to the documents transmitted during a similar period. Revenue
from related implementation, if any, and monthly hosting fees are recognized on
a straight-line basis over the term of the contract with the customer. Deferred
income includes amounts billed for implementation and hosting fees, which have
not been earned.
For related consulting arrangements on a time-and-materials basis,
revenue is recognized as services are performed and costs are incurred in
accordance with the billing terms of the contract. Revenues from related fixed
price consulting arrangements are recognized using the percentage-of-completion
method, unless the extent of progress toward completion cannot be reliably
determined. Progress towards completion is measured using efforts-expended
method based upon management estimates. To the extent that efforts expended and
costs to complete cannot be reasonably estimated, revenues are deferred until
the contract is completed. The Company does not have a history of incurring
losses on these types of contracts. If the Company were to incur a loss, a
provision for the estimated loss on the uncompleted contract would be recognized
in the period in which such loss becomes probable and estimable. Billings in
excess of revenue recognized are included in deferred income.
44
Revenue from training and client educational services was recognized upon
the completion of the seminar and was based upon class attendance. If a seminar
began in one period and was completed in the next period, the Company recognized
revenue based on the percentage of completion method for the applicable period.
Cash and Cash Equivalents
Cash and cash equivalents include cash, money market investments and other
highly liquid investments with original maturities of three months or less.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation
and amortization, and are depreciated or amortized using the straight-line
method over the following estimated useful lives:
Computer and communications equipment............. 2 to 3 years
Purchased software................................ 2 years
Office equipment and furniture.................... 4 to 5 years
Leasehold improvements............................ Shorter of useful life or lease term
Goodwill and Other Intangibles
During 2001, goodwill was amortized using the straight-line method over
the period of expected benefit. Other intangibles resulting from the Company's
purchase business combinations, including customer lists, are also amortized
over the straight-line method from the date of acquisition over the period of
expected benefit, which was estimated as three years. In September 2001, the
Company recorded an impairment charge to goodwill and reduced the expected
period of benefit to three years from five years. In December 2002, the Company
recorded an additional impairment charge to reduce goodwill to zero (See Note
6).
In 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible
Assets." This Statement provides that goodwill and intangible assets with
indefinite lives should no longer be amortized, but should be reviewed at least
annually, for impairment. In accordance with the adoption of SFAS No. 142,
beginning January 1, 2002, the Company ceased amortizing its existing net
goodwill of $1,558,000, resulting in the exclusion of $1,248,000 of amortization
during 2002.
Impairment of Long-Lived Assets
The Company's long-lived assets, including property and equipment,
goodwill and other intangibles, are reviewed for impairment whenever events or
changes in circumstances indicate that the net carrying amount may not be
recoverable. When such events occur, the Company measures impairment by
comparing the carrying value of the long-lived asset to the estimated
undiscounted future cash flows expected to result from use of the assets and
their eventual disposition. If the sum of the expected undiscounted future cash
flows were less than the carrying amount of the assets, the Company would
recognize an impairment loss. The impairment loss, if determined to be
necessary, would be measured as the amount by which the carrying amount of the
asset exceeds the fair value of the asset.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
SFAS No. 144 supersedes FASB Statement No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed of," and the
accounting and reporting provisions of APB Opinion No. 30, "Reporting the
Results of Operations - Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions," for the disposal of a segment of a business. This Statement also
amends ARP No. 51, "Consolidated Financial Statements," to eliminate the
exception to consolidation for a subsidiary for which control is likely to be
temporary. The provisions of this Statement are required to be applied starting
with fiscal years beginning after December 15, 2001. The Company has adopted the
new accounting standard in the year ended December 31, 2002.
Product Development
In accordance with the provisions of Statement of Position ("SOP") 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use", the Company capitalizes qualifying computer software costs
incurred during the application development stage. All other costs incurred in
connection with internal use software are expensed as incurred. The useful life
45
assigned to capitalized product development expenditures is based on the period
such product is expected to provide future utility to the Company. Total product
development costs expensed as amortization were approximately $1,217,000 and
$1,114,000 for the years ended December 31, 2002 and 2001, respectively.
Income Taxes
The Company records income taxes using the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and the tax effect of net operating loss carry-forwards. A valuation
allowance is recorded against deferred tax assets if it is more likely than not
that such assets will not be realized.
Fair Value of Financial Instruments
The carrying value of cash and cash equivalents, accounts receivable,
accounts payable, deferred income and the current portion of long-term debt
approximate fair value due to the short maturities of such instruments. The
carrying value of the long-term debt and capital lease obligations approximate
fair value based on current rates offered to the Company for debt with similar
collateral and guarantees, if any, and maturities.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to
concentrations of credit risk are cash and cash equivalents and accounts
receivable. Cash and cash equivalents are deposited with high credit quality
financial institutions. The Company's accounts receivable are derived from
revenue earned from customers located in the United States of America and are
denominated in U.S. dollars. Portions of the Company's accounts receivable
balances are settled either through customer credit cards or electronic fund
transfers. The Company maintains an allowance for doubtful accounts based upon
the estimated collectibility of accounts receivable. The Company recorded
provisions (additions) to the allowance of $137,000 and $226,000, respectively,
and write-offs (deductions) against the allowance of $153,000 and $192,000
during the years ended December 31, 2002 and 2001, respectively.
In the years ended December 31, 2002 and 2001, one customer from the
Company's transaction processing and related services' segment accounted for
approximately 25% and 21%, respectively, of the Company's total revenue. As of
December 31, 2002 and 2001, the same customer accounted for approximately 33%
and 22% of accounts receivable, respectively.
Net Loss per Common Share
Basic net loss per common share is computed by dividing net loss by the
weighted-average number of common shares outstanding during the period. Diluted
net loss per common share is the same as basic net loss per common share since
the assumed conversion of options, warrants and preferred shares would have been
anti-dilutive. Had the Company reported net earnings at December 31, 2002 and
2001, options and warrants to purchase 11,993,114 and 9,076,210 common shares,
and preferred shares convertible into 17,418,670 and 6,920,222 common shares,
respectively, and debt convertible into 9,845,806 and 934,922 common shares,
respectively, would have been included in the computation of diluted earnings
per common share, to the extent they were not anti-dilutive.
Net loss per common share and the weighted average number of shares
outstanding has been restated for all periods presented to give effect to the 1
for 15 reverse stock split completed in January 2002.
Stock-Based Compensation
Stock-based compensation is recognized using the intrinsic value method in
accordance with the provisions of Accounting Principles Board ("APB") Opinion
No. 25, "Accounting for Stock Issued to Employees". For disclosure purposes, pro
forma net loss and loss per common share data are provided in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock-Based Compensation," as if the fair value method had been applied.
New Accounting Pronouncements
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." For most companies, SFAS No. 145 will require gains and losses on
extinguishments of debt to be classified as income or loss from continuing
operations, rather than as an extraordinary item as previously required.
Extraordinary treatment will be required for certain extinguishments as provided
in APB Opinion No. 30. SFAS No. 145 also amends SFAS No. 13 to require that
46
certain modifications to capital leases be treated as a sale-leaseback, and to
modify the accounting for sub-leases when the original lessee remains a
secondary obligor. The Company is required to adopt the provisions of SFAS No.
145 in the first quarter of 2003. Any gain or loss on extinguishment of debt
that was classified as an extraordinary item in prior periods presented that
does not meet the criteria in APB Opinion No. 30 for classification as an
extraordinary item shall be reclassified. Early application of the provisions of
this statement related to the recission of SFAS No. 4 is encouraged.
Accordingly, the reversal of certain restructuring charges $655,000 during 2002
has been accounted for in accordance with SFAS No. 145.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associates with Exit or Disposal Activities," which addresses financial
accounting and reporting for costs associated with exit or disposal activities,
and nullifies Emerging Issues Task Force Issue No. 94-3, "Liability Recognition
for Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)." SFAS No. 146 requires
that a liability for a cost associated with an exit or disposal activity be
recognized when the liability is incurred. The requirements of SFAS No. 146
apply prospectively to activities that are initiated after December 31. 2002
and, as a result, the Company cannot reasonably estimate the impact of adopting
these new rules until and unless it undertakes relevant activities in future
periods.
In November 2002, the FASB issued Interpretation ("FIN") No. 45
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others," which clarifies the required
disclosures to be made by a guarantor in their interim and annual financial
statements about its obligations under certain guarantees that it has issued.
FIN No. 45 also requires a guarantor to recognize, at the inception of the
guarantee, a liability for the fair value of the obligation undertaken. The
Company is required to adopt the disclosure requirements of FIN No. 45 for
financial statements ending December 31, 2002. The Company is required to adopt
and accordingly has adopted prospectively the initial recognition and
measurement provisions of FIN No.45 for guarantees issued or modified after
December 31, 2002 and, as a result, the Company cannot reasonable estimate the
impact of adopting these new rules until and unless it undertakes relevant
activities in future periods.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure - an amendment of SFAS No.
123." This Statement amends SFAS No. 123, "Accounting for Stock-Based
Compensation", to provide alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation. In addition, this Statement amends the disclosure requirements of
SFAS No. 123 to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. The adoption
of SFAS No. 148 is not expected to have a material impact on the Company's
financial position or results of operations.
In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable
Interest Entities," which clarifies the application of Accounting Research
Bulletin No. 51, "Consolidated Financial Statements," relating to consolidation
of certain entities. First, FIN No. 46 will require identification of the
Company's participation in variable interests entities ("VIEs"), which are
defined as entities with a level of invested equity that is not sufficient to
fund future activities to permit them to operate on a stand alone basis, or
whose equity holders lack certain characteristics of a controlling financial
interest. For entities identified as VIEs, FIN No. 46 sets forth a model to
evaluate potential consolidation based on an assessment of which party to the
VIE, if any, bears a majority of the exposure to its expected losses, or stands
to gain from a majority of its expected returns. FIN No. 46 also sets forth
certain disclosures regarding interests in VIEs that are deemed significant,
even if consolidation is not required. As the Company does not participate in
VIEs, it does not anticipate that the provisions of FIN No. 46 will have a
material impact on its financial position or results of operations.
Reclassification
Certain prior year amounts, including those related to discontinued
operations, have been reclassified to conform to the current year presentation.
NOTE 5. ACQUISITIONS
Bac-Tech Systems, Inc.
On January 2, 2002, the Company acquired Bac-Tech Systems, Inc.
("Bac-Tech"), a New York City-based privately held e-commerce business, through
a merger. Pursuant to the merger agreement, the Company paid an aggregate of
$250,000 in cash and issued an aggregate of 200,000 shares of common stock and
95,000 shares of Series D preferred stock to the two stockholders of Bac-Tech.
In September 2002, the Series D preferred stock automatically converted into an
aggregate of 333,334 shares of common stock. The Company also issued secured
notes to the Bac-Tech stockholders in the aggregate amount of $600,000, payable
in three equal installments on May 1, 2003, January 1, 2004 and January 1, 2005,
47
of which $457,000, is included as long term debt, inclusive of current
maturities of $180,000, in the accompanying condensed consolidated balance sheet
after discounting these notes using the Company's estimated borrowing rate of 15
percent.
The Company has accounted for this acquisition using the purchase method
of accounting and determined the final purchase price to be $1,990,000, which
consisted of (i) cash of $250,000; (ii) 200,000 shares of the Company's common
stock at a price of $2.33 for total consideration of $465,000; (iii) 95,000
shares of Series D Preferred stock valued at $775,000; (iv) a three year
non-interest bearing note with a face value of $600,000 and a net present value
of $457,000 assuming the Company's effective borrowing rate; and (v) $43,000 in
closing costs and other items.
The following is a summary of the allocation of the purchase price of the
Bac-Tech acquisition (in thousands):
Purchase price .......................................... $ 1,947
Acquisition costs ....................................... 43
-------
Total purchase price .................................... $ 1,990
=======
Cash assumed ............................................ $ 52
Accounts receivable, net ................................ 326
Other current assets .................................... 51
Property, plant, and equipment, net ..................... 47
Accounts payable ........................................ (196)
Accrued expenses and other current liabilities .......... (161)
Deferred revenue ........................................ (110)
-------
Historical net assets acquired .......................... 9
Identifiable intangible assets .......................... 807
Goodwill ................................................ 1,174
-------
Total purchase price .................................... $ 1,990
=======
The Company estimated that the identifiable intangible assets include (i)
customer list of $188,000, which is estimated to have a useful life of three
years; (ii) Bac-Tech technology of $475,000, which is estimated to have a useful
life of two years; and (iii) below market lease for office space, which is
estimated at $144,000 and has a remaining life of 6 years, the remainder of the
lease term.
Since the acquisition of Bac-Tech occurred on January 2, 2003, the results
of operations of the Company for the year ended December 31, 2002, include the
results of operations of Bac-Tech for the year ended December 31, 2002.
Netlan Enterprises, Inc.
On February 22, 2000, eB2B completed its acquisition of Netlan
Enterprises, Inc. and subsidiaries ("Netlan"). Pursuant to the Agreement and
Plan of Merger (the "Netlan Merger"), Netlan's stockholders exchanged 100% of
their common stock for 8,334 shares of Company common stock, valued at the
market value of DWeb's common stock on January 7, 2000, the date at which the
parties signed the letter of intent. Additionally, 13,333 shares of Company
common stock were issued, placed into an escrow account, and may be released to
certain former shareholders of Netlan upon successful completion of escrow
requirements, including continued employment with the Company. The aggregate
value of such shares, or $2,050,000, was treated as stock-based compensation and
was amortized over the one-year vesting period from the date of acquisition. In
connection with this acquisition, eB2B incurred transaction costs consisting
primarily of professional fees of approximately $332,000, which have been
included in the purchase price of the Netlan Merger. The purchase price was
allocated to those assets acquired and liabilities assumed based on the
estimated fair value of Netlan's net assets as of February 22, 2000. At that
date, assets acquired and liabilities assumed had fair values that approximated
their historic book values. A total of approximately $334,000 of the purchase
consideration was allocated to other intangibles, including assembled workforce.
The remaining purchase consideration, or approximately $4,896,000, was recorded
as goodwill. As discussed in Notes 1 and 3, the results of operations of Netlan
have been included in the Company's discontinued operations for the years ended
December 31, 2002 and 2001. As further discussed in Note 6, the remaining
goodwill was determined to be impaired and the impairment loss was included
within the results of discontinued operations.
48
The following is a summary of the allocation of the purchase price in the
Netlan Merger (in thousands):
Purchase price ............................................... $ 1,297
Acquisition costs ............................................ 332
-------
Total purchase price ......................................... $ 1,629
=======
Historical net liabilities assumed ........................... $(2,490)
Write-down of property and equipment, and intangible assets .. (753)
Liabilities for restructuring and integration costs .......... (358)
Identifiable intangible assets ............................... 334
Goodwill ..................................................... 4,896
-------
Total purchase price ......................................... $ 1,629
=======
DynamicWeb Enterprises, Inc.
As described in Note 2 herein, the Merger of eB2B with and into DWeb was
accounted for as a reverse acquisition, utilizing the purchase business
combination method of accounting, in which eB2B acquired control of DWeb for
accounting purposes and DWeb acquired eB2B for legal purposes. Each share of
common stock of DWeb remained outstanding and each share of eB2B common stock
was exchanged for the equivalent of 2.66 shares of DWeb's common stock. In
addition, shares of eB2B preferred stock, warrants and options were exchanged
for like securities of DWeb, reflective of the 2.66 to 1 exchange ratio.
The purchase price of the Merger was approximately $59.1 million, which
primarily represents (i) the number of shares of DWeb's common stock outstanding
as of April 18, 2000, the date of the Merger, valued based on the average quoted
market price of DWeb's common stock in the three-day period before and after
December 1, 1999, the date at which the parties signed the definitive merger
agreement, or $31.9 million; (ii) the number of shares of DWeb's common stock
issuable under existing stock option and warrant agreements as of April 18, 2000
valued using the Black-Scholes option pricing model, or $6.4 million; (iii) the
aggregate market value of the shares of common stock and warrants principally
issued to a financial advisor (the "Financial Advisor"), or $10.2 million; and
(iv) the market value of warrants issued to the Financial Advisor in
consideration for the advisory services rendered during the Merger, or $10.1
million. In connection with this acquisition, eB2B also incurred transaction
costs consisting primarily of professional fees of approximately $363,000, which
have been included in the purchase price of the Merger. The purchase price was
allocated to those assets acquired and liabilities assumed based on the
estimated fair value of DWeb's net assets as of April 18, 2000. At that date,
assets acquired and liabilities assumed had fair values that approximated their
historic book values. A total of approximately $2.9 million of the purchase
consideration was allocated to other intangibles, including assembled workforce
and customer list. Also, the Company recorded liabilities totaling $1.0 million
principally in relation to severance provided to certain employees as well as
the settlement of a claim existing at the time of the Merger. The remaining
purchase consideration, or $58.1 million, was recorded as goodwill. As discussed
in Note 6, such goodwill was determined to be impaired in 2002 and 2001. The
results of operations of DWeb have been included in the Company's results of
operations since April 19, 2000.
The following is a summary of the allocation of the purchase price in the
acquisition of DWeb (in thousands):
Purchase price ............................................... $ 58,724
Acquisition costs ............................................ 363
--------
Total purchase price ...................................... $ 59,087
========
Historical net assets acquired ............................... $ 10
Write-down of property and equipment, and intangible assets .. (838)
Liabilities for restructuring and integration costs .......... (1,047)
Identifiable intangible assets ............................... 2,902
Goodwill ..................................................... 58,060
--------
Total purchase price ...................................... $ 59,087
========
49
NOTE 6. IMPAIRMENT OF GOODWILL AND OTHER INTANGIBLES
Based upon the Company's history of recurring operating losses and its
market capitalization being less than its stockholders' equity as of September
30, 2001, management assessed the carrying value of goodwill and other
intangibles and determined that such value may not be recoverable. In addition,
workforce-in-place no longer meets the definition of an identifiable intangible
asset. As a result, the net book value of $584,000 has been reclassified to
goodwill as of September 30, 2001. The impairment loss after reclassification
was measured as the amount by which the carrying amount of the goodwill and
other intangibles exceeds the fair value of the assets, calculated utilizing the
discounted future cash flows. In accordance with this policy, the Company
recorded impairment charges of $43,375,000 in 2001.
The net book values of goodwill and other intangibles associated with the
Dweb and Netlan acquisitions as of the date of the impairment charge, September
30, 2001, were as follows (amounts in thousands):
Dweb Netlan Total
-------- ------- --------
Goodwill
Balance as of September 30, 2001 $ 41,283 $ 3,380 $ 44,663
Reclassification from other intangibles 425 159 584
Impairment losses (40,088) (3,287) (43,375)
-------- ------- --------
Adjusted Balance $ 1,620 $ 252 $ 1,872
======== ======= ========
Other Intangibles
Balance as of September 30, 2001 $ 1,376 $ 159 $ 1,535
Reclassification to goodwill (425) (159) (584)
-------- ------- --------
Adusted Balance $ 951 $ -- $ 951
======== ======= ========
Amortization expense related to goodwill for the nine-month period ended
September 30, 2001 was approximately $9,441,000. The Company also changed the
amortization period from five years to three years. The Company recorded
goodwill amortization in the fourth quarter of 2001 of $314,000. Commencing
January 1, 2002, goodwill was no longer amortized, but rather reviewed for
impairment in compliance with SFAS No. 142.
The changes in the carrying amount of goodwill for the year ended December
31, 2002, are as follows:
Continuing Discontinued
Operations Operations Total
---------- ------------ -------
Balance as of January 1, 2002 $ 1,350 $ 208 $ 1,558
Goodwill acquired during year 1,174 -- 1,174
Impairment losses (2,524) (208) (2,732)
------- ------- -------
Balance as of December 31, 2002 $ -- $ -- $ --
======= ======= =======
A reconciliation of previously reported net loss and loss per share to the
amounts adjusted for the exclusion of goodwill and workforce-in-place
amortization is as follows:
50
(In thousands - except per share amounts) 2002 2001
-------- --------
Reported net loss $ (9,011) $(73,494)
Goodwill and workforce amortization -- 9,755
-------- --------
Adjusted net loss $ (9,011) $(63,739)
======== ========
Reported net loss per share $ (4.67) $ (58.88)
Goodwill and workforce amortization -- 7.82
-------- --------
Adjusted net loss per share $ (4.67) $ (51.06)
======== ========
Remaining other intangibles after the impairment review relate to customer
lists acquired in April 2000 and January 2002 of $2,376,000, a non-compete
agreement of $75,000, the cost of acquiring the Company's domain name and
establishing the Company's web-site of $22,000, a software platform of $475,000,
and the assumption of the Company's current lease at below market rates
aggregating $144,000. Amortization expense related to other intangibles for the
nine-month period ended September 30, 2001 was $747,000 prior to the impairment
review. In the fourth quarter of 2001, the Company recorded additional
amortization expense related to other intangible assets of $159,000. Aggregate
amortization expense for other intangibles for the year ended December 31, 2002
was $974,000.
Estimated Amortization Expense (in thousands):
----------------------------------------------
For year ended December 31, 2003 $ 489
For year ended December 31, 2004 91
For year ended December 31, 2005 29
For year ended December 31, 2006 29
No amortization is estimated after 2006.
NOTE 7. RESTRUCTURING
To address the continuing loss from operations and negative cash flows
from operations, management enacted a restructuring plan for the Company. During
the third and fourth quarters of 2000 and continuing into 2001 and 2002, the
Company reduced discretionary spending in selling, marketing, general and
administrative areas.
In the second and third quarters of 2001, the Company's Board of Directors
approved and the Company announced a restructuring plan that streamlined the
organizational structure and reduced monthly cash charges by approximately
$475,000 and planned for the anticipated exit of its current corporate office
lease to a more modest facility.
The following is a summary of the restructuring charges, and reversals
recognized in the years ended December 31, 2002 and 2001 (in thousands):
Amounts Paid
Writeoff as of Balance at
Restructuring of Leasehold December 31, December 31,
Charges Improvements 2001 2001
------------- ------------ ------------- ------------
Lease termination $ 1,765 $ 162 $ -- $ 1,603
Severance for 40 employees 1,145 -- 1,065 80
Contract termination settlement 418 -- 237 180
------- ------- ------- -------
Total charges $ 3,328 $ 162 $ 1,302 $ 1,863
======= ======= ======= =======
Balance at Balance
January 1, December 31,
2002 Payments Reversals 2002
---------- -------- --------- ------------
Lease termination $ 1,603 $ 948 $ (655) $ --
Severance for 40 employees 80 80 -- --
Contract termination settlement 180 180 -- --
------- ------- ------- -------
Total charges $ 1,863 $ 1,208 $ (655) $ --
======= ======= ======= =======
51
In December 2001, the Company issued 156,667 shares of common stock to two
former employees to satisfy $282,000 in severance claims, which is included in
the payments above. The Company made the final payment related to employee
severance in the second quarter of 2002 and finalized the lease termination for
less than the Company originally estimated. The remaining excess restructuring
accrual for lease termination costs of $655,000 was reversed into income through
the restructuring line item charge in the second quarter of 2002.
NOTE 8. PROPERTY AND EQUIPMENT
Property and equipment consist of the following as of December 31, 2002
(in thousands):
Computer and communications equipment .................... $ 2,440
Purchased software ....................................... 2,568
Office equipment and furniture ........................... 793
-------
5,800
Accumulated depreciation and amortization ................ (5,728)
-------
$ 73
=======
As of December 31, 2002 the cost of assets under capital leases,
principally computer and communications equipment was approximately $725,000.
The depreciation expense for 2002 and 2001 was $1,845,000 and $1,947,000,
respectively.
NOTE 9. ACCRUED EXPENSES, OTHER CURRENT LIABILITIES AND OTHER
Accrued expenses and other current liabilities consist of the following as
of December 31, 2002 (in thousands):
Accrued software development costs .......................... $ 590
Accrued severance ........................................... 44
Accrued professional fees ................................... 285
Accrued compensation and related costs ...................... 44
Accrued purchases and sub-contractors costs ................. 192
Accrued interest ............................................ 178
Current maturities of capital lease obligations ............. 109
Other ....................................................... 333
------
$1,775
======
During December 2001, the Company renegotiated a potential $1,200,000
liability with a creditor. The Company had previously issued 145,986 shares of
common stock to this party for amounts then owing. The Company had agreed that
in the event this party received gross proceeds less than the amount originally
owed, the Company would reimburse this party for the shortfall. In December
2001, this agreement was amended whereby the creditor agreed to be issued up to
266,667 shares of the Company's common stock to offset any deficiency, and to
the extent this amount is insufficient, the creditor would be paid one-half the
remaining balance in cash no earlier than April 2003, with the other half
forgiven. The Company has approximately $590,000 recorded in accrued software
development costs as of December 31, 2002 to cover the potential cash shortfall
to this vendor.
NOTE 10. FINANCINGS AND LONG-TERM DEBT
In February 2000, eB2B obtained a $2,500,000 term loan from a bank (the
"Bank"). The loan had a term of three years, interest-only was payable until
December 1, 2000, and the interest rate was equivalent to LIBOR plus 1%.
Beginning December 1, 2000, the term loan required ten quarterly principal
payments of $250,000. The proceeds from the term loan were primarily used to
refinance the $2,116,000 debt of Netlan paid by eB2B in connection with the
Netlan Merger.
On May 2, 2001, the Company completed a private placement of convertible
notes and warrants (the "Financing"). The gross proceeds of the Financing
totaled $7.5 million. Pursuant to the Financing, the Company issued $7,500,000
of principal amount of 7% convertible notes (the "Convertible Notes"), which
were convertible into an aggregate of 1,000,000 shares of Company common stock
52
at a price of $7.50, and warrants to purchase an aggregate 1,000,000 shares of
Company common stock at $13.95 per share (the "Private Warrants") prior to
adjustment for dilutive financings.
The Convertible Notes had a term of 18 months, which period may be
accelerated in certain events. Interest was payable quarterly in cash, in
identical Convertible Notes or in shares of common stock, at the option of the
Company. With respect to the initial quarterly interest payment related to the
June 30, 2001 quarter, the Company elected to pay interest in the form of 30,355
shares of common stock valued at approximately $85,000. In September 2001, the
Company issued additional Convertible Notes which was subsequently converted
into Series C Preferred Stock of approximately $131,000 in relation to the
quarterly interest due for the period from July 1, 2001 to September 28, 2001,
the date the Convertible Notes were converted into Series C Preferred Stock as
described in Note 12 below. The proceeds of this financing were used to pay off
the balance outstanding on the $2,500,000 term loan.
In December 2001, the Company raised gross proceeds of $2,000,000 through
the issuance of 90 day, 7% Senior Subordinated Secured Notes ("Bridge Notes")
and warrants to purchase an aggregate of 266,670 shares of the Company's common
stock at a price of $1.80 per share, prior to adjustment for dilutive
financings. These warrants were valued at $218,875 using the Black-Scholes model
assuming an expected life of two years, volatility of 80 percent, and a risk
free borrowing rate of 4.88 percent and will be charged to interest expense over
the life of the debt commencing in 2002. In connection with this financing, the
Company paid a cash private placement fee of $200,000 and incurred approximately
$85,000 in indirect fees consisting of primarily legal expenses. This will also
be amortized and charged to interest expense over the life of the debt.
In January 2002, these Bridge Notes were exchanged for five year 7% senior
subordinated secured convertible notes ("7% Notes"), which are due to be repaid
in January 2007. The Company also restructured a $263,000 long-term liability
through the issuance of these 7% Notes. The 7% Notes are convertible into an
aggregate of 934,922 shares of common stock at a price of $2.42 per share, prior
to adjustment for dilutive financings. The holders of the Bridge Notes also
received, in exchange for the Bridge Notes, warrants to purchase 826,439 shares
of common stock at a price of $2.90 per share, prior to adjustment for dilutive
financings. The Company also issued warrants to purchase 165,289 shares of
common stock at a price of $2.90 per share to our placement agent in connection
with the issuance of the 7% Notes. The warrants issued to the placement agent
and to the investors were valued in January 2002 using the Black-Scholes model
and will be charged to interest expense over the life of the debt. The proceeds
of these financings were used to fund (i) operating and working capital needs
and (ii) the $250,000 upfront cash portion of the Bac-Tech acquisition.
On July 15, 2002, the "Company initially closed a private placement (the
"July Financing") of five-year 7% senior subordinated secured notes (the "July
Notes") which are convertible into shares of common stock of the Company at the
conversion price of $0.101 per share (the closing price of the common stock on
the trading day prior to the closing). The Notes were purchased by ten persons
or entities, consisting of certain significant investors in the Company, and by
certain members of the Company's management. To date, the gross proceeds of this
transaction, exclusive of $300,000 held in escrow at December 31, 2002, were
$900,000 and are intended to be utilized for working capital and general
corporate purposes. The Notes contain anti-dilution protection in certain
events, including the issuances of shares by the Company at less than market
price or the applicable conversion price.
In connection with the July Financing, all subscription proceeds were held
in escrow by an escrow agent for the benefit of the holders of the Notes
pending, acceptance of subscriptions by the Company and shall be disbursed as
provided in the relevant escrow agreement (the "Escrow Agreement"). On the
closing of the Financing, proceeds of $350,000 were released to the Company and
the remaining proceeds were held in escrow (the "Retained Proceeds"). As
provided in the Escrow Agreement, the Retained Proceeds will be disbursed as
directed by the representative of the holders of the Notes, or, upon request of
the Company, after reducing its liabilities, existing as of June 18, 2002,
through negotiation with creditors. The Retained Proceeds may be released in
one-third increments provided that liabilities are reduced by defined
parameters. In this respect, in each of September 2002 and November 2002,
$275,000 was released from escrow leaving a balance of $300,000 at December 31,
2002.
The July Notes issued in the July Financing, together with the $2,000,000
of the 7% Notes issued in the Company's-private placement of notes and warrants
in January 2002, are secured by substantially all of the assets of the Company.
The security interest with respect to the July Notes are senior in right to the
security interest created with respect to the 7% Notes.
The January 2002 financing triggered anti-dilution provisions affecting
the conversion price of the Company's Series B preferred stock and Series C
preferred stock and the exercise price of and number of shares issuable under
various outstanding warrants. The July 2002 Financing also triggered
anti-dilution provisions as to such securities as well as in respect to the 7%
Notes.
53
The Company has an available line of credit with a commercial bank in the
amount of $165,000 personally guaranteed by two officers of the Company.
Interest rate is calculated at 1% over prime. The Bank's interest rate at
December 31, 2002 was 5.25%. Interest expense for the year ended December 31,
2002 was $7,000. As of December 31, 2002, $88,000 was outstanding.
NOTE 11. COMMITMENTS AND CONTINGENCIES
Leases and other commitments
The Company has several capital leases with various financial institutions
for computer and communications equipment used in operations with lease terms
ranging from 2 to 3 years. Also, during 2002, the Company assumed a lease for
new office space in connection with the acquisition of BacTech. The new lease
expires in 2008.
Future minimum rental commitments under non-cancelable leases as of
December 31, 2002 are as follows (in thousands):
Capital Operating
Year Ending December 31, leases leases
------------------------ ------- ---------
2003 ............................................. $109 $109
2004 ............................................. -- 114
2005 ............................................. -- 118
2006 ............................................. -- 121
2007 ............................................. -- 125
Thereafter ....................................... -- 21
---- ----
Total ............................................ $109 $608
==== ====
Less: amounts representing interest .............. -- --
Less: current maturities ......................... 109 --
---- ----
Long-term capital lease obligations .............. $ -- $608
==== ====
Employment agreements
The Company maintains employment agreements with three of its officers.
These employment agreements provide for (i) minimum aggregate annual base
salaries of $505,000 and (ii) minimum bonuses totaling $50,000 for each year of
employment of these three individuals. The bonuses were waived for 2002.
54
Litigation
The Company is party to certain legal proceedings and claims, which arise
in the ordinary course of business. In the opinion of management, the amount of
an ultimate liability with respect to these actions will not materially affect
our financial position, results of operations or cash flows.
In October 2000, Cintra Software & Services Inc. commenced a civil action
against the Company in New York Supreme Court, New York County. The complaint
alleges that we acquired certain software from Cintra upon the authorization of
the Company's former Chief Information Officer. Cintra is seeking damages of
approximately $856,000. The Company has filed an answer denying the material
allegations of the complaint. The Company believes it has meritorious defenses
to the allegations made in the complaint and intends to vigorously defend the
action.
In March 2001, a former employee commenced a civil action against the
Company and two members of its management in New York Supreme Court, New York
County, seeking, among other things, compensatory damages in the amount of $1.0
million and additional punitive damages of $1.0 million for alleged defamation
in connection with his termination, as well as a declaratory judgment concerning
his alleged entitlement to stock options to purchase 5,000 shares of the
Company's common stock. The Company subsequently filed a motion to dismiss,
which was granted as to the defamation action on January 7, 2002. In December
2002, this action was settled for a cash payment of approximately $2,000.
In December 2001, a former officer of the Company commenced a civil action
against our company in New York Supreme Court New York County, seeking $85,000,
plus liquidated damages, attorneys' fees and costs, for alleged bonuses owing to
her. During the fourth quarter of 2002, this matter was settled for
approximately $15,000.
NOTE 12. PREFERRED STOCK
In April 1999, eB2B authorized 2,000 shares of Series A Convertible
Preferred Stock ("Series A") with a par value of $.0001 per share, and issued
300 shares of Series A for $300,000. Each share of Series A is convertible into
the number of shares of common stock by dividing the purchase price for the
Series A by the conversion price in effect resulting in approximately 26,600
shares of Company common stock. The Series A have anti-dilution provisions,
which can change the conversion price in certain circumstances if additional
shares of common stock were to be issued by the Company. The holders have the
right to convert the shares of Series A at any time into common stock. Upon
liquidation, dissolution or winding up of the Company, the holders of the Series
A are entitled to receive $1,000 per share plus any accrued and unpaid dividends
before distributions to any holder of the Company's common stock. As of December
31, 2002, 293 shares of Series A issued in April 1999 had been converted into
25,980 shares of Company common stock.
In December 1999, eB2B authorized 4.0 million shares of Series B
Convertible Preferred Stock ("Series B") with a par value of $.0001 per share,
and issued approximately 3.3 million shares for $33.0 million in gross proceeds
($29.4 million in net proceeds), in a private placement conducted by eB2B. Each
share of Series B is convertible into the number of shares of common stock that
results from dividing the purchase price by the conversion price per share in
effect, which resulted in 1,066,667 shares of Company common stock valued at
$124.4 million based on the average quoted market price of DWeb's common stock
in the three-day period before and after December 1, 1999, the date at which the
parties signed the definitive merger agreement. As this value was significantly
greater than the net proceeds received in the private placement of Series B
preferred stock, the net proceeds received were allocated to the convertible
feature and amortized as a deemed dividend on preferred stock, resulting in a
corresponding charge to retained earnings and a credit to additional paid-in
capital within stockholders' equity as of December 31, 1999. The Series B have
anti-dilution provisions, which can change the conversion price in certain
circumstances if additional securities were to be issued by the Company. The
holders have the right to convert the shares of Series B at any time into common
stock. Upon liquidation, dissolution or winding up of the Company, the holders
of the Series B are entitled to receive $10.00 per share plus any accrued and
unpaid dividends before distributions to any holder of the Company's common
stock. As of December 31, 2002, 1,688,681 shares of Series B issued in December
1999 had been converted into 586,053 shares of Company common stock. At December
31, 2002, giving effect to anti-dilution adjustments, each share of Series B
Preferred Stock was convertible into 1.63 shares of common stock.
In the event the Company declares a cash dividend on the common stock, the
Company will at the same time, declare a dividend to the Series A, B and C
stockholders equal to the dividend which would have been payable if the Series
A, B and C stock had been converted into common stock. The holders of the Series
A, B and C are entitled to one vote for each share of the Company's common stock
into which such share of Series A, B and C is then convertible. In addition,
upon any liquidation of the Company, holders of shares of Series A and Series B
55
shall be entitled to payment of the purchase price before distributions to any
holder of the Company's common stock. Series C holders are entitled to a payment
of the purchase price plus a 33% premium before and distributions to any holder
of the Company's common stock.
On September 28, 2001, the $7.5 million of Convertible Notes plus $131,000
in accrued interest were automatically converted into Series C preferred stock
when the Company received the required consent from the holders of the Company's
Series B preferred stock for the issuance of this new series. The Series C
preferred stock is convertible into common stock on the same basis as the
Convertible Notes. The Series C preferred stock has (i) full ratchet
anti-dilution provisions until April 16, 2002 with weighted average
anti-dilution protection thereafter, (ii) a liquidation preference and (iii)
could be automatically converted by the Company in certain circumstances. As of
December 31, 2002, giving effect to anti-dilution adjustments, each share of
Series C Preferred Stock was convertible into 20.4 shares of common stock.
The Private Warrants are exercisable for a period of two years from
October 17, 2001.
In connection with the closing of the Financing, the Company cancelled a
$2,050,000 line of credit used in April 2001 (the "Line of Credit"), pursuant to
which it had not borrowed any funds. In connection with the Line of Credit, the
Company paid a cash fee amounting to $61,500 in consideration of the
availability of the Line of Credit. In addition, the issuer of the Line of
Credit was issued warrants to purchase 204,172 shares of Company common stock at
$2.21 per share for a period of five years in consideration of the availability
of such line (adjusted for subsequent anti-dilution events). These warrants were
valued using the Black-Scholes option-pricing model at $549,000. The $61,500
cash fee paid and the non-cash amount related to the warrants of $549,000 were
recorded as interest expense in the Company's statement of operations for the
year ended December 31, 2001.
In connection with the Financing as compensation to the placement agents,
the Company paid a cash fee amounting to $750,000 and issued (i) warrants to
purchase 310,929 shares of the Company's common stock with an exercise price of
$6.73 per share for a period of five years and (ii) unit purchase options to
purchase Series C preferred stock convertible into an aggregate of 625,000
shares of Company common stock with an exercise price of $1.80 per share for a
period of five years. These warrants have been adjusted for subsequent
anti-dilution events. These warrants and unit purchase options were valued at
the time of issuance using the Black-Scholes option-pricing model at $675,000
and $810,000, respectively. Additionally, other expenses directly related to the
Financing, principally legal and accounting fees, were approximately $309,000.
The $750,000 cash fee paid, the other direct expenses of $309,000, and the
non-cash amounts related to the warrants of $675,000 and the unit purchase
options of $810,000 have been capitalized as debt issuance costs in the
Company's balance sheet for an aggregate value of $2,544,000 and were amortized
as interest expense in the Company's statement of operations over the term of
the Convertible Notes. The remaining unamortized balance of $1,853,000 of debt
issuance cost was charged to additional paid-in capital on September 30, 2001,
at the date of the conversion of the Convertible Notes into Series C Preferred.
The Company allocated $2,400,000 of the $6,750,000 net proceeds from the
Financing to the Private Warrants using the Black-Scholes option-pricing model
and recorded such amount as a discount on the Convertible Notes. The discount on
the Convertible Notes was accreted as interest expense in the Company's
statement of operations over the term of the Convertible Notes. During 2001, the
Company recorded interest expense of $658,000 related to such discount. The
remaining unamortized balance of the discount on the Convertible Notes of
$1,742,000, was charged to additional paid-in capital at September 28, 2001. The
remaining unallocated portion of the proceeds was used to determine the value of
the 4,238,900 shares of Company common stock underlying the Convertible Notes
subsequently converted into Series C Preferred stock, or $4.35 per share. Since
this value was $3.45 lower than the fair market value of the Company's share of
common stock as listed on NASDAQ on May 2, 2001, the date at which the Financing
was closed, the $3,450,000 intrinsic value of the conversion option resulted in
an additional reduction to the carrying amount of the Convertible Notes and a
credit to additional paid-in capital in the Company's stockholders' equity.
During 2001, the Company recorded amortization expense of $1,137,000 related to
such conversion feature. The remaining unamortized balance of the conversion
feature, $2,313,000, was charged to additional paid-in capital on September 28,
2001 at the date of the conversion of the Convertible Notes into Series C
Preferred.
The assumptions used by the Company in determining the fair value of the
above warrants and unit purchase options were as follows: dividend yield of 0%,
risk-free interest of 6.5%, expected volatility of 80%, and expected life of 2
to 5 years.
In connection with the Company's acquisition of Bac-Tech, eB2B authorized
95,000 shares of Series D Convertible Preferred Stock ("Series D") with a par
value of $0.001 per share and issued the 95,000 shares to the two stockholders
of Bac-Tech with a value of $775,000. The Series D, inclusive of any accrued
dividend, is automatically convertible into an aggregate of 333,334 shares of
common stock. In November 2002, the Series D was converted into 333,334 shares
of common stock.
56
NOTE 13. COMMON STOCK AND WARRANTS
In 2001, the Company issued 398,738 shares of its common stock to settle
vendor and severance obligations with the former officers of the Company The
Company also issued 30,335 shares of its common stock in consideration for an
interest payment of $85,000 on the Convertible Notes prior to the September 28,
2001 conversion to Series C preferred stock.
On April 18, 2000, the number of shares of DWeb's common stock issuable
under existing warrants agreements became warrants to purchase shares of the
Company's common stock. As of December 31, 2002, 27,384, shares of common stock
were issuable under such warrants.
In 2000, the Company issued 20,000 warrants to purchase shares of Company
common stock at an exercise price of $58.65 per share to a business partner,
which vest in three equal installments, on each of the annual anniversary of the
warrant agreement date (the "Business Partner Warrants"). The Business Partner
Warrants have been valued at $900,000 using the Black-Scholes option pricing
model and their value will be amortized ratably over three years. During the
year ended December 31, 2001, the Company recognized business partner warrant
expenses in the amount of $300,000, which have been classified as stock-based
compensation expense in the Company's consolidated statement of operations. On
January 1, 2002, the business partner forfeited the warrants and the unamortized
value of $300,000 was relieved from unearned stock-based compensation and
charged to additional paid-in capital.
The assumptions used by the Company in determining the fair value of the
above warrants were as follows: dividend yield of 0%, risk-free interest rate of
6.5%, expected volatility of 80%, and expected life of 3 to 7 years depending on
the actual life of the respective warrants.
The following table summarizes the status of the above warrants at
December 31, 2002:
Warrants exercisable and outstanding
----------------------------------------------------
Range of Number Weighted average
exercise of shares remaining life
price per share (in thousands) (in years)
--------------- -------------- ----------------
Original Bridge Warrants $ 0.10 8,935 3.8
Merger & Advisory Warrants 31.05 124 1.8
Credit Line Warrants 2.21 204 3.0
Series C Investor Warrants 1.65 5,527 3.3
Series C Agent Warrants -
Preferred 0.49 1,659 3.3
Series C Agent Warrants -
Common 1.65 829 3.3
December 2001 Bridge
Warrants 1.01 396 4.0
January 2002 Investor
Warrants 1.85 1,229 2.0
January 2002 Agent
Warrants 1.54 246 2.0
Series B Investor Warrants 5.75 1,434 2.0
Series B Agent Warrants 5.75 1,418 2.0
Other 0.20 - 58.65 377 4.3
======
Total.................... 22,378
======
NOTE 14. STOCK OPTION AND DEFINED CONTRIBUTION PLANS
Stock options plans
The Company has stock-based compensation plans under which outside
directors, certain employees and consultants received stock options and other
equity-based awards. The shareholders of the Company approved the 2000 Stock
Option Plan (the "Plan"). All options outstanding under either eB2B's or DWeb's
prior plans at the time of the Merger remained in effect, but the plans have
been retired as of April 18, 2000, the date of the Merger. Stock options under
the Company's 2000 stock option plan are generally granted with an exercise
price equal to 100% of the market value of a share of common on the date of the
grant, have 10 year terms and vest within 2 to 4 years from the date of the
grant. Subject to customary antidilution adjustments and certain exceptions, the
total number of shares of common stock authorized for option grants under the
plan was approximately 667,000 shares at December 31, 2002. In January 2003, the
Board of Directors approved an increase in the number of shares underlying the
Plan to 8 million.
57
In connection with the Merger, outstanding options held by DWeb employees
became exercisable, according to their terms, for Company common stock effective
at the acquisition date. These options did not reduce the shares available for
grant under the 2000 stock option plan. The fair value of these options, valued
using the Black-Scholes pricing model, were included in the purchase price of
the Merger. There were no unvested options held by employees of companies
acquired in a purchase combination.
The former Chief Executive Officer of the Company was granted options to
purchase 88,667 shares of the Company's common stock at an exercise price of
$31.05 per share. These options vested upon the completion of the Merger on
April 18, 2000. In connection with such options, the Company recorded a one-time
charge classified as stock-based compensation expense of approximately $8.8
million in the year ended December 31, 2001.
The Company has adopted the disclosure requirements of SFAS No. 123 and,
as permitted under SFAS 123, applies APB 25 and related interpretations in
accounting for its plans. Compensation expense recorded under APB 25 was
approximately $2.0 million for the year ended December 31, 2001. No compensation
expense for options was recorded during 2002. If the Company had elected to
adopt optional recognition provisions of SFAS 123 for its stock option plans,
net loss and net loss per share would have been changed to the pro forma amounts
indicated below (in thousands, except per share data):
Years ended December 31,
------------------------
2002 2001
-------- --------
Net loss attributable to common stockholders
As reported .................................. $ (9,011) $(73,494)
Pro forma .................................... (9,704) $(76,288)
Net loss per common share - basic and diluted
As reported .................................. (4.67) $ (58.88)
Pro forma .................................... (5.03) $ (61.12)
The fair value of stock options used to compute pro forma net loss and
net loss per common share disclosures is the estimated fair value at grant date
using the Black-Scholes pricing model with the following assumptions:
Years ended December 31,
------------------------
Weighted-Average Assumptions 2002 2001
- ---------------------------- ------- -------
Dividend yield ............................... 0% 0%
Expected volatility .......................... 80% 80%
Risk-free interest rate ...................... 2.2% 6.5%
Expected life ................................ 3 years 3 years
Presented below is a summary of the status of the Company employee and
director stock options and the related transactions for the years ended December
31, 2002 and 2001:
Weighted Average
Shares Exercise Price
(in thousands) Per Share
-------------- ----------------
Options outstanding at December 31, 2000 ..... 2,048 $0.78
Granted/assumed (1) ....................... 7,784 2.78
Exercised ................................. 81 2.69
Forfeited/expired ......................... 1,143 2.64
----- -----
Options outstanding at December 31, 2001 ..... 8,608 2.32
Granted/assumed ........................... 3,283 0.21
Exercised ................................. -- --
Forfeited/expired ......................... 8,039 2.32
----- -----
Options outstanding at December 31, 2002 ..... 3,852 $0.21
===== =====
- ----------
(1) Includes options converted in DWeb acquisition.
58
The following table summarizes information about stock options outstanding
and exercisable as of December 31, 2002:
Options Outstanding Options Exercisable
--------------------------------------------- --------------------------
Weighted- Weighted- Weighted-
Average Average Average
Range of Outstanding Remaining Exercise Exercisable Exercise
Exercise Prices (in thousands) Contractual Life Price (in thousands) Price
--------------- -------------- ---------------- --------- -------------- ---------
$0.11 - $0.19 3,025 9.5 $0.12 625 $0.11
$1.30 250 9.0 $1.30 250 $1.30
$2.85 - $3.45 256 8.0 $3.45 256 $3.45
$7.95 - $8.25 270 7.5 $8.10 270 $8.10
$31.50 40 7.0 $31.50 40 $31.50
$48.75 11 6.5 $48.75 11 $48.75
As discussed in Note 4, in December 2002, the FASB issued SFAS No. 148,
which provides alternative methods of transition for voluntary change to the
fair value based method of accounting for stock-based employee compensation. In
addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to
require prominent disclosures in both annual and interim financial statements
about the method of accounting for stock-based employee compensation and the
effect of the method used on reported results. The Company is adopting the
provisions of SFAS No. 148 prospectively from January 1, 2003.
Defined contribution plan
The Company has a defined contribution savings plan (the "Plan"), which
qualifies under Section 401(k) of the Internal Revenue Code. Participants may
contribute up to 20%, of their salary, subject to a maximum contribution of
$11,000 of their gross wages, not to exceed, in any given year, a limitation set
by Internal Revenue Service regulations. The Plan provides for discretionary
contributions to be made by the Company as determined by its Board of Directors.
During the years ended December 31, 2002 and 2001, the Company has not made any
contributions to the Plan.
NOTE 15. INCOME TAXES
The components of the net deferred tax asset as of December 31, 2002
consists of the following (in thousands):
Deferred tax assets:
Net operating loss carryforwards .................... $ 14,205
Stock-based compensation ............................ 8,200
Other miscellaneous ................................. 600
--------
23,205
Valuation allowance ................................. (23,205)
--------
Net deferred tax asset .............................. $ --
========
Deferred income taxes reflect the net effects of temporary differences
between carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. In assessing the
realizability of deferred tax assets, management considers whether it is more
likely than not that some portion or all of the deferred tax assets will not be
realized. The ultimate realization of deferred tax assets is dependent upon the
generation of future taxable income during the periods in which temporary
differences representing net future deductible amounts become deductible. Due to
the uncertainty on the Company's ability to realize the benefit of the deferred
tax assets, the deferred tax assets are fully offset by a valuation allowance at
December 31, 2002.
As of December 31, 2002, the Company had approximately $35.5 million of
net operating loss (NOL) carryforwards for federal income tax purposes. The NOL
carryforwards expire in various years ranging from 2019 to 2022. During 2000,
the Company may have experienced an ownership change as that term is defined in
Section 382 of the Internal Revenue Code. Under that section, when there is an
ownership change, the pre-ownership-change loss carryforwards are subject to an
annual limitation which could reduce or defer the utilization of these losses.
Therefore, the Company's pre-ownership change tax losses may be severely limited
and may expire without being utilized.
59
The provision for income taxes differs from the amount computed by
applying the statutory federal income tax rate to income before provision for
income taxes. The sources and tax effects of the differences are as follows (in
thousands):
Year Ended December 31,
-------------------------
2002 2001
-------- --------
Federal income tax, at statutory rate ........ $ (3,064) $(24,400)
State income tax, net of federal benefit ..... (721) (2,100)
Non-deductible expenditures, including
goodwill amortization and other ............ 3,080 18,400
Change in valuation allowance ................ 705 8,100
-------- --------
Income taxes, as recorded .................... $ -- $ --
======== ========
NOTE 16. RELATED PARTIES
The Chief Operating Officer and a Managing Director of a securities firm
that has in the past provided financial advisory services to the Company (the
"Financial Advisor") are directors of the Company. In additional, until
recently, a principal and Chief Executive Officer of the Financial Advisor was a
director of the Company. For acting as a placement agent for the December 2001
and January 2002 financings, the Financial Advisor received a cash fee in the
amount of $200,000 and was issued warrants to purchase 165,289 shares of Company
common stock with an exercise price of $2.40 for a period of two years prior to
adjustment for dilutive financings. These warrants were valued using the
Black-Scholes option-pricing model at $180,900 assuming 80 percent volatility, a
bond equivalent yield of 4.9%, and at a price of $2.40, prior to adjustment for
dilutive financings. They are included on the accompanying condensed
consolidated balance sheet as deferred financing fees and are being amortized
and included as interest expense over the five-year life of the debt.
The Company also paid its former Chairman of the Board of the Company
$100,000 during the year ended December 31, 2002, to provide consulting services
related to the restructuring of the Company's current business operations as
well as to evaluate the Company's overall business strategies.
NOTE 17. SEGMENT REPORTING
The Company had two reportable operating segments during 2001. The Company
utilizes proprietary software to provide a technology platform for large buyers
and large suppliers to transfer business documents via the Internet to their
small and medium-sized trading partners. The Company also offered 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.
The Company's transaction processing technology platform and professional
services comprise one reportable segment defined as "transaction processing and
related services." In addition during 2001, the Company designed and delivered
custom technical education through delivery of custom computer and
Internet-based on line training seminars. This second reportable segment,
defined as "training and client educational services" during 2001, has been
discontinued during 2002, as further discussed in Notes 1 and 3.
The following information is presented in accordance with SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information", which
established standards for reporting information about operating segments in the
Company's financial statements (in thousands):
60
Year ended December 31,
-----------------------
2002 2001
-------- --------
Revenue from external customers
Transaction processing and related services ....... $ 3,493 $ 4,333
Training and client educational services .......... 1,105 2,483
-------- --------
$ 4,598 $ 6,816
======== ========
EBITDA (1)
Transaction processing and related services ....... $ (1,692) $ (8,108)
Training and client educational services .......... (608) (15)
-------- --------
EBITDA .......................................... (2,300) (8,123)
Depreciation and amortization ..................... (4,021) (13,716)
Stock-related compensation ........................ (12) (1,922)
Interest, net ..................................... (601) (3,031)
Restructuring (charge) benefit .................... 655 (3,327)
Impairment charge ................................. (2,732) (43,375)
-------- --------
Net Loss .......................................... $ (9,011) $(73,494)
======== ========
Identifiable assets
Transaction processing and related services ....... $ 2,050 $ 8,030
Training and client educational services .......... -- 818
Corporate, mainly goodwill and other intangibles .. -- 2,637
-------- --------
$ 2,050 $ 11,485
======== ========
Capital expenditures, including product development
Transaction processing and related services ....... $ 1,217 $ 2,253
Training and client educational services .......... -- 38
-------- --------
$ 1,217 $ 2,291
======== ========
(1) EBITDA is defined as net income (loss) adjusted to exclude: (i) provision
(benefit) for income taxes, (ii) interest income and expense, (iii)
depreciation, amortization and write-down of assets, (iv) stock-related
compensation, (v) product development costs, and (vi) restructuring
charges.
EBITDA is presented because management considers it an important indicator
of the operational strength and performance of its business. The Company
evaluates the performance of its operating segments without considering the
effects of (i) debt financing interest expense and investment interest income,
and (ii) non-cash charges related to depreciation, amortization and
stock-related compensation, which are managed at the corporate level.
61
Item 8. Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure
On July 31, 2002, the Company engaged Miller, Ellin & Company, LLP as its
independent accountants for the year ending December 31, 2002, and dismissed the
former independent accountants, Deloitte & Touche LLP. The report of the former
accountants for the year ended December 31, 2001, included an explanatory
paragraph describing conditions that raised substantial doubt about the
Company's ability to continue as a going concern.
During the most recent fiscal year and to the date hereof, there have been
no disagreements between the Registrant and the former accountants on any matter
of accounting principles or practices, financial statement disclosure, or
auditing scope or procedure, which if not resolved to the satisfaction of the
former accountant would have caused it to make reference to the subject matter
of the disagreement in connection with its report.
62
PART III
Item 9. Directors and Executive Officers of the Registrant
Executive officers and directors
The following table sets forth certain information regarding our directors and
executive officers:
Name Age Position
- ---- --- --------
Robert Priddy* 58 Chairman of the Board of Directors
Richard S. Cohan 50 Chief Executive Officer and President
Robert Bacchi 47 Chief Operating Officer
Michael Dodier 44 Executive Vice President - Sales
Steven Rabin 46 Chief Technology Officer
Stephen J. Warner* 61 Director
Harold S. Blue 40 Director
Thom Waye* 39 Director
- ----------
* Member of Audit Committee
Robert Priddy has been Chairman of the Board and a director of our company
since January 2003. He is currently chairman and chief executive officer of RMC
Capital, LLC. He was one of the four founding partners of ValuJet Airlines and
served in a variety of executive positions for the airline through its merger
with AirTran Airways in 1997. Mr. Priddy remains a Director of AirTran Airways,
a New York Stock exchange company. Prior to that, Mr. Priddy served as President
of Florida Gulf Airlines and Air Midwest, and was one of the three founders of
Atlantic Southeast Airlines (ASA) as well as its chief financial officer.
Richard S. Cohan joined our company in May 2001 as president and chief
operating officer. In July 2001, he became chief executive officer of our
company, and relinquished his position as chief operating officer. He has been a
director since May 2002. Mr. Cohan served as senior vice president of
CareInsite, a health information technology company (which merged with WebMD in
September 2000), from June 1998 to January 2001. He was also president of The
Health Information Network Company, an e-health consortium of major New York
health insurers and associations of which CareInsite was the managing partner,
from 1998 to 2001. Prior to joining CareInsite, Mr. Cohan spent 15 years at
National Data Corporation, with various titles including executive vice
president.
Robert Bacchi joined our company in January 2002 as chief operating
officer following our acquisition of Bac-Tech Systems, Inc., a privately-held
New York City based e-commerce company. Mr. Bacchi founded Bac-Tech in 1981 and
served as its President since such date.
Michael Dodier joined our company in January 2002 as Executive Vice
President - Sales following our acquisition of Bac-Tech. Mr. Dodier joined
Bac-Tech in 1993 and served as its Executive Vice President-Sales since such
date. Prior to that, Mr. Dodier was General Territory U.S. Sales Manager for
Data General Corporation.
63
Steven Rabin has served as our chief technology officer since November
2000 and currently serves on a part-time basis. Prior to joining our company,
Mr. Rabin was the chief technology officer for InterWorld Corporation from May
1997 to September 2000. From February 1995 to May 1997, Mr. Rabin worked as
chief technologist at Logility, Inc., a division of American Software Inc., a
publicly held company, where he designed and developed a variety of supply chain
management and business-to-business e-commerce solutions.
Stephen J. Warner has been a director of our company since May 2001. Mr.
Warner has been chief executive officer of Crossbow Ventures, Inc., a venture
capital firm, since January 1999. He was chairman of Bioform Inc., a consulting
firm, from 1994 to 1999. From 1991 to 1994, he was a director of Commonwealth
Associates, L.P. Mr. Warner served as president of Merrill Lynch Venture Capital
from 1981 to 1990.
Harold S. Blue has been a director of our company since May 2001. Mr. Blue
is President of Commonwealth Associates Group Holdings and from 1993 to 2000,
was Chairman and CEO of ProxyMed. During his career, Mr. Blue has founded and
sold a pharmacy chain, a generic pharmaceutical distributor known as Best
Generics, which was sold to IVAX, the largest generic drug manufacturer in the
U.S., and a physician practice company. He was formerly a director of IVAX and
is currently a director of Notify Corporation, and Commonwealth Associates Group
Holdings.
Thom Waye has been a director of our company since January 2003. Mr. Waye
is Managing Director of Corporate Finance and Business Development at
Commonwealth Associates. Mr. Waye has primary responsibility for originating
Commonwealth's investment opportunities, private placements, and public
offerings. Mr. Waye previously held various positions with American
International Group's (AIG) Financial Services companies, as well as led
Motorola's and Unisys' New York based Financial Services Marketing efforts.
All of the above directors will hold office until the next annual meeting
of the stockholders and until their successors have been duly elected and
qualified. All of the above executive officers serve at the discretion of our
board of directors.
Commonwealth Associates, L.P. currently has the right to designate two
members of our board of directors, and has designated Harold S. Blue and Thom
Waye. The holders of our Series B preferred stock, voting as a class, have the
right to designate one member of our board of directors, and have no designee at
this time. When the holders of the Series B preferred stock no longer have the
right to designate a director, Commonwealth shall receive the right to designate
such member. Commonwealth's right to designate this third member of the board
and one of its two other designees shall expire when the Series C preferred
stock has converted into shares of common stock or there is otherwise less than
20% of the originally issued shares of Series C preferred stock outstanding.
Section 16(a) Beneficial Ownership Reporting Compliance
Based solely upon a review of Forms 3, 4 and 5 and amendments to these forms
furnished to us, all parties subject to the reporting requirements of Section
16(a) of the Exchange Act filed on a timely basis all such required reports with
respect to transactions during our year ended December 31, 2002, except as
follows: 1) Commonwealth Associates, L.P. filed one late Form 4 relating to the
receipt of warrants as placement agent compensation for a January 2002
transaction; 2) Robert Priddy filed four late Form 4s relating to purchases of
convertible notes; and 3) one late Form 4 was filed by Michael Dodier to report
the automatic conversion of preferred stock to common stock.
64
Section 16(a) ("Section 16(a)") of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), requires executive officers and directors and
persons who beneficially own more than ten percent (10%) of the Company's common
stock to file initial reports of ownership on Form 3 and reports of changes in
ownership on Form 4 with the Securities and Exchange Commission and any national
securities exchange on which the Company's securities are registered.
Item 10. Executive Compensation
The following table provides information concerning the annual and
long-term compensation earned or paid to our chief executive officer and to each
of our most highly compensated named executive officers other than the chief
executive officer, whose compensation exceeded $100,000 during 2002.
Annual Compensation Long-Term Compensation
------------------- ----------------------
Name and Number of Securities
Principal Position Year Salary Bonus Underlying Options (#)
------------------ ---- ------ ----- ----------------------
Richard S. Cohan
Chief Executive Officer 2002 $201,068 $40,000 1,150,000
and President 2001 $114,086 $8,333 200,000
Robert Bacchi
Chief Operating Officer 2002 $151,104 -- 633,333
Michael Dodier
Executive Vice
President Sales 2002 $152,349 -- 333,333
65
Option Grants in 2002
The following table provides information concerning individual grants
of stock options made during 2002 to each of our named executive officers.
Exercise or
Number of Securities Percent of Total Options Base Price Expiration
Name Underlying Options (#) Granted to Employees in 2002 ($ per share) Date
---- ---------------------- ---------------------------- ------------- ----------
Richard S. Cohan 350,000 14.8% $1.30 February 2012
800,000 33.8% $0.11 June 2012
Robert Bacchi 33,333 1.4% $2.85 January 2012
600,000 25.4% $0.11 June 2012
Michael Dodier 33,333 1.4% $2.85 January 2012
300,000 12.7% $0.11 June 2012
66
Aggregated Option Exercises in 2002 and Year End Values
The following table provides information concerning the value of
unexercised options owned by each of our named executive officers at December
31, 2002. No stock options were exercised in 2002.
Number of Securities Value of Unexercised
Underlying Options In-the-Money Options (1)
Name Exercisable Unexercisable Exercisable Unexercisable
---- ----------- ------------- ----------- -------------
Richard S. Cohan 652,779 730,555 0 0
Robert Bacchi 322,222 311,111 0 0
Michael Dodier 172,222 161,111 0 0
(1) Based on closing price of our common stock as reported on Nasdaq on
December 31, 2002.
Employment Agreements
Our company and Richard S. Cohan, our chief executive officer and
president, are parties to an employment agreement, dated May 4, 2001. The
initial term of the agreement expires on May 3, 2004, but the agreement
automatically renews for successive one-year terms unless terminated by either
party prior to renewal. The agreement provides for an annual base salary of
$175,000 with a minimum annual bonus of $50,000. In 2002, the Board of Directors
increased Mr. Cohan's annual salary to $250,000 and changed the minimum
guaranteed bonus to a contingent bonus of up to 50% of base salary dependent
upon the achievement of certain defined operating parameters. Mr. Cohan was also
granted options to purchase 133,334 shares of common stock pursuant to our
amended 2000 stock option plan. In the event Mr. Cohan's employment is
terminated, for reason other than "cause" (as defined in the agreement),
including the resignation of Mr. Cohan for good reason, the termination of Mr.
Cohan's employment for our own convenience or upon Mr. Cohan's death or
disability, the agreement provides that we are required to pay Mr. Cohan an
amount equal to his annual base salary and bonus for a period of six months
following the date of the event that resulted in the termination of employment
and his options shall accelerate and immediately vest as provided in the
agreement.
In connection with the acquisition of their company Bac-Tech Systems,
Inc., our company entered into employment agreements, dated January 2, 2002,
with each of Robert Bacchi and Michael Dodier pursuant to which they were
employed as our chief operating officer and executive vice president-sales,
respectively. The initial term of the agreements expires on January 1, 2005, but
the agreements automatically renew for successive one-year terms unless
terminated by either party prior to renewal. The employment agreements each
provide for an annual base salary of $165,000. Messrs. Bacchi and Dodier were
each also granted options to purchase 33,334 shares of common stock pursuant to
our amended 2000 stock option plan. In the event the employment of Mr. Bacchi or
Mr. Dodier is terminated by us during the first year for reasons other than
"cause" (as defined in the agreements), including termination of employment for
our convenience, we are required to pay the terminated employee an amount equal
to his annual base salary for the remainder of the year plus an additional six
months. If either employee is terminated without cause or for our convenience
after the first year or in the event of their respective deaths or disabilities
at any time, he or his estate would be entitled to his base salary for a period
of six months from termination.
67
Provisions of Our Charter and By-Laws
Our amended and restated certificate of incorporation provides that we
will indemnify any person who is or was our director, officer, employee or agent
to the fullest extent permitted by the New Jersey Business Corporation Act, and
to the fullest extent otherwise permitted by law. The New Jersey law permits a
New Jersey corporation to indemnify its directors, officers, employees and
agents against liabilities and expenses they may incur in such capacities in
connection with any proceeding in which they may be involved, unless a judgment
or other final adjudication adverse to the director, officer, employee or agent
in question establishes that his or her acts or omissions (a) were in breach of
his or her duty of loyalty (as defined in the New Jersey law) to our company or
our stockholders, (b) were not in good faith or involved a knowing violation of
law or (c) resulted in the receipt by the director, officer, employee or agent
of an improper personal benefit.
Pursuant to our amended and restated certificate of incorporation and the
New Jersey law, no director or officer of our company will be personally liable
to us or to any of our stockholders for damages for breach of any duty owed to
us or our stockholders, except for liabilities arising from any breach of duty
based upon an act or omission (i) in breach of such director's or officer's duty
of loyalty (as defined in the New Jersey law) to us or our stockholders, (ii)
not in good faith or involving a knowing violation of law or (iii) resulting in
receipt by such director or officer of an improper personal benefit.
In addition, our bylaws include provisions to indemnify our officers and
directors and other persons against expenses, judgments, fines and amounts
incurred or paid in settlement in connection with civil or criminal claims,
actions, suits or proceedings against such persons by reason of serving or
having served as officers, directors, or in other capacities, if such person
acted in good faith, and in a manner such person reasonably believed to be in or
not opposed to our best interests and, in a criminal action or proceeding, if he
or she had no reasonable cause to believe that his/her conduct was unlawful. The
termination of any action, suit or proceeding by judgment, order, settlement,
conviction or upon a plea of nolo contendere or its equivalent will not, of
itself, create a presumption that the person did not act in good faith and in a
manner which he or she reasonably believed to be in or not opposed to our best
interests or that he or she had reasonable cause to believe his or her conduct
was unlawful. Indemnification as provided in the bylaws will be made only as
authorized in a specific case and upon a determination that the person met the
applicable standards of conduct.
Item 11. Security Ownership of Certain Beneficial Owners and Management
The following table shows the common stock owned by our current directors
and named executive officers, by persons known by us to beneficially own,
individually, or as a group, more than 5% of our outstanding common stock as of
December 31, 2002 and all of our current directors and executive officers as a
group. Included as shares beneficially owned are shares of convertible preferred
stock, which preferred shares have the equivalent voting rights of the
underlying common shares. Such preferred shares are included to the extent of
the number of underlying shares of common stock. Also included are shares of
common stock underlying convertible notes.
68
Beneficial Percent of Percent of
Name and Address Ownership of Common Common Stock
of Beneficial Owner (1) Capital Stock (2) Stock (3) On a Fully Diluted Basis (4)
- ----------------------- ----------------- --------- ----------------------------
Steven Rabin 13,376 (5) * *
Michael S. Falk (6) ** (7) ** **
Timothy P. Flynn (8) ** (9) ** **
Richard S. Cohan 244,648 (10) 8.0% 1.9%
Stephen J. Warner (11) ** (12) ** 8.4%
Harold S. Blue (13) ** (14) ** *
Commonwealth Associates LP (15) ** (16) ** **
Robert Priddy (17) 15,403,171 (18) 84.5% 19.6%
Robert Bachhi 454,160 (19) 15.0% 1.4%
Michael Dodier 454,160 (20) 15.0% *
Thom Waye (21) ** (22) * *
Edmund H. Shea, Jr. (23) ** (24) ** **
Jacob Safier (25) ** (26) ** **
All directors and officers as a group
(8 persons) ** (27) ** **
- ----------
* Less than 1%
** In the process of being determined
(1) The address of each person who is a 5% holder, except as otherwise noted,
is c/o eB2B Commerce, Inc., 665 Broadway, New York, New York 10012.
(2) Except as otherwise noted, each individual or entity has sole voting and
investment power over the securities listed. Includes ownership of only
those options and warrants that are exercisable within 60 days of December
31, 2002.
(3) The ownership percentages in this column for each person listed in this
table are calculated assuming the exercise of all options and warrants
held by such person exercisable within 60 days of the date of December 31,
2002 and conversion of all convertible notes held by such person
convertible within such time period and giving effect to the shares of
common stock held by such person.
(4) The ownership percentages in this column are calculated for each person
listed in this table on a fully diluted basis, assuming the exercise of
all options (regardless if exercisable within 60 days) and warrants, held
by such person and all of our other securityholders and conversion of all
preferred stock and convertible notes held by such person and all of our
other securityholders.
(5) Includes 10,042 shares underlying options and 3,334 shares of restricted
stock.
(6) The address of Mr. Falk is c/o Commonwealth Associates, L.P., 830 Third
Avenue, New York, New York 10022.
(7) In addition to the aggregate of _________ shares beneficially owned by
Commonwealth Associates L.P., which may be deemed to be beneficially owned
by Mr. Falk, Mr. Falk's holdings include 12,056 shares of common stock,
and the right to acquire (i) _______ shares underlying warrants and
options, (ii) ______ shares underlying convertible preferred stock. In his
capacity as chairman and controlling equity owner of Commonwealth
Associates Management Corp., Mr. Falk shares voting and dispositive power
with respect to the securities beneficially owned by Commonwealth
Associates L.P. and may be deemed to be the beneficial owner of such
securities. In addition, Mr. Falk (i) as sole member of the general
partner of ComVest Venture Partners, LP, Mr. Falk may be deemed to own the
_______ shares underlying warrants owned by such entity, and (ii) as a
manager and principal member of ComVest Capital Partners, LLC, Mr. Falk
may be deemed to beneficially own the _______ shares beneficially owned by
such entity, which is inclusive of _______ shares underlying warrants and
______ underlying convertible preferred stock. With respect to the
entities mentioned in this note, Mr. Falk may be deemed to share indirect
voting and dispositive power with respect to such entities' shares and may
therefore be deemed to be the beneficial owner of such securities.
(8) The address of Mr. Flynn is c/o Flynn Gallagher Associates, 3291 North
Buffalo Drive, Las Vegas, Nevada 89129.
69
(9) Includes (i) _______ shares underlying convertible preferred stock and
(ii) _______ shares underlying warrants.
(10) Includes 3,447 shares of common stock and (i) 185,645 shares underlying
convertible notes and (ii) 55,556 shares underlying options.
(11) The address of Mr. Warner is One N. Clematis Street, West Palm Beach,
Florida 33401.
(12) Includes _______ shares underlying convertible preferred stock, _______
shares underlying convertible notes and _______ shares underlying warrants
owned by Alpine Venture Capital Partners L.P. Mr. Warner is the chief
executive officer of Crossbow Ventures Inc., the management company for
Alpine Venture Capital Partners L.P.
(13) The address of Mr. Blue is c/o Commonwealth Associates, L.P., 830 Third
Avenue, New York, New York 10022.
(14) Includes _____ shares underlying convertible preferred stock and ______
shares underlying warrants.
(15) The address of Commonwealth Associates, L.P. is 830 Third Avenue, New
York, New York 10022.
(16) Commonwealth Associates, L.P.'s holding includes _____ shares underlying
convertible preferred stock and _________ shares underlying warrants and
unit purchase options. The address for ComVest Capital Management LLC is
830 Third Avenue, New York, New York 10022.
(17) The address of Mr. Priddy is 3291 Buffalo Drive, Suite 8, Las Vegas,
Nevada 89129.
(18) Mr. Priddy may be deemed to be the beneficially owner of (i) 4,161,101
shares of common stock beneficially owned by RMC Capital, LLC ("RMC"), of
which Mr. Priddy is a manager and principal member, (ii) 2,232,943 shares
of common stock underlying warrants, (iii) 222,088 shares of common stock
underlying convertible preferred stock, and (iv) 8,787,139 shares of
common stock underlying convertible notes. RMC's beneficial holdings
include 8,342 shares of common stock and 4,152,659 shares of common stock
underlying convertible preferred stock.
(19) In addition to 257,404 shares of common stock (including 80,000 shares
owned by family members) includes (i) 185,645 shares underlying
convertible notes and (ii) 11,111 shares underlying options.
(20) In addition to 257,404 shares of common stock (including 106,667 shares
owned by family members) includes 185,645 shares underlying convertible
notes and (ii) 11,111 shares underlying options.
(21) The address of Mr. Waye is c/o Commonwealth Associates, L.P., 830 Third
Avenue, New York, New York 10022.
(22) Includes ______________.
(23) The address of Mr. Shea is 655 Brea Canyon Road, Walnut, California 91789.
(24) Includes ______________.
(25) The address of Mr. Shafier is One State Street Plaza, New York, New York
10004.
(26) Includes ______________.
(27) Includes ______________.
70
Item 12. Certain Relationships and Related Transactions
In April and May 2001, we issued to Commonwealth Associates, L.P. (and its
designees), for providing services as the placement agent in a private placement
of convertible notes and warrants, five year "agents options" to purchase Series
C preferred stock, convertible into an aggregate of 125,000 shares of our common
stock at an exercise price of $7.50 and warrants to purchase 125,000 shares of
our common stock at an exercise price of $13.95 per share. We also paid
Commonwealth a fee of $637,500 plus reimbursement of its expenses in connection
with such services.
In connection with the closing of the April/May 2001 financing, we
canceled a $2,050,000 line of credit issued to us in April 2001 by ComVest
Venture Partners L.P., an affiliate of Commonwealth, pursuant to which we did
not borrow any funds. We incurred a cash fee amounting to $61,500 in
consideration of the availability of the line of credit. In addition, ComVest
Venture Partners L.P. was issued warrants to purchase 60,000 shares of our
common stock at an exercise price of $1.80 per share for a period of five years.
In December 2001, Commonwealth acted as the placement agent in our bridge
financing and we paid Commonwealth a placement fee of $200,000 plus
reimbursement of its expenses in connection with such services.
In January 2002, we issued Commonwealth (and its designees) for providing
services as the placement agent in the private placement of convertible notes
and warrants, five year warrants to purchase 165,288 shares of our common stock
at an exercise price of $2.42 per share.
All of the above share numbers for our common stock have been adjusted to
reflect the one-for-fifteen reverse stock split effected in January 2002, but do
not reflect anti-dilution adjustments subsequent to their issuance.
Commonwealth currently beneficially owns a significant amount of our
voting securities, and currently has two designees on our Board of Directors.
71
Item 13. Exhibits and Reports on Form 8-K
Number Description
- ------ -----------
2.1 Agreement and Plan of Merger by and between eB2B Commerce, Inc. and
DynamicWeb Enterprises, Inc., dated December 1, 1999, and as
amended, dated February 29, 2000 (incorporated by reference to
Exhibit 2.1 and Exhibit 2.2 filed with the Registrant's
Registration Statement on Form S-4 filed on January 24, 2000 and
amended on March 20, 2000 ("Form S-4")).
2.2 Agreement and Plan of Merger by and between eB2B Commerce, Inc.,
Netlan Merger Corporation and Netlan Enterprises, Inc., dated
February 22, 2000 (incorporated by reference to Exhibit 2.5 filed
with the Registrant's Form S-4).
2.3 Agreement and Plan of Merger among eB2B Commerce, Inc., Bac-Tech
Systems, Inc., Robert Bacchi and Michael Dodier, dated as of
January 2, 2002 (incorporated by reference to Exhibit 2.1 as filed
with the Registrant's Form 8-K, dated January 2, 2002).
3.1 Certificate of Incorporation, as filed with the Secretary of State
of New Jersey on August 7, 1979 together with subsequently filed
Amendments and Restatements through April 2001, inclusive of terms
and designations for Series A and Series B preferred stock
(incorporated by reference to Exhibits 3.1.1 through Exhibit 3.1.13
filed with the Registrant's Form S-4) and Amendments filed from May
2001 through January 2002, inclusive of terms and designations of
Series C and Series D preferred stock (incorporated by reference to
Exhibit 3.1 filed with the Registrant's Annual Report on Form 10-KSB
for the year ended December 31, 2001 ("2001 Form 10-KSB")).
3.2 Bylaws adopted August 7, 1979 including all subsequently filed
Amendments and Restatements (incorporated by reference to Exhibit
3.2.1 through Exhibit 3.2.4 filed with the Registrant's Form S-4).
10.1 Employment Agreement between Richard S. Cohan and eB2B Commerce,
Inc., dated effective as of May 4, 2001 (incorporated by reference
to Amendment No. 1 to the Registrant's Registration Statement on
Form SB-2).
10.2 Form of Series A Preferred Stock Subscription Agreement
(incorporated by reference to Amendment No. 1 to the Registrant's
Registration Statement on Form SB-2) and schedule related thereto
(incorporated by reference to Exhibit 10.5 filed with the
Registrant's 2001 Form 10-KSB.
10.3 Form of Unit Subscription Agreement relating to Series B preferred
stock and warrants (incorporated by reference to Amendment No. 1 to
the Registrant's Registration Statement on Form SB-2) and schedule
related thereto (incorporated by reference to Exhibit 10.6 as filed
with the Registrant's 2001 Form 10-KSB).
10.4 Form of Unit Subscription Agreement relating to convertible notes
and warrants issued in April/May 2001 (incorporated by reference to
Amendment No. 1 to the Registrant's Registration Statement on Form
SB-2) and schedule related thereto (incorporated by reference to
Exhibit 10.7 as filed with the Registrant's 2001 Form 10-KSB).
10.5 Form of Unit subscription relating to convertible notes and
warrants issued in December 2001 and schedule related thereto
(incorporated by reference to Exhibit 10.8 as filed with the
Registrant's 2001 Form 10-KSB).
10.6 Form of Unit Subscription Agreement relating to convertible notes
and warrants issued in January 2002 and schedule related thereto
(incorporated by reference to Exhibit 10.9 as filed with the
Registrant's 2001 Form 10-KSB).
72
10.7 Form of 7% Senior Subordinated Secured Convertible Note
(incorporated by reference to Exhibit 10.10 as filed with the
Registrant's 2001 Form 10-KSB).
10.8 Software License Agreement between InterWorld Corporation and
eChannel Ventures Inc., dated December 11, 1998, Addendum thereto
dated September 30, 1999, Letter Agreement amending the Addendum,
dated February 21, 2001, Amendment No. 1, dated April 12, 2001 and
Amendment No. 2, dated December 24, 2001(incorporated by reference
to Exhibit 10.11 as filed with the Registrant's 2001 Form 10-KSB).
10.9 eB2B Commerce, Inc. 2000 Stock Option Plan, as amended through
January 16, 2003.
10.10 Promissory Note, dated January 2, 2002, issued by eB2B Commerce,
Inc. in favor of Robert Bacchi (incorporated by reference to
Exhibit 10.1 as filed with the Registrant's Form 8-K, dated January
2, 2002).
10.11 Promissory Note, dated January 2, 2002, issued by eB2B Commerce,
Inc. in favor of Michael Dodier (incorporated by reference to
Exhibit 10.2 as filed with the Registrant's Form 8-K, dated January
2, 2002).
10.12 Security Agreement dated January 2, 2002, between eB2B Commerce,
Inc. and each of Robert Bacchi and Michael Dodier (incorporated by
reference to Exhibit 10.3 as filed with the Registrant's Form 8-K,
dated January 2, 2002).
10.13 Registration Rights Agreement, dated January 2, 2002, between eB2B
Commerce, Inc. and each of Robert Bacchi and Michael Dodier
(incorporated by reference to Exhibit 10.4 as filed with the
Registrant's Form 8-K, dated January 2, 2002).
10.14 Employment Agreement, dated January 2, 2002, between eB2B Commerce,
Inc., and Robert Bacchi (incorporated by reference to Exhibit 10.5
as filed with the Registrant's Form 8-K, dated January 2, 2002).
10.15 Employment Agreement, dated January 2, 2002, between eB2B Commerce,
Inc. and Michael Dodier (incorporated by reference to Exhibit 10.6
as filed with the Registrant's Form 8-K, dated January 2, 2002).
10.16 Non-Competition Agreement, dated January 2, 2002, between eB2B
Commerce, Inc. and Robert Bacchi (incorporated by reference to
Exhibit 10.7 as filed with Registrant's Form 8-K, dated January 2,
2002).
10.17 Non-Competition Agreement, dated January 2, 2002, between eB2B
Commerce, Inc. and Michael Dodier (incorporated by reference to
Exhibit 10.8 as filed with Registrant's Form 8-K, dated January 2,
2002).
10.18 Form of Subscription Agreement relating to promissory notes issued in
each of July 2002, September 2002, and November 2002 and schedule
related thereto.
10.19 Form of 7% Senior Subordinated Secured Promissory Note issued each as
of July 15, 2002, September 11, 2002, and November 4, 2002 and
schedule related thereto.
10.20 General Security Agreement, dated July 11, 2002, between eB2B
Commerce, Inc. and Robert Priddy, as Investor Representative.
99.1 Certification pursuant to 18 U.S.C. S1350 as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
73
Reports on Form 8-K.
During the fourth quarter of 2002, we filed two Form 8-Ks as follows: 1)
On October 24, 2002, we filed a Form 8-K to report the discontinuation of our
training and client education services business and 2) on November 7, 2002, we
filed a Form 8-K to report the release of funds from escrow.
Item 14. Controls and Procedures.
Our principal executive and financial officer has concluded, based on his
evaluation as of a date within 90 days before the filing of this Form 10-KSB,
that our disclosure controls and procedures under Rule 13a-14 of the Securities
Exchange Act of 1934 are effective to ensure that information we are required to
disclose in the reports we file or submit under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the
SEC's rules and forms, and include controls and procedures designed to ensure
that information we are required to disclose in such reports is accumulated and
communicated to management, including our principal executive and financial
officer, as appropriate to allow timely decisions regarding required disclosure.
Subsequent to our evaluation, there were no significant changes in
internal controls or other factors that could significantly affect these
internal controls.
74
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
has caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
April 15, 2003 eB2B Commerce, Inc.
By: /s/ Richard S. Cohan
----------------------------
Richard S. Cohan
Chief Executive Officer & President
(Principal Executive,
Financial and Accounting Officer)
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the Registrant and in the capacities and on
the dates indicated.
April 15, 2003 By /s/ Richard S. Cohan
--------------------
Richard S. Cohan
Director
April 15, 2003 By:
-----------------
Robert Priddy
Director
April 15, 2003 By: /s/ Harold S. Blue
------------------
Harold S. Blue
Director
April 15, 2003 By: /s/ Thom Waye
-------------
Thom Waye
Director
April 15, 2003 By: /s/ Stephen J. Warner
---------------------
Stephen J. Warner
Director
75
CERTIFICATIONS
I, Richard S. Cohan, certify that:
1. I have reviewed this annual report on Form 10-KSB of eB2B Commerce, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the periods covered
by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual
report.
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a. Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this annual
report is being prepared;
b. Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this annual report (the "Evaluation Date"); and
c. Presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrants' other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not here were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: April 15, 2003
/s/ Richard S. Cohan
-----------------------------------
Richard S. Cohan
Chief Executive Officer and
President (Principal Executive and
Financial Officer)
76