U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM 10-QSB
Quarterly Report under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended June 30, 2003
Commission file number 10039
eB2B COMMERCE, INC.
-----------------------------------
(Exact name of small business issuer as specified in its charter)
NEW JERSEY 22-2267658
---------------- -------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
665 BROADWAY
NEW YORK, NY 10012
----------------------------------
(Address of Principal Executive Offices)
(212) 477-1700
--------------
(Issuer's telephone number, including area code)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports) and (2) has been
subject to such filing requirements for the past 90 days. YES |X| NO |_|
As of June 30, 2003, there were 3,157,431 shares of Common Stock, $0.0001 par
value per share, of the registrant outstanding.
Transitional Small Business Disclosure format YES |_| NO |X|
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
eB2B COMMERCE, INC.
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
June 30, 2003
-------------
(Unaudited)
ASSETS
Current Assets
Cash and cash equivalents $ 307
Accounts receivable, net of allowance of $131 368
Other current assets 8
---------
Total Current Assets 683
Property and equipment, net 18
Product development costs, net of accumulated amortization of $5,499 432
Deferred financing costs, net of accumulated amortization of $140 326
Other intangibles, net of accumulated amortization of $2,768 313
Deposit 35
---------
Total assets $ 1,807
=========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities
Accounts payable $ 1,224
Accrued expenses and other current liabilities 998
Current maturities of long-term debt 2,777
Deferred revenue 185
Current liabilities of discontinued operations 252
---------
Total current liabilities 5,436
Long-term debt, less current maturities 373
---------
Total liabilities 5,809
---------
Commitments and contingencies
Stockholders' Deficit
Preferred stock, convertible Series A - $.0001 par value;
2,000 shares authorized; 7 shares issued and outstanding --
Preferred stock, convertible Series B - $.0001 par value;
4,000,000 shares authorized; 2,211,675 shares issued and
outstanding --
Preferred stock, convertible Series C - $.0001 par value;
1,750,000 shares authorized; 732,875 shares issued and
outstanding --
Common stock - $.0001 par value; 200,000,000 shares authorized;
3,157,431 shares issued and outstanding --
Additional paid-in capital 157,291
Accumulated deficit (161,293)
---------
Total stockholders' deficit (4,002)
---------
Total liabilities and stockholders' deficit $ 1,807
=========
See accompanying notes to consolidated financial statements.
-2-
eB2B COMMERCE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------- --------------------------
2003 2002 2003 2002
-------------------------- --------------------------
Revenue $ 1,213 $ 832 $ 2,244 $ 1,917
-------------------------- --------------------------
Costs and Expenses:
Cost of revenue 300 282 600 533
Marketing and selling 100 101 225 248
Product development costs 54 350 182 695
General and administrative 430 884 853 2,074
Amortization of other intangibles 82 195 324 389
Depreciation 30 543 72 1,086
Restructuring credit -- (655) -- (655)
Gain on settlement of licensing liability (566) -- (566) --
Stock-based compensation expense -- 81 -- 162
-------------------------- --------------------------
Total costs and expenses 430 1,781 1,690 4,532
-------------------------- --------------------------
Income (loss) from continuing operations before
interest and other expenses, net 783 (949) 554 (2,615)
Interest and other expenses, net (168) (115) (331) (230)
-------------------------- --------------------------
Income (loss) from continuing operations 615 (1,064) 223 (2,845)
Income (loss) from discontinued operations 17 (529) (6) (342)
-------------------------- --------------------------
Net income (loss) $ 632 $ (1,593) $ 217 $ (3,187)
========================== ==========================
Income (loss) per common share from continuing operations $ 0.19 $ (0.56) $ 0.07 $ (1.51)
Income (loss) per common share from discontinued operations 0.01 (0.28) -- (0.18)
-------------------------- --------------------------
Net income (loss) per common $ 0.20 $ (0.84) $ 0.07 $ (1.69)
========================== ==========================
Weighted average number of common shares outstanding 3,157,416 1,892,196 3,140,931 1,883,730
========================== ==========================
See accompanying notes to consolidated financial statements.
-3-
eB2B COMMERCE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
For the Six Months Ended June 30,
---------------------------------
2003 2002
-------- --------
Cash flows from operating activities:
Net income (loss) from continuing operations $ 223 $ (2,845)
Adjustments to reconcile net income (loss)
from continuing operations to
net cash used in operating activities:
Depreciation and amortization 578 2,219
Restructuring credit -- (655)
Gain on settlement of licensing liability (566) --
Stock-based compensation expense -- 162
Non-cash interest expense 211 176
Changes in operating assets and liabilities
Accounts receivable 240 668
Other current assets 46 14
Other assets 15 --
Accounts payable (229) (477)
Accrued expenses and other liabilities (150) 157
Deferred revenue (555) --
Other liabilities -- (218)
-------- --------
Net cash used in operating activities (187) (799)
-------- --------
Cash flows from investing activities:
Acquisition of Bac-Tech Systems, Inc., net -- (198)
Purchases of property and equipment -- (40)
Product development expenditures (182) (240)
-------- --------
Net cash used in investing activities (182) (478)
-------- --------
Cash flows from financing activities:
Payments on borrowings (24) --
Proceeds from long-term debt 275 --
Payment of capital lease obligations -- (65)
-------- --------
Net cash provided by (used in)
financing activities 251 (65)
-------- --------
Net cash used in continuing operations (118) (1,342)
-------- --------
Net cash used in discontinued operations (36) (633)
-------- --------
Net change in cash and cash equivalents (154) (1,975)
Cash and equivalents - beginning of period 461 2,240
-------- --------
Cash and equivalents - end of period $ 307 $ 265
======== ========
See accompanying notes to consolidated financial statements.
-5-
eB2B COMMERCE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(CONTINUED)
(IN THOUSANDS)
For the Six Months Ended June 30,
---------------------------------
2003 2002
-------- --------
Non-cash transactions:
Common and preferred stock issued in connection
with acquisition $ -- $ 1,240
Issuance of warrants with convertible debt $ -- $ 750
Issuance of long-term note in connection with
acquisition $ -- $ 397
Beneficial conversion with issuance of
convertible debt $ -- $ 512
Supplemental disclosure of cash flow information:
Cash paid during the year for interest $ 2 $ 2
See accompanying notes to consolidated financial statements.
-6-
eB2B COMMERCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1. ORGANIZATION AND LIQUIDITY PLANS
eB2B Commerce, Inc. (the "Company") utilizes proprietary software to
provide a technology platform for buyers and suppliers to transfer business
documents via the Internet to their small and medium-sized trading partners.
These documents include, but are not limited to, purchase orders, purchase order
acknowledgements, advanced shipping notices and invoices. The Company provides
access via the Internet to its proprietary software, which is maintained on its
hardware and on hosted hardware. The Company also offers professional services,
which provide consulting expertise to the same client base, as well as to other
businesses that prefer to operate or outsource the transaction management and
document exchange of their business-to-business relationships. In addition,
until it discontinued these operations as of September 30, 2002, the Company
provided authorized technical education to its client base, and also designed
and delivered custom computer and Internet-based training seminars.
Since its inception, the Company has accumulated deficits and negative
cash flows from operations, which raises substantial doubt about its ability to
continue as a going concern.
To ensure the success of the Company, and to address the accumulated
deficits and negative cash flows from operations, management enacted a plan for
the Company, which includes various cost cutting measures commencing in 2001.
Management is currently prepared to take the following actions:
o Raise additional capital, for which there can be no assurance of
obtaining, to fund the Company's internal growth, and to sustain the
Company if positive cash flow from operations is not generated, or
if there are unanticipated expenses.
o Continue to pursue negotiations with its remaining unsecured
creditors.
o Investigate potential transactions involving the sale or merger of
the Company.
NOTE 2. BASIS OF PRESENTATION
The accompanying quarterly financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of
America.
In the opinion of management, all material adjustments, consisting of
normal recurring adjustments, considered necessary for a fair presentation have
been included in the accompanying unaudited condensed consolidated financial
statements. All significant intercompany balances and transactions have been
eliminated in consolidation and certain other prior period balances have been
reclassified to conform to the current period presentation. The accompanying
unaudited condensed consolidated financial statements are not necessarily
indicative of full year results.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with accounting principles generally
accepted in the United States of America have been condensed or omitted pursuant
to such rules and regulations; however, management believes that the disclosures
are adequate to make the information presented not misleading. This report
should be read in conjunction with the audited consolidated financial statements
and footnotes therein included in the Company's Annual Report on Form 10-KSB for
the fiscal year ended December 31, 2002.
In January 2002, the Company completed a fifteen for one reverse stock
split. All shares and per share amounts have been adjusted to reflect this
reverse stock split.
NOTE 3. DISCONTINUED OPERATIONS
In September 2002, the Company discontinued its Training and Educational
Services business segment. The Company was unable to find a buyer for this
business segment and determined that it was in the best interests of its
shareholders to discontinue its operations rather than continue to fund its
working capital needs and operating losses. Accordingly, the related results of
operations and cash flows have been
-6-
NOTE 3. DISCONTINUED OPERATIONS (CONTINUED)
reflected as discontinued operations in the accompanying consolidated financial
statements. For the six months ended June 30, 2003 and 2002, the Company's
discontinued operations contributed net sales of $0 and $724,000, respectively.
As of June 30, 2003, there were no assets relating to this segment, and only the
liabilities appear on the Company's balance sheet.
NOTE 4. ACCOUNTING FOR STOCK BASED COMPENSATION
Effective January 1, 2003, the Company adopted the fair value recognition
provisions of Statement of Financial Accounting Standards ("FAS") No. 123,
"Accounting for Stock-Based Compensation", prospectively to all employee awards
granted, modified, or settled after January 1, 2003. Prior to 2003, the Company
accounted for stock-based employee compensation under the recognition and
measurement provisions of APB Opinion No. 25, "Accounting for Stock Issued to
Employees," and related Interpretations. No stock-based employee compensation
cost is reflected in 2002 net income, as all options granted to employees had an
exercise price equal to the market value of the underlying common stock on the
date of grant. No stock-based compensation cost is reflected in 2003 net income,
as no awards were granted during the three and six months ended June 30, 2003.
The following table illustrates the effect on net income (loss) and income
(loss) per share as if the fair value based method had been applied to all
outstanding and unvested awards in each period.
Three Months Ended Six Months Ended
June 30, June 30,
----------------------- -----------------------
2003 2002 2003 2002
---------- ---------- ---------- ----------
Income (loss) from continuing operations, as reported $ 615 $ (1,064) $ 223 $ (2,854)
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all awards -- (272) -- (693)
---------- ---------- ---------- ----------
Pro forma income (loss) from continuing
operations, net of tax $ 615 $ (1,336) $ 223 $ (3,538)
========== ========== ========== ==========
Income (loss) from discontinued operations, as reported $ 17 $ (529) $ (6) $ (342)
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all awards -- -- -- --
---------- ---------- ---------- ----------
Pro forma income (loss) from discontinued
operations, net of tax $ 17 $ (529) $ (6) $ (342)
========== ========== ========== ==========
Net income (loss), as reported $ 632 $ (1,593) $ 217 $ (3,187)
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all awards -- (272) -- (693)
---------- ---------- ---------- ----------
Pro forma net income (loss) $ 632 $ (1,865) $ 217 $ (3,880)
========== ========== ========== ==========
Income (loss) per share:
Income (loss) from continuing operations - as reported $ 0.19 $ (0.56) $ 0.07 $ (1.51)
========== ========== ========== ==========
Income (loss) from continuing operations - pro forma $ 0.19 $ (0.71) $ 0.07 $ (1.88)
========== ========== ========== ==========
Income (loss) from discontinued operations - as reported $ 0.01 $ (0.28) $- $ (0.18)
========== ========== ========== ==========
Income (loss) from discontinued operations - pro forma $ 0.01 $ (0.28) $- $ (0.18)
========== ========== ========== ==========
Net income (loss) - as reported $ 0.20 $ (0.84) $ 0.07 $ (1.69)
========== ========== ========== ==========
Net income (loss) - pro forma $ 0.20 $ (0.99) $ 0.07 $ (2.06)
========== ========== ========== ==========
Weighted average number of common shares outstanding 3,157,416 1,892,196 3,140,931 1,883,730
========== ========== ========== ==========
-7-
NOTE 5. NET INCOME (LOSS) PER COMMON SHARE
Basic net income (loss) per common share is computed by dividing net
income (loss) by the weighted-average number of common shares outstanding during
the period. Diluted earnings per share is computed using the weighted-average
number of common and dilutive common-equivalent shares outstanding during the
period. Dilutive common-equivalent shares consist of shares that would be issued
upon the exercise of stock options and warrants (computed using the treasury
stock method).
Options and warrants to purchase 26,229,826 shares of common stock, and
preferred shares or long term debt convertible into 50,437,000 shares of common
stock for the three and six months ended June 30, 2003 were not included in
diluted earnings per share as their effect would be anti-dilutive. Options and
warrants to purchase 8,958,653 shares of common stock, and preferred shares or
long term debt convertible into 8,103,759 shares of common stock for the three
and six months ended June 30, 2002, respectively. were not included in diluted
loss per share because they would have been antidilutive.
NOTE 6. LONG-TERM DEBT
On March 27, 2003, the Company and the selling shareholders of Bac-Tech
Systems, Inc. amended the $600,000 non-interest bearing promissory notes,
whereby the $200,000 installment due to the selling shareholders of Bac-Tech
Systems, Inc. due May 1, 2003 was deferred until July 1, 2005. The installments
of $200,000 due on January 1, 2004 and January 1, 2005 remain unchanged.
In April 2003, the $275,000 of the retained proceeds from the private
financing of convertible notes in July 2002 was released from escrow. The
proceeds are to be used to pay for negotiated reduced liabilities and working
capital.
The Company is obligated to pay interest on its 5-year, 7%, senior
subordinated secured convertible notes issued in January 2002 on a quarterly
basis beginning March 2002, and each subsequent quarter thereafter, which
interest payments have not been made. If the Company does not make these
payments, or obtain waivers from the noteholders, the noteholders may pursue
whatever legal remedies are available to them under the terms of the notes,
which are secured by all of the assets of the Company. In view of the Company's
cash position, it intends to seek waivers from these holders. There can be no
assurance that such waivers can be obtained or that such holders will not
declare a default of their entire indebtedness. Accordingly, such notes have
been classified as current liabilities.
NOTE 7. ADDITIONAL PAID-IN CAPITAL
During December 2001, the Company renegotiated a potential $1,200,000
liability with a creditor relating to the licensing of software. The Company had
previously issued 145,986 shares of common stock to this party for amounts then
owing. The Company had agreed that in the event this party received gross
proceeds less than the amount originally owed, the Company would reimburse this
party for the shortfall. In December 2001, this agreement was amended whereby
the creditor agreed to be issued up to 266,667 shares of the Company's common
stock to offset any deficiency, and to the extent this amount is insufficient,
the creditor would be paid one-half the remaining balance in cash no earlier
than April 2003, with the other half forgiven.
At March 31, 2003, the Company remeasured its potential liability under
the agreement. As a result of the remeasurement, the Company reduced its
liability by $4,000 and increased additional paid-in capital as of March 31,
2003.
-8-
NOTE 8 - SUBSEQUENT EVENT
On July 8, 2003, the Company further amended the agreement discussed in
Note 7 and superceded the prior compensation arrangement. The amended agreement
provides for a two year term, continued use by the Company of the creditor's
software, and compensation to the creditor as follows: (i) $20,000 in cash, (ii)
such number of shares of common stock of the Company, if any, as is required to
bring the ownership of the creditor to 9.9% of the outstanding common shares of
the Company, (iii) 10% of the revenues that the Company generates through the
use of the software and (iv) 7.5%; of the revenues (excluding those generated
under provision (iii)) received by the Company from maintenance and other
services performed by the Company for third parties for or an account of the
software; in no event shall the amounts payable pursuant to provisions (iii) and
(iv) above exceed the aggregate amount of $300,000. The effect of this amended
agreement was to reduce the Company's licensing liability by $566,000. This gain
has been reflected in the Company's consolidated statements of operations for
the three and six months ended June 30, 2003.
-9-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Forward Looking Statements
The statements contained in this Form 10-QSB that are not historical facts
may be "forward-looking statements," as defined in Section 27A of the Securities
Act and Section 21E of the Securities Exchange Act of 1934, which contain risks
and uncertainty. Such statements can be identified by the use of forward-looking
terminology such as "estimates," "projects," "anticipates," "expects,"
"intends," "believes," or the negative of each of these terms or other
variations thereon or comparable terminology or by discussions of strategy that
involve risks and uncertainties. Although we believe that our expectations are
reasonable within the bounds of our knowledge of our business operations, there
can be no assurance that actual results will not differ materially from our
expectations. The uncertainties and risks include, among other things, our
plans, beliefs and goals, estimates of future operating results, our limited
operating history, the ability to raise additional capital, our limited cash
resources and negative working capital position, the risk that our secured
noteholders will seek our assets in view of default in payment in interest, the
risks and uncertainties associated with rapidly changing technologies such as
the Internet, the risks of technology development and the risks of competition
that can cause actual results to differ materially from those in the
forward-looking statements.
Forward-looking statements are only estimates or predictions and cannot be
relied upon. We can give you no assurance that future results will be achieved.
Actual events or results may differ materially as a result of risks facing us or
actual results differing from the assumptions underlying such statements. These
risks and assumptions could cause actual results to vary materially from the
future results indicated, expressed or implied in the forward-looking statements
included in this Form 10-QSB. We disclaim any obligation to update information
contained in any forward-looking statement.
General
The following discussion and analysis should be read with the financial
statements and accompanying notes, included elsewhere in this form 10-QSB. It is
intended to assist the reader in understanding and evaluating our financial
position.
On April 18, 2000, eB2B Commerce, Inc., a Delaware corporation, merged
with DynamicWeb, which is a New Jersey corporation, which was the surviving
legal entity. Following the merger, although the merged company maintained the
corporate and legal identity of DynamicWeb, we changed our name from DynamicWeb
Enterprises, Inc. to eB2B Commerce, Inc. and assumed the accounting history of
the former eB2B Commerce, Inc. (i.e. the Delaware corporation).
Overview
We are a provider of business-to-business transaction management
services designed to simplify trading partner integration, automation and
collaboration.
We use proprietary software to provide services that enable more
efficient trading to take place between business partners. Our technology
platform allows business partners to electronically initiate, communicate, and
respond to business documents, regardless of the differences in the partners'
respective computer systems.
Through our service offerings and technology, we:
- receive business documents including, but are not limited to,
purchase orders, purchase order acknowledgments, advanced shipping
notices and invoices in any data format,
-10-
- ensure that the appropriate data has been sent,
- translate the document into any other format readable by the trading
partner,
- transmit the documents correctly to the respective trading partner,
- acknowledge the flow of transactions to each partner,
- allow the partners to view and interact with other supply chain
information,
- alert the partners to time-critical information.
We provide access to our services via the Internet and traditional
communications methodologies. Our software is maintained on both on-site
hardware and remotely hosted hardware.
We also provide professional services and consulting services to tailor
our software to our customers' specific needs with regard to automating the
customers' transactions with their suppliers, as well as to businesses that wish
to build, operate or outsource the transaction management of their
business-to-business trading partner relationships and infrastructure.
In some instances, we provide access to our software to third-party
software vendors as resellers, who use our solutions to meet their customers'
requirements in this area. We may also allow certain of these customers to take
delivery of our proprietary software on a licensed basis to support our services
remotely.
Impact of Critical Accounting Policies
The SEC has recently issued Financial Reporting Release No. 60,
"Cautionary Advice Regarding Disclosure About Critical Accounting Policies"
("FRR 60"), suggesting companies provide additional disclosure and commentary on
those accounting policies considered most critical. FRR 60 considers an
accounting policy to be critical if it is important to our financial condition
and results, and requires significant judgment and estimates on the part of
management in its application. Management believes the following represent our
critical accounting policies as contemplated by FRR 60. For a summary of all of
our significant accounting policies, ncluding the critical accounting policies
discussed below, see the Notes to the Financial Statements included in our Form
10-KSB for the year ended December 31, 2002.
Revenue Recognition
Revenue from transaction processing is recognized on a per transaction
basis when a transaction occurs between a buyer and a supplier. The fee is based
on the volume of transactions processed during a specific period, typically one
month. Revenue from related implementation, if any, annual subscription and
monthly hosting fees are recognized on a straight-line basis over the term of
the contract with the customer. Deferred income includes amounts billed for
implementation, annual subscription and hosting fees, which have not been
earned. For related consulting arrangements on a time-and-materials basis,
revenue is recognized as services are performed and costs are incurred in
accordance with the terms of the contract. Revenues from related fixed-price
consulting or large project arrangements are recognized using either the
contract completion or percentage-of-completion method. The revenue recognized
from fixed price consulting arrangements is based on the
percentage-of-completion method if management can accurately allocate (i) the
ongoing costs to undertake the project relative to the contracted price and
-11-
projected margin; and (ii) the degree of completion at the end of the applicable
accounting period. Otherwise, revenue is recognized upon customer acceptance of
the completed project. Fixed-price consulting arrangements are mainly short-term
in nature and we do not have a history of incurring losses on these types of
contracts. If we were to incur a loss, a provision for the estimated loss on the
uncompleted contract would be recognized in the period in which such loss
becomes probable and estimable. Billings in excess of revenue recognized are
included in deferred income.
Accounting for Business Combinations and Intangible Assets
The judgments made in determining the estimated fair value and expected
useful lives assigned to each class of assets and liabilities acquired can
significantly impact net income. For example, different classes of assets will
have useful lives that differ--the useful life of a customer list may not be the
same as the other intangible assets, such as patents, copyrights, or to other
assets, such as software licenses. Consequently, to the extent a longer-lived
asset (e.g., patents) is ascribed greater value than to a shorter-lived asset
with a definitive life (e.g. customer lists and software licenses) there may be
less amortization recorded in a given period. Furthermore, determining the fair
value of certain assets and liabilities acquired is judgmental in nature and
often involves the use of significant estimates and assumptions. One of the
areas that requires more judgment in determining fair values and useful lives is
intangible assets. While there were a number of different methods used in
estimating the value of the intangibles acquired, there were two approaches
primarily used: discounted cash flow and market multiple approaches. Some of the
more significant estimates and assumptions inherent in the two approaches
include: projected future cash flows (including timing); discount rate
reflecting the risk inherent in the future cash flows; perpetual growth rate;
determination of appropriate market comparables; and the determination of
whether a premium or a discount should be applied to comparables. The value of
our intangible assets is exposed to future adverse changes if our company
experiences decline in operating results or experiences significant negative
industry or economic trends or if future performance is below historical trends.
We periodically review intangible assets for impairment using the guidance of
applicable accounting literature.
RESULTS OF OPERATIONS
THREE AND SIX MONTH PERIODS ENDED JUNE 30, 2003 AND 2002
Total revenue for the second quarter ended June 30, 2003 was $1,213,000,
compared to $832,000 for the same period in 2002, an increase of $381,000, or
46%. Compared to revenue of $1,031,000 for the first quarter of 2003, total
revenue increased by $182,000, or 18%. Revenue for the six-month periods ended
June 30,2003 and 2002 amounted to $2,244,000 and $1,917,000, respectively, an
increase of $327,000, or 17%.
Revenue from the Company's core transaction services business grew to
$935,000, an increase of $383,000, or 69%, for the second quarter from the same
period in 2002. Core transaction services revenue increased by $189,000, or 25%,
from the $746,000 realized in the first quarter of 2003. For the six-month
periods ended June 30, 2003 and 2002, core transaction services revenue was
$1,681,000 and $1,232,000 respectively, an increase of $449,000, or 36%. The
increase in overall revenue was attributable to completion and subsequent
revenue recognition of several large projects for existing customers, as well as
growth in eB2B's Trade GatewayTM supplier network. Professional services
consulting revenue for the second quarter decreased by $2,000, or 1%, from the
same period in 2002, and by $7,000, or 3% from the first quarter of 2003. The
Company expects revenue from this business line to remain stable at this level.
-12-
In the three-month periods ended June 30, 2003 and 2002, one customer
accounted for approximately 22% and 22% of our total revenue, respectively. No
other customer accounted for 10% or more of our total revenue for the respective
periods.
Cost of revenue consists primarily of salaries and benefits for employees
providing technical support as well as salaries of personnel and consultants
providing consulting services to clients. Total cost of revenue for the
three-month periods ended June, 2003 and 2002 amounted to $300,000 and $282,000,
respectively, an increase of $18,000 or 6% percent. The increase in 2003 was a
result of increases in salaries and benefits. For the six-month periods ended
June 30,2003 and 2002, cost of revenue was $600,000 and $533,000, respectively.
The increase of $67,000, or 13%, was attributable to increases in salaries and
benefits.
Marketing and selling expenses consist primarily of employee salaries,
benefits and commissions, and the costs of promotional materials, trade shows
and other sales and marketing programs. Marketing and selling expenses
(exclusive of stock-based compensation) decreased to $100,000, or 1%, for the
three months ended June 30, 2003, from the $101,000 for the three months ended
June 30, 2002 due to a decrease in travel and related expenses. For the
six-month periods ended June 30, 2003 and 2002, marketing and selling expense
was $225,000 and $248,000 respectively. The decrease of $23,000, or 9% reflected
a decrease in travel and related expense and the elimination of a sales
position.
Product development expenses mainly represent amortization of capitalized
software development costs and related costs associated with the development of
our intellectual property and technology infrastructure necessary to capture and
process transactions. Product development expenses (exclusive of stock-based
compensation) were approximately $54,000 and $350,000 for the three-month
periods ended June 30, 2003 and 2002, respectively. The decrease of $296,000, or
85%, was primarily attributable to a stabilized technology platform in 2002 and
2003, resulting in less development expense capitalized in prior periods and
subsequent reduction in amortization in 2003. We capitalize qualifying computer
software costs incurred during the application development stage. Accordingly,
we anticipate that product development expenses will fluctuate from quarter to
quarter as various milestones in the development are reached and future versions
of our software are implemented. Product development expense for the six-month
periods June 2003 and 2002 were $182,000 and $695,000 respectively. The decrease
of $513,000 or 74% was due to the stabilized technology platform and subsequent
reduction of amortization expense mentioned above.
General and administrative expenses consist primarily of employee salaries
and related expenses for executives, administrative and finance personnel, as
well as other consulting, legal and professional fees and, to a lesser extent,
facility and communication costs. During the three-month periods ended June 30,
2003 and 2002, total general and administrative expenses (exclusive of
stock-based compensation) amounted to $430,000 and $884,000, respectively, a
decrease of $454,000, or 51%. The decrease is attributable primarily to
reductions in employees resulting in savings on salaries, severance and related
benefits of $355,000, insurance of $73,000 and telecommunications of $26,000.
For the six-month periods June 2003 and 2002, general and administrative
expenses were $853,000 and $2,074,000, respectively. The decrease of $1,221,000,
or 59% was primarily due to (i) reduction in employee salaries and benefits of
$595,000 (ii) reduction in healthcare expense of $72,000, (iii) reduction in
insurance, legal, and accounting of $211,000, and, (iv) reduction in
telecommunications expense of $123,000.
Amortization of other intangibles are non-cash charges associated with the
DynamicWeb, and Bac-Tech business combinations. Amortization expense was $82,000
and $195,000 for the three-month periods ended June 30, 2003 and 2002,
respectively. The decrease of $113,000 is due to the full effect of the previous
adjustment which wrotedown goodwill acquired in the Bac-Tech business
combination. For the six-month periods ending June 30, 2003 and 2002,
amortization expense was $324,000 and $389,00 respectively, a decrease of
$65,000, or 17%, also related to the writedown of goodwill and certain
intangibles with indefinite lives.
-13-
During the three-month periods ended June 30, 2003 and 2002, stock-based
compensation expense amounted to $0 and $81,000, respectively. The deferred
stock compensation cost in 2002 related to warrants issued to non-employees, and
was expensed over the period of the expected benefit. The balance of unearned
stock-based compensation at June 30, 2003 was zero. For the six-month periods
ending June 30,2003 and 2002, stock-based compensation expense amounted to $0
and $162,000 respectively, related to the aforementioned warrants.
The Company defines Earnings Before Interest, Taxes, Depreciation and
Amortization ("EBITDA") as net income (loss) adjusted to exclude: (i) provision
(benefit) for income taxes, (ii) interest income and expense, (iii)
depreciation, amortization and write-down of assets, (iv) stock-related
compensation, (v) non-recurring items such as restructuring credit and gain on
settlement of licensing liability, and (vi) income or loss from discontinued
operations.
EBITDA is discussed because management considers it an important indicator
of the operational strength and performance of its business based in part on the
significant level of non-cash expenses recorded by the Company to date, coupled
with the fact that these non-cash items are managed at the corporate level.
EBITDA, however, should not be considered an alternative to operating or net
income as an indicator of the performance of the Company, or as an alternative
to cash flows from operating activities as a measure of liquidity, in each case
determined in accordance with accounting principles generally accepted in the
United States of America. See Liquidity and Capital Resources for a discussion
of cash flow information.
For the three-month periods ended June 30, 2003 and 2002, EBITDA from
continuing operations was $383,000 versus negative EBITDA of $435,000,
respectively, an improvement of $818,000. For the six months ended June 30,
2003, EBITDA was $566,000, as compared to the a negative $938,000 reported for
the same period in 2002. The improvement in EBITDA is a result of the savings
from the Company's restructuring and cost reduction measures implemented in
2002, particularly in regard to general and administrative expense, as well as
an increase in revenues.
A reconciliation of net income (loss) to EBITDA for the three months ended
June 30, 2003 and 2002 is as follows (in thousands):
2003 2002
-------- --------
Net income/(loss) $ 632 $ (1,593)
Depreciation and amortization 166 1,088
Interest 168 115
Settlement of licensing liability (566) --
Restructuring credit -- (655)
Income/(loss) from disc/ops (17) 529
Stock-based compensation -- 81
-------- --------
EBITDA $ 383 $ (435)
======== ========
Interest and other expenses, net amounted to an expense of $168,000 for
the three-month period ended June 30, 2003 compared to $115,000 for the
three-month period ended June 30, 2002. The higher interest expense for the
second quarter 2003 is a result of non-cash interest expense of $106,000 related
to the amortization of deferred financing fees and debt discount related to
-14-
warrants combined with interest of $26,000 on the notes issued during the second
half of 2002 and $35,000 of interest expense related to the $2 million senior
subordinated convertible notes issued in January 2002 compared to interest
income earned on a higher average cash balance in the three month period ended
June 30, 2002. Such income, net of other expenses, related primarily to interest
earned on cash balances and available-for-sale marketable securities during the
respective periods.
A one-time adjustment to settlement of licensing liability of $566,000 was
recorded during the period as a result of settling a liability with eB2B's
largest creditor. This adjustment represented the reversal of the fully reserved
liability, which was not impacted by the terms of the settlement.
Net income in the second quarter of 2003 was $632,000, or $0.20 per share,
compared to a net loss of $1,593,000, or ($0.84) per share, for the same period
last year, representing an improvement of $2,225,000. For the six-month period
ended June 30,2003, net income was $217,000, or $.07 per share compared to a net
loss of $3,187,000, or ($1.69) per share for the six-month period ended June 30,
2002. The improvement in net income/loss is a combined result of the changes
discussed above.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 2003, our principal source of liquidity was approximately
$307,000 of cash and cash equivalents. The Company drew down the remaining funds
held in escrow pursuant to our July 2002 financing on April 29, 2003. As of June
30, 2003, we had a negative working capital position of $4,753,000. The report
of our independent auditors' on our financial statements as of and for the year
ended December 31, 2002 contains an unqualified report with an explanatory
paragraph which states that our recurring losses from operations and negative
cash flows from operations raise substantial doubt about our ability to continue
as a going concern.
As of August 20, 2003, our unaudited cash and cash equivalent balance was
approximately $123,000. Though our ongoing quarterly cash expenses more closely
approximate our quarterly revenue, the Company requires additional capital to
resolve its outstanding obligations, improve its working capital position, and
to accelerate its growth.
Though the Company has shown stronger financial performance in the past
six months, its reported EBITDA, which has been positive for three quarters, and
its net income, reported for the first time this quarter, are partially due to
one-time margin gains as a result of negotiated settlements with creditors or
reversals of accruals associated with resolved issues. Though the Company has
reported positive EBITDA for the first six months of 2003, we still have
negative cash flows from operations for this period. We used $187,000 of cash in
continuing operations for the six-months ended June 30, 2003. At our current
quarterly expense rates, we will require approximately $900,000 in quarterly
revenue and $960,000 in cash collections, respectively, to report positive
EBITDA and cash flow from operations. However, there can be no assurances in
this regard.
Currently, we are dependent on our month-to-month collection activity as
well as our best efforts in anticipating expenses in order to continue
operations. Any unexpected shortfall in collections or unanticipated major
expense could cause us to scale back our operations or even cause us to suspend
or cease operations.
The Company currently has verbal commitments from existing and prospective
customers to proceed with projects sufficient, along with current capital, to
fund its ongoing near term operational needs. However, should the Company not be
successful in converting these commitments into contractual obligations, and is
unsuccessful in pursuing potential remedies discussed below, it will need
additional capital immediately.
-15-
The Company successfully settled a potential liability of approximately
$566,000 with a creditor who holds a license to software used by the Company to
support its Trade Gateway TM platform. The settlement included a combination of
a $20,000 cash payment, which has been made, stock of eB2B Commerce equivalent
to bring the creditor to ownership of approximately 9.9% of the outstanding
common shares of the Company, and an ongoing royalty of between seven and
one-half (7 1/2) and ten(10) percent of revenue generated by the platform, up to
a maximum payment of $300,000. As a result of the settlement, eB2B's margin
derived from the platform will decrease by the amount of the royalty. Over the
two year period of the agreement, the Company anticipates that growth of the
Trade Gateway network will more than offset the effect of the royalty payments,
however, in the near term, cash generated by the platform will be negatively
affected.
Further, the Company is obligated to pay interest on its 5-year, 7%,
senior subordinated secured convertible notes issued in January 2002 on a
quarterly basis beginning March 2002, and each subsequent quarter thereafter,
which interest payments have not been made. As a result of this default, the
Company has likely cross-defaulted on its July 2002 5-year, 7%, senior secured
convertible notes. If the Company does not make these payments, or obtain
waivers from the noteholders, the noteholders may pursue whatever legal remedies
are available to them under the terms of the notes, which are secured by all of
the assets of the Company. In view of the Company's cash position, it intends to
seek waivers from these holders. There can be no assurance that such waivers can
be obtained or that such holders will not declare a default of their entire
indebtedness and make claim to all of the assets of the Company.
Because of the substantial anti-dilution provisions contained in the
Company's previous rounds of financing, in addition to the security interests of
its noteholders, the Company is seriously constrained by its current capital
structure, limiting its ability to raise additional capital and making
traditional financing from banks or corporate lenders extremely difficult, if
not impossible, to secure.
As a result of the above constraints, the Company is exploring both its
strategic and structural options to resolve its issues, including filing for
bankruptcy protection under Chapter 11. The Company has retained a creditor's
rights attorney and will retain other advisors as appropriate.
We have taken actions to improve our cash position and fund any remaining
operating losses including:
- Additional cost reduction measures, which we believe will further
reduce annual salaries, benefits or other operating expenses by
approximately $20,000 per month for the remaining six months of
2003.
- Discussions aimed at securing additional capital, through commercial
banking, investment banking, and receivables financing channels,
- Discussions with potential sale or merger partners of the Company.
- Discussions with secured and unsecured creditors regarding the
Company's financial status.
These concerns about capital may lead us to take additional steps to
eliminate or curtail certain projects and conserve cash that may adversely
affect operations. If we are unable to obtain additional capital as needed, we
may be required to cease operations altogether. If we are able to raise
additional funds on an equity basis, for which there can be no assurance,
extensive dilution to existing shareholders would likely occur in light of the
antidilution provisions of our preferred stock, notes, and related warrants. In
-16-
fact, under certain scenarios, there may be virtually no value remaining to the
common stock shareholders. Some of the alternatives that we are pursuing,
however, may be less dilutive or non-dilutive to existing shareholders.
Notwithstanding the foregoing, the Company believes that our negative cash
flow will continue to improve on a quarterly basis. A large percentage of our
operating expense is fixed and as we increase our revenues, for which there can
be no assurance, our operating expenses will remain relatively stable.
The Company has entered into various financing and commercial commitments.
The Company's long-term debt is carried on its financial statements net of
discounts of $1,034,000 at June 30, 2003. Following is a summary of required
cash obligations as they come due:
Year Ended March 31,
--------------------------------------------------------------
2004 2005 2006 2007 2008
---------- ---------- ---------- ---------- ----------
Long-term debt $3,415,300 $ 225,402 $ 200,000 $ -- $ --
Operating leases 111,715 115,067 118,519 122,074 114,971
Capital leases 78,202 -- -- -- --
---------- ---------- ---------- ---------- ----------
$3,605,217 $ 340,469 $ 318,519 $ 122,074 $ 114,971
========== ========== ========== ========== ==========
In July 2002, we initially closed a private placement of five-year 7%
senior subordinated secured notes, which are convertible into shares of our
common stock at the conversion price of $0.101 per share (the closing price of
the common stock on the trading day prior to the closing). Ten persons or
entities, consisting of certain of our significant investors and members of our
management, purchased these notes. The gross proceeds of this transaction,
amounting to $1,200,000, have been and 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 were disbursed as provided in the escrow
agreement. On the closing of this financing, proceeds of $350,000 were released
to us. As provided in our escrow agreement, the remaining proceeds were
disbursed as follows: $275,000 in September 2002, $275,000 in November 2002 and
$300,000 in April 2003.
On April 29, 2003, we drew down the remaining funds held in escrow. The
draw down on our financing triggered anti-dilution provisions affecting the
conversion price of the Company's notes issued in January 2002, Series B
preferred stock and Series C preferred stock and the exercise price of and
number of shares issuable under various outstanding warrants.
Net cash used in continuing operating activities totaled approximately
$187,000 for the six-months ended June 30, 2003 as compared to $799,000 for the
same period in 2002. Net cash used in continuing operating activities for the
six-month period resulted primarily from (i) a $633,000 use of cash from
operating assets and liabilities, including the recognition of a significant
portion of deferred revenue, offset by (ii) the $223,000 net income from
continuing operations and (iii) an aggregate of $223,000 of non-cash charges
consisting primarily of depreciation, amortization, stock-based compensation
expense, non-cash interest expense less the gain from the creditor settlement
discussed previously. Net cash used in operating activities for the six-months
ended June 30, 2002, resulted primarily from (i) the $2,845,000 net loss from
continuing operations offset by (ii) $144,000 of cash provided by operating
assets and liabilities, (iii) an aggregate of $1,902,000 of non-cash charges
consisting primarily of depreciation, amortization and stock-based compensation
expense, less a restructuring credit.
-17-
Net cash used in investing activities totaled approximately $182,000 of
product development costs for the six months ended June 30, 2003 as compared to
net cash used by investing activities of approximately $478,000 for the same
period in 2002. Net cash used in investing activities for the six months ended
June 30,2002 resulted from (i) the acquisition of Bac-Tech Systems, Inc.,
including net cash outlays of $198,000, (ii) $240,000 in product development
costs consisting of fees of outside contractors and capitalized salaries, and
(iii) $40,000 of property and equipment acquisitions.
Net cash provided by financing activities totaled $251,000 for the
six-months ended June 30,2003 and resulted from the draw down of the remaining
funds in escrow from the July 2002 financing of $275,000 less payments of
borrowings totaling $24,000. Net cash used for financing activities for the
six-months ended June 30, 2002 resulted from payments of capital leases totaling
$65,000.
ITEM 3 - CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures.
Our principal executive and financial officer has reviewed and evaluated
the effectiveness of our disclosure controls and procedures (as defined in Rules
13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934 (the "Exchange
Act")), as of a date within ninety days before the filing of this quarterly
report. Based on that evaluation, such officer has concluded that our current
disclosure controls and procedures are effective to ensure that information
required to be disclosed by us in reports that we file or submit under the
Exchange Act is recorded, processed, summarized, and reported within the time
periods specified in the Commission's rules and forms.
Changes in internal controls.
There have not been any significant changes in our internal controls or in
other factors that could significantly affect these controls subsequent to the
date of their evaluation. There were no significant deficiencies or material
weakness in the internal controls, and therefore no corrective actions were
taken.
-18-
PART II. OTHER INFORMATION
ITEM 3. DEFAULT ON SENIOR SECURITIES
According to the terms of its January 2002 5-year, 7%, subordinated senior
secured notes, the Company was obligated to begin making interest payments each
quarter, in cash or registered shares of company stock, beginning March 2002. To
date, the Company has paid no cash interest and because we do not have an
effective registration statement covering the applicable shares, we are in
default in the approximate amount of $238,000, representing interest payments
for March, June, September, and December of 2002, as well as March and June
2003. The total amount of indebtedness equals $2,262,500 plus the unpaid
interest.
Because of the amount owing on the January 2002 notes, it is likely that
we are in a cross-default position regarding our July 2002 notes, which limit
the amount of indebtedness the Company may incur. The total amount of the July
2002 notes is $1,200,000.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
31. Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002.
32. Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
A Form 8-K was filed on April 29, 2003 to report the drawn down of the
remaining funds pursuant to the Company's July 2002 financing.
A Form 8-K was filed on June 25, 2003 to report certain changes on the
Board of Directors of the Company.
-19-
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
eB2B Commerce, Inc.
-------------------
(Registrant)
August 22, 2003 By: /s/ Richard Cohan
- ----------------- -------------------------
Chief Executive Officer and President
(Principal financial officer)
-20-