________________________________________________________________________________
United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED JUNE 30, 2006
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _____ TO _____
COMMISSION FILE NUMBER 0-27865
ICEWEB INCORPORATED
-------------------
(Exact name of small business issuer as specified in its charter)
DELAWARE 13-2640971
-------- ----------
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
205 VAN BUREN STREET, SUITE 150, HERNDON, VA 20170
--------------------------------------------------
(Address of principal executive offices)
(703) 964-8000
--------------
(Issuer's telephone number)
NOT APPLICABLE
--------------
(Former name, former address and former fiscal year,
if changed since last report)
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 whether the issuer is a shell company as defined by paragraph 12b-2 of the
Exchange Act. Yes [ ] No [X]
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: 8,393,319 shares of common stock
issued and outstanding at August 15, 2006.
Transitional Small Business Disclosure Format: Yes [ ] No [X]
________________________________________________________________________________
IceWeb, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEET
June 30,
2006
ASSETS (Unaudited)
-----------
Current Assets:
Cash .......................................................... $ 129,911
Accounts receivable, net of allowance for doubtful
accounts of $2,271 at June 30, 2006 ......................... 504,382
Other receivables ............................................. 58,838
Prepaid expense ............................................... 31,591
Other current assets .......................................... 64,227
-----------
Total current assets ...................................... 788,949
Property and equipment, net of accumulated depreciation
of $200,055 at June 30, 2006 ................................ 117,018
Software development costs, net of accumulated amortization
of $206,143 at June 30, 2006 ................................ 248,194
Goodwill ...................................................... 41,800
Depostis ...................................................... 16,170
Intangibles, net .............................................. 624,863
Deferred financing cots, net of accumulated amortization ...... 165,000
-----------
Total assets .............................................. $ 2,001,994
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable .............................................. $ 988,825
Accrued expenses .............................................. 146,030
Note payable .................................................. 471,243
Advances from related party ................................... 1,391
Deferred revenues ............................................. 81,512
-----------
Total current liabilities ................................. 1,689,001
Notes payable-related parties ................................. 229,688
Stockholders' Equity:
Preferred Stock, $.001 par value; 10,000,000 shares authorized;
Series A and B Convertible Preferred stock, par value .001,
3,090,000 shares issued and outstanding ...................... 3,090
Common stock; $.001 par value; 25,000,000,000 shares
authorized; 8,393,319 issued, and 7,862,711 outstanding ...... 8,393
Treasury stock, at cost, 162,500 shares ....................... (13,000)
Subscription receivable ....................................... (50,000)
Additional paid-in capital .................................... 9,611,277
Deferred compensation ......................................... (417,836)
Accumulated deficit ........................................... (9,058,619)
-----------
Total stockholders' equity ................................ 83,305
-----------
Total liabilities and stockholders' equity ................ $ 2,001,994
===========
See Notes to Unaudited Consolidated Financial Statements.
1
IceWeb, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
Three months ended Nine months ended
June 30, June 30,
2006 2005 2006 2005
------------ ------------ ------------ ------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Net sales .................................. $ 835,555 $ 2,049,483 $ 2,970,046 $ 4,987,776
------------ ------------ ------------ ------------
Cost of goods sold ......................... 683,799 1,464,673 2,401,566 3,789,535
------------ ------------ ------------ ------------
Gross profit ............................... 151,756 584,810 568,480 1,198,241
Operating expenses:
Research and development ................... 17,936 - 17,936 -
Gerneral and administrative expenses ....... 1,012,618 673,465 2,375,639 1,987,031
------------ ------------ ------------ ------------
1,030,554 673,465 2,393,575 1,987,031
Loss from operations ................... (878,798) (88,655) (1,825,095) (788,790)
------------ ------------ ------------ ------------
Interest expense ........................... (161,403) (13,424) (232,869) (44,361)
Other income ............................... - - - 19,283
------------ ------------ ------------ ------------
Loss before income taxes ................... (1,040,201) (102,079) (2,057,964) (813,868)
Net loss ................................... $ (1,040,201) $ (102,079) $ (2,057,964) $ (813,868)
============ ============ ============ ============
Preferred stock dividend ................... - - (500,000) (1,000,000)
------------ ------------ ------------ ------------
Loss imputed to shareholders ............... $ (1,040,201) $ (102,079) $ (2,557,964) $ (1,813,868)
============ ============ ============ ============
Basic earnings per common share ............ $ (0.14) $ (0.02) $ (0.39) $ (0.31)
============ ============ ============ ============
Diluted earnings per common share .......... $ (0.14) $ (0.01) $ (0.39) $ (0.31)
============ ============ ============ ============
Basic weighted average common
shares outstanding ......................... 7,226,854 5,962,657 6,506,433 5,795,522
============ ============ ============ ============
Diluted weighted average common
shares outstanding ........................ 7,226,854 5,962,657 6,506,433 5,795,522
============ ============ ============ ============
See Notes to Unaudited Consolidated Financial Statements.
2
IceWeb, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine months ended
June 30,
2006 2005
(Unaudited) (Unaudited)
----------- -----------
Cash flows from operating activities:
Net loss ........................................... $(2,057,964) $ (813,868)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization .................... 648,323 180,807
Allowance for doubtful accounts .................. (3,575) (7,600)
Fair value of options issued to employees
and consultants ................................. 127,976 -
Fair value of shares issued to employees
and consultants for services .................... 196,536 -
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable ....... 1,076,653 (487,770)
Decrease in other receivables .................... (58,838) -
(Increase) decrease in prepaid expenses .......... (5,612) (7,400)
(Increase) decrease in intangible assets ......... (332,874) 572,073
Increase in other assets ......................... (26,657) (40,437)
Decrease in employee advances .................... 61,302 -
(Decrease) increase in accrued expenses .......... 108,542 (67,002)
Increase in capitalized software development ..... (454,337) (129,000)
Increase in deferred revenue ..................... (1,075) -
Increase (decrease) in accounts payable .......... 177,393 (126,245)
----------- -----------
Net cash used in operating activities .............. (544,207) (926,442)
----------- -----------
Cash flows used in investing activity:
Purchases of property and equipment .............. (143,657) (132,373)
Cash paid in acquisition ......................... (185,247) -
----------- -----------
Net cash used in investing activity ................ (328,904) (132,373)
----------- -----------
Cash flows from financing activities:
Payments from (to) related parties ............... (84,610) (73,357)
Increase in line of credit ....................... 136,780 461,269
Proceeds/Repayments-note payable ................. 14,062 (581,129)
Proceeds for subscription receivable ............. - 1,700
Payment of financing costs ....................... (52,385) -
Proceeds from exercise of warrants ............... 400,000 -
Common stock issued for cash ..................... - 468,375
Net preferred stock issued for cash .............. - 845,836
Proceeds from the exercise of options ............ 32,000 27,300
----------- -----------
Net cash provided by financing activities .......... 445,847 1,149,994
----------- -----------
Net increase (decrease) in cash .................... (427,264) 91,179
Cash, beginning of year ............................ 557,175 178,781
----------- -----------
Cash, end of year .................................. $ 129,911 $ 269,960
=========== ===========
Supplemental disclosures of cash flow information:
Cash paid for interest ........................... $ - $ -
=========== ===========
Cash paid for taxes .............................. $ - $ -
=========== ===========
Non-cash transactions affecting investing and
financing actvities:
Fair value of shares of common stock in
consideration for nonmonetary assets and
liabilities ..................................... $ 100,000 $ -
=========== ===========
Fair value of shares issued for services from
a retailer and an investor relations firm ....... $ 456,000 $ -
=========== ===========
Conversion of 410,000 shares of Preferred stock
to 410,000 shares of common stock ................. $ 410 $ -
=========== ===========
Fair value of shares in partial satsifaction of
debt to related parties ........................... $ 126,806 $ -
=========== ===========
See Notes to Unaudited Consolidated Financial Statements.
3
ICEWEB, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2006
NOTE 1 - ORGANIZATION, BASIS OF PRESENTATION AND GOING CONCERN
IceWEB, Inc., a Delaware corporation ("IWEB" or the "Company") is a diversified
technology company headquartered in Herndon, Virginia which was founded in April
2000, became public in April 2002 through a reverse merger, and began trading
publicly on the OTCBB under the Trading Symbol "IWEB". The Company is a provider
of hosted web-based collaboration solutions that enable organizations to
establish Internet, Intranet, and email/collaboration services with little or no
up-front capital investment. These enterprise software applications are normally
cost prohibitive for Small businesses to deploy so IceWEB's targets these
customers with a "Software as a Service" (Saas) recurring monthly service fee.
IceWEB has brought these services to market using a "Software as a Service"
(Saas) business model. The Company also provides consulting services to our
larger enterprise and government customers including network infrastructure,
enterprise email/collaboration, and Internet/Intranet portal implementation and
support services. IceWEB also markets an array of information technology
services and third party computer network hardware and software to large
enterprise and government clients.
The financial statements included in this report have been prepared by the
Company pursuant to the rules and regulations of the Securities and Exchange
Commission for interim reporting and include all adjustments (consisting only of
normal recurring adjustments) that are, in the opinion of management, necessary
for a fair presentation. These financial statements have not been audited.
Certain amounts in the 2005 consolidated financial statements have been
reclassified to conform to the 2006 consolidated financial statement
presentation. These reclassifications had no impact on previously reported net
results of operations or stockholders' equity.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to such rules and regulations for
interim reporting. The Company believes that the disclosures contained herein
are adequate to make the information presented not misleading. However, these
financial statements should be read in conjunction with the financial statements
and notes thereto included in the Company's annual Report for the year ended
September 30, 2005, which is included in the Company's Form 10-KSB for the year
ended September 30, 2005. The financial data for the interim periods presented
may not necessarily reflect the results to be anticipated for the year ended
September 30, 2006.
The Company's auditor stated in their reports on the financial statements of the
Company for the years ended September 30, 2005 and 2004 that the Company is
dependent on outside financing and has incurred losses since inception. These
factors raise substantial doubt about our ability to continue as a going
concern.
For the nine months ended June 30, 2006, the Company incurred net losses of
approximately $2.1 million and used cash in operations of approximately
$545,000. The accompanying unaudited financial statements do not include any
adjustments relating to the recoverability and classification of recorded
assets, or the amounts and classification of liabilities that might be necessary
in the event the Company cannot continue in existence.
Management has established plans intended to increase the sales of the Company's
products and services. Management intends to seek new capital from new equity
securities offerings to provide funds needed to increase liquidity, fund growth
and implement its business plan; however, no assurance can be given that the
Company will be able to raise any additional capital.
4
ICEWEB, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2006
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in accordance with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Significant estimates made by management include, but are not
limited to, the valuation of derivative liabilities and share-based payments.
Actual results will differ from these estimates.
EARNINGS PER SHARE
Basic earnings per share are calculated by dividing income available to
stockholders by the weighted-average number of common shares outstanding during
each period. Diluted earnings per share are computed using the weighted average
number of common and dilutive common share equivalents outstanding during the
period. Dilutive common share equivalents consist of shares issuable upon the
exercise of stock options and warrants (calculated using the modified treasury
stock method). The outstanding options and warrants issuable amounted to
8,033,075 and 7,181,835 at June 30, 2006 and 2005, respectively. The outstanding
options, warrants and shares equivalent issuable pursuant to embedded conversion
features and warrants at June 30, 2006 and 2005 are excluded from the loss per
share computation for that period due to their anti-dilutive effect.
RISKS AND UNCERTAINTIES
The Company maintains its cash and cash equivalent accounts in financial
institutions. Accounts at these institutions are insured by the Federal Deposit
Insurance Corporation ("FDIC") up to $100,000. During the six-month period ended
June 30, 2006, the Company has reached bank balances exceeding the FDIC
insurance limit. To reduce its risk associated with the failure of such
financial institutions, the Company evaluates at least annually the rating of
the financial institutions in which it holds deposits.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of the Company's cash and cash equivalents, accounts
payable and accrued expenses and due to stockholder approximate their estimated
fair values due to the short-term maturities of those financial instruments. The
carrying amount of the derivative liability is based on its fair value. The
carrying amount of the convertible notes and bridge notes approximates the
estimated fair value for these financial instruments as management believes that
such convertible notes constitute substantially all of the Company's debt and
the interest payable on the convertible notes approximates the Company's
incremental borrowing rate.
5
ICEWEB, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2006
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
PROPERTY AND EQUIPMENT
Property and equipment, which primarily consists of office equipment and
computer software, are recorded at cost and are depreciated on a straight-line
basis over their estimated useful lives of three to five years. Maintenance and
repairs are charged to expense as incurred. Significant renewals and betterments
are capitalized. At the retirement or other disposition of property and
equipment, the cost and accumulated depreciation are removed from the accounts
and any resulting gain or loss is reflected in other income (expense) in the
accompanying statements of operations.
DEFERRED FINANCING COSTS
Deferred financing costs represent costs incurred in connection with the
issuance of certain loans. Deferred financing costs are being amortized over the
terms of the related debt agreements, which is ten years.
SHARE-BASED PAYMENTS
In December 2004, the FASB issued SFAS No. 123(R), "Share-Based Payment," which
replaces SFAS No. 123 and supersedes APB Opinion No. 25. Under SFAS No. 123(R),
companies are required to measure the compensation costs of share-based
compensation arrangements based on the grant-date fair value and recognize the
costs in the financial statements over the period during which employees are
required to provide services. Share-based compensation arrangements include
stock options, restricted share plans, performance-based awards, share
appreciation rights and employee share purchase plans. In March 2005, the SEC
issued Staff Accounting Bulletin No. 107, or "SAB 107". SAB 107 expresses views
of the staff regarding the interaction between SFAS No. 123(R) and certain SEC
rules and regulations and provides the staff's views regarding the valuation of
share-based payment arrangements for public companies. SFAS No. 123(R) permits
public companies to adopt its requirements using one of two methods. On April
14, 2005, the SEC adopted a new rule amending the compliance dates for SFAS
123(R). Companies may elect to apply this statement either prospectively, or on
a modified version of retrospective application under which financial statements
for prior periods are adjusted on a basis consistent with the pro forma
disclosures required for those periods under SFAS 123. Effective January 1,
2006, the Company has fully adopted the provisions of SFAS No. 123(R) and
related interpretations as provided by SAB 107. As such, compensation cost is
measured on the date of grant as the fair value of the share-based payments.
Such compensation amounts, if any, are amortized over the respective vesting
periods of the option grant. The Company applies this statement prospectively.
6
ICEWEB, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2006
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
We previously accounted for stock-based compensation issued to our employees
using the intrinsic value method. Accordingly, compensation cost for stock
options issued was measured as the excess, if any, of the fair value of our
common stock at the date of grant over the exercise price of the options. The
pro forma net earnings per share amounts as if the fair value method had been
used are presented below for the three months and the six months ended March 31,
2005 and the actual net earnings per share are presented below for the three
months and six months ended June 30, 2006 in accordance with the Company's
adoption of SFAS 123 ( R ) effective January 1, 2006.
For purposes of the following disclosures during the transition period of
adoption of SFAS 123 ( R), the weighted-average fair value of option has been
estimated on the date of grant using the Black-Scholes options-pricing model
with the following weighted-average assumptions used for grants for the three
months ended June 30, 2006: no dividend yield; expected volatility 110%;
risk-free interest rate of 5.1%; and a expected five-year term for options
granted. Had the compensation cost for the nine-months ended June 30, 2005 been
determined based of the fair value at the grant, our net income(loss) and basic
and diluted earnings(loss) per share would have been reduced to the pro forma
amount for that period indicated below. For the quarter ending June 30, 2006,
the net income and earnings per share reflect the actual deduction for option
expense as compensation. Compensation recorded for stock options is a non-cash
expense item.
The following pro forma information is to reflect the change from applying the
provisions of FAS 123 and APB 25:
Nine-months ended
June 30,
2006 2005
----------- -----------
Net loss ....................................... $(2,057,964) $ (813,868)
Add: Stock-based compensation expense
included in reported net (loss)
income, net of related tax effects ........ - -
Deduct: Total stock-base employee
compensation expense determined
under fair value based method for
all awards, net of related tax
effects excluded from net
(loss) income: ......................... (-) (-)
----------- -----------
Net loss pro forma ............................. $(2,057,964) $ (813,868)
=========== ===========
Proforma earnings per share:
Basic .......................................... $ (0.30) $ (0.31)
=========== ===========
Diluted ........................................ $ (0.30) $ (0.31)
=========== ===========
7
ICEWEB, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2006
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
The fair value of the options granted during the nine-month period ended June
30, 2005 was determined using the Black-Scholes option-pricing model with the
following assumptions: risk-free interest of 5.1%; stock volatility of 110%; no
dividends; and estimated life of 5 months.
RECENT ACCOUNTING PRONOUNCEMENTS
In May 2005, the Financial Accounting Standard Board ("FASB") issued Statement
No. 154, "Accounting Changes and Error Corrections, a replacement of APB Opinion
No. 20, Accounting Changes, and Statement No. 3, Reporting Accounting Changes in
Interim Financial Statements" (SFAS 154). SFAS 154 changes the requirements for
the accounting for, and reporting of, a change in accounting principle.
Previously, most voluntary changes in accounting principles were required to be
recognized by way of a cumulative effect adjustment within net income during the
period of the change. SFAS 154 requires retrospective application to prior
periods' financial statements, unless it is impracticable to determine either
the period-specific effects or the cumulative effect of the change. SFAS 154 is
effective for accounting changes made in fiscal years beginning after December
15, 2005; however, the Statement does not change the transition provisions of
any existing accounting pronouncements. We do not believe adoption of SFAS 154
will have a material effect on our financial position, results of operations or
cash flows.
In July 2005, the FASB issued FASB Staff Position ("FSP") 150-5, "Accounting
Under SFAS 150 for Freestanding Warrants and Other Similar Instruments on
Redeemable Shares". FSP 150-5 clarifies that warrants on shares that are
redeemable or puttable immediately upon exercise and warrants on shares that are
redeemable or puttable in the future qualify as liabilities under SFAS 150,
regardless of the redemption feature or redemption price. The FSP is effective
for the first reporting period beginning after June 30, 2005, with resulting
changes to prior period statements reported as the cumulative effect of an
accounting change in accordance with the transition provisions of SFAS 150. We
adopted the provisions of FSP 150-5 on July 1, 2005, which did not have a
material effect on our financial statements.
In July 2005, the FASB issued EITF 05-6, "Determining the Amortization period
for Leasehold Improvements Purchased After Lease Inception or Acquired in a
Business Combination", which addressed the amortization period for leasehold
improvements made on operating leases acquired significantly after the beginning
of the lease. The EITF is effective for leasehold improvements made in periods
beginning after June 29, 2005. We adopted the provisions of EITF 05-6 on July 1,
2005, which did not have a material impact to the Company's financial position,
results of operations and cash flows.
8
ICEWEB, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2006
NOTE 3 - RELATED PARTIES
Stockholders have loans amounting to $25,000 at June 30, 2006, which are
non-interest bearing. During the nine months ended June 30, 2006, the Company
has issued the note holder 125,000 shares of common stock in exchange for the
individual to extend the maturity date of the note by 10 years. The cost
associated with these shares has been accounted for as deferred finance charges,
and are being amortized over the life of the deferral period. The shares were
valued at $200,000 the fair value at the date of issuance. During the nine-month
ended June 30, 2006, the Company issued 176,150 shares of common stock to the
note holders in partial satisfaction of the notes payable. Such shares were
valued at approximately $125,000 based on the quoted market price of the the
Company's share of common stock.
The amortization of the deferred financing costs amounted to $35,000 for the
nine month period ended June 30, 2006.
The Chief Executive Officer of the Company, from time to time, provides advances
to the Company for operating expenses. These advances are short-term in nature
and non-interest bearing.
NOTE 4 - STOCKHOLDERS' EQUITY
The Company is authorized to issue 10,000,000 shares of Preferred Stock, par
value $.001, with such designations, rights and preferences as may be determined
from time to time by the Board of Directors. During the nine-month period ended
June 30, 2005, the Company issued 1,666,667 shares of preferred stock for
$845,836. There are currently 1,256,667 shares of Series A Preferred Stock
issued and outstanding at June 30, 2006.
On December 28, 2005, the Company consummated the sale of 1,833,333 shares of
Series B Convertible Preferred Stock to Barron Partners, L.P. and issued the
purchaser common stock purchase warrants to purchase an aggregate of 2,250,000
shares of the Company's common stock for an aggregate purchase price of
$500,000. The purchase price was paid through the satisfaction of a liability to
Barron Partners, L.P. for funds advanced to the Company in September 2005. The
Company incurred a "beneficial conversion feature" dividend related to the above
transaction in the amount of $500,000.
In the event the Company sells, grants or issues any shares, options, warrants,
or any instrument convertible into shares or equity in any form below $2.00 per
share the warrant exercise price shall be reduced proportionately at a 20%
discount rate of the effective price of such convertible instruments.
Such reduction shall be made at the time such transaction is made, and shall be
cumulative upon any other changes to the exercise of the warrants that may
already have been made.
No exercise of any warrant can occur if the exercise would result in the holder,
Barron Partners LP, and any of its affiliates beneficially owning more than 4.9%
of our outstanding common shares following such conversion. Barron Partners LP
may waive this provision only with the consent of all of the Series B Preferred
Stock Holders and the consent of the holders of a majority of the shares of
outstanding Common Stock of the Company who are not affiliates.
9
ICEWEB, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2006
NOTE 4 - STOCKHOLDERS' EQUITY (continued)
All of these five-year warrants are exercisable on a cashless basis.
On April 27, 2005, the Company effected a 1 for 80 reverse split of its issued
and outstanding common stock. All amounts have been retroactively adjusted to
reflect this split.
During the nine-month period ended June 30, 2006, Barron Partners, LP exercised
500,000 warrants at $0.80 per share. The Company received $400,000 in proceeds
from the exercise of these warrants.
During the nine-month period ended June 30, 2006, the Company issued 213,877
shares to certain employees, consultants and a US retailer for services. The
fair value of the shares amounted to approximately $197,000, based on the quoted
price of the Company's share of common stock on the date of issuance. The fair
value of such shares has been recognized as sales, general, and administrative
expenses.
During the nine-month period ended June 30, 2006, the Company issued 176,120
shares of its common stock to two note holders in partial satisfaction of debt.
The fair value of the shares at the date of the partial satisfaction amounted to
approximately $127,000 and has reduced the debt by a corresponding amount.
NOTE 5 - STOCK OPTIONS AND COMMON STOCK PURCHASE WARRANTS
During the nine-month period ended June 30, 2006, the Company issued 453,535
shares of common stock to a consultant and a US retailer for services to be
rendered. The fair value of the shares amounted to approximately $456,000, based
on the quoted price of the Company's share of common stock on the date of
issuance. The fair value of such shares has been recognized as deferred
compensation and is recognized as a sales, general, and administrative expense
over the terms of the agreements, which are one year. The amortization of the
deferred compensation amounted to approximately $38,000 during the nine-month
period ended June 30, 2006.
During March 2002, the Company adopted the "Management and Director Equity
Incentive and Compensation Plan." The maximum number of shares authorized and
available under the plan is 1,250,000 shares. Under the terms of the plan, the
options expire after 5 years, as long as the employees remain employed with the
Company.
Stock Options
During the nine-months ended June 30, 2006 and 2005, the Company had issued
47,500 shares pursuant to the exercise of stock options which generated proceeds
of $32,000.
10
ICEWEB, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2006
NOTE 5 - STOCK OPTIONS AND COMMON STOCK PURCHASE WARRANTS (continued)
During the nine-month period ended June 30, 2006, the Company issued 500,000
options to employees. Such options were valued at approximately $370,000 at
their date of grant. The options were valued based on the Black-Scholes model
using the following assumptions: volatility 110%, risk-free interest rate 5%,
dividend rate:0%, term 5 years. The fair value of the options was amortized over
their vesting terms, which was up to one year. The amortization of the fair
value of the options amounted to approximately $128,000 for the nine-month
period ended June 30, 2006.
NOTE 6 - ACCOUNTS RECEIVABLE
Accounts receivable consist of normal trade receivables. The Company assesses
the collectability of its accounts receivable regularly. During December 2005,
the Company entered into a financing agreement with Sand Hill Finance. This
agreement gives Sand Hill a security interest in all accounts receivable. The
agreement allows the Company to finance up to 80% of receivables under 90 days
old.
NOTE 7 - OTHER RECEIVABLES
Other receivables consists of trade receivables for the company PartiotNet,
which was acquired in March 22, 2006.
NOTE 8 - SOFTWARE DEVELOPMENT AND SYSTEM DEVELOPMENT COSTS
Under the criteria set forth in SFAS No. 86, "Accounting for the Costs of
Computer Software to be Sold, Leased or Otherwise Marketed," capitalization of
software development costs begins upon the establishment of technological
feasibility of the software. The establishment of technological feasibility and
the ongoing assessment of the recoverability of these costs require considerable
judgment by management with respect to certain external factors, including, but
not limited to, anticipated future gross product revenues, estimated economic
life, and changes in software and hardware technology. Capitalized software
development costs are amortized utilizing the straight-line method over the
estimated economic life of the software not to exceed three years.
As of June 30, 2006, such capitalizable software development costs were
approximately $454,337. The amortization of the software development costs
amounted to $206,143 during the nine-month period ended June 30, 2006. These
costs will be amortized over a period of three years. The Company regularly
reviews the value of software development assets and a loss is recognized when
the unamortized costs are deemed unrecoverable based on the estimated cash flows
to be generated from the applicable software.
11
ICEWEB, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2006
NOTE 9 - SIGNIFICANT CUMSTOMER INFORMATION AND SEGMENT REPORTING
SFAS No. 131, Disclosure about Segments of an Enterprise and Related
Information, establishes standards for the reporting by business enterprises of
information about operating segments, products and services, geographic areas,
and major customers. The method for determining what information to report is
based on the way that management organizes the operating segments with IceWEB
for making operational decisions and assessments of financial performance.
Iceweb's chief operating decision-maker is considered to be the chief executive
officer (CEO). The CEO reviews financial information presented on a consolidated
basis for purposes of making operating decisions and assessing financial
performance. The financial information reviewed by the CEO is identical to the
information presented in the accompanying consolidated statements of operations.
Therefore, IceWEB has determined that it operates in a single operating segment,
specifically, web communications services. For the period ended June 30, 2006
all material assets and revenues of IceWEB were in the United States.
NOTE 10 - CONTINGENCIES
From time to time the Company faces litigation in the ordinary course of
business. Currently, we are not involved in any significant litigations.
NOTE 11 - ACQUISITION
PatriotNet, Inc. is a professional Internet Service Provider (ISP) servicing
over 3,500 customers with T-1, DSL, dial up lines and email services. In
consideration for the purchase of the assets and liabilities including accounts
receivable, equipment and intangibles for customer contracts in the amount of
$392,325, the Company paid to PatriotNet (a non-related party to Iceweb) of (a)
the payment of cash consideration by IOI to PatriotNet of $190,000 at Closing;
(b) the issuance by IceWEB of 100,000 shares of IceWEB common stock at Closing,
valued at $1.00 dollar per share.
The excess value recorded for the acquisition of PatriotNet over the value of
assets received less liabilities assumed has been recorded as customer
relationships. Amortization expense for this intangible is provided by using the
expected cash flow method for customer relationship capitalized from the date of
acquisitions. The acquisition of PatriotNet occurred on March 22, 2006 and the
Company has included PatriotNet operations in it's financials from that date.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Part 1
OVERVIEW
The following Management's Discussion and Analysis ("MD&A"), is intended to help
the reader understand the results of operations and financial condition of
IceWEB. This MD&A is provided as a supplement to, and should be read in
conjunction with, our financial statements and the accompanying notes to the
financial statements.
The Company provides hosted web-based collaboration solutions that enable
organizations to establish Internet, Intranet, and email/collaboration services
with little or no up-front capital investment. These enterprise software
applications are normally cost prohibitive for Small businesses to deploy so
IceWEB's targets these customers with a "Software as a Service" (Saas) recurring
monthly service fee. IceWEB has brought these services to market using a
"Software as a Service" (Saas) business model. The Company also provides
consulting services to our larger enterprise and government customers including
network infrastructure, enterprise email/collaboration, and Internet/Intranet
portal implementation and support services. IceWEB also markets an array of
information technology services and third party computer network hardware and
software to large enterprise and government clients.
The majority of revenue historically has come from professional services,
consulting, and hardware/software sales while IceWEB performed the necessary R&D
and implementation of our hosted messaging, collaboration, Internet, and other
hosted subscription services. Going forward, we will continue to engage in
consulting and hardware/software sales; however, the majority of growth is
anticipated to be in our "IceWEB Online" services area with products such as
IceMAIL, IceVISTA, IcePORTAL, and IceCONNECT.
We intend to sustain the long-term growth of our business through technological
innovation, engineering excellence, and a commitment to delivery high-quality
product and services to our customers. We are pursuing new customers and revenue
sources through our partners and affiliates as well as direct sales to
commercial and government customers. We are increasing our use of partners to
leverage their existing client base and our combined talents to pursue more
online recurring subscription-based services. We are experiencing a greater than
95% retention rate among our subscription-based monthly services such as
IceMAIL, IceVISTA, IcePORTAL, and IceCONNECT so every new customer brings us
long-term recurring revenue with no recurring cost of sale. Our traditional
hardware/software sales and consulting services does, however, continue to be
our primary source of revenue at this time and for the next two to three fiscal
quarters.
IceWEB has completed several acquisitions over the past five years in an effort
to gain technology strength and additional customers. These acquisition have
brought computer networking, software development, and Internet-based software
service capabilities to the company that were required to expand into the
relatively young but prosperous SaaS market.
o In June 2001, IceWEB acquired the assets of Learning Stream, Inc. provider
of digital content streaming services. Online educational courses are
still available for purchase on the Internet through
www.learningstream.com. It is our intention to improve this web site and
increate the selection of online courses for sale within the next 3-6
months. One method of accomplishing this is our recent agreement with
MindLeaders which will enable IceWEB to greatly expand our available
course offerings on the web.
13
o In June 2003, IceWEB acquired all of the outstanding stock of Interlan
Communications, Inc., a provider of data communications and networking
solutions for business, government, and education. Interlan provided
technical services including presales design and consulting, installation,
troubleshooting, and long term maintenance and support contracts.
Hardware/software sales and integration services continue to generate
revenues for IceWEB based on vendor partners and customer relationships
from this acquisition.
o In June 2003, IceWEB acquired all of the outstanding stock of The Seven
Corporation, a provider of network engineering services to commercial and
government customers throughout the United States. IceWEB continues to
generate revenue from this practice and the customers gained by this
acquisition.
o In October 2003, IceWEB acquired the software ownership rights and
customers of Iplicity, Inc. of Virginia. Iplicity had developed a complete
content management software platform based on open source architecture to
run in any operating environment. In this transaction we acquired software
licenses, source code, potential patents and trademarks that were
utilizing in developing the current IceVISTA product line.
o In May 2004 IceWEB acquired substantially all of the assets of
DevElements, Inc. of Virginia, a professional IT consultancy firm that
designs, develops and implements web-based portal solutions. In this
transaction we acquired software licenses, source code, potential patents
and trademarks, as well as some cash and tangible assets. Engineering
skills, programming code, and revenue from this acquisition are still
being leveraged in IceWEB's IceVISTA product.
o In March 2006, the Company, through its wholly-owned subsidiary, IceWEB
Online, Inc., completed the acquisition of substantially all of the assets
and some liabilities of PatriotNet, Inc. This brought over 3000 customers
with recurring subscription-based services into IceWEB. IceWEB has
consolidated customer service and technical personnel to improve overall
operational efficiencies within the company. PatriotNet customers and our
service offerings continue to generate revenue for the Company and will be
sold under the IceCONNECT product/service going forward.
The Company generates revenues from sales of software licenses, hosting of
software applications over the Internet, application development, and network
management/integration products and services. During fiscal 2005 we have
performed a substantial amount of R&D and implementation to introduce new
products and services to the market. The combined skills and technology gained
from our strategic acquisitions over the past five years has allowed us to bring
leading edge enterprise technologies to small and medium sized businesses. We
anticipate that our revenues for SaaS subscriptions will exceed our legacy
hardware/software sales and integration in fiscal 2007.
We believe that the key factors to our continued growth and profitability
include the following:
o The introduction of our IceWEB Vista portal software which was released
June 2005 combined with web portal systems and customers from PatriotNet.
o The launch of IceMAIL in December metricconverterProductID2005, a2005, a
packaged service that provides a network-hosted groupware, email,
calendaring, and collaboration solution utilizing Microsoft Exchange, the
most widely used enterprise messaging system available.
14
o The introduction of the IcePORTAL service in Q4 of FY2005 based on
Microsoft SharePoint which will integrate with IceMAIL and provide small
business customers with a complete collaboration solution when combined
with IceMAIL.
o Continued focus on developing strategic partnerships with key retail and
small business solution providers such as CompUSA, Simply Wireless, and
Intelligent Office--all of which entered into sales and marketing
agreements with IceWEB in July 2006 to sell IceMAIL, IcePORTAL, and
IceVISTA.
o Raising approximately $4 million of additional working capital to expand
our marketing, support our growth and for an acquisition of an additional
company in the software services group.
o Hiring additional qualified technical employees
RESULTS OF OPERATIONS
NINE MONTHS ENDED JUNE 30, 2006 AS COMPARED TO NINE MONTHS ENDED JUNE 30, 2005
Increase/ Increase/
For the Nine Months Ended (Decrease) (Decrease)
June 30, in $ 2006 in % 2006
2006 2005 vs 2005 vs 2005
----------- ----------- ----------- -----------
Net Sales .............................. 2,970,046 4,987,776 $(2,017,730) -40.5%
----------- ----------- ----------- -----------
Cost of goods sold ..................... 2,401,566 3,789,535 (1,387,969) -36.6%
Gross Profit ........................... 568,480 1,198,241 (629,761) -52.6%
----------- ----------- ----------- -----------
Operating expenses:
Research and development ............... 17,936 - 17,936 NM
General and administrative expenses .... 2,375,639 1,987,031 388,608 19.6%
----------- ----------- ----------- -----------
Loss from operations ................. (1,825,095) (788,790) 1,036,305 131.4%
----------- ----------- ----------- -----------
Interest expense ....................... 232,869 44,361 188,508 NM
Other incomes .......................... - 19,283 (19,283) NM
----------- ----------- ----------- -----------
Net loss ............................... (2,057,964) (813,868) $(1,244,096) 152.9%
=========== =========== =========== ===========
NM: Not meaningful
Revenues
The decrease in the revenues during the nine-month period ended June 30, 2006
when compared to the prior year period is due to a number of factors. The
business of two divisions, integration and critical power which resell third
party equipment, represents approximately 55% of top line revenue, is very
cyclical. Both divisions experienced higher then usual customer delays on
forecasted business for this period. The company is in the process of
restructuring its business in order to limit and/or remove the impact of these
third party influenced scenarios by shifting focus to internally developed
products and services. The company expects revenues to grow from internally
developed products and services, despite the restructuring away from third party
product sales. The company also continues to target strategic acquisitions to
assist in this growth, as well as continued marketing for its products and
services.
15
Cost of Sales
The decrease in cost of sales during the nine-month period ended June 30, 2006
when compared to the prior period is commensurate with our decrease in revenues.
Research and development expenses
The increase in research and development expenses is primarily due to our
amortization of research and development expenses, which up to March 31, 2006,
were capitalized. No such expenses were amortized during the ine-month period
ended June 30, 2005.
Sales, general and administrative expenses
Our sales, general and administrative expenses consists of personnel costs,
including commissions, public relations, advertising, marketing programs, lead
generation, travel and trade shows as well as rent, legal, accounting, human
resources, telecommunications, office supplies and other costs related to our
corporate governance and compliance with the reporting requirements of publicly
held companies.
The increase in sales, general, and administrative expenses is primarily due to
the following:
Issuance of shares to employees and third parties amounting to approximately
$197,000 as well as the amortization of the fair value of the stock options
issued to employees amounting to approximately $128,000. No such expenses
occurred during the nine-months ended June 30, 2005.
We anticipate that general and administrative expenses will continue to remain
flat or decline during the balance of fiscal 2006, with the exception of
share-based paymentsthat the Company may incur from time to time. The
acquisition of PatriotNet should not increase the sales, general and
administrative cost of the Company. The Company has already made adjustments to
operations of PatriotNet to eliminate redundant overhead.
Amortization expense for intangibles will continue to be substantially lower due
to the expensing of approximately all of the $1,800,000 previously recorded
goodwill in the prior periods. Amortization expense is provided by use of the
straight-line method over five years for IceMail software development costs and
the remaining customer relationships capitalized during acquisitions.
Interest Expense
Interest expense consists primarily of the amounts accrued on our revolving
credit line with Comerica Bank and notes payable to related parties. The
decrease in interest expense for the nine-month period ended June 30, 2006 is
primarily due to having a lower weighted-average debt during the nine-month
period ended June 30, 2006 when compared to the prior year period.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity is the ability of a company to generate funds to support its current
and future operations, satisfy its obligations and otherwise operate on an
ongoing basis.
Net cash used in operating activities amounted to approximately $545,000 during
the nine-month period ended June 30, 2006.
16
The net cash used in operating activities consist of our net loss, which
amounted to approximately $2.1 million adjusted for the following:
o Depreciation and amortization of approximately $649,000
o Fair value of options issued to employees and consultants of approximately
$128,000
o Fair value of shares issued to employees and consultants for services
rendered of approximately $197,000
o Decrease in accounts receivable of $1.1 million resulting from lower
revenues
o Acquisition of intangible assets of approximately $332,000
o Capitalization of research and development expenses of approximately
$454,000 resulting from greater resources allocated to research and
development to develop internally new products
o A decrease in accounts payable of approximately $177,000 due to a better
cash flow position than in the prior periods.
Net cash used in investing activities for the nine months ended June 30, 2006
was $328,904 and is primarily due to a cash outlay to acquire Patriot for
approximately $185,000 and incurring capital expenditures of approximately
$144,000.
Net cash provided by financing activities amounted to approximately $446,000
during the nine-month period ended June 30, 2006 and is primarily due to the
generation of proceeds of $400,000 from the exercise of warrants, and increase
in the line of credit of approximately $137,000, offset by payments made to
related parties of approximately $84,000.
At June 30, 2006 we had an accumulated deficit of approximately $9.0 million and
the report from our independent registered public accounting firm on our audited
financial statements at September 30, 2005 contained an explanatory paragraph
regarding doubt as to our ability to continue as a going concern as a result of
our net losses and cash used in operations. There are no assurances that we will
report net income in any future periods.
Historically, our revenues have not been sufficient to fund our operations and
we have relied on capital provided through the sale of equity securities, a bank
line of credit and loans from related parties. While we do not have any working
capital commitments, we do not presently have any external sources of working
capital. Our working capital needs in future periods depend primarily on the
rate at which we can increase our revenues while controlling our expenses and
decreasing the use of cash to fund operations. Additional capital may be needed
to fund acquisitions of additional companies or assets, although we are not a
party to any pending agreements at this time and, accordingly, cannot estimate
the amount of capital which may be necessary, if any, for acquisitions.
17
As long as our cash flow from operations remains insufficient to completely fund
operations, we will continue depleting our financial resources and seeking
additional capital through equity and/or debt financing. In March 2005 we sold
shares of our Series A Convertible Preferred Stock and in December 2005 we sold
shares of our Series B Convertible Preferred Stock to the same purchaser. The
designations of these shares included a restriction that so long as the shares
are outstanding, we cannot sell or issue any common stock, rights to subscribe
for shares of common stock or securities which are convertible or exercisable
into shares of common stock at an effective purchase price of less than the then
conversion value which is presently $0.60 per share for the Series A Convertible
Preferred Stock and $0.2727 for the Series B Convertible Preferred Stock. Under
the terms of the Series B Convertible Preferred Stock transaction we also agreed
not to issue any convertible debt or preferred stock. Finally, under the terms
of the financing agreement with Sand Hill Finance, LLC we agreed not to incur
any additional indebtedness other than trade credit in the ordinary course of
business. These covenants may limit our ability to raise capital in future
periods. There can be no assurance that acceptable financing can be obtained on
suitable terms, if at all. Our ability to continue our existing operations and
to continue growth strategy could suffer if we are unable to raise the
additional funds on acceptable terms which will have the effect of adversely
affecting our ongoing operations and limiting our ability to increase our
revenues and maintain profitable operations in the future. If we are unable to
secure the necessary additional working capital as needed, we may be forced to
curtail some or all of our operations.
CRITICAL ACCOUNTING POLICIES
Financial Reporting Release No. 60, which was released by the U.S. Securities
and Exchange Commission, encourages all companies to include a discussion of
critical accounting policies or methods used in the preparation of financial
statements. Our consolidated financial statements include a summary of the
significant accounting policies and methods used in the preparation of our
consolidated financial statements. Management believes the following critical
accounting policies affect the significant judgments and estimates used in the
preparation of the financial statements.
Revenue Recognition - revenues are recognized at the time of shipment of the
respective products and/or services. Our Company includes shipping and handling
fees billed to customers as revenues. Costs of sales include outbound freight.
Licenses and software are billed as services are rendered on a biweekly
schedule.
Use of Estimates - Management's discussion and analysis of financial condition
and results of operations is based upon our unaudited consolidated financial
statements, which have been prepared in accordance with accounting principles
generally accepted in the United States of America. The preparation of these
financial statements requires management to make estimates and judgments that
affect the reported amounts of assets, liabilities, revenues, and expenses, and
related disclosure of contingent assets and liabilities. On an ongoing basis,
management evaluates these estimates, including those related to allowances for
doubtful accounts receivable and the carrying value of intangibles and
long-lived assets. Management bases these estimates on historical experience and
on various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis of making judgments about the
carrying value of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under different
assumptions or conditions.
18
ITEM 3. CONTROLS AND PROCEDURES
Our management, which includes our Chief Executive Officer and Chief Financial
Officer have conducted an evaluation of the effectiveness of our disclosure
controls and procedures (as defined in Rule 13a-14(c) promulgated under the
Securities and Exchange Act of 1934, as amended) as of a date (the "Evaluation
Date") as of the end of the period covered by this report. Based upon that
evaluation, our Chief Executive Officer and Chief Financial Officer concluded
that our disclosure controls and procedures are effective for timely gathering,
analyzing and disclosing the information we are required to disclose in our
reports filed under the Securities Exchange Act of 1934, as amended. There have
been no changes made in our internal controls that has materially affected, or
is reasonably likely to materially affect, our internal control over financial
reporting based on such evaluation.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
During March 2006, we issued 10,031 shares to an employee for services
rendered. The fair value of the shares amounted to $11,536.
During March 2006, we issued 100,000 shares to a consultant for
investor relations services. The fair value of the shares amounted to $100,000.
During April 2006, we issued 150,000 shares to two employees for
services rendered. The fair value of the shares amounted to $111,536.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER EVENTS
On August 16th G. Tony Munno, the President of the company and Brian
Crooks, The Chief Financial Officer of the company resigned effective
immediately.
ITEM 6. EXHIBITS
Exhibit No. Description
----------- -----------
Exhibit 31.1 Certification of Principal Executive Officer
pursuant to Section 302
Exhibit 31.2 Certification of Principal Financial Officer
pursuant to Section 302
Exhibit 32.1 Certification of Principal Executive Officer
pursuant to Section 906
Exhibit 32.2 Certification of Principal Financial Officer
pursuant to Section 906
19
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
IceWEB, Inc.
Dated: August 21, 2006 By: /s/ John R. Signorello
----------------------
John R. Signorello,
Chairman and CEO,
Principal Executive Officer
20