________________________________________________________________________________
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 December 31, 2005
[ ] 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: 6,329,787 shares of common stock
issued and outstanding at January 31, 2006.
Transitional Small Business Disclosure Format: Yes [ ] No [X]
________________________________________________________________________________
ICEWEB INCORPORATED
FORM 10-QSB
FOR THE QUARTER ENDED DECEMBER 31, 2005
INDEX
PART I FINANCIAL INFORMATION
Item 1. Financial Statements .............................................. 3
Consolidated Balance Sheet at December 31, 2005 (unaudited) ....... 3
Consolidated Statements of Operations for the three months
ended December 31, 2005 and December 31, 2004 (unaudited) ......... 4
Consolidated Statements of Cash Flows for the three months
ended December 31, 2005 and December 31, 2004 (unaudited) ......... 5
Notes to Consolidated Financial Statements (unaudited) ............ 6
Item 2. Management's Discussion and Analysis or Plan of Operation ......... 10
Item 3. Controls and Procedures .......................................... 15
PART II OTHER INFORMATION ................................................. 15
Signatures ................................................................. 15
When used in this report, the terms "IceWEB," the "Company," " we," "our," and
"us" refers to IceWEB, Inc., a Delaware corporation, and its subsidiaries. The
information which appears on the Company's web site at www.iceweb.com is not
part of this quarterly report.
All per share information contained in this quarterly report gives effect to the
ten for one (10:1) forward stock split of the Company's common stock effective
October 13, 2004 and a one for eighty (1:80) reverse stock split of its common
stock effective April 27, 2005.
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10QSB for the three months ended December 31, 2005
includes "forward-looking statements" within the meaning of Section 27A of the
Securities Act of 1933, as amended and Section 21E of the Securities Exchange
Act of 1934, as amended. Forward-looking statements involve known and unknown
risks, uncertainties, and other factors which could cause the Company's actual
results, performance (financial or operating) or achievements expressed or
implied by such forward looking statements not to occur or be realized. Such
forward looking statements generally are based upon the Company's best estimates
of future results, performance or achievement, based upon current conditions and
the most recent results of operations. Forward-looking statements may be
identified by the use of forward-looking terminology such as "may," "will,"
"expect," "believe," "estimate," "anticipate," "continue," or similar terms,
variations of those terms or the negative of those terms. Potential risks and
uncertainties include, among other things, such factors as our ability to grow
our revenues and establish our brand, our history of unprofitable operations,
the continued availability of financing in the amounts, at the times and on the
terms required, to support our future business and capital projects, the extent
to which we are successful in developing, acquiring, licensing or securing
patents for proprietary products, changes in economic conditions specific to any
one or more of our markets, changes in general economic conditions, our ability
to produce and install product that conforms to contract specifications and in a
time frame that meets the contract requirements, and the other factors and
information disclosed and discussed in other sections of this report. Investors
and shareholders should carefully consider such risks, uncertainties and other
information, disclosures and discussions which contain cautionary statements
identifying important factors that could cause actual results to differ
materially from those provided in the forward-looking statements. Except as
required by federal securities law, we undertake no obligation to publicly
update or revise any forward-looking statements, whether as a result of new
information, future events or otherwise.
2
PART I -FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
IceWEB, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEET
December 31, 2005
(Unaudited)
Current assets:
Cash $ 181,847
Accounts receivable, net of allowance of $4,756 1,902,795
Prepaid expense 76,250
Employee advances 62,277
-----------
Total current assets 2,223,169
Property, equipment, and software net of accumulated
depreciation of $366,069 329,699
Goodwill 41,800
Intangibles, net 229,298
Deposits 33,025
Deferred financing costs 175,000
-----------
Total non-current assets 808,822
-------------------------------------------------------------------------------
Total assets $ 3,031,991
-------------------------------------------------------------------------------
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 1,143,644
Accrued expenses 90,929
Advances from related party 92,522
Line of credit 800,745
Deferred revenue 3,200
-----------
Total Current liabilities 2,131,040
Notes payable - related parties 220,312
-------------------------------------------------------------------------------
Total liabilities $ 2,351,352
-------------------------------------------------------------------------------
Stockholders' equity:
Preferred stock (par value $.001; 10,000,000 shares authorized;
Series A Convertible Preferred Stock, par value .001, 1,666,667
shares issued and 1,666,667 shares outstanding) Series B
Convertible Preferred Stock, par value .001, 1,833,333 shares
issued and 1,833,333 shares outstanding) 3,500
Common stock (par value $.001 1,000,000,000 shares authorized
6,492,287 issued, and 6,329,787 outstanding) 6,493
Treasury stock, at cost, (162,500 shares) (13,000)
Subscription receivable (143,477)
Additional paid in capital 8,179,436
Accumulated deficit (7,352,313)
-------------------------------------------------------------------------------
Total stockholders' equity 680,639
-------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 3,031,991
-------------------------------------------------------------------------------
See accompanying notes to unaudited consolidated financial statements
3
IceWEB, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended
-------------------------
December 31, December 31,
2005 2004
(Unaudited) (Unaudited)
----------- -----------
Revenue $ 1,491,216 $ 1,432,883
-------------------------------------------------------------------------------
Cost of Sales 1,241,409 1,068,200
-------------------------------------------------------------------------------
Gross Profit 249,807 364,683
Operating Expenses:
Marketing and Selling 47,189 12,703
Research & Development - 193,727
General and Administrative 513,987 489,091
Depreciation 9,371 40,256
Amortization Expense 10,000 195,691
----------- -----------
Total Operating Expenses 580,547 931,468
Operating (Loss) (330,740) (566,785)
Interest Expense (20,918) (20,301)
Other Income - 9,769
-------------------------------------------------------------------------------
Net (Loss) $ (351,658) $ (577,317)
-------------------------------------------------------------------------------
Preferred Stock Dividend (500,000) -
-------------------------------------------------------------------------------
Loss Available to Shareholders $ (851,658) $ (577,317)
-------------------------------------------------------------------------------
Basic and Diluted Loss per common share $ (0.13) $ (0.10)
-------------------------------------------------------------------------------
Weighted average common shares outstanding Basic
and Diluted 6,329,787 5,542,491
-------------------------------------------------------------------------------
See accompanying notes to unaudited consolidated financial statements
4
IceWEB, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended
-------------------------
December 31, December 31,
2005 2004
(Unaudited) (Unaudited)
----------- -----------
-------------------------------------------------------------------------------
NET CASH USED IN OPERATING ACTIVITIES $ (843,773) $ (112,671)
-------------------------------------------------------------------------------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Purchase of property and equipment (79,218) (8,838)
Capitalized software (160,773) -
-------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (239,991) (8,838)
-------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments from related parties 6,522 8,198
Payment of subscription receivable - 32,000
Preferred stock issued for cash net of $137,562
issuance costs 362,438 -
Proceeds from the exercise of common stock
options - 21,000
Proceeds from bank financing 339,476 -
-------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 708,436 61,198
-------------------------------------------------------------------------------
NET DECREASE IN CASH (375,328) (60,311)
CASH - beginning of year 557,175 178,781
-------------------------------------------------------------------------------
CASH - end of period $ 181,847 $ 118,470
-------------------------------------------------------------------------------
See accompanying notes to the unaudited consolidated financial statements
5
ICEWEB, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS UNAUDITED
DECEMBER 31, 2005
NOTE 1 - BASIS OF PRESENTATION
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 2004 consolidated financial statements have been
reclassified to conform to the 2005 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 complete year.
NOTE 2 - RELATED PARTIES
Stockholders have loans totaling $150,000 plus accrued interest of $70,312. Of
this amount, $150,000 bears interest at a rate of 2.5% per annum. 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. An employee has a
loan totaling $60,000 payable on demand. This item is shown separately on the
balance sheet as employee advances. This employee is not an officer of the
company.
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. The amount due to the Chief Executive Officer of
$92,522, at December 31, 2005 is shown separately on the balance sheet as
advances from related party.
NOTE 3 - 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 year ended September 30,
2005, the Company sold 1,666,667 shares of preferred stock for $845,836. There
are currently 1,666,667 shares of Series A Preferred Stock issued and
outstanding.
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. For example,
if the Company sells, grants or issues any shares, options, warrants, or any
instrument convertible into shares or equity in any form at $1.60 per share, or
20% below $2.00 per share, then the warrant exercise price shall be reduced by
20%. 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.
All of these five-year warrants are exercisable on a cashless basis which means
that the holders, rather than paying the exercise price in cash, may surrender a
number of warrants equal to the exercise price of the warrants being exercised.
The utilization of this cashless exercise feature will deprive us of additional
capital which might otherwise be obtained if the warrants did not contain a
cashless feature.
6
ICEWEB, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS UNAUDITED
DECEMBER 31, 2005
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.
NOTE 4 - STOCK OPTIONS AND COMMON STOCK PURCHASE WARRANTS
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. A summary of the status of the Company's outstanding stock options as
of September 30, 2005 and changes during the period ending December 31, 2005 is
as follows:
Weighted Average
Shares Exercise Price
--------- ----------------
Outstanding at September 30, 2005 .............. 882,479 $1.55
Granted ........................................ 261,250 0.84
Exercised ...................................... 0 (2.25)
Forfeited ...................................... 6000 (2.72)
--------- -----
Outstanding at December 31, 2005. .............. 1,137,729 $1.38
--------- -----
Options exercisable at end of period ........... 739,235 $1.36
--------- -----
Weighted-average fair value of options granted
during the period .............................. 261,250 $0.84
Common stock warrants
---------------------
A summary of the status of the Company's outstanding stock warrants granted as
of September 30, 2005 and changes during the period ending December 31, 2005 is
as follows:
Weighted Average
Shares Exercise Price
--------- ----------------
Outstanding at September 30, 2005 .............. 5,490,000 $5.00
Granted ........................................ 2,275,000 $4.85
Exercised ...................................... - -
Forfeited ...................................... - -
--------- -----
Outstanding at December 31,, 2005 .............. 7,765,000 $5.00
--------- -----
Warrants exercisable at end of period .......... 7,765,000 $5.00
--------- -----
The following information applies to all warrants outstanding at December 31,
2005:
Warrants Outstanding Warrants Exercisable
---------------------------- ---------------------
Weighted Average Weighted Weighted
Range of Remaining Average Average
Exercise Contractual Life Exercise Exercise
Prices Shares (Years) Price Shares Price
-------- --------- ---------------- -------- --------- --------
$ 0.70 175,000 4.25 $ 0.70 175,000 $ 0.70
$ 2.00 2,000,000 4.25 $ 2.00 2,000,000 $ 2.00
$ 4.80 1,250,000 4.25 $ 4.80 1,250,000 $ 4.80
$ 9.60 1,250,000 4.25 $ 9.60 1,250,000 $ 9.60
$ 4.00 250,000 2 $ 4.00 250,000 $ 4.00
$ 8.00 250,000 4 $ 8.00 250,000 $ 8.00
$ 2.40 58,750 4 months $ 2.40 58,750 $ 2.40
$ 4.80 58,750 4 months $ 4.80 58,750 $ 4.80
$ 8.00 58,750 4 months $ 8.00 58,750 $ 8.00
$16.00 58,750 4 months $16.00 58,750 $16.00
$ 2.00 5,000 5.5 $ 2.00 5,000 $ 2.00
$ 4.00 37,500 2 $ 4.00 37,500 $ 4.00
$ 8.00 37,500 4 $ 8.00 37,500 $ 8.00
$ 2.00 1,000,000 5 $ 2.00 1,000,000 $ 2.00
$ 4.80 625,000 5 $ 4.80 625,000 $ 4.80
$ 9.60 625,000 5 $ 9.60 625,000 $ 9.60
$ 1.00 25,000 5 $ 1.00 25,000 $ 1.00
7
ICEWEB, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS UNAUDITED
DECEMBER 31, 2005
SFAS No. 123 "Accounting for Stock Based Compensation" ("SFAS 123") and SFAS No.
148 "Accounting for Stock-Based Compensation - Transition and Disclosure" ("SFAS
148") requires the Company to disclose pro forma information regarding option
grants made to its employees. SFAS 123 specifies certain valuation techniques
that produce estimated compensation charges that are included in the pro forma
results below. These amounts have not been reflected in the Company's Statement
of Operations, because Accounting Principles Board Opinion 25, "Accounting for
Stock issued to Employees" specifies that no compensation charge arises when the
price of the employees' stock options equal the market value of the underlying
stock at the grant date, as in the case of options granted to the Company's
employees.
Pro forma results are as follows for the three months ended December 31, 2005:
Actual net (loss) ............................. (351,658)
SFAS 123 Compensation Cost .................... 0
--------
Pro forma net (loss) .......................... (351,658)
--------
Under SFAS 123, the fair value of each option grant is estimated on the date of
grant using the Black-Scholes option-pricing model. The following weighted
average assumptions were used:
Risk free interest rate 4%
Expected dividends 0
Volatility factor 111%
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options that have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion the existing models do not necessarily provide a reliable single measure
of the fair value of the Company's options.
NOTE 5 - 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 80% of receivables under 90 days old.
NOTE 6 - 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 December 31, 2005, such capitalizable software development costs were
approximately $364,220. These costs will be amortized over a period of three
years beginning January 1, 2006. The Company regularly reviews the carrying
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.
NOTE 7 - 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 December 31,
2005 all material assets and revenues of IceWEB were in the United States.
8
ICEWEB, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS UNAUDITED
DECEMBER 31, 2005
NOTE 8 - GOING CONCERN
The Company's auditors 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 had losses since inception that raise
substantial doubt about our ability to continue as a going concern.
For the year ended September 30, 2005, the Company incurred net annual losses of
($903,508) and used cash in operations of $920,515. The 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.
NOTE 9 - CONTINGENCIES
From time to time the Company faces litigation in the ordinary course of
business. Currently, we are involved in litigation with two prior employees,
which in our opinion will not have a material adverse effect on our financial
condition. The two related lawsuits have been filed against the Company in the
Circuit Court of Fairfax County, Virginia, captioned Bonnie Edenfield vs.
IceWEB, Inc., et al., Chancery No. CH 2005 4303; and Christopher MacDonald vs.
IceWEB, Inc., et al., Chancery No. CH 2005 4304. Both suits are brought by
former shareholders of DevElements, Inc., the assets of which were purchased by
a Company subsidiary. Edenfield and MacDonald were parties to the asset purchase
agreement between DevElements and the Company subsidiary. The plaintiffs seek
money damages from the Company for alleged breach of the asset purchase
agreement, and damages related to stock options. The Company intends to
vigorously defend this litigation. The Company believes the litigation is
without merit.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
OVERVIEW
The Company provides hosted web-based collaboration solutions that enable
organizations to establish Internet, Intranet, and email/collaboration services
immediately and with little or no up-front capital investment. Our Vista portal
and IceMAIL collaboration software services are available on a monthly or annual
subscription basis to small and medium-sized businesses and non-profit and
government organizations. The Company also provide consulting services to our
larger enterprise and government customers including network infrastructure,
enterprise email/collaboration, and Internet/Intranet portal implementation and
support services. The Company also offer pre-packaged and custom services, using
proven best practices to help organizations define their online business
objectives and quickly deploy their Internet, Intranet, and email/collaboration
systems. Although most of our small to medium-sized business customers purchase
and activate our solutions online, our professional services teams work closely
with our government, non-profit and larger customers to deploy customized
solutions. Iceweb also market an array of information technology services and
third party computer hardware and software.
Our history and acquisition strategy has been key in our growth as a company.
Iceweb began as a full service provider of computer systems and professional
services to private sector corporations and to the federal government under a
General Services Administration (GSA) schedule contract for computer systems and
peripherals. Beginning in 2001, we began a series of strategic acquisitions
which have resulted in our current business and operations, including:
o in June 2001, IceWEB acquired the assets of Learning Stream, Inc., a
provider of digital content streaming services, which coincided with
the transition of our business model to a focus on e-learning.
LearningStream had developed custom streaming solutions which we
believed were more efficient and effective than the solutions we had
implemented at that time. We considered the software we acquired to be
competitive because it helped remove the complexity and unnecessary
cost from the implementation of the streaming technology,
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,
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,
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, and
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 productivity solutions for
the customers. In this transaction we acquired software licenses,
source code, potential patents and trademarks, as well as some cash and
tangible assets.
The Company generates revenues from sales of software licenses and provision of
software application services, application development and network management
services and integrated technology, infrastructure solutions and third party
hardware sales. As a result of the growth of our company both through
acquisitions and organically, we have significantly increased both our revenues
and expenses during fiscal 2004. During fiscal 2005 we have capitalized on our
growth through these acquisitions to organically grow our company and introduce
new products. As a result of this growth, and as described elsewhere herein, we
anticipate that both revenues and expenses will continue to increase in future
periods.
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
to general availability during June 2005. IceWEB Vista is a powerful
tool for efficient website portal development and management, built
upon open source architecture, (.Net) that allows users to quickly,
easily and affordably update their Web content and site structure,
10
o the launch of IceMAIL, a packaged service that provides a
network-hosted groupware, email, calendaring, and collaboration
solution utilizing Microsoft Exchange 2003, the most widely used
enterprise system available. Customers will be able to leverage the
full capabilities of Microsoft Exchange 2003 and Outlook without the
initial implementation and maintenance costs associated with such an
advanced system. The Company launched IceMAIL in December 2005.,
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, and
IceWEB launched IceWEB Vista in June 2005 and launched IceMAIL in December 2005.
The sale of these products are the focus of our business. The company has
numerous challenges in other areas which we believe are key to our growth, many
of which are beyond our control.
While we believe that we will be able to identify and recruit a Chief Financial
Officer prior to the end of fiscal 2005 and to implement upgrades to our
internal systems, we face continuing difficulties in locating sufficient
qualified technical personnel. Our company is located in the "Tech Corridor" of
Northern Virginia and we compete with a number of companies for employees, many
of which have been in business longer than we have and which are more attractive
to prospective employees. Our inability to accomplish one or more of these key
goals may limit our growth in future periods.
RESULTS OF OPERATIONS
THREE MONTHS ENDED DECEMBER 31, 2005 AS COMPARED TO THREE MONTHS ENDED DECEMBER
31, 2004
The following table provides an overview of certain key factors of our results
of operations for the three months ended December 31, 2005 as compared to the
three months ended December 31, 2004:
Three Months Ended
---------------------------
December 31, December 31,
2005 2004 $ Change % Change
------------ ------------ ---------- --------
Revenues ................. $1,491,216 $1,432,883 $ 58,333 4.1%
Marketing and selling .... 47,189 12,703 34,486 271.0%
General and administrative
expenses ............... 513,987 489,091 24,896 5.1%
Total operating expenses . 580,547 931,468 (350,921) -37.7%
Operating (loss) ......... (330,740) (566,785) (236,045) -41.6%
Net (loss) ............... $ (351,658) $ (577,317) $ 225,659 -39.1%
Other key indicators:
Three Months Ended
December 31,
------------------
2005 2004 % of change
---- ---- -----------
Cost of sales as a percentage of revenues .. 83.3% 74.5% + 7.8%
Gross profit margin ........................ 16.8% 25.5% -8.7%
General and administrative expenses as a
percentage of revenues ................... 34.5% 34.1% 0.04%
Total operating expenses as a percentage
of revenues .............................. 37.6% 65.0% -27.4%
Revenues
For the three months ended December 31, 2005, we reported revenues of $1,491,216
as compared to revenues of $1,432,883 for the comparative three month period in
2004, an increase of approximately 4.1%. Revenues for the three months ended
increased $54,103, or approximately 4.1%, from the comparable three month period
in fiscal 2004.
Cost of Sales
Our cost of sales consists of products purchased for resale, salaries of
technical personnel, third party contractors, hosting and sales commissions. For
the three months ended December 31, 2005, cost of sales were $1,241,409 or
approximately 83% of revenues, compared to $1,068,200 or approximately 75% of
revenues, for the three months ended December 31, 2004. The Company attributes
the increase in the cost of sales to an increase in the ratio of hardware sales
to software sales which have a higher gross margin compared to hardware sales.
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Total Operating Expenses
Our total operating expenses decreased $350,921, or approximately 38% to
$580,547 for the three months ended December 31, 2005 as compared to $931,468 in
the same period in fiscal 2004. These decreases are attributable to the
following:
o Marketing and Selling. Our marketing and selling expense consists of
personnel costs, including commissions, public relations, advertising, marketing
programs, lead generation, travel and trade shows. For the three months ended
December 31, 2005, marketing and selling costs were $47,189 as compared to
$12,703 for comparative period in 2004, an increase of $34,486 or approximately
271.5%. These increases were the result of new marketing efforts for IceWeb
Vista software and continued marketing relating to our Integrated Power System
division.
o General and administrative expenses. General and administrative expense
consists primarily of personnel costs, 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. For the three months ended December 31, 2005, general and
administrative expenses were $513,987 as compared to $489,091 for the
comparative period in 2004, a increase of $24,896 or approximately 0.04%. This
increase in general and administrative expenses reflects increases in personnel
costs. We anticipate that general and administrative expenses will continue to
remain flat during the balance of fiscal 2005.
Interest Expense
Interest expense consists primarily of the amounts accrued on our revolving
credit line with Comerica Bank and notes payable to related parties. For the
three months ended December 31, 2005 interest expense was $20,918 as compared to
$20,301 for the comparative period in 2004. We anticipate that interest expense
will increase in the second quarter of fiscal 2006 as a result of the conversion
of our loan with Comerica Bank to Sand Hill Finance do to an increase in the
borrowing base and an increase in interest rates.
Amortization Expense
Amortization expense for intangibles will continue to be substantially lower do
to the expensing of approximately all of the $1,800,000 in the prior periods.
Amortization expense is provided by use of the straight-line method over five
years for IceMail start up costs and the remaining $55,000 of customer
relationships capitalized during acquisitions.
Preferred stock Dividend
The Company issued preferred stock with a conversion to common stock below the
fair market value of the common stock on the date of closing. This resulted in a
book entry for a preferred dividend of $500,000 causing an increased loss per
share of $(.08). This is a one time charge and the Company does not expect a
comparable charge in future periods as the designations, rights and preferences
of the preferred stock do not provide for the payment of dividends.
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. The following table provides certain selected balance sheet
comparisons between December 31, 2005 (unaudited) and September 30, 2005:
December 31, September $ of % of
2005 30, 2005 Change Change
----------- ----------- ---------- -------
Working capital ............. $ 92,129 $ 319,137 $ (227,008) - 71.1%
Cash ........................ $ 181,847 $ 557,175 $ (375,328) -67.3%
Accounts receivable, net .... $ 1,902,795 $ 1,577,460 $ 325,335 + 20.1%
Total current assets ........ $ 2,223,169 $ 2,221,916 $ 1,253 + 0.0%
Property and equipment, net . $ 329,699 $ 259,852 $ (69,847) + 26.9%
Total assets ................ $ 3,031,991 $ 2,788,263 $ 243,728 + 8.7%
Accounts payable ............ $ 1,143,644 $ 904,910 $ 238,734 + 26.4%
Accrued expenses ............ $ 90,929 $ 37,488 $ 53,451 +142.6%
Deferred revenue ............ $ 3,200 $ 4,275 $ (1,075) - 25.2%
Total current liabilities ... $ 2,131,040 $ 1,902,779 $ 228,261 +12.0%
Total liabilities ........... $ 2,351,352 $ 2,118,404 $ 232,948 + 11.0%
Accumulated (deficit) ....... $(7,352,313) $(6,500,655) $ 851,658 + 18.9%
Stockholders' equity ........ $ 680,639 $ 669,859 $ 10,780 + 1.6%
Net cash used in operating activities was $(843,773) for the three months ended
December 31, 2005 as compared to net cash used in operating activities of
$(112,671) for the three months ended December 31, 2004. The decrease in cash
from operations is primarily due to increase in current assets excluding cash of
$ 369,790 and an operating loss excluding non-cash items of $318,185.
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Net cash used in investing activities for the three months ended December 31,
2005 was $239,991 as compared to net cash used in investing activities of $8,838
for the comparative period in 2004.
At December 31, 2005 we had an accumulated deficit of $(7,352,313) 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. We reported a net loss of $(851,658)
for the three months ended December 31, 2005 and 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. At December 31, 2005 we had cash
on hand of $181,847 and working capital of $92,129. At December 31, 2005 we owed
$800,745 under our line of credit with Sand Hill Finance, which is reflected as
a current liability. 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.
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 and 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.
On December 28, 2005, we consummated a Preferred Stock Purchase Agreement and
related agreements with Barron Partners LP. Under the terms of these agreements
we issued Barron Partners LP, an accredited investor, 1,833,334 shares of our
Series B Convertible Preferred Stock and Common Stock Purchase Warrants "D", "E"
and "F" to purchase an aggregate of 2,250,000 shares of our common stock at
exercise prices ranging from $2.00 to $9.60 per share, for an aggregate purchase
price of $ 500,000. We are using these proceeds for general working capital.
Barron Partners LP had previously purchased shares of our Series A Convertible
Preferred Stock in a transaction which closed in March 2005
We received net proceeds of approximately $408,000 after payment of commissions
of $25,000 and other expenses of the offering. The proceeds were paid to us
through the satisfaction of a liability to Barron Partners LP for funds advanced
to us in September 2005. We also issued Liberty Company LLC, a broker-dealer, a
Common Stock Purchase Warrant "G" exercisable into 25,000 shares of our common
stock with an exercise price of $1.00 per share as additional compensation for
its services. The proceeds are being used for general working capital. The
transaction was exempt from registration under the Securities Act of 1933 in
reliance on an exemption provided by Section 4(2) of that act.
Under the terms of the Preferred Stock Purchase Agreement, we agreed:
o that all convertible debt in our company would be cancelled and that
for a period of three years from the closing date we will not issue any
convertible debt or preferred stock. In addition, we agreed to cause all reset
features related to any shares of our outstanding common stock to be cancelled
and for a period of three years from the closing date to refrain from entering
into any transactions that have reset features,
o to maintain a majority of independent directors on our Board of
Directors, and that these independent directors will make up a majority of the
audit and compensation committees of our Board. If at any time we should fail to
maintain these independent majority requirements, we are required to pay Barron
Partners LP liquidated damages of 24% of the purchase price of the securities
($120,000) per annum, payable monthly in kind,
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o that if within 24 months from the closing date we consummate the sale
of debt or equity securities with a conversion price less than the then
effective conversion price of the Series B Convertible Preferred Stock we will
make a post-closing adjustment in the conversion price of the Series B
Convertible Preferred Stock to such lower conversion price,
o that for a period of three years all employment and consulting
agreements must have the unanimous consent of the compensation committee of our
Board, and any awards other than salary are usual and appropriate for other
officers, directors, employees or consultants holding similar positions in
similar publicly held-companies,
o that for a period of two years from the closing we will not enter
into any new borrowings of more than twice as much as the sum of EBITDA from
recurring operations over the past four quarters, subject to certain exceptions,
o that for long as Barron Partners LP holds any of the securities we
will not enter into any subsequent financing in which we issue or sell any debt
or equity securities with a floating conversion price or containing a reset
feature, and
o that we will submit a proposal at our next annual meeting of
stockholders to amend our Certificate of Incorporation to require the consent of
the holders of a designated percentage of a designated class of our securities
to waive or amend the terms of any rights, options and warrants approved by our
Board.
Mr. John R. Signorello, our CEO, agreed not to sell any shares of our common
stock that he many own in excess of 1% per quarter or at a price of less than
$3.00 per share for a period ending August 30, 2007, and that the earliest any
other insiders could sell their shares would be beginning two years from the
closing date.
We granted Barron Partners LP a right of first to participate in any subsequent
funding we may undertake on a pro rata basis at 94% of the offering price.
We have agreed to file a registration statement with the Securities and Exchange
Commission within 30 days to register for resale the shares of common stock
issuable upon the possible conversion of the Series B Convertible Preferred
Stock and the exercise of the warrants, and to use our best efforts to cause
such registration statement to be declared effective within 120 days from the
closing date. We have also granted Barron Partners LP demand registration rights
covering these securities, as well as piggy-back registration rights for a
period of two years from the closing date. We will pay all costs associated with
these registration statements and have indemnified Barron Partners LP with
respect thereto for any losses or claims related to material misstatements or
material omissions by us in the registration statement(s).
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 inventories 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.
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ITEM 3. CONTROLS AND PROCEDURES
Our management, which includes our Chief Executive 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 management has
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 significant changes made in our internal controls or in other
factors that could significantly affect our internal controls subsequent to the
end of the period covered by this report based on such evaluation.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS
Exhibit No. Description
----------- -----------
Exhibit 31.1 Certification of Chief Executive Officer
pursuant to Section 302
Exhibit 31.2 Certification of Principal Financial Officer
pursuant to Section 302
Exhibit 32.1 Certification of Chief Executive Officer
pursuant to Section 906
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: February 15, 2006 By: /s/ John R. Signorello
--------------------------
John R. Signorello,
Chairman and CEO,
principal executive officer
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