________________________________________________________________________________
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 MARCH 31, 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: 7,092,287 shares of common stock
issued and outstanding at May 15, 2006.
Transitional Small Business Disclosure Format: Yes [ ] No [X]
________________________________________________________________________________
ICEWEB INCORPORATED
FORM 10-QSB
FOR THE QUARTER ENDED MARCH 31, 2006
INDEX
PART I FINANCIAL INFORMATION
Item 1. Financial Statements ............................................... 4
Consolidated Balance Sheet at March 31, 2006 (unaudited) ........... 4
Consolidated Statements of Operations for the three months
ended March 31, 2006 and March 31, 2005 (unaudited) ................ 5
Consolidated Statements of Operations for the six months
ended March 31, 2006 and March 31, 2005 (unaudited) ................ 6
Consolidated Statements of Cash Flows for the six months
ended March 31, 2006 and March 31, 2005 (unaudited) ................ 7
Notes to Consolidated Financial Statements (unaudited) ............. 8
Item 2. Management's Discussion and Analysis or Plan of Operation .......... 14
Item 3. Controls and Procedures ........................................... 19
PART II OTHER INFORMATION .................................................. 20
Item 6. Exhibits ........................................................... 20
Signatures .................................................................. 20
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
one for eighty (1:80) reverse stock split of the Company's common stock
effective April 27, 2005.
2
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10QSB for the three months ended March 31, 2006
includes "forward-looking statements." 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.
3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
IceWEB, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEET
March 31, 2006
(Unaudited)
Assets
Current assets:
Cash $ 67,514
Accounts receivable, net of allowance of $2,271 809,007
Prepaid expense 31,202
Stock warrant proceeds receivable 128,800
Employee advances 63,252
-----------
Total current assets 1,099,775
Property and equipment, net of accumulated depreciation of
$215,842 120,727
Software development costs, net of accumulated amortization of
$153,173 249,659
Goodwill 41,800
Intangibles, net of accumulated amortization of $1,751,199 628,699
Deposits 16,170
Deferred financing costs 170,000
-------------------------------------------------------------------------------
Total assets $ 2,326,830
-------------------------------------------------------------------------------
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 1,027,564
Accrued expenses 84,646
Line of credit 399,561
Deferred revenue 81,512
-----------
Total current liabilities 1,593,283
Notes payable - related parties 225,000
-------------------------------------------------------------------------------
Total liabilities 1,818,283
-------------------------------------------------------------------------------
Stockholders' equity:
Preferred stock (par value $.001; 10,000,000 shares authorized;
Series A and B Convertible Preferred Stock, par value .001
3,500,000 shares issued and 3,500,000 shares outstanding) 3,500
Common stock (par value $.001 25,000,000 shares authorized
7,254,797 issued, and 7,092,287 outstanding) 7,093
Treasury stock, at cost, (162,500 shares) (13,000)
Subscription receivable (143,477)
Additional paid in capital 8,672,849
Accumulated deficit (8,018,418)
-------------------------------------------------------------------------------
Total stockholders' equity 508,547
-------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 2,326,830
-------------------------------------------------------------------------------
See accompanying notes to unaudited consolidated financial statements
4
IceWEB, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended
-------------------------
March 31, March 31,
2006 2005
(Unaudited) (Unaudited)
----------- -----------
Revenue $ 642,059 $ 1,514,920
-------------------------------------------------------------------------------
Cost of sales 548,028 985,111
-------------------------------------------------------------------------------
Gross profit 94,031 529,809
Operating expenses:
Marketing and selling 52,479 3,199
General and administrative 643,430 443,157
Depreciation 13,750 11,598
Amortization expense - 195,691
----------- -----------
Total operating expenses 709,659 653,645
Operating loss (615,628) (123,836)
Interest expense (50,498) (10,636)
-------------------------------------------------------------------------------
Net loss $ (666,126) $ (134,472)
-------------------------------------------------------------------------------
Less: preferred stock dividend - (1,000,000)
-------------------------------------------------------------------------------
Loss available to common shareholders $ (666,126) $(1,134,472)
-------------------------------------------------------------------------------
Basic loss per common share $ (0.10) $ (0.20)
Diluted Loss per common share $ (0.10) $ (0.20)
-------------------------------------------------------------------------------
Weighted average common shares outstanding basic 6,507,842 5,623,435
Weighted average common shares outstanding diluted 6,507,842 5,623,435
-------------------------------------------------------------------------------
See accompanying notes to unaudited consolidated financial statements
5
IceWEB, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
Six Months Ended
-------------------------
March 31, March 31,
2006 2005
(Unaudited) (Unaudited)
----------- -----------
Revenue $ 2,134,491 $ 2,957,577
-------------------------------------------------------------------------------
Cost of sales 1,717,767 2,258,595
-------------------------------------------------------------------------------
Gross profit 416,724 698,982
Operating expenses:
Marketing and selling 100,668 15,902
General and administrative 1,229,232 944,589
Depreciation 33,121 27,960
Amortization expense - (391,382)
----------- -----------
Total operating expenses 1,363,021 1,379,833
Operating loss (946,297) (680,851)
Interest expense (71,466) (30,937)
-------------------------------------------------------------------------------
Net loss $(1,017,763) $ (711,788)
-------------------------------------------------------------------------------
Preferred stock dividend (500,000) (1,000,000)
-------------------------------------------------------------------------------
Loss available to shareholders $(1,517,763) $(1,711,788)
-------------------------------------------------------------------------------
Basic and diluted loss per common share $ (0.23) $ (0.30)
-------------------------------------------------------------------------------
Weighted average common shares outstanding basic 6,499,979 4,846,944
Weighted average common shares outstanding diluted 6,499,979 4,846,944
-------------------------------------------------------------------------------
See accompanying notes to unaudited consolidated financial statements
6
IceWEB, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended
-------------------------
March 31, March 31,
2006 2005
(Unaudited) (Unaudited)
----------- -----------
-------------------------------------------------------------------------------
NET CASH USED IN OPERATING ACTIVITIES $(641,594) $ (409,284)
-------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (143,657) (75,969)
Cash used in acquisitions (190,000) -
-------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (333,657) (75,969)
-------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments (to) related parties (86,001) (7,822)
Payment of subscription receivable - 37,700
Common stock issued for cash 270,861 393,775
Net preferred stock issued for cash 362,438 880,631
Proceeds from the exercise of common stock option - 27,300
Payments to bank financing (61,708) -
-------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 485,590 1,331,584
-------------------------------------------------------------------------------
NET (DECREASE) INCREASE IN CASH (489,661) 846,331
CASH - beginning of period 557,175 178,781
-------------------------------------------------------------------------------
CASH - end of period $ 67,514 $ 1,025,112
-------------------------------------------------------------------------------
See accompanying notes to the unaudited consolidated financial statements
7
ICEWEB, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS UNAUDITED
MARCH 31, 2006
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 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.
NOTE 2 - RELATED PARTIES
Stockholders have loans totaling $150,000 plus accrued interest of $75,000. 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.
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%.
8
ICEWEB, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS UNAUDITED
MARCH 31, 2006
NOTE 3 - STOCKHOLDERS' EQUITY (CONT)
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.
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.
On March 25, 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.
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 March 31, 2006 and changes during the period ending March 31, 2006 is as
follows:
Weighted Average
Shares Exercise Price
--------- ----------------
Outstanding at December 31, 2005 ............... 1,137,729 $ 0.84
Granted ........................................ 40,000 0.65
Exercised ...................................... 0 -
Forfeited ...................................... 25,229 (2.75)
--------- ------
Outstanding at March 31, 2006. ................ 1,152,500 $ 1.37
--------- ------
Options exercisable at end of period ........... 834,052 $ 1.36
--------- ------
Weighted-average fair value of options granted
during the period .............................. 261,250 $0.65
Common stock warrants
---------------------
A summary of the status of the Company's outstanding stock warrants granted as
of December 31, 2005 and changes during the period ending March 31, 2006 is as
follows:
9
ICEWEB, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS UNAUDITED
MARCH 31, 2006
NOTE 4 - STOCK OPTIONS AND COMMON STOCK PURCHASE WARRANTS (CONT)
Weighted Average
Shares Exercise Price
--------- ----------------
Outstanding at December 31, 2005 ............... 7,765,000 $ 5.00
Granted ........................................ - -
Exercised ...................................... 500,000 .80
Forfeited ...................................... - -
--------- ------
Outstanding at March 31, 2006 ................ 7,265,000 $ 5.00
--------- ------
Warrants exercisable at end of period .......... 7,265,000 $ 5.00
--------- ------
The following information applies to all warrants outstanding at March 31, 2006:
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. $ 0.70 175,000 $ 0.70
$ 2.00 1,500,000 4. $ 2.00 1,500,000 $ 2.00
$ 4.80 1,250,000 4. $ 4.80 1,250,000 $ 4.80
$ 9.60 1,250,000 4. $ 9.60 1,250,000 $ 9.60
$ 4.00 250,000 1.75 $ 4.00 250,000 $ 4.00
$ 8.00 250,000 3.75 $ 8.00 250,000 $ 8.00
$ 2.40 58,750 1 month $ 2.40 58,750 $ 2.40
$ 4.80 58,750 1 month $ 4.80 58,750 $ 4.80
$ 8.00 58,750 1 month $ 8.00 58,750 $ 8.00
$16.00 58,750 1 month $16.00 58,750 $16.00
$ 2.00 5,000 5.25 $ 2.00 5,000 $ 2.00
$ 4.00 37,500 1.75 $ 4.00 37,500 $ 4.00
$ 8.00 37,500 3.75 $ 8.00 37,500 $ 8.00
$ 2.00 1,000,000 4.75 $ 2.00 1,000,000 $ 2.00
$ 4.80 625,000 4.75 $ 4.80 625,000 $ 4.80
$ 9.60 625,000 4.75 $ 9.60 625,000 $ 9.60
$ 1.00 25,000 4.75 $ 1.00 25,000 $ 1.00
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 March 31, 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 March 31, 2006: no dividend yield; expected volatility ranging 100%
to 110%; risk-free interest rate of 4%; and a expected five-year term for
options granted. Had the compensation cost for the quarter ended March 31, 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 March 31,
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.
10
ICEWEB, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS UNAUDITED
MARCH 31, 2006
NOTE 4 - STOCK OPTIONS AND COMMON STOCK PURCHASE WARRANTS (CONT)
Pro forma results are as follows for the six months ended March 31, 2006:
Three Months Ended Six Months Ended
March 31 March 31
----------------------- -------------------------
2006 2005 2006 2005
--------- ----------- ----------- -----------
Net income (loss)
- as reported $(666,126) $(1,134,472) $(1,517,763) $(1,711,788)
Less: Stock-based employee
compensation determined
under the fair value
method, net of income tax
effect - - - -
-------------------------------------------------------------------------------
Net income (loss) $(666,126) $(1,134,472) $(1,517,763) $(1,711,788)
-------------------------------------------------------------------------------
Basic and Diluted earnings
(loss) per share
- as reported (.10) (.20) (.23) (.30)
-------------------------------------------------------------------------------
Basic and Diluted earnings
(loss) per share
- as pro forma (.10) (.20) (.23) (.30)
-------------------------------------------------------------------------------
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 March 31, 2006, such capitalizable software development costs were
approximately $364,220. These costs will be amortized over a period of three
years beginning April 1, 2006. 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.
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.
11
ICEWEB, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS UNAUDITED
MARCH 31, 2006
NOTE 7 - SIGNIFICANT CUMSTOMER INFORMATION AND SEGMENT REPORTING (CONT)
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 March 31, 2006
all material assets and revenues of IceWEB were in the United States.
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 incurred losses since inception. These
factors raise substantial doubt about our ability to continue as a going
concern.
For the six months ended March 31, 2006, the Company incurred net losses of
($1,017,763) and used cash in operations of $641,594. 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 not involved in any litigation.
NOTE 10 - ACQUISITION
The following Pro Forma Combined Financial Statements of IceWeb, Inc. and
PatriotNet gives effect to the acquisition of certain assets of companies under
the purchase method of accounting prescribed by SFAS number 141. Business
Combinations as if it had occurred on October 1, 2004. These pro forma
statements, for the six months ending March 31, 2006 and 2005, respectively, are
presented for illustrative purposes only. The pro forma adjustments are based
upon available information and assumptions that management believes are
reasonable. 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 ONE
HUNDRED NINETY THOUSAND DOLLARS (US $190,000) at Closing; (b) the issuance by
IceWEB of 100,000 (restricted under Rule 144) 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 an intangible
asset for customer contracts and customer relationships. Amortization expense
for intangibles is provided by use 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
ICEWEB, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS UNAUDITED
MARCH 31, 2006
NOTE 10 - ACQUISITION (CONT)
Pro Forma Combined Statements of Operations for the Six Months Ended March 31,
2006.
IceWEB, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
Pro Forma
IceWeb PatriotNet Adjustments Pro Forma
---------- ---------- ----------- -----------
Revenue $2,134,491 $ 180,000 $ - $2,314,491
--------------------------------------------------------------------------------
Cost of Sales 1,717,767 90,000 - $1,807,767
--------------------------------------------------------------------------------
Gross Profit 416,724 90,000 - 506,724
Operating Expenses:
Marketing and Selling 100,668 4,500 - 105,168
General and Administrative 1,229,232 - - 1,229,232
Depreciation 33,121 5,000 - 38,121
---------- ---------- ----------- -----------
Total Operating Expense 1,363,021 9,500 - 1,372,521
Operating Loss (946,297) 80,500 - (865,797)
Interest Expense (71,466) - - (71,466)
Amortization Expense - (28,000) - (28,000)
--------------------------------------------------------------------------------
Net (Loss) (1,017,763) 52,500 - (956,263)
--------------------------------------------------------------------------------
Pro Forma Combined Statements of Operations For The Six Months Ended March 31,
2005.
IceWEB, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
Pro Forma
IceWeb PatriotNet Adjustments Pro Forma
---------- ---------- ----------- ----------
Revenue $2,957,577 $ 180,000 $ - $3,137,577
--------------------------------------------------------------------------------
Cost of Sales 2,258,595 90,000 - $3,158,595
--------------------------------------------------------------------------------
Gross Profit 698,982 90,000 - 788,982
Operating Expenses:
Marketing and Selling 15,902 4,500 - 20,402
General and Administrative 944,589 - - 944,589
Depreciation 27,960 5,000 - 32,960
---------- ---------- ----------- -----------
Total Operating Expense 988,451 9,500 - 997,951
Operating Loss (299,469) 80,500 - (218,969)
Interest Expense (30,937) - - (30,937)
Amortization Expense (391,382) (28,000) - (419,382)
--------------------------------------------------------------------------------
Net (Loss) (711,788) 52,500 - (659,288)
--------------------------------------------------------------------------------
13
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 provides 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 offers 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 markets 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.
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.
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. PatriotNet, Inc. is a
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (CONT)
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, the Company paid to
PatriotNet (a non-related party to Iceweb) of (a) the payment of cash
consideration by IOI to PatriotNet of ONE HUNDRED NINETY THOUSAND AND
NO/100 US DOLLARS (US $190,000.00) at Closing; (b) the issuance by
IceWEB of 100,000 (restricted under Rule 144) shares of IceWEB common
stock at Closing.
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. During fiscal 2005 we 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
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,
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. The Company raised
$400,000 in March of 2006 for the acquisition of PatriotNet.
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. The acquisition of PatriotNet has allowed
IceWEB, Inc. to immediately expand the IceMail network by adding 1,500 customers
with a total of 3,400 email accounts.
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
SIX MONTHS ENDED MARCH 31, 2006 AS COMPARED TO SIX MONTHS ENDED MARCH 31, 2005
The following table provides an overview of certain key factors of our results
of operations for the six months ended March 31, 2006 as compared to the six
months ended March 31, 2005:
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (CONT)
Six Months Ended
--------------------------
March 31, March 31,
2006 2005 $ Change % Change
----------- ----------- --------- --------
Revenues ................. $ 2,134,491 $ 2,957,577 $(823,086) (27.8)%
Marketing and selling .... 100,688 15,902 84,786 533.2%
General and administrative
expenses ............... 1,229,232 944,589 284,643 30.1%
Total operating expenses . 1,363,021 1,379,833 (16,812) (1.2)%
Operating (loss) ......... (946,297) (680,851) 265,446 39.0%
Net (loss) ............... $(1,017,763) $ (711,788) $305,975 43.0%
Other key indicators:
Six Months Ended
March 31,
----------------
2006 2005 % of change
---- ---- -----------
Cost of sales as a percentage of revenues .. 80.5% 76.4% + 4.1%
Gross profit margin ........................ 19.5% 23.6% - 4.1%
General and administrative expenses as a
percentage of revenues ................... 57.6% 31.9% + 25.7%
Total operating expenses as a percentage
of revenues .............................. 63.8% 46.7% + 17.1%
Revenues
For the six months ended March 31, 2006, we reported revenues of $2,134,491 as
compared to revenues of $2,957,577 for the comparative six month period in 2005,
a decrease of approximately 27.8%. Revenues for the six months ended March 31,
2006 decreased $823,086, or approximately 27.8%, from the comparable six month
period in fiscal 2005. PatriotNet acquisition added approximately $16,000
dollars to this quarters revenue. Revenues were lower for this period due to a
number of factors that effected business. 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.
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 six months ended March 31, 2006, cost of sales were $1,717,767 or
approximately 80,5% of revenues, compared to $2,258,595 or approximately 76.4%
of revenues, for the six months ended March 31, 2005. The Company attributes the
decrease in the cost of sales to a decrease in the hardware and software sales.
Total Operating Expenses
Our total operating expenses decreased $16,812, or approximately 1.2% to
$1,363,021 for the six months ended March 31, 2006 as compared to $1,379,833 in
the same period in fiscal 2005. These decreases are attributable to the
following:
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (CONT)
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
six months ended March 31, 2006, marketing and selling costs were
$100,668 as compared to $15,902 for comparative period in 2005, an
increase of $84,786 or approximately 533.2%. These increases were
primarily, the result of new marketing efforts for IceWeb Vista and,
Icemail software. The Company also continued to market and sell
products and services of Integrated Power.
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 six months ended March
31, 2006, general and administrative expenses were $1,229,232 as
compared to $944,589 for the comparative period in 2005, a increase of
$284,643 or approximately 30.1%. This increase in general and
administrative expenses reflects additional increases in personnel
costs. We anticipate that general and administrative expenses will
continue to remain flat or decline during the balance of fiscal 2006.
The acquisition of PatriotNet should not increase the General and
Administrative cost of the Company. The Company has already made
adjustments to operations of PatriotNet to eliminate redundant
overhead.
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 six
months ended March 31, 2006 interest expense was $71,466 as compared to $30,937
for the comparative period in 2005. We anticipate that interest expense will
decrease in the third quarter of fiscal 2006 as a result of a reduced loan
balance through the next quarter.
Amortization Expense
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 $447,000 of customer relationships capitalized during
acquisitions.
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 March 31, 2006 (unaudited) and September 30, 2005:
March 31, September $ of % of
2006 30, 2005 Change Change
----------- ----------- ----------- -------
Working capital ............. $ (493,508) $ 319,137 $ (812,645) -254.6%
Cash ........................ $ 67,514 $ 557,175 $ (489,661) -87.9%
Accounts receivable, net .... $ 809,007 $ 1,577,460 $ (768,453) -48.7%
Total current assets ........ $ 1,099,775 $ 2,221,916 $(1,122,141) -50.5%
Fixed assets, net . $ 370,386 $ 259,852 $ 110,534 42.5%
Total assets ................ $ 2,326,830 $ 2,788,263 $ (461,433) -16.5%
Accounts payable ............ $ 1,027,564 $ 904,910 $ 122,654 13.6%
Accrued expenses ............ $ 84,646 $ 37,488 $ 47,158 125.8%
Deferred revenue ............ $ 81,512 $ 4,275 $ 77,237 1806.7%
Total current liabilities ... $ 1,593,283 $ 1,902,779 $ (309,496) -16.3%
Total liabilities ........... $ 1,818,283 $ 2,118,404 $ (300,121) -14.2%
Accumulated (deficit) ....... $(8,018,418) $(6,500,655) $ 1,517,763 23.3%
Stockholders' equity ........ $ 508,547 $ 669,859 $ (161,312) -24.1%
17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (CONT)
Net cash used in operating activities was $(641,594) for the six months ended
March 31, 2006 as compared to net cash used in operating activities of
$(409,284) for the six months ended March 31, 2005. The decrease in cash from
operations is primarily due to an net loss of $(1,017,763).
Net cash used in investing activities for the six months ended March 31, 2006
was $333,657 as compared to net cash used in investing activities of $75,969 for
the comparative period in 2005. Net cash provided by investing activities was
$633,299 during the six months ending March 31, 2006.
At March 31, 2006 we had an accumulated deficit of $(8,018,418) 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 $(1,017,763) for
the six months ended March 31, 2006 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 March 31, 2006 we had cash on
hand of $67,514 and working capital (deficit) of $(493,508). At March 31, 2006
we owed $399,561 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 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.
18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (CONT)
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.
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.
19
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER EVENTS
None
ITEM 6. EXHIBITS
Exhibit No. Description
----------- -----------
Exhibit 31.1 Certification of Chief Operating Officer
pursuant to Section 302
Exhibit 31.2 Certification of Chief Financial Officer
pursuant to Section 302
Exhibit 32.1 Certification of Chief Operating Officer
pursuant to Section 906
Exhibit 32.2 Certification of Chief Financial 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: May 22, 2006 By: /s/ G. Anthony Munno
--------------------
G. Anthony Munno,
President and Chief Operating Officer
Dated: May 22, 2006 By: /s/ Brian Crooks
--------------------
Brian Crooks,
Chief Financial Officer
20