________________________________________________________________________________
United States Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED JUNE 30, 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 420, 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 [ ]
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: 6,492,287 shares of common stock
issued and outstanding at August 16, 2005.
Transitional Small Business Disclosure Format: Yes [ ] No [X]
________________________________________________________________________________
ICEWEB INCORPORATED
FORM 10-QSB
FOR THE QUARTER ENDED JUNE 30, 2005
INDEX
PART I Financial Information
Item 1. Financial Statements ............................................... 4
Consolidated Balance Sheet at June 30, 2005 (unaudited) ............ 4
Consolidated Statements of Operations for the
three months ended June 30, 2005 and June 30, 2004 (unaudited) ..... 5
Consolidated Statements of Operations for the
nine months ended June 30, 2005 and June 30, 2004 (unaudited) ...... 6
Consolidated Statements of Cash Flows for the
nine months ended June 30, 2005 and June 30, 2004 (unaudited) ...... 7
Notes to Consolidated Financial Statements (unaudited) ............. 8
Item 2. Management's Discussion and Analysis or Plan of Operation .......... 11
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.
Page 2
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10QSB for the three and nine months ended June 30,
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.
Page 3
PART I -FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
IceWEB, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEET
June 30, 2005
(Unaudited)
Current assets:
Cash $ 269,960
Accounts receivable, net of allowance of $20,846 1,558,077
Prepaid expense 7,400
Other current assets 40,437
Employee advances 60,000
-----------
Total current assets 1,935,874
Property and equipment, net of accumulated depreciation of 342,409 52,817
Software development costs 129,000
Goodwill 1,812,999
Deposits 16,170
Deferred financing costs 185,000
-------------------------------------------------------------------------------
Total assets $ 4,131,860
-------------------------------------------------------------------------------
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 1,032,463
Accrued expenses 85,347
Advances from related party 92,875
Line of credit 461,269
Deferred revenue 4,275
-----------
Total Current liabilities 1,676,229
Notes payable - related parties 213,124
-------------------------------------------------------------------------------
Total liabilities $ 1,889,353
-------------------------------------------------------------------------------
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) 1,667
Common stock (par value $.001 1,000,000,000 shares authorized
6,654,787 issued, and 6,492,287 outstanding) 6,493
Treasury Stock, at cost, (162,500 shares) (13,000)
Subscription receivable (50,300)
Additional paid in capital 6,188,154
Accumulated deficit (3,890,507)
-------------------------------------------------------------------------------
Total stockholders' equity 2,242,507
-------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 4,131,860
-------------------------------------------------------------------------------
See accompanying notes to unaudited consolidated financial statements
Page 4
IceWEB, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended
-------------------------
June 30, June 30,
2005 2004
(Unaudited) (Unaudited)
----------- -----------
Revenue $ 2,049,483 $ 1,699,783
-------------------------------------------------------------------------------
Cost of Sales 1,464,673 1,153,591
-------------------------------------------------------------------------------
Gross Profit 584,810 546,192
Operating Expenses:
Marketing and Selling 9,402 58,231
General and Administrative 459,526 674,067
Depreciation and Amortization 13,846 12,461
----------- -----------
Total Operating Expenses 482,774 744,759
Operating (Loss)/Income 102,036 (198,567)
Interest Expense (13,424) (11,787)
Other Income - 38,652
-------------------------------------------------------------------------------
Net (Loss)Income $ 88,612 $ (171,702)
-------------------------------------------------------------------------------
Basic Income (Loss) per common share $ 0.01 $ (0.03)
Diluted Income (Loss) per common share $ 0.01 $ (0.03)
Weighted average common shares outstanding basic 5,962,657 5,148,806
Weighted average common shares outstanding diluted 12,907,606 5,148,806
See accompanying notes to unaudited consolidated financial statements
Page 5
IceWEB, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
Nine Months Ended
-------------------------
June 30, June 30,
2005 2004
(Unaudited) (Unaudited)
----------- -----------
Revenue $ 4,987,776 $ 4,848,499
-------------------------------------------------------------------------------
Cost of Sales 3,789,535 3,379,655
-------------------------------------------------------------------------------
Gross Profit 1,198,241 1,468,844
Operating Expenses:
Marketing and Selling 25,825 154,440
General and Administrative 1,337,326 1,588,640
Depreciation and Amortization 51,807 52,716
----------- -----------
Total Operating Expense 1,414,958 1,795,796
Operating Loss (216,717) (326,952)
Interest Expense (44,361) (33,739)
Other Income 19,283 38,652
-------------------------------------------------------------------------------
Net (Loss) (241,795) (322,039)
-------------------------------------------------------------------------------
Preferred Stock Dividend (1,000,000) -
-------------------------------------------------------------------------------
Loss available to Shareholders $(1,241,795) $ (322,039)
-------------------------------------------------------------------------------
Basic and diluted Loss per common share $ (0.21) $ (0.07)
-------------------------------------------------------------------------------
Weighted average common shares outstanding basic
and diluted 5,795,522 4,846,944
-------------------------------------------------------------------------------
See accompanying notes to unaudited consolidated financial statements
Page 6
IceWEB, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended
-------------------------
June 30, June 30,
2005 2004
(Unaudited) (Unaudited)
----------- -----------
-------------------------------------------------------------------------------
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES $(1,003,322) $ 30,428
-------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (132,373) (77,437)
Cash acquired in acquisitions - 103,107
-------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (132,373) 25,670
-------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments from(to) related parties (116,337) (44,318)
Payment of subscription receivable 1,700 -
Common Stock issued for cash 468,375 158,600
Net Preferred Stock issued for cash 845,836 -
Proceeds from the exercise of common stock option 27,300 9,660
Purchase of treasury stock - (13,000)
-------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 1,226,874 110,942
-------------------------------------------------------------------------------
NET INCREASE IN CASH 91,179 167,040
CASH - beginning of year 178,781 104,314
-------------------------------------------------------------------------------
CASH - end of period 269,960 271,354
-------------------------------------------------------------------------------
See accompanying notes to the unaudited consolidated financial statements
Page 7
ICEWEB, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS UNAUDITED
JUNE 30, 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, 2004, which is included in the Company's Form 10-KSB for the year
ended September 30, 2004, as amended. 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/Employees have loans totaling $152,186 plus accrued interest of
approximately $60,938. Of this amount, $150,000 bears interest at a rate of
12.5% 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
$92,875, at June 30, 2005 is shown separately on the balance sheet as advances
from related party.
NOTE 3 - STOCKHOLDERS' EQUITY
Between December 2004 and January 2005, the Company sold 250,000 units of its
securities at a purchase price of $2.00 per unit to three accredited investors
in exchange for gross proceeds of $500,000. In this transaction the Company
issued an aggregate of 250,000 shares of its common stock, 250,000 Series H
Common Stock Purchase Warrants with an exercise price of $4.00 per share and
expiring in December 2007 and 250,000 Series I Common Stock Purchase Warrants
with an exercise price of $8.00 per share and expiring in December 2009. A third
party with whom the Company had previously entered into an agreement with to
provide assistance and advisory services to the Company, including the structure
of financing, strategic planning and business combinations, introduced the
Company to the investors and received fees of $20,000 in cash and common stock
purchase warrants to purchase an aggregate of 75,000 shares of our common stock
at exercise prices ranging from $4.00 to $8.00 per share.
In March 2005, the Company sold an accredited investor 1,666,667 shares of its
Series A Convertible Preferred Stock and issued the purchaser Common Stock
Purchase Warrants "A", "B" and "C" to purchase an aggregate of 4,500,000 shares
of its common stock at exercise prices ranging from $2.00 to $9.60 per share for
an aggregate purchase price of $1,000,000. These five year common stock purchase
warrants contain a cashless exercise provision and the exercise price of the "A"
warrants are subject to reduction in the event the Company does not meet certain
financial criteria in future periods. The Company received net proceeds of
$845,000 after payment of expenses of $70,000 and a finder's fee to a broker
dealer of $65,000. The Company also issued the broker dealer a warrant to
purchase 175,000 shares of its common stock with an exercise price of $0.70 per
share, the terms of which, other than the exercise price, are identical to the
Common Stock Purchase Warrants "A" issued to the investor.
During the current quarter no common stock options were exercised by employees.
In April 2005 the Company issued 416,667 shares of its common stock in exchange
for $50,000 and the satisfaction of a note payable in the principal amount of
$93,177 which had been acquired from a related party. The $50,000 is reflected
on the Company's balance sheet at June 30, 2005 as a subscription receivable.
The transfer or sale of the shares is restricted until such time as the
subscription receivable has been paid.
In April 2005 the Company also issued 125,000 shares of its common stock to an
employee as satisfaction of a related party loan in the amount of $77,000.
Page 8
ICEWEB, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS UNAUDITED
JUNE 30, 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.
In May 2005 the Company issued a stockholder whom it owed $150,000 principal
plus interest under an unsecured promissory note 125,000 shares of its common
stock as consideration for a 10 year extension of the due date of the note. See
Note 2.
NOTE 4 - STOCK OPTIONS AND COMMON STOCK PURCHASE WARRANTS
A summary of the status of the Company's outstanding stock options as of June
30, 2005 and changes during the period ending on that date is as follows:
Weighted Average
Shares Exercise Price
--------- ----------------
Outstanding at March 31, 2005 .................. 779,460 $2.17
Granted ........................................ 270,500 1.57
Exercised ...................................... - (0.00)
Forfeited ...................................... (44,375) (2.64)
--------- -----
Outstanding at June 30, 2005 ................... 1,005,585 $2.01
--------- -----
Options exercisable at end of period ........... 603,282 $1.99
--------- -----
Weighted-average fair value of options granted
during the period .............................. - $1.57
Common stock warrants
---------------------
A summary of the status of the Company's outstanding stock warrants granted as
of June 30, 2005 and changes during the period is as follows:
Weighted Average
Shares Exercise Price
--------- ----------------
Outstanding at March 31, 2005 .................. 6,176,250 $5.00
Granted ........................................ - -
Exercised ...................................... - -
Forfeited ...................................... - -
--------- -----
Outstanding at June 30, 2005 ................... 6,176,250 $5.00
--------- -----
Warrants exercisable at end of period .......... 6,176,250 $5.00
--------- -----
The following information applies to all warrants outstanding at June 30, 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 4.75 $ 0.70 175,000 $ 0.70
$ 2.00 2,000,000 4.75 $ 2.00 2,000,000 $ 2.00
$ 4.80 1,250,000 4.75 $ 4.80 1,250,000 $ 4.80
$ 9.60 1,250,000 4.75 $ 9.60 1,250,000 $ 9.60
$ 4.00 250,000 2.5 $ 4.00 250,000 $ 4.00
$ 8.00 250,000 4.5 $ 8.00 250,000 $ 8.00
$ 2.40 58,750 10 months $ 2.40 58,750 $ 2.40
$ 4.80 58,750 10 months $ 4.80 58,750 $ 4.80
$ 8.00 58,750 10 months $ 8.00 58,750 $ 8.00
$16.00 58,750 10 months $16.00 58,750 $16.00
$ 2.40 228,750 3 months $ 2.40 228,750 $ 2.40
$ 4.80 228,750 3 months $ 4.80 228,750 $ 4.80
$ 8.00 228,750 3 months $ 8.00 228,750 $ 8.00
$ 2.00 5,000 6.0 $ 2.00 5,000 $ 2.00
$ 4.00 37,500 2.5 $ 4.00 37,500 $ 4.00
$ 8.00 37,500 4.5 $ 8.00 37,500 $ 8.00
Page 9
ICEWEB, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS UNAUDITED
JUNE 30, 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 June 30, 2005:
Actual net income ............................. 88,612
SFAS 123 Compensation Cost .................... 0
------
Pro forma net income .......................... 88,612
------
Pro forma basic and diluted net income per share .... .01
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 ............................. 52%
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.
NOTE 6 - SOFTWARE DEVELOPMENT COSTS
Under the criteria set forth in SFAS No. 86, "Accounting for the Costs of
Computer Software to be Sold, Leased or Otherwise Marketed," capitalization of
software development costs begins upon the establishment of technological
feasibility of the software. The establishment of technological feasibility and
the ongoing assessment of the recoverability of these costs require considerable
judgment by management with respect to certain external factors, including, but
not limited to, anticipated future gross product revenues, estimated economic
life, and changes in software and hardware technology. Capitalized software
development costs are amortized utilizing the straight-line method over the
estimated economic life of the software not to exceed three years.
As of June 30, 2005, such capitalizable software development costs were
approximately $129,000. These costs will be amortized over a period of three
years beginning July, 1, 2005. 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.
Page 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
OVERVIEW
We provide 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. We 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. We 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. We 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. We
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.
We generate 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 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. We plan a launch of IceMAIL before the end of fiscal
2005,
Page 11
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
o hiring a Chief Financial Officer and improving our internal financial
reporting systems and processes.
IceWEB launched IceWEB Vista in June 2005 and will launch IceMAIL before the end
of fiscal 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
NINE MONTHS ENDED JUNE 30, 2005 AS COMPARED TO NINE MONTHS ENDED JUNE 30, 2004
The following table provides an overview of certain key factors of our results
of operations for the nine months ended June 30, 2005 as compared to the nine
months ended June 30, 2004:
Nine Months Ended
--------------------------
June 30, June 30,
2005 2004 $ Change % Change
----------- ----------- ---------- --------
Revenues ................. $4,987,776 $4,848,499 $ 139,277 2.9%
Marketing and selling .... 25,825 154,440 (128,615) -83.3%
General and administrative
expenses ............... 1,337,326 1,588,640 (251,314) -15.8%
Total operating expenses . 1,414,958 1,795,796 (380,838) -21.2%
Operating (loss) ......... (216,717) (326,952) (110,235) -33.7%
Net (loss) ............... $ (241,795) $ (323,039) $ (81,244) -25.1%
Other key indicators:
Nine Months Ended
June 30,
-----------------
2005 2004 % of change
---- ---- -----------
Cost of sales as a percentage of revenues .. 76.0% 69.7% + 9.0%
Gross profit margin ........................ 24.0% 30.3% -20.8%
General and administrative expenses as a
percentage of revenues ................... 26.8% 32.8% -18.3%
Total operating expenses as a percentage
of revenues .............................. 28.4% 37.0% -23.2%
Revenues
For the nine months ended June 30, 2005, we reported revenues of $4,987,776 as
compared to revenues of $4,848,499 for the comparative nine month period in
2004, an increase of approximately 2.9%. Revenues for the three months ended
increased $349,700, or approximately 20.6%, from the comparable three month
period in fiscal 2004. Historically the Company has relied upon funds available
under its revolving credit line to provide sufficient cash to purchase hardware
for resale; during the three months ended March 31, 2005 the Company had reached
the maximum borrowing amount under the credit line and was unable to purchase
hardware from certain vendors for resale to our customers. As a result of
working capital made available to us from the sale of securities during March
2005 an advances from our CEO as described elsewhere herein, we now have capital
available to purchase the necessary hardware for resale. This increase in
working capital is the primary reason for the increase in revenue for the three
months ended June 30, 2005. The Company has also increased its revenue 4% from
software sales and service for the nine months ending June 30, 2005
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 nine months ended June 30, 2005, cost of sales was $3,789,535 or
approximately 76% of revenues, compared to $3,379,655 or approximately 69.7% of
revenues, for the nine months ended June 30, 2004. The Company attributes the
increase in the cost of sales to an increase in cost of technical personnel and
hardware for resale.
Page 12
Total Operating Expenses
Our total operating expenses decreased $380,838, or approximately 21.2% to
$1,414,958 for the nine months ended June 30, 2005 as compared to $1,795,796 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 nine months ended
June 30, 2005, marketing and selling costs were $25,825 as compared to $154,440
for comparative period in 2004, a decrease of $128,615 or approximately 83.3%.
These decreases were the result of a reduction in marketing personnel, trade
show events, onlineWeb marketing, advertising and print advertising during the
first three quarters of fiscal 2005 as a result of limited working capital. As a
result of working capital made available to us from the sale of securities in
March 2005, we anticipate that our marketing and selling expense will increase
during the balance of fiscal 2005 in conjunction with the launch of our new
software offerings;
o General and administrative expenses. Ggeneral 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 nine months ended June 30, 2005, general and administrative
expenses were $1,337,326 as compared to $1,588,640 for the comparative period in
2004, a decrease of $251,314 or approximately 15.8%. This decrease in general
and administrative expenses reflects decreases in personnel costs, acquisition
efficiencies and other operating expenses incurred in the period. 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
nine months ended June 30, 2005 interest expense was $44,361 as compared to
$33,739 the comparative period in 2004. We anticipate that interest expense will
decline in the fourth quarter of fiscal 2005 as a result of the conversion to
equity of the notes held by related parties during the third quarter of fiscal
2005. See Note 2.
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 $1,000,000 causing an increased loss per
share of $(.20). 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 June 30, 2005 (unaudited) and September 30, 2004:
June 30, September $ of % of
2005 30, 2004 Change Change
----------- ----------- ---------- -------
Working capital (deficit) ... $ 259,645 $(1,048,557) $1,308,202 +124.8%
Cash ........................ $ 269,960 $ 178,781 $ 91,179 + 51.0%
Accounts receivable, net .... $ 1,558,077 $ 1,062,707 $ 495,370 + 46.6%
Total current assets ........ $ 1,935,874 $ 1,241,488 $ 694,386 + 55.9%
Property and equipment, net . $ 52,817 $ 86,251 $ (33,434) - 38.8%
Total assets ................ $ 4,131,860 $ 3,156,908 $ 974,952 + 30.9%
Accounts payable ............ $ 1,032,463 $ 1,233,708 $ (201,245) -116.3%
Accrued expenses ............ $ 85,347 $ 152,577 $ (67,230) - 44.1%
Deferred revenue ............ $ 4,275 $ 19,030 $ (14,755) - 77.5%
Total current liabilities ... $ 1,676,229 $ 2,291,045 $ (614,816) - 26.8%
Total liabilities ........... $ 1,889,353 $ 2,291,045 $ (401,692) - 17.5%
Accumulated (deficit) ....... $(3,890,507) $(3,648,940) $ 241,567 + 6.6%
Stockholders' equity ........ $ 2,242,507 $ 865,863 $1,376,644 +159.0%
Net cash used in operating activities was $(1,003,322) for the nine months ended
June 30, 2005 as compared to net cash provided by operating activities of
$30,428 for the nine months ended June 30, 2004. The decrease in cash from
operations is primarily due to increase in current assets excluding cash of $
603,000 and a decrease in Accounts Payable of $190,000, and an operating loss
excluding non-cash items of $210,000.
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Net cash used in investing activities for the nine months ended June 30, 2005
was ($132,373) as compared to net cash provided by investing activities of
$25,670 for the comparative period in 2004. During the nine months ended June
30, 2004 we acquired two companies and in connection therewith recognized cash
provided by investing activities; we did not have any similar transactions
during the nine months ended June 30, 2005 which accounts for the increase in
cash used. Net cash provided by financing activities for the nine months ended
June 30, 2005 was $1,226,874 as compared to $110,942 for the comparative period
in 2004. The primary reason for the increase is an increase of $1,155,661 in
proceeds from the sale of equity securities during the nine months ended June
30, 2005 as compared to the nine months ended June 30, 2004.
At June 30, 2005 we had an accumulated deficit of $(3,890,507) and the report
from our independent registered public accounting firm on our audited financial
statements at September 30, 2004 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 $(241,795) for the
nine months ended June 30, 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 June 30, 2005 we had cash on
hand of $269,960 and working capital of $259,645. At June 30, 2005 we owed
$461,269 under our line of credit with Comerica Bank, which is reflected as a
current liability, and we do not have any ability to borrow any additional sums
under this credit facility. 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 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. 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. This may limit our ability to raise capital
in future periods. There can be no assurance that acceptable financing can be
obtained on suitable terms, if at all. Our ability to continue our existing
operations and to continue growth strategy could suffer if we are unable to
raise the additional funds on acceptable terms which will have the effect of
adversely affecting our ongoing operations and limiting our ability to increase
our revenues and maintain profitable operations in the future. If we are unable
to secure the necessary additional working capital as needed, we may be forced
to curtail some or all of our operations.
CRITICAL ACCOUNTING POLICIES
Financial Reporting Release No. 60, which was released by the U.S. Securities
and Exchange Commission, encourages all companies to include a discussion of
critical accounting policies or methods used in the preparation of financial
statements. Our consolidated financial statements include a summary of the
significant accounting policies and methods used in the preparation of our
consolidated financial statements. Management believes the following critical
accounting policies affect the significant judgments and estimates used in the
preparation of the financial statements.
Revenue Recognition - revenues are recognized at the time of shipment of the
respective products and/or services. Our Company includes shipping and handling
fees billed to customers as revenues. Costs of sales include outbound freight.
Licenses and software are billed as services are rendered on a biweekly
schedule.
Use of Estimates - Management's discussion and analysis of financial condition
and results of operations is based upon our unaudited consolidated financial
statements, which have been prepared in accordance with accounting principles
generally accepted in the United States of America. The preparation of these
financial statements requires management to make estimates and judgments that
affect the reported amounts of assets, liabilities, revenues, and expenses, and
related disclosure of contingent assets and liabilities. On an ongoing basis,
management evaluates these estimates, including those related to allowances for
doubtful accounts receivable and the carrying value of 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.
Page 14
ITEM 3. CONTROLS AND PROCEDURES
Our management, which includes our Chief Executive Officer who also serves as
our principal 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 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 1. LEGAL PROCEEDINGS.
None.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
In April 2005 our CEO transferred a note from our company in the principal
amount of $93,177 plus accrued interest of approximately $41,600 to a third
party in a private transaction. Thereafter, the recipient, who was an accredited
investor, agreed to purchase 416,667 shares of our common stock in exchange for
$50,000 and the forgiveness of the principal and interest due by us under the
note. This transaction was exempt from registration under the Securities Act in
reliance on an exemption provided by Section 4(2) of that act. The $50,000 due
us under this transaction is reflected as a subscription receivable in the
financial statements contained elsewhere in this quarterly report. These 416,667
shares of our common stock are not transferable by the holder until such time as
the subscription receivable has been satisfied.
In April 2005 we also issued 125,000 shares of our common stock to Mr. James
Bond, one of our key employees, in satisfaction of a non-interest bearing note
in the principal amount of $125,000 in a transaction exempt from registration
under the Securities Act in reliance on an exemption provided by Section 4(2) of
that act. The recipient was a sophisticated investor who had such knowledge and
experience in business matters that he was capable of evaluating the merits and
risks of the prospective investment in our securities. The recipient had access
to business and financial information concerning our company.
In May 2005 we issued a stockholder whom we owe $150,000 principal plus interest
under an unsecured promissory note 125,000 shares of our common stock as
consideration for a 10 year extension of the due date of the note. The recipient
was an accredited investor and the transaction was exempt from registration
under the Securities Act in reliance on an exemption provided by Section 4(2) of
that act.
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: August 19, 2005 By: /s/ John R. Signorello
--------------------------
John R. Signorello,
Chairman and CEO,
principal executive officer and
principal financial officer
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