U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
-------------
|X| Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended April 30, 2002
|_| Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from ____ to ____
Commission File No. 000-24996
INTERNET COMMERCE CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 13-3645702
(State of incorporation) (I.R.S. Employer
Identification Number)
805 Third Avenue, 9th Floor
New York, New York 10022
(Address of principal executive offices, including zip code)
(212) 271-7640
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
As of May 31, 2002 the registrant had outstanding 11,479,967 shares of
Class A Common Stock.
INTERNET COMMERCE CORPORATION
INDEX TO FORM 10-Q
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated balance sheets as of April 30, 2002
(unaudited) and July 31, 2001..................................... 3
Consolidated statements of operations and comprehensive
loss for the three and nine months ended
April 30, 2002 (unaudited) and April 30, 2001 (unaudited)......... 4
Consolidated statements of cash flows for the nine months
ended April 30, 2002 (unaudited) and April 30, 2001
(unaudited)....................................................... 5
Notes to consolidated financial statements.............................. 6-14
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................. 15-29
Item 3..Quantitative and Qualitative Disclosures About Market Risk...... 29
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds...................... 29
Item 6. Exhibits and Reports on Form 8-K .............................. 29
SIGNATURES.............................................................. 30
INTERNET COMMERCE CORPORATION
Consolidated Balance Sheets
April 30, July 31,
2002 2001
--------- --------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 1,365,864 $ 2,223,487
Marketable securities 240,629 665,552
Accounts receivable, net of allowance for doubtful accounts
of $273,228 and $224,022, respectively 1,504,856 1,588,242
Prepaid expenses and other current assets 454,776 401,334
------------ ------------
Total current assets 3,566,125 4,878,615
Restricted cash 213,706 276,635
Property and equipment, net 1,282,992 1,920,662
Software development costs, net 389,429 425,471
Goodwill 3,904,684 2,194,067
Other intangible assets, net 3,346,000 5,917,854
Other assets 122,863 60,794
------------ ------------
Total assets $ 12,825,799 $ 15,674,098
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 707,322 $ 713,670
Accrued expenses 1,680,579 2,381,788
Accrued dividends - preferred stock 137,126 273,289
Deferred revenue 177,480 306,764
Capital lease obligation 206,433 328,480
Other liabilities 191,961 228,189
------------ ------------
Total current liabilities 3,100,901 4,232,180
Capital lease obligation - less current portion 178,867 255,009
------------ ------------
Total liabilities 3,279,768 4,487,189
------------ ------------
Commitments and contingencies
Stockholders' Equity:
Preferred stock:
Preferred stock - 5,000,000 shares authorized, including 10,000
shares of series A, 10,000 shares of series C and 175 shares
of series S: Series A preferred stock - par value $.01 per share,
225 shares issued and outstanding in 2001 -- 2
Series C preferred stock - par value $.01 per share, 44.76 votes
per share; 10,000 shares issued and outstanding (liquidation
value of $10,131,148) 100 100
Common stock:
Class A - par value $.01 per share, 40,000,000 shares authorized,
one vote per share; 11,411,041 and 9,770,180 shares issued and
outstanding, respectively 114,111 97,702
Class B - par value $.01 per share, 2,000,000 shares authorized,
six votes per share; 1,930 shares issued and outstanding in 2001 -- 19
Additional paid-in capital 84,843,243 80,750,153
Accumulated deficit (75,126,530) (69,261,320)
Accumulated other comprehensive loss (284,893) (209,728)
Deferred compensation - restricted stock -- (190,019)
------------ ------------
Total stockholders' equity 9,546,031 11,186,909
------------ ------------
Total liabilities and stockholders' equity $ 12,825,799 $ 15,674,098
============ ============
See notes to consolidated financial statements.
3
INTERNET COMMERCE CORPORATION
Consolidated Statements of Operations and Comprehensive Loss (unaudited)
Three Months Ended Nine Months Ended
April 30, April 30,
---------------------------- ----------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
Revenue:
Services $ 2,724,582 $ 3,041,468 $ 8,460,108 $ 6,940,238
------------ ------------ ------------ ------------
Expenses:
Cost of services (excluding non-cash compensation of
$133,429 for the nine months ended April 30, 2002) 1,863,741 2,478,409 6,492,832 6,258,618
Product development and enhancement 230,456 237,012 729,786 674,654
Selling and marketing (excluding non-cash compensation of
$23,109 for the nine months ended April 30, 2002) 922,900 1,362,391 2,823,173 4,096,837
General and administrative (excluding non-cash
compensation of $33,481 for the nine months ended
April 30, 2002 and $450,110 for the nine months ended
April 30, 2001) 1,510,986 2,920,720 4,165,266 7,712,621
Non-cash charges for stock-based compensation and services -- -- 190,019 450,110
Impairment of acquired intangibles -- 1,871,900 -- 1,871,900
------------ ------------ ------------ ------------
4,528,083 8,870,432 14,401,076 21,064,740
------------ ------------ ------------ ------------
Operating loss (1,803,501) (5,828,964) (5,940,968) (14,124,502)
------------ ------------ ------------ ------------
Interest and investment income 53,582 57,311 130,512 434,340
Interest expense (6,906) (21,315) (61,885) (59,962)
Other income 18,651 30,994 7,131 30,994
------------ ------------ ------------ ------------
65,327 66,990 75,758 405,372
------------ ------------ ------------ ------------
Loss before income taxes (1,738,174) (5,761,974) (5,865,210) (13,719,130)
Income tax benefit -- 1,605,380 -- 1,605,380
------------ ------------ ------------ ------------
Net loss $ (1,738,174) $ (4,156,594) $ (5,865,210) $(12,113,750)
Dividends on preferred stock (98,299) (102,518) (263,837) (314,827)
Beneficial conversion feature from repricing and issuance of
warrants in warrant exchange offer (461,084) -- (461,084) --
------------ ------------ ------------ ------------
Loss attributable to common stockholders $ (2,297,557) $ (4,259,112) $ (6,590,131) $(12,428,577)
============ ============ ============ ============
Basic and diluted loss per common share $ (0.21) $ (0.45) $ (0.62) $ (1.47)
============ ============ ============ ============
Weighted average number of common shares outstanding--
basic and diluted loss per share 11,163,575 9,519,102 8,461,208 10,655,905
============ ============ ============ ============
COMPREHENSIVE LOSS:
Net loss $ (1,738,174) $ (4,156,594) $ (5,865,210) $(12,113,750)
Other comprehensive loss:
Unrealized losses - marketable securities (38,027) (137,389) (75,165) (155,877)
------------ ------------ ------------ ------------
Comprehensive loss $ (1,776,201) $ (4,293,983) $ (5,940,375) $(12,269,627)
============ ============ ============ ============
See notes to consolidated financial statements.
4
INTERNET COMMERCE CORPORATION
Consolidated Statements of Cash Flows (unaudited)
Nine Months Ended April 30,
----------------------------------
2002 2001
------------ -------------
Cash flows from operating activities:
Net loss $ (5,865,210) $(12,113,750)
Adjustments to reconcile net loss to net cash used in operating activities:
Impairment of intangible assets -- 1,871,900
Depreciation and amortization 1,635,615 2,901,535
Allowance for doubtful accounts 161,600 53,696
Gain on sale of marketable securities (106,399) --
Gain on sale of long term assets (8,591)
Deferred taxes -- (1,613,925)
Non-cash charges for equity instruments issued for compensation
and services 190,019 450,110
Changes in:
Accounts receivable (78,214) (1,177,037)
Prepaid expenses and other assets (120,066) 70,194
Accounts payable (6,348) (398,809)
Accrued expenses (516,830) 323,200
Deferred revenue (129,284) (346,998)
Other liabilities (36,228) 14,116
------------ ------------
Net cash used in operating activities (4,879,936) (9,965,768)
------------ ------------
Cash flows from investing activities:
Payment for purchase of acquisition, net of cash acquired -- (22,055)
Capitalization of software development costs (164,256) (74,230)
Purchases of property and equipment (46,948) (574,991)
Purchases of certificates of deposit -- (24,540)
Proceeds from sales of property and equipment 31,251 --
Proceeds from maturities of certificates of deposit 62,929 --
Proceeds from sales of marketable securities 456,157 --
------------ ------------
Net cash provided by (used in) investing activities 339,133 (695,816)
------------ ------------
Cash flows from financing activities:
Proceeds from issuance of common stock and warrants, net 3,107,269 --
Proceeds from exercise of employee stock options 223,882 291,310
Proceeds from exercise of warrants 602,022 --
Payments of capital lease obligations (249,993) (323,391)
------------ ------------
Net cash provided by (used in) financing activities 3,683,180 (32,081)
------------ ------------
Net decrease in cash and cash equivalents (857,623) (10,693,665)
Cash and cash equivalents, beginning of period 2,223,487 14,003,329
------------ ------------
Cash and cash equivalents, end of period $ 1,365,864 $ 3,309,664
============ ============
Supplemental disclosure of cash flow information:
Cash paid for interest during the period $ 61,885 $ 59,962
See notes to consolidated financial statements.
5
INTERNET COMMERCE CORPORATION
Notes to Consolidated Financial Statements
April 30, 2002
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of Internet
Commerce Corporation (the "Company" or "ICC") have been prepared in
accordance with accounting principles generally accepted in the United
States of America ("GAAP") for interim financial information. In the
opinion of management, such statements include all adjustments (consisting
only of normal recurring adjustments) necessary for the fair presentation
of the Company's financial position, results of operations and cash flows
at the dates and for the periods indicated. Pursuant to the requirements
of the Securities and Exchange Commission applicable to Quarterly Reports
on Form 10-Q, the accompanying financial statements do not include all the
disclosures required by GAAP for annual financial statements. While the
Company believes that the disclosures presented are adequate to make the
information not misleading, these interim consolidated financial
statements should be read in conjunction with the audited financial
statements and related notes included in the Company's Annual Report on
Form 10-K for the year ended July 31, 2001. Operating results for the
three and nine month periods ended April 30, 2002 are not necessarily
indicative of the results that may be expected for the fiscal year ending
July 31, 2002.
Certain 2001 items have been reclassified to conform to their 2002
presentation.
2. ORGANIZATION AND NATURE OF BUSINESS
The Company was incorporated under the name Infosafe Systems, Inc. in
November 1991 in the State of Delaware.
ICC provides Internet-based services for the electronic commerce
business-to-business communication services market. ICC.NET, our global
Internet-based value added network, or VAN, provides supply chain
connectivity solutions for electronic data interchange, or EDI, and
electronic commerce and offers users a vehicle to securely send and
receive files of any format and size.
The ICC.NET system uses the Internet and proprietary technology to deliver
customers' documents and data files to members of their trading
communities, many of which have incompatible systems, by translating such
documents and data files into any format required by the receiver. The
ICC.Net system can be accessed using a standard web browser or virtually
any other communications protocol.
The acquisition of Research Triangle Commerce, Inc. ("RTCI") on November
6, 2000, gives the Company the capability to facilitate the development
and operations of comprehensive business-to-business electronic commerce
solutions. RTCI specializes in electronic commerce solutions involving EDI
and EAI (Enterprise Application Integration) by providing mission critical
electronic commerce consulting, electronic commerce software, outsourced
electronic commerce services and technical resource management.
Through the acquisition of Intercoastal Data Corporation ("IDC") on August
3, 2000, ICC expanded its capabilities to include an EDI service bureau,
which provides EDI services to small and mid-sized companies. These
services include the conversion of electronic forms into hard copies and
the conversion of hard copies to an EDI format. IDC also provides
Universal Product Code, or UPC, services and maintains UPC catalogs for
our customers.
In October 2001, we sold in a private placement 1,159,716 shares of class
A common stock and warrants to purchase 347,915 additional shares of class
A common stock for gross proceeds of $3,189,219. The warrants expire in
October 2006 and are immediately exercisable at $3.58 per share. On April
23, 2002, the Company offered certain holders of its warrants the option
to exercise these warrants at a reduced exercise price of $2.50 per share
in exchange for a new five-year warrant, on substantially similar terms,
exercisable at $3.50 per share. Warrantholders exercised warrants for
217,007 shares of class A common stock of the Company and the Company
received gross proceeds of $542,247 and issued 217,002 five-year warrants
to these holders. See Note 4.
6
INTERNET COMMERCE CORPORATION
Notes to Consolidated Financial Statements
April 30, 2002
2. ORGANIZATION AND NATURE OF BUSINESS (CONTINUED)
As of April 30, 2002, we had cash and cash equivalents and marketable
securities of $1,606,000. These resources, together with the amounts owed
to the Company by Triaton GmbH under the Joint Services Agreement, should
provide the Company with sufficient liquidity to continue in operation
through July 31, 2002. The Joint Services Agreement requires payment by
Triaton of $1,000,000 in July 2002 and $6,000,000 during fiscal year 2003.
However, if we do not receive the scheduled payments from Triaton GmbH and
we cannot reduce costs to achieve sufficient savings, or our expenses
increase more than anticipated, our revenue does not increase as
anticipated because of competitive or other reasons, our cash resources
may not be sufficient and we will require additional financing. There can
be no assurances that any financing will be available or that the terms
will be acceptable to us, or that any financing will be consummated.
3. SIGNIFICANT ACCOUNTING POLICIES AND PROCEDURES
Principles of consolidation:
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiary. All significant intercompany transactions
have been eliminated in consolidation.
Revenue recognition:
The Company derives its revenue from subscriptions to its ICC.NET service,
which include transaction, mailbox and fax transmission fees. The
subscription fees are comprised of both fixed and usage-based fees. Fixed
subscription fees are recognized on a pro-rata basis over the subscription
period, generally one year. Usage fees are recognized in the period the
services are rendered. The Company also derives revenue through
implementation fees and interconnection fees. Implementation fees are
recognized over the life of the subscription period. Interconnection fees
are fees charged to connect to another VAN service and are recognized when
the data is transmitted to the connected service.
The Company also provides a broad range of professional services
consisting of EDI and electronic commerce consulting, data mapping
services and EDI education and training at seminars hosted by leading
universities around the United States. Revenue from EDI and electronic
commerce consulting and education and training are recognized when the
services are provided. Revenue from data mapping services are recognized
when the map has been completed and delivered to the customer. Revenue
from fixed fee professional service contracts are recognized using the
percentage-of-completion method of accounting, as prescribed by SOP 81-1
"Accounting for Performance of Construction-Type and Certain
Production-Type Contracts."
The percentage of completion for each contract is determined based on the
ratio of direct labor hours incurred to total estimated direct labor hours
required to complete the contract. The Company may periodically encounter
changes in estimated costs and other factors that may lead to a change in
the estimated profitability of a fixed-price contract. In such
circumstances, adjustments to cost and profitability estimates are made in
the period in which the underlying factors requiring such revisions become
known. If such revisions indicate a loss on a contract, the entire loss is
recorded at such time. Amounts billed in advance of services being
performed are recorded as deferred revenue. Certain fixed-fee contracts
may have substantive customer acceptance provisions. The acceptance terms
generally include a single review and revision cycle for each deliverable
to incorporate the customer's suggested or required modifications.
Deliverables are considered accepted upon completion of the review and
revision and revenue is recognized upon acceptance.
7
INTERNET COMMERCE CORPORATION
Notes to Consolidated Financial Statements
April 30, 2002
3. SIGNIFICANT ACCOUNTING POLICIES AND PROCEDURES (continued)
The Company also derives revenue from its service bureau. Service bureau
revenues are comprised of EDI services, including data translation
services, purchase order and invoice processing from EDI-to-print and
print-to-EDI, UPC services, including UPC number generation, UPC catalog
maintenance and UPC label printing. The service bureau also derives
revenue from software licensing and provides software maintenance and
support. Revenue from the EDI services and UPC services is recognized when
the services are provided. The Company accounts for its EDI software
license sales in accordance with the American Institute of Certified
Public Accountants' Statement of Position 97-2, "Software Revenue
Recognition", as amended. Revenue from software licenses are recognized
when all of the following conditions are met: (1) a non-cancelable
non-contingent license agreement has been signed; (2) the software product
has been delivered; (3) there are no material uncertainties regarding
customer acceptance; and (4) collection of the resulting receivable is
probable. Revenue from software maintenance and support contracts are
recognized ratably over the life of the contract. The Company's software
license revenue was not significant in any of the periods presented.
In addition, SOP 97-2, generally requires revenue from software
arrangements involving multiple elements to be allocated to each element
of the arrangement based on the relative fair values of the elements, such
as software licenses, post contract customer support, installation, or
training and recognized as the element is delivered and the Company has no
significant remaining performance obligations. The Company's multiple
element arrangements generally consist of a software license and post
contract support. The Company allocates the aggregate revenues from
multiple element arrangements to each element based on vendor specific
objective evidence. The Company has established vendor specific objective
evidence for each of the elements as it sells both the software and post
contract customer support independent of multiple element agreements.
Customers are charged standard prices for the software and post contract
customer support and theses prices do not vary from customer to customer.
If the Company enters into a multiple element agreement where vendor
specific objective evidence of fair value for each element of the
arrangement does not exist, all revenue from the arrangement is deferred
until all elements of the arrangement are delivered.
Service revenue from maintenance contracts is recognized ratably over the
term of the maintenance contract, on a straight-line basis. Other service
revenue is recognized at the time the service is performed.
Deferred revenue:
Deferred revenue is comprised of deferrals for subscription fees,
professional services, license fees and maintenance associated with
contracts for which amounts have been received in advance of services to
be performed or prior to the shipment of software.
Recent Accounting Pronouncements:
In July 2001, the FASB issued SFAS No. 141, "Business Combinations" and
SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141
requires that all business combinations subsequent to June 30, 2001, be
accounted for under the purchase method of accounting. SFAS No.141 also
requires that the fair value of an assembled workforce acquired be
included in the amount initially recorded as goodwill. As required by the
statement, the Company reclassified into goodwill $1,710,617 initially
recorded as other intangible assets related to the value of the assembled
workforce of RTCI as required by this statement. SFAS No. 142 requires
that upon adoption, amortization of goodwill will cease; and instead, the
carrying value of goodwill will be evaluated for impairment on at least an
annual basis. SFAS No. 142 is effective for fiscal years beginning after
December 15, 2001; however, the Company has adopted this standard as of
the beginning of its 2002 fiscal year, August 1, 2001, as permitted under
the provisions of SFAS No. 142. See Note 8 for the effects of adoption of
this standard. The Company has evaluated goodwill for impairment and has
determined that no impairment exists at August 1, 2001.
8
INTERNET COMMERCE CORPORATION
Notes to Consolidated Financial Statements
April 30, 2002
3. SIGNIFICANT ACCOUNTING POLICIES AND PROCEDURES (continued)
In July 2001, the FASB issued SFAS No.143, "Accounting for Asset
Retirement Obligations." SFAS No. 143 is effective for fiscal years
beginning after June 15, 2002, and establishes an accounting standard
requiring the recording of the fair value of liabilities associated with
the retirement of long-lived assets in the period in which they are
incurred. The Company is in the process of determining the impact that the
adoption of SFAS No. 143 may have on its earnings and financial position.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 supercedes SFAS
No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of." SFAS No. 144 addresses financial
accounting and reporting for the impairment or disposal of long-lived
assets. The provisions of SFAS No. 144 are effective for fiscal years
beginning after December 15, 2001. The Company is required to adopt SFAS
No. 144 by the first quarter of fiscal 2003. The Company is currently
evaluating the potential impact of SFAS No. 144 on its results of
operations and financial position.
In November 2001, the Emerging Issues Task Force ("EITF") of the FASB
reached a consensus on Issue No. 01-14, "Income Statement Characterization
of Reimbursements Received for `Out-of-Pocket' Expenses Incurred." A
consensus was reached that reimbursements received for out-of-pocket
expenses incurred should be characterized as revenue in the income
statement. The Company adopted 01-14 effective February 1, 2002.
Reimbursements of out-of-pocket expenses were not significant in any of
the periods presented.
4. STOCKHOLDERS' EQUITY
Private Placement of Common Stock:
On October 29, 2001, the Company sold 1,159,716 shares of class A common
stock and warrants to purchase 347,915 shares of class A common stock for
gross proceeds of $3,189,219. The warrants are immediately exercisable and
have an exercise price of $3.58 per share. The warrants are exercisable
for a five-year period. The Company may redeem the warrants, at its
option, at any time beginning 180-calendar days after the sale if the
closing bid price of the class A common stock exceeds 200% of the exercise
price for a period of 30 consecutive trading days. The redemption price is
ten cents per warrant.
In connection with the private placement the Company incurred fees of
$152,511, of which $35,000 has been paid in cash and $117,511 has been
paid by issuing warrants to purchase 50,000 shares of class A common
stock. The warrants have substantially the same terms and conditions as
the warrants issued in the private placement.
Approximately 20%, or $635,000, of the gross proceeds were received from
directors and officers, or entities with which the Company's directors are
affiliated.
Warrant Exchange Offer:
The Company commenced a warrant exchange offer on April 23, 2002. The
offer was extended to investors who participated in the private placement
on October 29, 2001 and to holders of warrants issued as fees in
connection with such private placement. The offer lowered the exercise
price of the warrants issued in the private placement to $2.50 per class A
common share for those investors that agreed to exercise those warrants.
In addition, for each class A common share purchased pursuant to the
warrant exercise, a new warrant (the "New Warrants") to purchase an
equivalent number of class A common shares was issued. The New Warrants
have an exercise price of $3.50 per share and are exercisable for a
five-year period. The New Warrants have the same redemption terms as the
warrants issued in the private placement. The warrant exchange offer was
originally set to expire on April 30, 2002, but was extended by the
Company's board of directors until May 31, 2002. As of April 30, 2002, the
Company received $542,247 in proceeds and issued a total of 217,007 shares
of class A common stock and warrants to purchase 217,007 shares of class A
common stock.
9
INTERNET COMMERCE CORPORATION
Notes to Consolidated Financial Statements
April 30, 2002
4. STOCKHOLDERS' EQUITY (CONTINUED)
The Company valued the warrant exchange offer and the newly issued
warrants at $461,084 using the Black-Scholes pricing model. This amount
has been deducted from the Company's net loss to arrive at the net loss
attributable to common stockholders.
All of our directors and officers and the entities with which our
directors are affiliated that participated in the October 2001 private
placement discussed above participated in this warrant exchange, providing
approximately 32%, or $173,180, of the gross proceeds received from this
offer as of April 30, 2002.
Class A and Class B Warrants:
On February 18, 2002, 234,140 class A warrants and 263,835 class B
warrants expired. The warrants were exercisable for an aggregate of
1,002,200 shares of the Company's class A common stock.
Private Placement Commission Warrants (April 1999):
On April 29, 2002, 43,350 Private Placement Commission Warrants expired.
The warrants were exercisable for an aggregate of 43,350 shares of the
Company's class A common stock.
5. CONTINGENCY
In October 2000, Thomas Lipscomb, a former President and Chief Executive
Officer of the Company, commenced an action against Alan Alpern, a former
officer of the Company, and against Arthur Medici, a former officer and a
current director of the Company, in the Supreme Court of the State of New
York, County of New York. In the action, Mr. Lipscomb claims that Messrs.
Alpern and Medici tortuously interfered with his employment agreement with
the Company. Mr. Lipscomb seeks compensatory damages of $672,000 and
punitive damages of $1 million. Both Messrs. Alpern and Medici have
requested that the Company indemnify them pursuant to its by-laws. The
Company is defending the action and currently considering such requests.
It is the Company's understanding that both Messrs. Alpern and Medici
intend to defend the action vigorously. The Company is unable to predict
the ultimate outcome of this claim since this action is in its preliminary
stage.
Subsequently, by Demand for Arbitration dated November 30, 2001, Mr.
Lipscomb commenced an arbitration against the Company arising out of the
same alleged breach of his employment agreement that formed the underlying
basis for his suit against Messrs. Alpern and Medici. In the arbitration,
Mr. Lipscomb seeks recovery of $614,000 before interest, costs and
attorneys' fees. The Company intends to defend the arbitration vigorously
and to predict the ultimate outcome of this claim. The Company has not
accrued any amount for this contingency as the possible loss is not
probable nor can it be reasonably estimated at this time.
6. CONCENTRATION OF CREDIT RISK
No single customer accounted for more than 10% of the Company's revenue
for the three and nine-month periods ended April 30, 2002 and April 30,
2001. No single customer accounted for more than 10% of the Company's
accounts receivable as of April 30, 2002 and July 31, 2001.
10
INTERNET COMMERCE CORPORATION
Notes to Consolidated Financial Statements
April 30, 2002
7. BUSINESS SEGMENT INFORMATION
The Company has three operating segments. These three operating segments
are:
ICC.NET service - Our ICC.NET service, the Company's global Internet-based
value added network, or VAN, uses the Internet and our proprietary
technology to deliver our customers' documents and data files to members
of their trading communities, many of which may have incompatible systems,
by translating the documents and data files into any format required by
the receiver.
Service Bureau - Our service bureau manages and translates the data of
small and mid-sized companies that exchange EDI data with large companies
and provides various EDI and UPC (universal product code) services. Our
service bureau also licenses EDI software.
Professional Services - Our professional services segment provides
comprehensive business-to-business electronic commerce solutions including
electronic commerce infrastructure solutions and data mapping services.
Our professional services segment also conducts a series of
product-independent one-day EDI seminars for electronic commerce users.
The tables below summarize information about operations and long-lived
assets of our operating segments as of and for the three and nine-months
ended April 30, 2002 and 2001.
Service Professional
ICC.NET Bureau Services Total
------- ------ -------- -----
Three Months - April 30, 2002
Revenue from external customers $ 1,660,461 $ 419,567 $ 644,554 $ 2,724,582
=========== =========== =========== ===========
Operating (loss) income $(1,170,251) $ 29,455 $ (662,705) $(1,803,501)
Other income, net 53,166 -- 12,161 65,327
----------- ----------- ----------- -----------
Net (loss) income $(1,117,085) $ 29,455 $ (650,544) $(1,738,174)
=========== =========== =========== ===========
Supplemental segment information:
Amortization and depreciation $ 168,827 $ 32,611 $ 320,753 $ 522,191
Non-cash charges for stock-based
Compensation -- -- -- --
Nine Months - April 30, 2002
Revenue from external customers $ 4,681,202 $ 1,217,959 $ 2,560,947 $ 8,460,108
=========== =========== =========== ===========
Operating loss $(3,807,528) $ (32,119) $(2,101,321) $(5,940,968)
Other income (expense), net 106,095 -- (30,337) 75,758
----------- ----------- ----------- -----------
Net loss $(3,701,433) $ (32,119) $(2,131,658) $(5,865,210)
=========== =========== =========== ===========
Supplemental segment information:
Amortization and depreciation $ 574,602 $ 72,953 $ 988,060 $ 1,635,615
Non-cash charges for stock-based compensation -- -- 190,019 190,019
As of April 30, 2002
Property and equipment, net $ 668,841 $ 65,211 $ 548,940 $ 1,282,992
Software development costs, net 59,324 330,105 -- 389,429
Goodwill 26,132 2,167,935 1,710,617 3,904,684
Other intangible assets, net -- -- 3,346,000 3,346,000
----------- ----------- ----------- -----------
Long lived assets, net $ 754,297 $ 2,563,251 $ 5,605,557 $ 8,923,105
=========== =========== =========== ===========
11
INTERNET COMMERCE CORPORATION
Notes to Consolidated Financial Statements
April 30, 2002
7. BUSINESS SEGMENT INFORMATION (CONTINUED)
Service Professional
ICC.NET Bureau Services (A) Total
------- ------ ------------ -----
Three Months - April 30, 2001
Revenue from external customers $ 1,602,157 $ 329,319 $ 1,109,992 $ 3,041,468
============ ============ ============ ============
Operating loss $ (2,024,387) $ (104,650) $ (3,699,927) $ (5,828,964)
Other income, net 70,396 -- (3,406) 66,990
Income tax benefit 344,300 -- 1,261,080 1,605,380
------------ ------------ ------------ ------------
Net loss $ (1,609,691) $ (104,650) $ (2,442,253) $ (4,156,594)
============ ============ ============ ============
Supplemental segment information:
Amortization and depreciation $ 239,132 $ 70,606 $ 1,010,726 $ 1,320,464
Impairment of acquired intangibles $ -- $ -- $ 1,871,900 1,871,900
Nine Months - April 30, 2001
Revenue from external customers $ 3,542,234 $ 1,086,504 $ 2,311,500 $ 6,940,238
============ ============ ============ ============
Operating loss $ (8,154,411) $ (114,581) $ (5,855,510) $(14,124,502)
Other income, net 369,234 -- 36,138 405,372
Income tax benefit 344,300 -- 1,261,080 1,605,380
------------ ------------ ------------ ------------
Net loss $ (7,440,877) $ (114,581) $ (4,558,292) $(12,113,750)
============ ============ ============ ============
Supplemental segment information:
Amortization and depreciation $ 687,368 $ 191,765 $ 2,022,402 $ 2,901,535
Impairment of acquired intangibles $ -- $ -- $ 1,871,900 $ 1,871,900
As of April 30, 2001
Property and equipment, net $ 1,097,312 $ 79,931 $ 1,038,629 $ 2,215,872
Software development costs, net 296,620 74,231 -- 370,851
Goodwill, net 65,331 2,244,944 16,252,389 18,562,664
Other intangible assets, net -- -- 7,185,300 7,185,300
------------ ------------ ------------ ------------
Long lived assets, net $ 1,459,263 $ 2,399,106 $ 24,476,318 $ 28,334,687
============ ============ ============ ============
(A) - The Company's professional services segment was acquired on November 6,
2000.
12
INTERNET COMMERCE CORPORATION
Notes to Consolidated Financial Statements
April 30, 2002
8. GOODWILL AND OTHER INTANGIBLE ASSETS
In July 2001, the FASB issued SFAS No. 141, "Business Combinations" and
SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141
requires that all business combinations subsequent to June 30, 2001, be
accounted for under the purchase method of accounting. SFAS No.141 also
requires that the fair value of an assembled workforce acquired be
included in the amount initially recorded as goodwill. The Company
reclassified into goodwill $1,710,617 initially recorded as other
intangible assets related to the value of the assembled workforce of RTCI
as required by this statement. SFAS No. 142 requires that upon adoption,
amortization of goodwill will cease; and instead, the carrying value of
goodwill will be evaluated for impairment on at least an annual basis.
SFAS No. 142 is effective for fiscal years beginning after December 15,
2001; however, the Company has adopted this standard as of the beginning
of its 2002 fiscal year, August 1, 2001, as permitted under the provisions
of SFAS No. 142. The Company has evaluated goodwill for impairment and has
determined that no impairment exists at August 1, 2001. The Company's
reporting units utilized for evaluating the recoverability of goodwill are
the same as its operating segments.
The following table reports the amounts that net loss and loss per basic
and diluted share would have been in all periods presented exclusive of
goodwill amortization expense recognized in those periods.
Three Months Ended Nine Months Ended
April 30, April 30,
--------------------------------- -----------------------------------
2002 2001 2002 2001
------------ ------------- ------------- --------------
Reported net loss $ (1,738,174) $ (4,156,594) $ (5,865,210) $ (12,113,750)
Add: Goodwill amortization -- 543,817 -- 1,155,007
------------- ------------- ------------- --------------
Adjusted net loss $ (1,738,174) $ (3,612,777) $ (5,865,210) $ (10,958,743)
============= ============= ============= ==============
Reported basic and diluted loss per
common share $ (0.21) $ (0.45) $ (0.62) $ (1.47)
Add: Goodwill amortization -- 0.06 -- 0.14
------------- ------------- ------------- --------------
Adjusted basic and diluted $ (0.21) $ (0.39) $ (0.62) $ (1.33)
loss per share ============= ============= ============= ==============
At April 30, 2002, other intangible assets consisted of the proprietary
technology acquired in the acquisition of RTCI. The proprietary technology
is being amortized over five years and amortization expense has been
recorded in cost of services. Additional information on the Company's
other intangible assets is as follows:
As of April 30, 2002 As of July 31, 2001
------------------------- ----------------------
Gross Gross
Carrying Accumulated Carrying Accumulated
Value Amortization Value Amortization
----------- ------------ --------- ------------
Amortized intangible assets
Proprietary technology 4,780,000 1,434,000 4,780,000 717,000
Assembled workforce -- -- 2,154,595 299,741
---------- ---------- ---------- ----------
Total $4,780,000 $1,434,000 $6,934,595 $1,016,741
========== ========== ========== ==========
The Company did not have any indefinite lived intangible assets that were
not subject to amortization as of April 30, 2002 or as of July 31, 2001.
The aggregate amortization expense for other intangible assets was
approximately $717,000 and $938,800 during the nine months ended April 30,
2002 and April 30, 2001, respectively.
At July 31, 2001, estimated amortization expense for the five years
commencing August 1, 2002 related to other intangible assets is as
follows:
2002 $956,000
2003 $956,000
2004 $956,000
2005 $956,000
2006 $239,000
13
INTERNET COMMERCE CORPORATION
Notes to Consolidated Financial Statements
April 30, 2002
9. SUPPLEMENTAL NON-CASH DISCLOSURES TO STATEMENT OF CASH FLOWS
The Company had the following non-cash investing and financing activities:
Nine Months Ended April 30,
---------------------------
2002 2001
---------- ----------
Issuance of common stock for dividends
on preferred stock $ 400,000 $ --
Issuance of common stock for services 77,400 --
Property acquired under capital leases 51,804 44,945
Amounts related to business acquisition:
Fair value of assets acquired, net
of cash acquired, less: -- 28,492,257
----------- -----------
Liabilities assumed -- 1,921,092
Fair value of equity instruments
issued -- 20,529,624
Note receivable -- 5,000,000
Transactions costs paid in
prior period -- 369,486
Transaction costs accrued -- 650,000
----------- -----------
-- 28,470,202
----------- -----------
Payment for purchase of
acquisitions, net of cash acquired -- 22,055
10. SUBSEQUENT EVENT
As of May 31, 2002, and subsequent to April 30, 2002, the Company received
an additional $116,770 in proceeds and issued a total of 46,708 shares of
class A common stock and warrants to purchase 46,708 shares of class A
common stock.
14
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
This Quarterly Report on Form 10-Q contains a number of "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended (the "Securities Act"), and Section 21E of the Securities Exchange Act
of 1934, as amended (the "Exchange Act"). Specifically, all statements other
than statements of historical facts included in this Quarterly Report regarding
our financial position, business strategy and plans and objectives of management
for future operations are forward-looking statements. These forward-looking
statements are based on the beliefs of management, as well as assumptions made
by and information currently available to management. When used in this report,
the words "anticipate," "believe," "estimate," "expect," "may," "will,"
"continue" and "intend," and words or phrases of similar import, as they relate
to our financial position, business strategy and plans, or objectives of
management, are intended to identify forward-looking statements. These
"cautionary statements" reflect our current view with respect to future events
and are subject to risks, uncertainties and assumptions related to various
factors including, without limitation, those listed below the heading "Overview"
and in our registration statements and periodic reports filed with the
Securities and Exchange Commission under the Securities Act and the Exchange
Act.
Although we believe that our expectations are reasonable, we cannot assure
you that our expectations will prove to be correct. Based upon changing
conditions, should any one or more of these risks or uncertainties materialize,
or should any underlying assumptions prove incorrect, actual results may vary
materially from those described in this Quarterly Report as anticipated,
believed, estimated, expected or intended.
In this Item 2, references to the "Company", "we", "our", or "us", mean
Internet Commerce Corporation.
Overview
We are a leader in the electronic commerce business-to-business
communication services market that provides complete electronic commerce
infrastructure solutions. Our business operates in three segments: our ICC.Net
service, our professional services and our service bureau.
Our ICC.NET service, the Company's global Internet-based value added
network, or VAN, uses the Internet and our proprietary technology to deliver our
customers' documents and data files to members of their trading communities,
many of which may have incompatible systems, by translating the documents and
data files into any format required by the receiver. We believe that our ICC.NET
service has significant advantages over traditional VANs, and email-based and
other Internet-based systems, because our service has a lower cost, greater
transmission speed and more features, including authentication and audit
services. Our professional services segment facilitates the development and
operations of comprehensive business-to-business electronic commerce solutions.
Our service bureau manages and translates the data of small and mid-sized
companies that exchange EDI data with large companies.
Through July 2000, our business was entirely focused on our ICC.NET
service. During fiscal 2001, we made two acquisitions that enable us to offer a
more complete range of services and allow our customers to expand their
electronic commerce trading communities and bridge their legacy systems to the
Internet.
In August 2000, we acquired IDC through which we acquired our service
bureau. IDC is engaged in the development, marketing, sale and other
exploitation of business-to-business EDI standards-based applications for
standard-based EDI exchange over VANs, private networks, exchanges, extranets
and the Internet.
In November 2000, we completed the acquisition of RTCI, through which we
acquired our professional services segment. RTCI is an electronic commerce
infrastructure solutions company serving the business-to-business electronic
commerce market. RTCI helps its clients conduct business electronically through
a continuum of services including eConsulting, data transformation mapping (EDI,
EAI, XML) and internetworking. RTCI has developed a business model that offers
remote service delivery, fixed and value-based pricing and reusable solutions.
Subsequent to the acquisition, due to a reduction of the workforce of RTCI, a
steep decline in value of companies similar to RTCI, continued operating losses
and a significant reduction in the forecasted future operating profits of our
professional services segment, management determined that triggering events had
occurred related to certain intangible assets. Projected cash flow analysis
related to those assets determined that the assets had been
15
impaired. These intangible assets were written down to estimated fair value
based on the related discounted expected future cash flows in fiscal year 2001.
We rely on many of our competitors to interconnect, at reasonable cost,
with our service. We have interconnection arrangements with more than 50
business-to-business networks for the benefit of our customers. Two of the
largest networks, GE Global Exchange Services ("GXS") and Sterling Commerce,
which we believe account for approximately 60% of the estimated EDI users, have
chosen to discontinue their interconnect arrangements with the Company. GXS
discontinued its interconnection with our service in September 2001 and Sterling
Commerce discontinued its interconnection with our service on April 8, 2002. We
have entered into arrangements with Peregrine Systems, Inc. and IBM Corporation
so our customers can continue to communicate through us with their trading
communities. As a result of these new interconnection arrangements, we will
incur additional costs and may lose existing customers if the arrangements we
have provided are inadequate for their business purposes. We believe, however,
that the arrangements we have made will satisfy our existing customers and that
our business and financial condition will not be materially or adversely
affected as a result of these new arrangements.
Critical Accounting Policies and Significant Use of Estimates in Financial
Statements
The Securities and Exchange Commission ("SEC") recently issued disclosure
guidance for "critical accounting policies." The SEC defines "critical
accounting policies" as those that require application of management's most
difficult, subjective or complex judgments, often as a result of the need to
make estimates about the effect of matters that are inherently uncertain and may
change in subsequent periods.
The following list of critical accounting policies is not intended to be a
comprehensive list of all of our accounting policies. Our significant accounting
policies are more fully described in Note 2 to the consolidated financial
statements included in our Annual Report on Form 10-K. In many cases, the
accounting treatment of a particular transaction is specifically dictated by
generally accepted accounting principles with no need for management's judgment
in their application. There are also areas in which management's judgment in
selecting any available alternative would not produce a materially different
result. We have identified the following to be critical accounting policies of
the Company:
Revenue Recognition: The Company derives its revenue from subscriptions to
its ICC.NET service, which include transaction, mailbox and fax transmission
fees. The subscription fees are comprised of both fixed and usage-based fees.
Fixed subscription fees are recognized on a pro-rata basis over the subscription
period, generally one year. Usage fees are recognized in the period the services
are rendered. The Company also derives revenue through implementation fees and
interconnection fees. Implementation fees are recognized over the life of the
subscription period. Interconnection fees are fees charged to connect to another
VAN service and are recognized when the data is transmitted to the connected
service.
The Company also provides a broad range of professional services
consisting of EDI and electronic commerce consulting, data mapping services and
EDI education and training at seminars hosted by leading universities around the
United States. Revenue from EDI and electronic commerce consulting and education
and training are recognized when the services are provided. Revenue from data
mapping services are recognized when the map has been completed and delivered to
the customer. Revenue from fixed fee professional service contracts are
recognized using the percentage-of-completion method of accounting, as
prescribed by SOP 81-1 "Accounting for Performance of Construction-Type and
Certain Production-Type Contracts."
The percentage of completion for each contract is determined based on the
ratio of direct labor hours incurred to total estimated direct labor hours
required to complete the contract. The Company may periodically encounter
changes in estimated costs and other factors that may lead to a change in the
estimated profitability of a fixed-price contract. In such circumstances,
adjustments to cost and profitability estimates are made in the period in which
the underlying factors requiring such revisions become known. If such revisions
indicate a loss on a contract, the entire loss is recorded at such time. Amounts
billed in advance of services being performed are recorded as deferred revenue.
Certain fixed-fee contracts may have substantive customer acceptance provisions.
The acceptance terms generally include a single review and revision cycle for
each deliverable to incorporate the customer's suggested or required
modifications. Deliverables are considered accepted upon completion of the
review and revision and revenue is recognized upon acceptance.
16
The Company also derives revenue from its service bureau. Service bureau
revenues are comprised of EDI services, including data translation services,
purchase order and invoice processing from EDI-to-print and print-to-EDI, UPC
services, including UPC number generation, UPC catalog maintenance and UPC label
printing. The service bureau also derives revenue from software licensing and
provides software maintenance and support. Revenue from the EDI services and UPC
services is recognized when the services are provided. The Company accounts for
its EDI software license sales in accordance with the American Institute of
Certified Public Accountants' Statement of Position 97-2, "Software Revenue
Recognition", as amended. Revenue from software licenses are recognized when all
of the following conditions are met: (1) a non-cancelable non-contingent license
agreement has been signed; (2) the software product has been delivered; (3)
there are no material uncertainties regarding customer acceptance; and (4)
collection of the resulting receivable is probable. Revenue from software
maintenance and support contracts are recognized ratably over the life of the
contract. The Company's software license revenue was not significant in any of
the periods presented.
In addition, SOP 97-2, generally requires revenue from software
arrangements involving multiple elements to be allocated to each element of the
arrangement based on the relative fair values of the elements, such as software
licenses, post contract customer support, installation, or training and
recognized as the element is delivered and the Company has no significant
remaining performance obligations. The Company's multiple element arrangements
generally consist of a software license and post contract support. The Company
allocates the aggregate revenues from multiple element arrangements to each
element based on vendor specific objective evidence. The Company has established
vendor specific objective evidence for each of the elements as it sells both the
software and post contract customer support independent of multiple element
agreements. Customers are charged standard prices for the software and post
contract customer support and theses prices do not vary from customer to
customer.
If the Company enters into a multiple element agreement where vendor
specific objective evidence of fair value for each element of the arrangement
does not exist, all revenue from the arrangement is deferred until all elements
of the arrangement are delivered.
Service revenue from maintenance contracts is recognized ratably over the
term of the maintenance contract, on a straight-line basis. Other service
revenue is recognized at the time the service is performed.
Goodwill: Goodwill consists of the excess purchase price over the fair
value of identifiable net assets of acquired businesses. The carrying value of
goodwill is evaluated for impairment on an annual basis. Management also reviews
goodwill for impairment whenever events or changes in circumstances indicate
that the carrying amount of goodwill may be impaired. If it is determined that
an impairment in value has occurred, goodwill will be written down to the
present value of the expected future operating cash flows to be generated by the
respective reporting unit. The Company has evaluated goodwill for impairment and
has determined that no impairment exists at August 1, 2001. The Company's
reporting units utilized for evaluating the recoverability of goodwill are the
same as its operating segments.
Other Intangible Assets: Other Intangible assets are carried at cost less
accumulated amortization. Other intangible assets are amortized on a
straight-line basis over their expected lives, which are estimated to be five
years. The Company did not have any indefinite lived intangible assets that were
not subject to amortization
Impairment of long-lived assets. Long-lived assets of the Company are
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of the asset may not be recoverable. Management also
reevaluates the periods of amortization of long-lived assets to determine
whether events and circumstances warrant revised estimates of useful lives. The
Company evaluates the carrying value of its long-lived assets in relation to the
operating performance and future undiscounted cash flows of the asset when
indications of impairment are present. If it is determined that an impairment in
value has occurred, the excess of the value of the asset will be written down to
the present value of the expected future operating cash flows to be generated by
the asset.
Stock-based compensation: The Company accounts for its stock-based
compensation arrangements with its employees in accordance with the provisions
of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" and complies with the disclosure provisions of SFAS 123, "Accounting
for Stock-based Compensation." SFAS 123 established a fair-value-based method of
accounting for stock-based compensation plans. Stock-based awards to
nonemployees are accounted for at fair value in accordance with the provisions
of SFAS 123.
17
Income Taxes: We have a history of unprofitable operations from the
operating losses incurred, which generated significant state and federal tax net
operating losses, or NOL carryforward. GAAP requires that we record a valuation
allowance against the deferred tax asset associated with this NOL if it is "more
likely than not" that we will not be able to utilize it to offset future taxes.
Due to our history of unprofitable operations, we have recorded a valuation
allowance equal to 100% of these deferred tax assets.
It is possible, however, that we could be profitable in the future at
levels which cause management to conclude that it is more likely than not that
we will realize all or a portion of the NOL carryforward. Upon reaching such a
conclusion, we would immediately record the estimated net realizable value of
the deferred tax asset at that time and would then provide for income taxes at a
rate equal to our combined federal and state effective rates. Subsequent
revisions to the estimated net realizable value of the deferred tax asset could
cause our provision for income taxes to vary significantly from period to
period, although our cash tax payments would remain unaffected until the benefit
of the NOL is utilized.
Use of Estimates. The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and reported amounts of revenue and expense
during the reporting period. Actual results could differ from those estimates.
The following discussion reviews items incorporated in our financial statements
that required the use of significant management estimates.
In connection with our purchase of Intercoastal Data Corporation ("IDC")
and Research Triangle Commerce, Inc. ("RTCI"), we allocated the total
acquisition costs to all tangible and intangible assets acquired and all
liabilities assumed, with the excess purchase price over the fair value of net
assets acquired recorded to goodwill. To arrive at the allocation of the total
purchase price, management used the best information available to make certain
assumptions in estimating the fair market value of IDC's and RTCI's tangible
assets, intangible assets (such as trademarks, brand, intellectual property
rights to developed technology, and customer lists) and liabilities.
Impairment of acquired intangibles in the amount of $1,872,000 resulted
from a reduction of the workforce of RTCI during and subsequent to the
three-month period ended April 30, 2001. The workforce of RTCI was recorded at
its estimated fair value at the time of the merger. The value of the workforce
was impaired approximately 50% by the reduction of RTCI personnel.
In March 2000, ICC granted an option to purchase 100,000 shares of class A
common stock pursuant to a consulting agreement with a former executive officer
and board member. The Black-Scholes option-pricing model was used to determine
the market value of these options, which required management to make certain
estimates for values of variables used by the model. Management estimated the
values for stock price volatility, the expected life of the options and
risk-free rate based on information that was available to management at the time
the Black-Scholes option-pricing calculations were performed. Non-cash
consulting charges for this stock option amounted to $450,000 in the 2001 Nine
Months.
In connection with a warrant exchange offer in April 2002, the Company
valued the repriced and newly issued warrants at $461,084 using the
Black-Scholes pricing model. This amount has been deducted from the Company's
net loss to increase the net loss attributable to common stockholders.
18
Three Months Ended April 30, 2002 Compared with Three Months Ended April 30,
2002.
Results of Operations - Consolidated
The following table reflects consolidated operating data by reported segments.
All significant intersegment activity has been eliminated. Accordingly, segment
results reported exclude the effect of transactions between our subsidiary and
us.
Three Months Ended
April 30,
--------------------------------
Consolidated loss before income taxes: 2002 2001
------------ -----------
ICC.Net $ (1,117,085) $(1,945,365)
Service Bureau 29,455 (104,650)
Professional Services (650,544) (3,711,959)
------------ -----------
Consolidated loss before income taxes (1,738,174) $(5,761,974)
============ ===========
Results of Operations - ICC.Net
Our ICC.NET service, the Company's global Internet-based value added
network, or VAN, uses the Internet and our proprietary technology to deliver our
customers' documents and data files to members of their trading communities,
many of which may have incompatible systems, by translating the documents and
data files into any format required by the receiver. The following table
summarizes operating results for our ICC.Net service:
Three Months Ended
April 30,
-----------------------------
2002 2001
------------ ------------
Revenue:
Services not including Triaton Joint
Services Agreement $ 1,660,461 $ 1,102,157
Services performed under Triaton Joint
Services Agreement -- 500,000
-------------- -----------
1,660,461 1,602,157
Expenses:
Cost of services 924,318 903,094
Product development and enhancement 198,292 158,216
Selling and marketing 713,278 924,865
General and administrative 994,824 1,640,369
----------- -----------
2,830,712 3,626,544
----------- -----------
Operating loss (1,170,251) (2,024,387)
----------- -----------
Other income, net 53,166 79,022
----------- -----------
$(1,117,085) $(1,945,365)
Loss before income taxes =========== ===========
Revenue - ICC.Net - Revenue related to our ICC.NET service was 61% of
consolidated revenue for the quarter ended April 30, 2002 ("2002 Quarter"). Our
ICC.NET service revenue increased $58,000 in the 2002 Quarter from the quarter
ended April 30, 2001 ("2001 Quarter"). The 2001 Quarter included $500,000 of
fees from Triaton GmbH, a subsidiary of ThyssenKrupp Information Services GmbH,
under a Joint Services Agreement dated July 28, 2000. No such fees were
recognized in the 2002 Quarter. Transaction fees from our ICC.NET service
increased $692,000 as a result of a larger billable customer base and increased
volume usage by new and existing customers.
19
Cost of services - ICC.Net - Cost of services relating to our ICC.NET
service was 56% of revenue derived from the service in the 2002 Quarter,
compared to 56% of revenue in the 2001 Quarter. Cost of services related to our
ICC.Net service consists primarily of salaries and employee benefits and
connectivity fees. Connectivity fees are those costs that we incur to transmit
data electronically. These fees include charges from other VANS and charges from
Internet service providers. We reduced our cost of services personnel to 23 at
the end of the 2002 Quarter from 46 at the end of the 2001 Quarter and as a
result we were able to reduce salaries and benefits $196,000. However, these
savings were partially offset by our increase in cost for connectivity fees of
$118,000 in the 2002 Quarter from the 2001 Quarter. The increase in connectivity
fees was primarily due to additional fees incurred to offer our customers and
their trading partners alternative connectivity as a result of GXS and Sterling
disconnecting our service from their networks. We anticipate that our ICC.NET
cost of services will decline as a percentage of revenue in future periods due
to increased utilization of our existing communications infrastructure as we
expect the use of our service to increase.
Product development and enhancement - ICC.Net - Product development and
enhancement costs relating to our ICC.Net service consists primarily of salaries
and employee benefits. The increase of $21,000 in the 2002 Quarter from the 2001
Quarter was primarily the result of additional costs due to implementing
alternative connectivity of our ICC.NET service as a result of GXS and Sterling
disconnecting our service from their networks and other enhancements in the
amount of $232,000. This was partially offset by a decrease of $163,000 in
salaries and employee benefits which were realized as a result of reducing
staffing to thirteen employees in the 2002 Quarter from nineteen employees in
the 2001 Quarter. The reduction in employees was necessary to reduce our
operating expenses in order to reach our goal of cash flow breakeven. The
reduction in employees did not affect the quality or reliability of our service;
however, a number of enhancement projects were postponed as a result. The
postponement of some of these enhancement projects has delayed the initiation of
service to certain customers.
Selling and marketing - ICC.Net - Selling and marketing expenses relating
to our ICC.Net service consist primarily of salaries and employee benefits,
advertising and tradeshow costs and travel-related costs. Selling and marketing
expenses related to our ICC.NET service were reduced $212,000 in the 2002
Quarter from the 2001 Quarter. We reduced advertising and tradeshow costs
$48,000 and travel-related costs $32,000 in the 2002 Quarter from the 2001
Quarter as a result of our cost reduction efforts to achieve to cash flow
breakeven. In addition, consulting fees decreased $48,000 as a result of a
branding project that was completed in the 2001 Quarter.
General and administrative - ICC.Net - General and administrative expenses
supporting our ICC.NET service consist primarily of salaries and employee
benefits, facility costs and legal and professional fees. General and
administrative costs supporting our ICC.Net service decreased $645,000 in the
2002 Quarter. Legal and professional fees increased $238,000 in the 2002 Quarter
primarily as a result of exploring legal remedies available to us as a result of
GXS and Sterling disconnecting our service from their networks. Consulting fees
decreased $74,000 as a result of the termination of a consulting contract with a
former officer of the Company that resulted in a charge in the 2001 Quarter.
Also, depreciation and amortization decreased $133,000 primarily as a result of
the Company's implementation of SFAS No. 142, effective August 1, 2001, which
requires goodwill to be tested for impairment on a periodic basis and no longer
permits the amortization of goodwill. The 2001 Quarter included severance of
$438,000, due to the termination of an officer. In addition, expenses associated
with the integration of the information systems of acquired companies amounted
to $256,000. No such expenses were incurred in the 2002 Quarter.
Other income - ICC.Net - Other income decreased as a result of lower
average cash balances in the 2002 Quarter compared to the 2001 Quarter. In
addition, we had realized gains from the sale of marketable securities in the
amount of $42,000 in the 2002 Quarter. No realized gains were recognized in the
2001 Quarter.
20
Results of Operations - Service Bureau
Our service bureau manages and translates the data of small and mid-sized
companies that exchange EDI data with large companies and provides various EDI
and UPC (universal product code) services. Our service bureau also licenses EDI
software. The following table summarizes operating results for our service
bureau:
Three Months Ended
April 30,
-------------------------
2002 2001
-------- ---------
Revenue:
Services $ 419,567 $ 329,319
--------- ---------
Expenses:
Cost of services 208,685 169,532
Product development and enhancement 32,164 78,796
Selling and marketing 34,501 34,947
General and administrative 114,762 150,694
--------- ---------
390,112 433,969
--------- ---------
Operating income (loss) 29,455 (104,650)
--------- ---------
Other income, net -- --
--------- ---------
Income (loss) before income taxes $ 29,455 $(104,650)
========= =========
Revenue - Service Bureau - Revenue related to our service bureau was 15%
of the 2002 Quarter consolidated revenue. The service bureau's revenue was
primarily generated from services performed, customer support and licensing
fees. The increase in revenue of $90,000 was primarily the result of an
increased demand for barcode label printing from existing customers.
Cost of services - Service Bureau - Cost of services relating to our
service bureau was 50% of revenue derived from the service bureau in the 2002
Quarter, compared to 51% of revenue derived from the service bureau in the 2001
Quarter. Cost of services related to our service bureau consists primarily of
salaries and employee benefits. The increase in cost of services was primarily
the result of an increase in salaries and employee benefits as a result of
hiring employees that were previously outsourced from a temporary employment
agency.
Product development and enhancement - Service Bureau - Product development
and enhancement costs consist primarily of salaries and employee benefits.
Product development and enhancement costs incurred by our service bureau
decreased $47,000 in the 2002 Quarter from the 2001 Quarter. The decrease was
primarily attributable to a decrease in salaries and employee benefits as a
result of reduced staffing in the 2002 Quarter from the 2001 Quarter. The
reduced staffing did not have any impact on future or existing projects.
Selling and marketing - Service Bureau - Selling and marketing expenses
relating to our service bureau consist primarily of salaries and employee
benefits.
General and administrative - Service Bureau - General and administrative
expenses relating to our service bureau consist primarily of salaries and
employee benefits.
21
Results of Operations - Professional Services
Our professional services segment provides comprehensive
business-to-business electronic commerce solutions including electronic commerce
infrastructure solutions and data mapping services. Our professional services
segment also conducts a series of product-independent one-day EDI seminars for
electronic commerce users. The following table summarizes operating results for
our professional services:
Three Months Ended
April 30,
-----------------------------
2002 2001
----------- -----------
Revenue:
Services $ 644,554 $ 1,109,992
----------- -----------
Expenses:
Cost of services 730,738 1,405,783
Selling and marketing 175,121 402,579
General and administrative 401,400 1,129,657
Impairment of acquired intangible -- 1,871,900
----------- -----------
1,307,259 4,809,919
----------- -----------
Operating loss (662,705) (3,699,927)
Other income (expense), net 12,161 (12,032)
----------- -----------
Loss before income taxes $ (650,544) $(3,711,959)
=========== ===========
Revenue - Professional services - Revenue related to professional services
was 24% of the 2002 Quarter consolidated revenue. Revenue generated from
professional services consists of consulting, educational and mapping services.
As a result of the continuing economic slowdown, revenue from professional
services has decreased $465,000. In addition, the impact of headcount reductions
also contributed to a decrease in revenue.
Cost of services - Professional Services - Cost of services relating to
professional services was 113% of revenue derived from professional services in
the 2002 Quarter, compared to 127% of revenue in the 2001 Quarter. Cost of
services related to our professional services consists primarily of salaries and
employee benefits, contract labor and depreciation and amortization. Salaries
and employee benefits relating to our professional services decreased $156,000
in the 2002 Quarter, compared to the 2001 Quarter due to a reduction in the
workforce. Non-reimbursable travel-related expenses decreased $130,000 as a
direct result of the reduction in the workforce. Contract labor decreased
$135,000 as a consequence of decreased revenues. In addition, amortization
decreased $200,000 as a result of the impairment of the acquired workforce
recognized at the end of 2001 Quarter.
Selling and marketing - Professional Services - Selling and marketing
expenses relating to our professional services consist primarily of salaries and
employee benefits. Selling and marketing expenses related to our professional
services were reduced $227,000 in the 2002 Quarter from the 2001 Quarter. The
decrease in selling and marketing expenses was primarily attributable to a
decrease in salaries and benefits of $82,000, primarily due to a reduction in
the workforce, and a decrease of $45,000 in travel-related expenses as a result
of the reduction in workforce. We also reduced our trade show and advertising
expenses in the amount of $73,000 as a result of focusing on our ICC.Net
service. In addition, we had a $30,000 decrease in amortization of our acquired
customer list, which was impaired in the 2001 Quarter.
22
General and administrative - Professional Services - General and
administrative expenses supporting our professional services consist primarily
of salaries and employee benefits, facility costs and depreciation and
amortization. General and administrative costs supporting our professional
services decreased $728,000 in the 2002 Quarter from the 2001 Quarter. The
decrease was partially attributable to a decrease in depreciation and
amortization of $478,000, a result of the Company's implementation of SFAS No.
142, effective August 1, 2001, which requires goodwill to be tested for
impairment on a periodic basis and no longer permits the amortization of
goodwill. The decrease was also attributable to a decrease in salaries and
benefits of $166,000 primarily due to a reduction in the workforce. In addition,
we also reduced facility charges by $47,000 primarily as a result of
renegotiating the terms of the lease to reduce office space from our existing
facility.
Nine Months Ended April 30, 2002 Compared with Nine Months Ended April 30, 2001.
Results of Operations
The following table reflects consolidated operating data by reported
segment. All significant intersegment activity has been eliminated. Accordingly,
segment results reported exclude the effect of transactions between our
subsidiary and us:
Nine Months Ended
April 30,
-------------------------------
Consolidated loss before income taxes: 2002 2001
------------ -------------
ICC.Net $ (3,701,433) $ (7,785,177)
Service Bureau (32,119) (114,581)
Professional Services (2,131,658) (5,819,372)
------------ ------------
Consolidated loss before income taxes $ (5,865,210) $(13,719,130)
============ ============
Results of Operations - ICC.Net
The following table summarizes operating results for our ICC.Net service:
Nine Months Ended
April 30,
------------------------------
2002 2001
------------ ------------
Revenue:
Services not including Triaton Joint
Services Agreement $ 4,681,202 $ 2,542,234
Services performed under Triaton Joint
Services Agreement -- 1,000,000
------------ ------------
4,681,202 3,542,234
Expenses:
Cost of services 2,897,584 2,656,022
Product development and enhancement 610,458 409,057
Selling and marketing 2,197,020 3,254,969
General and administrative 2,783,668 4,926,487
Non-cash charges for stock-based
compensation and services -- 450,110
------------ ------------
8,488,730 11,696,645
------------ ------------
Operating loss $ (3,807,528) $ (8,154,411)
------------ ------------
Other income, net 106,095 369,234
------------ ------------
Loss before income taxes $ (3,701,433) $ (7,785,177)
============ ============
23
Revenue - ICC.Net - Revenue related to our ICC.NET service was 55% of the
consolidated revenue for the nine months ended April 30, 2002 ("2002 Nine
Months"). Our ICC.NET service revenue increased $1,139,000 in the 2002 Nine
Months from the nine months ended April 30, 2001 ("2001 Nine Months). The 2001
Nine Months includes $1,000,000 of fees from Triaton GmbH, a subsidiary of
ThyssenKrupp Information Services GmbH, under a Joint Services Agreement dated
July 28, 2000. No such fees were recognized in the 2002 Nine Months. Transaction
fees from our ICC.NET service increased $2,237,000 as a result of a larger
billable customer base and increased volume usage by new and existing customers.
Cost of services - ICC.Net - Cost of services relating to our ICC.NET
service was 62% of revenue derived from the service in the 2002 Nine Months,
compared to 75% of revenue in the 2001 Nine Months. Cost of services related to
our ICC.Net service consists primarily of salaries and employee benefits and
connectivity fees. Connectivity fees are those costs that we incur to transmit
data electronically. These fees include charges from other VANS and charges from
Internet service providers. Salaries and benefits increased $48,000 in the 2002
Nine Months from the 2001 Nine Months and connectivity fees increased $258,000
in the 2002 Nine Months from the 2001 Nine Months. The increase in connectivity
fees was primarily due to additional fees incurred to offer our customers and
their trading partners alternative connectivity as a result of GXS and Sterling
disconnecting our service from their networks. In addition, consulting fees
decreased $107,000 in the 2002 Nine Months from the 2001 Nine Months. The
consulting fees in the 2001 Quarter were for mapping services performed by RTCI
prior to its acquisition in November 2000. We anticipate that our ICC.NET cost
of services will continue to decline as a percentage of revenue in future
periods due to increased utilization of our existing communications
infrastructure as we expect the use of our service to increase.
Product development and enhancement - ICC.Net - Product development and
enhancement costs relating to our ICC.Net service consist primarily of salaries
and employee benefits and software and hardware purchases. The increase of
$201,000 in the 2002 Nine Months from the 2001 Nine Months was primarily the
result of additional costs due to implementing alternative connectivity of our
ICC.NET service as a result of GXS and Sterling disconnecting our service from
their networks and other enhancements in the amount of $602,000. This was
partially offset by a decrease of $295,000 in salaries and employee benefits
which were realized as a result of reducing staffing to thirteen employees at
the end of the 2002 Nine Months from nineteen employees at the end of the 2001
Nine Months. The reduction in employees was necessary to reduce our operating
expenses in order to reach our goal of positive cash flow. The reduction in
employees did not affect the quality or reliability of our service, however,
there were a number of enhancement projects that were postponed as a result. It
is not expected that the postponement of these enhancement projects will affect
future revenue. In addition, as part of overall cost reduction, travel-related
expenses were reduced by $22,000 and consulting expenses were reduced $16,000.
Selling and marketing - ICC.Net - Selling and marketing expenses relating
to our ICC.Net service consist primarily of salaries and employee benefits,
advertising and tradeshow costs and travel-related costs. Selling and marketing
expenses related to our ICC.NET service were reduced $1,058,000 in the 2002 Nine
Months from the 2001 Nine Months. Salaries and employee benefits related to our
ICC.NET service decreased $491,000, primarily due to the elimination of our
telesales force. We reduced advertising and tradeshow costs $98,000 and
travel-related costs $138,000 in the 2002 Nine Months from the 2001 Nine Months
as a result of our cost reduction efforts to achieve to cash flow breakeven. In
addition, consulting fees decreased $195,000 primarily as a result of a branding
project and a mass marketing project that was completed in the 2001 Nine Months.
No similar projects were undertaken in the 2002 Nine Months.
24
General and administrative - ICC.Net - General and administrative expenses
supporting our ICC.NET service consist primarily of salaries and employee
benefits, facility costs and legal and professional fees. General and
administrative costs supporting our ICC.Net service decreased $2,143,000 in the
2002 Nine Months from the 2001 Nine Months. Salaries and related employee
benefits decreased $306,000 in the 2002 Nine Months, due to a reduction in the
workforce. Recruitment fees decreased $137,000 as a result of a hiring freeze
during the 2002 Nine Months. Consulting fees decreased $281,000 as a result of
the termination of a consulting contract with a former officer of the Company
that resulted in a charge in the 2001 Nine Months. Also, depreciation and
amortization decreased $240,000 primarily as a result of the Company's
implementation of SFAS No. 142, effective August 1, 2001, which requires
goodwill to be tested for impairment on a periodic basis and no longer permits
the amortization of goodwill. The 2001 Nine Months included severance of
$455,000, primarily due to the termination of an officer, and expenses
associated with the integration of the information systems of the acquired
companies that amounted to $827,000.
Non-cash charges - ICC.Net - In March 2000, ICC granted an option to
purchase 100,000 shares of class A common stock pursuant to a consulting
agreement with a former executive officer and board member. Non-cash consulting
charges for this stock option amounted to $450,000 in the 2001 Nine Months.
Other income, net - Interest and investment income decreased to $129,000
in the 2002 Nine Months from $380,000 in the 2001 Nine Months. The decrease was
due to lower average cash balances in the 2002 Nine Months compared to the 2001
Nine Months. This was offset by realized gains from sales of marketable
securities in the amount of $106,000 in the 2002 Nine Months. No such realized
gains were recognized in the 2001 Nine Months.
Results of Operations - Service Bureau
The following table summarizes operating results for our service bureau:
Nine Months Ended
April 30,
--------------------------
2002 2001
----------- -----------
Revenue:
Services $ 1,217,959 $ 1,086,504
----------- -----------
Expenses:
Cost of services 663,730 464,130
Product development and enhancement 119,328 265,597
Selling and marketing 95,767 77,146
General and administrative 371,253 394,212
----------- -----------
1,250,078 1,201,085
----------- -----------
Operating loss (32,119) (114,581)
----------- -----------
Other income, net -- --
----------- -----------
Loss before income taxes $ (32,119) $ (114,581)
=========== ===========
Revenue - Service Bureau - Revenue related to our service bureau was 14%
of the 2002 Nine Month consolidated revenue. The service bureau's revenue was
primarily generated from services performed, customer support and licensing
fees. The increase in revenues of $131,000 was primarily the result of an
increased demand for barcode label printing from existing customers.
Cost of services - Service Bureau - Cost of services relating to our
service bureau was 54% of revenue derived from the service bureau in the 2002
Nine Months, compared to 43% of revenue derived from the service bureau in the
2001 Nine Months. Cost of services related to our service bureau consists
primarily of salaries and employee benefits. The increase in cost of services
was primarily the result of an increase in salaries and employee benefits as a
result of hiring employees that were previously outsourced from a temporary
employment agency.
25
Product development and enhancement - Service Bureau - Product development
and enhancement costs consist primarily of salaries and employee benefits.
Product development and enhancement costs incurred by our service bureau
decreased $146,000 in the 2002 Nine Months from the 2001 Nine Months. The
decrease was primarily attributable to costs being capitalized for newly
developed software in the amount of $82,000. Also, we reduced consulting fees
$52,000 by hiring an additional employee to perform the work previously
performed by consultants.
Selling and marketing - Service Bureau - Selling and marketing expenses
relating to our service bureau consist primarily of salaries and employee
benefits.
General and administrative - Service Bureau - General and administrative
expenses relating to our service bureau consist primarily of salaries and
employee benefits.
Results of Operations - Professional Services
Note: The following analysis of professional services for the 2001 Nine
Months reflects the results of operations of our professional services group
from November 6, 2000, the acquisition date of RTCI.
The following table summarizes operating results for our professional
services:
Nine Months Ended
April 30,
-----------------------------
2002 2001
----------- ------------
Revenue:
Services $ 2,560,947 $ 2,311,500
----------- -----------
Expenses:
Cost of services 2,931,518 3,138,466
Selling and marketing 530,386 764,722
General and administrative 1,010,345 2,391,922
Non-cash charges for stock-based
compensation and services 190,019 --
Impairment of acquired intangibles -- 1,871,900
----------- -----------
4,662,268 8,167,010
----------- -----------
Operating loss $(2,101,321) $(5,855,510)
----------- -----------
Other (expense) income, net (30,337) 36,138
----------- -----------
Loss before income taxes $(2,131,658) $(5,819,372)
=========== ===========
Revenue - Professional services - Revenue related to professional services
was 30% of the 2002 Nine Months consolidated revenue. Revenue generated from
professional services consists of consulting, educational and mapping services.
The average monthly revenue decreased in the 2002 Nine Months as a result of the
continuing economic slowdown. In addition, the impact of headcount reductions
also contributed to a decrease in average monthly revenue.
Cost of services - Professional Services - Cost of services relating to
professional services was 114% of revenue derived from professional services in
the 2002 Nine Months, compared to 136% of revenue in the 2001 Nine Months. The
decrease of cost of services as a percent of revenue in the 2002 Nine Months is
primarily the result of the amortization of the workforce intangible of $400,000
in the 2001 Nine Months. As required by FAS 142, we reclassed the workforce
intangible from other intangible assets to goodwill and as a result no such
amortization charge was incurred in the 2002 Nine Months. Cost of services
related to our professional services consists primarily of salaries and employee
benefits, contract labor and depreciation and amortization.
26
Selling and marketing - Professional Services - Selling and marketing
expenses relating to our professional services consist primarily of salaries and
employee benefits.
General and administrative - Professional Services - General and
administrative expenses supporting our professional services consist primarily
of salaries and employee benefits, facility costs and depreciation and
amortization.
Non-cash charges - Professional Services - Non-cash charges for
compensation and services relating to our professional services in the 2002 Nine
Months consisted of $190,000 of stock-based compensation expenses related to
172,907 unvested restricted shares issued to RTCI employees in connection with
our acquisition of RTCI. The value of the restricted shares was amortized from
the date of acquisition through January 1, 2002.
Impairment of Acquired Intangibles - Professional Services -Due to a
reduction of the workforce of RTCI, management determined that a triggering
event had occurred related to the acquired workforce. Projected cash flow
analysis related to this asset determined that this asset had been impaired.
This intangible asset was written down to estimated fair value based on the
related discounted expected future cash flows and other relevant factors. During
the 2001 Nine Months, we recorded an impairment charge related to the impaired
intangible acquired from RTCI.
Liquidity and Capital Resources
Our principal sources of liquidity, which consist of cash and cash
equivalents and marketable securities, decreased to $1,606,000 as of April 30,
2002 from $2,889,000 as of July 31, 2001. We believe, these resources together
with the amounts owed to us by Triaton GmbH under the Joint Services Agreement,
should provide us with sufficient liquidity to continue in operation through
July 31, 2003. The Joint Services Agreement requires payment by Triaton of
$1,000,000 in July 2002 and $6,000,000 during fiscal year 2003. However, if we
do not receive the scheduled payments from Triaton GmbH and we cannot reduce
costs to achieve sufficient savings, or our expenses increase more than
anticipated, our revenue does not increase as anticipated because of competitive
or other reasons, our cash resources may not be sufficient and we will require
additional financing. There can be no assurances that any financing will be
available or that the terms will be acceptable to us, or that any financing will
be consummated.
We anticipate losses through July 31, 2002 as we continue to expand the
commercial markets for our ICC.NET service and service bureau.
We have financed our operations through private placements during fiscal
1994, our initial public offering during fiscal 1995 (the "IPO"), a private
placement in March 1997, a private placement of bridge note units during fiscal
1998 and 1999, a private placement of series A preferred stock in April 1999,
private placements of our class A common stock, series C preferred stock and
warrants in November 1999 and a private placement of our class A common stock
and warrants in October 2001.
We sold in the October 2001 private placement 1,159,716 shares of class A
common stock and warrants to purchase 347,915 additional shares of class A
common stock for gross proceeds of $3,189,219. The warrants expire in October
2006 and are exercisable at $3.58 per share, subject to adjustment pursuant to
customary antidilution adjustments for stock splits, dividends and combinations.
In connection with the private placement, the Company incurred fees of $152,511,
of which $35,000 has been paid in cash and $117,511 has been paid by issuing
warrants to purchase 50,000 shares of class A common stock. The warrants have
substantially the same terms and conditions as the warrants issued in the
private placement.
We commenced a warrant exchange offer on April 23, 2002. The offer was
extended to investors who participated in the private placement on October 29,
2001 and to holders of warrants issued as fees in connection with such private
placement. The offer lowered the exercise price of the warrants issued in the
private placement to $2.50 per class A common share for those investors that
agreed to exercise those warrants. In addition, for each class A common share
purchased pursuant to the warrant exercise, a new warrant (the "New Warrants")
to purchase an equivalent number of class A common shares was issued. The New
Warrants have an exercise price of $3.50 per share and are exercisable for a
five-year period. The New Warrants have the same redemption terms as the
warrants issued in the private placement. The warrant exchange offer was
originally set to expire on April 30, 2002, but was extended by the Company's
board of directors until May 31, 2002. As of April 30, 2002, the Company
received $542,247 in proceeds and issued a total of 217,007 shares of class A
common stock and warrants to purchase 217,007 shares of class A common stock.
27
We have a net operating loss carryforward of approximately $76 million to
offset future taxable income for federal income tax purposes. The utilization of
the loss carryforward to reduce any such future income taxes will depend on our
ability to generate sufficient taxable income prior to the expiration of the net
operating loss carryforwards. The carryforward expires from 2007 to 2021. The
Internal Revenue Code of 1986, as amended, and the regulations promulgated
thereunder contain provisions which limit the use of available net operating
loss carryforwards in any given year should significant changes (greater than
50%) in ownership interests occur. Due to the IPO, the net operating loss
carryover of approximately $1.9 million incurred prior to the IPO is subject to
an annual limitation of approximately $400,000 until that portion of the net
operating loss is utilized or expires. Due to the private placement of series A
preferred stock in April 1999, the net operating loss carryover of approximately
$18 million incurred prior to the private placement is subject to an annual
limitation of approximately $1 million until that portion of the net operating
loss is utilized or expires. Also, due to the 100% ownership change when we
acquired RTCI, RTCI's net operating loss of approximately $6.5 million incurred
prior to the ownership change is subject to an annual limitation of
approximately $1.4 million until that portion of the net operating loss is
utilized or expires.
Consolidated Working Capital
Consolidated working capital decreased to $465,000 at April 30, 2002 from
$646,000 at July 31, 2001. This decrease is due to a $1,283,000 decrease in cash
and cash equivalents and marketable securities primarily as a result of
continued operating losses partially offset by proceeds raised in our October
2001 private placement and April 2002 warrant exchange offer. The decrease is
also the result of a $701,000 decrease in accrued expenses.
Analysis of Cash Flows
Cash used in operating activities decreased to $4,880,000 in the 2002 Nine
Months from $9,966,000 in the 2001 Nine Months. The decrease is primarily the
result of a decrease in cash operating expenses of $3,266,000, which excludes
impairment of intangible assets, depreciation and amortization and non-cash
charges for equity instruments issued for compensation and services. This
decrease is also the result of an increase in revenue of $1,520,000.
Cash provided by investing activities increased to $339,000 in the 2002
Nine Months compared to cash used by investing activities of $696,000 in the
2001 Nine Months. This increase is primarily the result of $456,000 in proceeds
from the sales of marketable securities in the 2002 Nine Months and a decrease
of cash purchases of property and equipment of $528,000.
Cash provided by financing activities increased to $3,683,000 in the 2002
Nine Months compared to cash used in financing activities of $32,000 in the 2001
Nine Months. The increase is primarily the result of net proceeds of $3,107,000
from the October 2001 private placement described above and an increase of
$602,000 of proceeds from the exercise of warrants to purchase class A common
stock.
Recent Accounting Pronouncements
In July 2001, the FASB issued SFAS No. 141, "Business Combinations" and
SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires that
all business combinations subsequent to June 30, 2001 be accounted for under the
purchase method of accounting. SFAS No.141 also requires that the fair value of
an assembled workforce acquired be included in the amount initially recorded as
goodwill. As required by this statement, the Company reclassified into goodwill
$1,710,617 initially recorded as other intangible assets related to the value of
the assembled workforce of RTCI. SFAS No. 142 requires that upon adoption,
amortization of goodwill will cease, and instead, the carrying value of goodwill
will be evaluated for impairment on at least an annual basis. SFAS No. 142 is
effective for fiscal years beginning after December 15, 2001; however, the
Company has adopted this standard as of the beginning of its 2002 fiscal year,
August 1, 2001, as permitted under the provisions of SFAS No. 142. The adoption
of this standard resulted in no charges for amortization of goodwill in the 2002
Quarter and the 2002 Nine Months. Amortization expense in the amount of $544,000
and $1,155,000 were charged in the 2001 Quarter and 2001 Nine Months,
respectively, prior to the adoption of SFAS No. 142. The Company has evaluated
goodwill for impairment and has determined that no impairment exists at August
1, 2001.
28
In July 2001, the FASB issued SFAS No.143, "Accounting for Asset
Retirement Obligations." SFAS No. 143 is effective for fiscal years beginning
after June 15, 2002, and establishes an accounting standard requiring the
recording of the fair value of liabilities associated with the retirement of
long-lived assets in the period in which they are incurred. The Company is in
the process of determining the impact that the adoption of SFAS No. 143 may have
on its earnings and financial position.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 supersedes SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of." SFAS No. 144 addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. The provisions of
SFAS No. 144 are effective for fiscal years beginning after December 15, 2001.
The Company is required to adopt SFAS No. 144 by the first quarter of fiscal
2003. The Company is currently evaluating the potential impact of SFAS No. 144
on its results of operations and financial position.
In November 2001, the Emerging Issues Task Force ("EITF") of the FASB
reached a consensus on Issue No. 01-14, "Income Statement Characterization of
Reimbursements Received for `Out-of-Pocket' Expenses Incurred." A consensus was
reached that reimbursements received for out-of-pocket expenses incurred should
be characterized as revenue in the income statement. The Company adopted 01-14
effective February 1, 2002. Reimbursements of out-of-pocket expenses were not
significant in any of the periods presented.
Item 3: Quantitative and Qualitative Disclosures About Market Risk
During the third quarter ended April 30, 2002, there were no significant
changes related to the Company's market risk exposure.
PART II. OTHER INFORMATION
Item 2: Changes in Securities and Use of Proceeds
The Company commenced a warrant exchange offer on April 23, 2002. The
offer was extended to investors who participated in our private placement on
October 29, 2001. The offer lowered the exercise price of the warrants issued in
the private placement to $2.50 per warrant for those investors that agreed to
exercise those warrants. In addition, for each warrant exercised, a new
five-year warrant was issued having an exercise price of $3.50 per warrant. The
offer was originally set to expire on April 30, 2002, but was extended by the
Company's board of directors until May 31, 2002. As of April 30, 2002, the
Company received $542,247 in proceeds and issued a total of 217,007 shares of
class A common stock and warrants to purchase 217,007 shares of class A common
stock. The Company may redeem the warrants, at its option, at any time beginning
180 calendar days after the sale if the closing bid price of the class A common
stock exceeds 200% of the exercise price for a period of thirty consecutive
trading days. The redemption price is ten cents per warrant. We intend to use
the proceeds from the private placement for general corporate purposes. The
securities described in this section were issued by ICC in a transaction not
involving a public offering, to investors that made representations that they
were "accredited" investors who were purchasing the securities with investment
intent and not with the intent to distribute the securities. The issuance of the
securities was exempt from registration under Section 4(2) of the Securities Act
of 1933, as amended.
Item 6: Exhibits and Reports on Form 8-K
(a) Exhibits.
--------
None.
(b) Reports on Form 8-K
--------------------
None.
29
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of
1934, as amended, the registrant has caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
INTERNET COMMERCE CORPORATION
-----------------------------
(Registrant)
Date: June 7, 2002 By: /s/ Walter M. Psztur
-------------------------------
Walter M. Psztur
Chief Financial Officer
(Principal Financial and
Accounting Officer)
30