AMENDMENT NO. 1
TO
FORM 10-QSB - Quarterly
Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of l934.
For the period ended June 30, 2001.
-------------
[_] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934.
For the transition period from __________________ to ________________________.
Commission File Number 0-28462.
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WEBB INTERACTIVE SERVICES, INC.
-------------------------------
(Exact name of registrant as specified in its charter)
COLORADO 84-1293864
--------------------------------------------------------------
(State or other jurisdiction I.R.S. Employer
of incorporation or organization Identification No.)
1899 WYNKOOP, SUITE 600, DENVER, CO 80202
-----------------------------------------
(Address of principal executive offices) (Zipcode)
(303) 296-9200
--------------
(Registrant's telephone number, including area code)
Former name, former address and former fiscal year, if changed since last
report.)
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.
[X] YES [_] NO
APPLICABLE ONLY TO CORPORATE ISSUERS:
As of August 7, 2001, Registrant had 10,873,567 shares of common stock
outstanding.
________________
1
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
WEBB INTERACTIVE SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
June 30, December 31,
2001 2000
------------ ------------------
(As Restated -
See Note 13)
ASSETS
Current assets:
Cash and cash equivalents $ 1,364,011 $ 4,856,686
Restricted cash 475,000 525,000
Accounts receivable, net of allowance for doubtful accounts of $54,435
and $151,882, respectively 641,709 469,639
Prepaid expenses 379,223 301,657
Notes receivable and accrued interest from Company officers 175,155 198,444
Short-term deposits 35,828 370,522
------------- ------------
Total current assets 3,070,926 6,721,948
Property and equipment, net of accumulated depreciation of $1,613,554 and
$963,417, respectively 2,296,949 2,830,132
Intangible assets, net of accumulated amortization of $12,590,103 and
$10,870,312, respectively 4,281,876 6,001,667
Deferred financing costs 438,267 815,301
Other assets 46,362 51,689
------------- ------------
Total assets $ 10,134,380 $ 16,420,737
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Convertible note payable and accrued interest payable $ 2,532,482 $ -
Capital leases payable 119,355 227,876
Accounts payable and accrued liabilities 1,976,210 2,142,731
Accrued salaries and payroll taxes payable 998,979 1,232,844
Accrued interest payable 52,434 63,014
Customer deposits and deferred revenue 144,634 174,522
------------- ------------
Total current liabilities 5,824,094 3,840,987
10% convertible note payable, net of discount of $159,284 and
$295,676, respectively 1,878,980 2,358,434
Commitments and contingencies
Stockholders' equity
Preferred stock, no par value, 5,000,000 shares authorized:
Series C-1 convertible preferred stock, 2,500 and none shares issued
and outstanding, respectively 2,450,000 -
Series B-2 convertible preferred stock, 450 and 978 shares issued and
outstanding, respectively 419,733 912,286
Common stock, no par value, 60,000,000 shares authorized, 10,828,415 and
10,354,473 shares issued and outstanding, respectively 92,424,608 85,506,004
Warrants and options 15,133,304 15,450,237
Deferred compensation (254,729) (154,774)
Accumulated other comprehensive income 2,513 1,371
Accumulated deficit (107,744,123) (91,493,808)
------------- ------------
Total stockholders' equity 2,431,306 10,221,316
------------- ------------
Total liabilities and stockholders' equity $ 10,134,380 $ 16,420,737
============= ============
The accompanying notes to condensed consolidated financial statements are an
integral part of these condensed consolidated balance sheets.
3
WEBB INTERACTIVE SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------------- ------------------------------------
2001 2000 2001 2000
------------ -------------- -------------- -------------
(As Restated (As Restated
-See Note 13) -See Note 13)
Net revenues $ 748,484 $ 903,749 $ 1,727,238 $ 1,716,302
Cost of revenues 1,129,538 706,109 2,463,799 1,351,921
------------ ------------ ------------- -------------
Gross margin (381,054) 197,640 (736,561) 364,381
------------ ------------ ------------- -------------
Operating expenses:
Sales and marketing expenses 533,560 738,776 1,138,439 1,193,227
Product development expenses 1,400,164 1,435,208 3,145,643 2,557,814
General and administrative expenses 1,839,908 2,713,636 3,616,338 4,475,957
Depreciation and amortization 1,080,043 2,428,978 2,144,379 4,602,967
------------ ------------ ------------- -------------
4,853,675 7,316,598 10,044,799 12,829,965
------------ ------------ ------------- -------------
Loss from operations (5,234,729) (7,118,958) (10,781,360) (12,465,584)
Interest income 18,272 283,486 131,911 445,373
Gain (loss) on disposal of property and equipment 1,300 - (11,116) -
Loss on foreign currency transactions (2,885) - (17,517) -
Interest expense (248,668) (280,170) (2,894,147) (649,550)
------------ ------------ ------------- -------------
Net loss from continuing operations (5,466,710) (7,115,642) (13,572,229) (12,669,761)
Net loss from discontinued operations - (27,065) - (61,857)
------------ ------------ ------------- -------------
Net loss before minority interest (5,466,710) (7,142,707) (13,572,229) (12,731,618)
Minority interest in losses of subsidiary 65,175 - 178,540 -
------------ ------------ ------------- -------------
Net loss (5,401,535) (7,142,707) (13,393,689) (12,731,618)
Preferred stock dividends - - - (373,126)
Accretion of preferred stock to redemption value - - (2,856,627) (12,500,000)
------------ ------------ ------------- -------------
Net loss applicable to common stockholders $ (5,401,535) $ (7,142,707) $ (16,250,316) $ (25,604,744)
============ ============ ============= =============
Net loss applicable to common stockholders from
continuing operations per share, basic and diluted $ (0.51) $ (0.78) $ (1.55) $ (2.87)
============ ============ ============= =============
Net loss applicable to common stockholders per share
from discontinued operations, basic and diluted - - - $ (0.01)
============ ============ ============= =============
Net loss per share, basic and diluted $ (0.51) $ (0.78) $ (1.55) $ (2.88)
============ ============ ============= =============
Weighted average shares outstanding, basic and
diluted 10,582,877 9,112,440 10,469,306 8,888,848
============ ============ ============= =============
The accompanying notes to condensed consolidated financial statements are an
integral part of these condensed consolidated statements.
4
WEBB INTERACTIVE SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended
June 30,
-----------------------------------
2001 2000
------------ ---------------
(As Restated -
See Note 13)
Cash flows from operating activities:
Net loss $(13,393,689) $(12,700,987)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation expense 653,129 668,481
Amortization expense 1,719,791 4,130,045
Minority interest in losses of subsidiary (178,540) -
Stock and stock options issued for services 495,537 655,515
Loss on sale and disposal of property and equipment 11,116 -
Bad debt expense 42,792 50,000
Accrued interest payable on convertible note payable 32,482 -
Accrued interest income on notes receivable (7,100) -
Interest expense on 10% convertible note from beneficial conversion
feature 2,394,234 -
Notes payable issued for interest on 10% convertible note payable 9,436 62,329
Amortization of 10% convertible note payable discount 84,732 96,934
Amortization of 10% convertible note payable financing costs 235,029 311,500
Changes in operating assets and liabilities:
(Decrease) increase in restricted cash 50,000 (453,624)
Increase in accounts receivable (214,862) (632,376)
(Increase) decrease in prepaid expenses (77,566) 244,118
Decrease (increase) in short-term deposits and other assets 340,021 (5,490)
(Decrease) increase in accounts payable and accrued liabilities (166,520) 762,251
Increase in accrued salaries and payroll taxes payable (233,865) (56,682)
Decrease in accrued interest payable (10,580) (126,028)
Decrease in customer deposits and deferred revenue (29,888) (35,368)
------------ ------------
Net cash used in operating activities (8,244,311) (7,029,382)
------------ ------------
Cash flows from investing activities:
Proceeds from the sale of property and equipment 9,800 -
Purchase of property and equipment (140,862) (1,554,136)
Collection of (advance for) notes receivable from Company officers 30,389 (100,000)
------------ ------------
Net cash used in investing activities (100,673) (1,164,136)
------------ ------------
Cash flows from financing activities:
Payments on capital leases (108,521) (61,269)
Proceeds from exercise of stock options and warrants 9,688 7,163,363
Proceeds from issuance of convertible note payable 2,500,000 -
Proceeds from issuance of series C-1 preferred stock and warrant 2,500,000 -
Proceeds from issuance of series B preferred stock and warrants - 12,500,000
Preferred stock cash offering costs (50,000) (840,000)
------------ ------------
Net cash provided by financing activities 4,851,167 18,762,124
------------ ------------
Net (decrease) increase in cash and cash equivalents (3,493,817) 10,078,606
Effect of foreign currency exchange rate changes on cash 1,142 -
Cash and cash equivalents, beginning of period 4,856,686 4,164,371
------------ ------------
Cash and cash equivalents, end of period $ 1,364,011 $ 14,242,977
============ ============
The accompanying notes to condensed consolidated financial statements are an
integral part of these condensed consolidated statements.
5
WEBB INTERACTIVE SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(UNAUDITED)
Six Months Ended
June 30,
-----------------------------------
2001 2000
-------------- ----------------
(As Restated -
See Note 13)
Supplemental disclosure of cash flow information:
Cash paid for interest $ 148,337 $ 137,742
========== ===========
Supplemental schedule of non-cash investing and financing activities:
Common stock and warrants issued in business combinations $ - $ 9,995,417
Accretion of preferred stock to stated value $2,856,627 $12,500,000
Preferred stock dividends paid in common stock $ - $ 373,126
Preferred stock and prior period cumulative dividends converted to
common stock $ 492,553 $ 1,023,028
10% note payable converted to common stock $ 429,617 $ 803,569
The accompanying notes to condensed consolidated financial statements are an
integral part of these condensed consolidated statements.
6
WEBB INTERACTIVE SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
WEBB INTERACTIVE SERVICES, INC. AND SUBSIDIARIES
JUNE 30, 2001 AND DECEMBER 31, 2000
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited condensed interim consolidated financial
statements include the accounts of Webb Interactive Services, Inc. and its
subsidiaries (collectively "Webb" or the "Company"). All significant
intercompany balances and transactions have been eliminated in consolidation.
Minority interest share of the net loss of our Jabber subsidiary is recorded
based upon the minority interest share in the net assets of Jabber. The
condensed consolidated financial statements have been prepared without audit
pursuant to rules and regulations of the Securities and Exchange Commission and
reflect, in the opinion of management, all adjustments, which are of a normal
and recurring nature, necessary for a fair presentation of the financial
position and results of operations for the periods presented. The preparation of
financial statements in accordance with generally accepted accounting principles
requires management to make estimates and assumptions. Such estimates and
assumptions affect the reported amounts of assets and liabilities as well as
disclosure of contingent assets and liabilities at the date of the accompanying
financial statements, and the reported amounts of revenue and expenses during
the reporting period. Actual results could differ from those estimates. The
results of operations for the interim periods are not necessarily indicative of
the results for the entire year. The interim financial statements should be read
in connection with the financial statements included in our Annual Report on
Form 10-KSB for the year ended December 31, 2000 filed with the Securities and
Exchange Commission ("SEC"), as well as any filing made to update or amend our
Annual Report.
The accompanying consolidated financial statements have been prepared
assuming that Webb will continue as a going concern. Among other factors, we
have incurred significant and recurring losses from operations, and such losses
are expected to continue in the near future, which, combined with our current
inadequate working capital, raises substantial doubt about our ability to
continue as a going concern. Management's plans in regard to these matters are
described below and in "Management's Discussion and Analysis of Financial
Condition and Results of Operations." The accompanying financial statements do
not include any adjustments relating to the recoverability and classification of
asset carrying amounts or the amount and classification of liabilities that
might result should we be unable to continue as a going concern. The report of
Arthur Andersen LLP, our independent public accountant, on our financial
statements as of and for the year ended December 31, 2000, included a paragraph
expressing substantial doubt about our ability to continue as a going concern.
We have not been profitable since inception. Our ability to become
profitable depends on our ability to market our products and services and
generate revenues sufficient to exceed our expenses. The success of our revenue
model will depend upon many factors including the success of our distribution
partners in marketing their products and services; and the extent to which
consumers and businesses use our services and conduct e-commerce transactions
and advertising utilizing our services. Because of the new and evolving nature
of the Internet, we cannot predict whether our revenue model will prove to be
viable, whether demand for our products and services will materialize at the
prices we expect to charge, or whether current or future pricing levels will be
sustainable. We are also highly dependent on certain key personnel.
At June 30, 2001, we had $1,364,011 in cash and cash equivalents and
$(2,753,168) in working capital, including the convertible promissory note and
accrued interest payable totalling $2,532,482, of which $2,441,000 was converted
into Jabber preferred stock in July 2001. We have expended significant funds to
develop our current product offerings and we anticipate additional research,
development and marketing expenditures during the remainder of 2001, which we
believe are necessary for us to further develop and market our products as well
as to achieve market acceptance of our products in sufficient quantities to
achieve positive cash flow from operations. Our continued viability depends, in
part, on our ability to obtain additional profitable customer contracts and to
obtain additional capital through debt or equity financing sufficient to fund
our expected operations. Following the France Telecom Technologies
Investissements ("FTTI") purchase of Jabber preferred in July 2001 (See Note
12), our AccelX and Jabber businesses are being seperately funded. Our cash and
cash equivalents and working capital are adequate to fund our AccelX business to
only September 2001. We believe the proceeds from the sale to FTTI of Jabber
preferred stock in July
7
2001, and FTTI's commitment to purchase an additional $1.75 million of such
stock (See Note 12) are adequate to sustain our Jabber operations through at
least January 2002. In addition to the remaining $2.5 million which may be
raised pursuant to the February 2001, preferred stock financing and the
additional $2 million which may be raised from the sale of Jabber preferred
stock, we have begun discussions for an additional $3.5 million of financing for
our AccelX business. However, we have no commitments for the $3.5 million
financing and the conditions to the private investor's obligation to purchase
the additional $2.5 million worth of our preferred stock may not be satisfied
and the additional sale of $2 million worth of Jabber's preferred stock may not
occur. Therefore, there can be no guarantee that any of these financings will be
completed, or if completed, that the terms of any such financings will be
acceptable to us. If we are not successful in obtaining funding in appropriate
amounts or on appropriate terms, we would consider additional significant
reductions in our operating activities, particularly those relating to our
AccelX business, and/or the sale of all or a portion of either our AccelX or our
Jabber businesses.
On August 20, 2001, we made the following projections. These projections
were based on our assessment of the markets for our products and are subject to
the availability of sufficient financing to fund planned marketing and sales
activities and to the factors discussed under Item 2--"Management's Discussion
and Analysis of Financial Condition and Results of Operations--Factors That May
Affect Future Results."
. Consolidated net revenues from continuing operations in 2001,
while less than previously expected, were projected to exceed the
prior year's revenues by 50%.
. Expense reductions and controls were expected to result in
breakeven consolidated earnings before interest, taxes,
depreciation and amortization ("EBITDA") by the third quarter of
2002, and the Company's AccelX business was expected to reach
breakeven EBITDA by December 31, 2001.
. Consolidated revenues were estimated to almost triple in 2002 over
2001 and to double again in 2003.
. Jabber's revenues were projected to grow from about 40% of
consolidated revenues in 2002 to approximately 65% in 2003. Net
profitability was projected by the first quarter of 2003.
As discussed in Note 13, in August 2001, the Company determined to
re-characterize a warrant issued to a note holder in December 1999, and
accordingly modified its accounting for the warrant. Previously reported
financial statements have been restated to reflect the re-characterization and
revised accounting.
NOTE 2 - REVENUE RECOGNITION
Webb generates revenues from the license of its software products and
from professional service arrangements. Software license revenue is recognized
in accordance with the American Institute of Certified Public Accountants
Statement of Position 97-2 "Software Revenue Recognition" ("SOP 97-2") and
related interpretations and amendments as well as Technical Practice Aids issued
from time to time by the American Institute of Certified Public Accountants.
The SEC issued Staff Accounting Bulletin No. 101, "Revenue Recognition
in Financial Statements" ("SAB 101") in December 1999. As amended, SAB 101
provides further interpretive guidance for publicly traded companies on the
recognition, presentation, and disclosure of revenue in the accompanying
financial statements. In June 2000, the SEC issued SAB No. 101B, delaying the
implementation of SAB 101 until the fourth quarter of 2000. The provisions of
SAB 101 had no material impact on Webb's revenue recognition policies and
presentation as reflected in the accompanying condensed consolidated financial
statements.
We recognize revenue on software arrangements only when persuasive
evidence of an agreement exists, delivery and customer acceptance, if any, have
occurred, our fee is fixed or determinable, and collectibility is probable.
Under certain circumstances, software license revenue is deferred until
all criteria of SOP 97-2 are met. Certain arrangements contain provisions which
result in the recognition of revenue from software licenses ratably over the
term of the contract. In instances where we charge monthly license fees, revenue
is recognized on a month-by-month basis as the fees are determined and become
collectible.
Revenue from professional services billed on a time and materials basis
is recognized as the services are performed and amounts due from customers are
deemed collectible and are contractually non-refundable. Revenue from fixed
price long-term contracts is recognized on the percentage of completion method
for individual contracts. Revenues are recognized in the ratio that costs
incurred bear to total estimated contract costs. The use of the percentage of
completion method of revenue recognition requires estimates of percentage of
project completion. Changes in job performance, estimated profitability and
final contract settlements may result in revisions to costs and income in the
period in which the revisions are determined. Provisions for any estimated
losses on uncompleted contracts are made in the period in which such losses are
determinable. In instances when the work performed on fixed price agreements is
of relatively short duration, or if we are unable to make sufficient accurate
estimates of costs at the outset of the arrangement, we use the completed
contract method of accounting whereby revenue is recognized when the work is
completed. Customer advances and billed amounts due from or collected from
customers in excess of revenue recognized are recorded as deferred revenue.
Revenue from maintenance and support agreements is recognized on a
straight-line basis over the term of the related support and maintenance
agreement.
8
We follow the provisions of EITF 00-3, "Application of AICPA SOP 97-2,
`Software Revenue Recognition,' to Arrangements That Include the Right to Use
Software Stored on Another Entity's Hardware," for software arrangements that
include provisions for hosting. Under the EITF consensus, if the customer has
the contractual right to take possession of the software at anytime during the
hosting period without significant penalty and it is feasible for the customer
to either run the software on its own hardware or contract with another party
not related to Webb to host the software, then the software portion of the
arrangement is accounted for under SOP 97-2. If the customer does not have this
right, then the fee for the entire arrangement is recognized on a straight-line
basis over the life of the related arrangement.
For software arrangements with multiple elements, we apply the residual
method prescribed by SOP 98-9. Revenue applicable to undelivered elements,
principally software maintenance, training, hosting and limited implementation
services, is deferred based on vendor specific objective evidence ("VSOE") of
the fair value of those elements. VSOE is established by the price of the
element when it is sold separately (i.e., the renewal rate for software
maintenance and normal prices charged for training, hosting and professional
services). Revenue applicable to the delivered elements is deemed equal to the
remainder/residual amount of the fixed arrangement price. Assuming none of the
undelivered elements are essential to the functionality of any of the delivered
elements, we recognize the residual revenue attributed to the delivered elements
when all other criteria for revenue recognition for those elements have been
met.
We believe our current revenue recognition policies and practices are
consistent with the provisions of SOP 97-2, as amended by SOP 98-4 and SOP 98-9,
which were issued by the American Institute of Certified Public Accountants, as
well as other related authoritative literature. Implementation guidelines for
these standards, as well as potential new standards, could lead to unanticipated
changes in our current revenue recognition policies. Such changes could affect
the timing of our future revenue and results of operations.
Net revenues from continuing operations are comprised of the following:
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------- ------------------------------------
2001 2000 2001 2000
--------- ------------- ---------------- ----------------
Net revenues
Licenses $ 184,414 $ 487,008 $ 656,679 $ 1,168,734
Services 564,070 416,741 1,070,559 547,568
----------- ---------- ------------ ------------
Total net revenues: $ 748,484 $ 903,749 $ 1,727,238 $ 1,716,302
=========== ========== ============ ============
NOTE 3 - GOODWILL
Long-Lived Assets, Intangible Assets and Goodwill
In accordance with the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of," ("SFAS 121"), we evaluate the
carrying value of our long-lived assets and certain identifiable intangible
assets for impairment whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable. Impairment of assets to
be held and used is calculated by a comparison of the carrying amount of an
asset to future undiscounted net cash flows expected to be generated by the
asset. If such assets are determined to be impaired, the impairment to be
recognized is measured by the amount which the carrying amount of the assets
exceed the estimated fair value of the assets. Assets to be disposed of are
reported at the lower of the carrying amount or fair value less the cost to sell
the asset.
Intangible assets and goodwill are being amortized on a straight-line
basis over their estimated economic lives of three years. We recorded
amortization expense of $864,646 and $2,092,790 for the three months ended June
30, 2001 and 2000, respectively, and $1,719,791 and $4,130,045 for the six
months ended June 30, 2001 and 2000, respectively. As of June 30, 2001, $213,610
of our intangible assets consisted of goodwill. Subsequent to acquisitions which
result in intangible assets and goodwill, we continually evaluate whether later
events and
9
circumstances have occurred that indicate the remaining useful life of the
intangible assets and goodwill may warrant revision or that the remaining
balance may not be recoverable. When factors indicate that intangible assets and
goodwill should be evaluated for possible impairment, we use an estimate of the
undiscounted cash flows over the remaining life of the intangible assets and
goodwill in measuring whether the intangible assets and goodwill are
recoverable.
We performed an analysis to determine whether our goodwill and
intangible assets were impaired at June 30, 2001. Based on our review at June
30, 2001, we have determined that to support our recorded value of intangibles
at June 30, 2001:
. We need to earn revenues from our Site Builder product of
approximately $300,000 during the next 12 months to realize the
remaining carrying value of the intangible assets from the
NetIgnite, Inc. acquisition, which were approximately $300,000 at
June 30, 2001. During the six months ended June 30, 2001, we
recorded revenues totalling approximately $112,000 from our Site
Builder product. The majority of the revenues earned from these
two products during 2001 were from a single sale to one customer.
. We need to earn revenues from our Connect product of approximately
$2.77 million during the next 18 months to realize the remaining
carrying value of the intangible assets from the Update Systems,
Inc. acquisition, which were approximately $2.45 million at June
30, 2001. During the six months ended June 30, 2001, we recorded
revenues totalling approximately $95,000 from our Connect product.
We believe that our current sales strategy which is in the early
implementation stages with two customers that assists our distribution customers
in selling products to their customers and building recurring monthly revenue
from our Site Builder and Connect products will be successful in achieving our
revenue targets. Therefore, we have concluded that the intangible assets and
goodwill related to the AccelX segment of our business are not impaired. Our
current sales initiatives are unproven and there can be no guarantees that we
will be able to earn sufficient revenues in the relevant time frames to achieve
net cash flows equal to or greater than the carrying value of our intangible
assets.
We have also concluded, based upon the values established in the
transaction with FTTI, that the intangible assets and goodwill related to our
Jabber products are not impaired.
If, in future periods, we determine that the carrying value of the
intangible assets exceeds the related estimated undiscounted future cash flows,
it is reasonably possible we may be required to record impairment losses in
future periods and those losses could be substantial.
In June 2001, the Financial Accounting Standards Board approved
Statement of Financial Accounting Standard ("SFAS") No. 141, "Business
Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS
No. 141 prospectively prohibits the pooling of interest method of accounting for
business combinations initiated after June 30, 2001. SFAS No. 142 requires
companies to cease amortizing goodwill on December 31, 2001. Any goodwill
resulting from acquisitions completed after June 30, 2001 will not be amortized.
SFAS No. 142 also establishes a new method of testing goodwill for impairment on
an annual basis or on an interim basis if an event occurs or circumstances
change that would indicate that the fair value of a reporting unit is below its
carrying value, beginning in the first quarter of 2002. This new method of
measuring impairment is based on the estimated fair value of the goodwill,
rather than comparing the carrying amount of the goodwill to estimated
undiscounted cash flows. Fair value is typically less than undiscounted cash
flows, and therefore, a review for impairment based upon fair value will
typically indicate impairment at a lower threshold than under the previous
standard. Additionally, under these new rules, acquired intangible assets should
be separately recognized if the benefit of the intangible asset is obtained
through contractual or other legal rights, or if the intangible asset can be
sold, transferred, licensed, rented, or exchanged, regardless of the acquirer's
intent to do so. These new rules will likely result in more intangible assets,
such as unpatented technology and database content, being separated from
goodwill than generally occurs in practice today. We are currently assessing the
impact of these rules on the
10
recorded amounts of goodwill. During 2001, we typically record approximately
$37,000 of goodwill amortization quarterly, which amount will not be recorded
after December 31, 2001.
NOTE 4 - NET LOSS PER SHARE
Net loss per share is calculated in accordance with SFAS No. 128,
"Earnings Per Share" ("SFAS 128"). Under the provisions of SFAS 128, basic net
loss per share is computed by dividing net loss applicable to common
shareholders for the period by the weighted average number of common shares
outstanding for the period. Diluted net loss per share is computed by dividing
the net loss for the period by the weighted average number of common and
potential common shares outstanding during the period if the effect of the
potential common shares is dilutive. As a result of our net losses, all
potentially dilutive securities, as indicated in the table below, would be
anti-dilutive and are excluded from the computation of diluted loss per share,
and there are no differences between basic and diluted per share amounts for all
periods presented.
June 30,
----------------------------------------
2001 2000
---------------- ----------------
Stock options 4,075,658 3,461,215
10% convertible note payable 815,343 248,262
Warrants and underwriter options 1,230,315 777,085
Series C-1 preferred stock 1,000,000 -
Series B-2 preferred stock 180,000 -
Series B preferred stock - 625,000
---------------- ----------------
Total 7,301,316 5,111,562
================ ================
The number of shares excluded from the earnings per share calculation
because they are anti-dilutive, using the treasury stock method, were 117,069
and 576,693 for the three and six months ended June 30, 2001, respectively, and
2,554,633 and 3,872,394 for the three and six months ended June 30, 2000,
respectively.
NOTE 5 - SERIES C-1 PREFERRED STOCK
On February 28, 2001, pursuant to a securities purchase agreement, we
concluded a private placement that resulted in gross proceeds of $2,500,000. We
sold 2,500 shares of our series C-1 convertible preferred stock (the "series C-1
preferred stock"), including warrants to purchase 500,000 shares of our common
stock. We received net proceeds totalling approximately $2,450,000 after
deducting approximately $50,000 in offering costs.
The series C-1 preferred stock is convertible into shares of our common
stock at $2.50 per share. The conversion price is subject to anti-dilution
protection in the event we issue common stock at prices less than the current
conversion price for the preferred stock or the then current price for our
common stock and for stock splits, stock dividends and other similar
transactions. If the conversion price is reduced, we may be required to record
additional charges against income and such charges may be significant.
In addition, subject to certain conditions, including the SEC declaring
the associated registration statement effective and the market capitalization
for our common stock being at least $32.3 million (or $3.125 per share), we have
the right to sell 2,500 shares of our series C-2 convertible preferred stock
(the "series C-2 preferred sock") to the investor for gross proceeds of
$2,500,000. As of the date of this report, the Form S-3 filed with the SEC had
not been declared effective and the market capitalization of our common stock
was approximately $17.2 million. The initial conversion price of the series C-2
preferred stock will be equal to the lesser of 80% of the average closing bid
price of our common stock for three trading days immediately preceding the
issuance of the series C-2 preferred stock, 80% of the closing bid price of our
common stock on the trading day immediately preceding such issuance or $7.50 per
share. If we consummate the sale of our series C-2 preferred stock, we will also
issue a common stock purchase warrant to the investor. The number of shares
issuable upon exercise of the warrant will be determined by the aggregate value
of the series C-2 preferred stock divided by the initial conversion price
multiplied by 20%. The exercise price of the warrant will be computed as the
greater of 150% of the initial conversion price of the series C-2 preferred
stock and the closing bid price on the trading day immediately preceding the
issuance date. The
11
issuance of the series C-2 preferred stock may result in significant charges to
be recorded against net losses applicable to common stockholders.
We also issued a three-year warrant to purchase 500,000 shares of our
common stock in connection with the series C-1 preferred stock. The warrant
entitles the holder to purchase our common stock for a purchase price of $3.75
per share. The exercise price of the warrant is subject to anti-dilution
protection should certain events transpire such as subdivision or combination of
our common stock, distributions to holders of our common stock, or
consolidations or mergers with another corporation. If the exercise price is
reduced, we may be required to record additional charges against income and such
charges may be significant.
The warrant was valued at $735,279 determined based on the relative
fair value of the warrant utilizing the Black-Scholes option pricing model using
the following assumptions:
Exercise price $3.75
Fair market value of common stock on measurement date $3.00
Option life 3 years
Volatility rate 120%
Risk free rate of return 6.0%
Dividend rate 0%
Due to the conversion feature associated with the series C-1 preferred
stock, we recognized the beneficial conversion feature as an additional
preferred stock dividend. The computed value of the beneficial conversion
feature of $1,235,279 was initially recorded as a reduction of the series C-1
preferred stock and an increase to additional paid-in capital. The beneficial
conversion feature reduction to the series C-1 preferred stock and the relative
fair value of the warrant was accreted as a charge to income applicable to
common stockholders on the date of issuance (the date on which the series C-1
preferred stock was first convertible) as follows:
Beneficial conversion feature $ 1,235,279
Relative fair value of common stock purchase warrant 735,279
-----------------
Total accretion expense $ 1,970,558
=================
As a result of the issuance of the series C-1 preferred stock, in
accordance with terms of the original agreements, the conversion prices for the
10% note payable and our series B-2 preferred stock as well as the exercise
prices for the 10% note payable and series B preferred stock warrants were reset
as indicated below:
Conversion or Exercise Conversion or Exercise
Price Immediately Price Immediately After
Preceding Series C-1 Series C-1 Preferred
Preferred Stock Issuance Stock Issuance
----------------------------------------------------------------------------- --------------------------
10% convertible note payable $ 10.07 $ 2.50
Series B-2 preferred stock $ 10.20408 $ 2.50
Series B common stock purchase warrants $ 3.875 $ 3.75374
10% note payable common stock purchase warrant
$ 10.264 $ 9.33431
With respect to the 10% convertible note payable and the series B-2
preferred stock, the non-cash expense represents an additional beneficial
conversion feature calculated by multiplying the number of common shares
issuable upon conversion after the reset by the fair market value of our common
stock on the issuance date of the series C-1 preferred stock as follows:
10% Series B-2
Convertible Preferred
------------- -----------
12
Note Payable Stock
----------------- -----------------
Value of security $2,654,110 $ 978,000
Conversion price before reset $ 10.07 $10.20408
Number of common shares issuable upon conversion before reset 263,566 95,844
Conversion price after reset $ 2.50 $ 2.50
Number of common shares issuable upon conversion after reset 798,078 295,356
Fair market value of common stock on series C-1 preferred stock
issuance date $ 3.00 $ 3.00
Additional beneficial conversion feature recognized as interest
expense $2,394,234
Additional beneficial conversion feature recognized as accretion
of preferred stock to stated value $ 886,068
With respect to the warrants, the non-cash expense was computed based
on the difference of the warrant value immediately before the reset to the value
immediately after the reset using the Black-Scholes option pricing model as
indicated below:
Series B Common Stock Purchase 10% Note Payable Common Stock
Warrant Purchase Warrant
--------------------------------------- ----------------------------------------
Immediately Immediately
Preceding Immediately Preceding Immediately
Reset After Reset Reset After Reset
---------------- ----------------- ----------------- -----------------
Common stock issuable
upon exercise of
warrant 343,750 343,750 136,519 150,116
Exercise price $ 3.85 $3.75374 $10.26425 $9.33431
Fair market value of
common stock on
date of issuance $ 3.00 $ 3.00 $ 3.00 $ 3.00
Option life 5 years 5 years 5 years 5 years
Volatility rate 120% 120% 104% 104%
Risk-free rate of 6.71% 6.71% 6.0% 6.0%
return
Dividend rate 0% 0% 0% 0%
Calculated value $854,110 $856,374 $ 256,731 $288,663
NOTE 6 - CONVERTIBLE NOTE PAYALE
On May 2, 2001, pursuant to a letter of intent between Webb, Jabber,
Inc., a majority-owned subsidiary of Webb ("Jabber"), France Telecom and France
Telecom Technologies Investissements ("FTTI"), a wholly-owned subsidiary of
France Telecom, FTTI loaned Jabber $2.5 million pursuant to a convertible
promissory note.
The convertible promissory note accrues interest at an annual rate of
9.5% and, unless earlier converted, the loan is due on demand any time after May
2, 2002. The obligations of Jabber are secured by: (i) a security interest in
substantially all of the assets of Jabber; (ii) a guaranty given by Webb; and
(iii) a pledge by Webb of the stock it holds in Jabber.
On July 17, 2001, $2,441,000 of the convertible promissory note,
including $41,000 of accrued interest payable, was cancelled in exchange for the
issuance of 2,441 shares of Jabbers series B preferred stock to FTTI (See Note
12). The remaining principal amount of $100,000 plus accrued interest payable
may, at any time on or prior to May 2, 2002, be converted into Jabber series B
preferred stock at $1,000 per share.
13
NOTE 7 - CONVERSION OF SERIES B-2 PREFERRED STOCK
During April and May, 2001, the holder of our series B-2 preferred
stock converted 528 shares of the series B-2 preferred stock into 211,200 shares
of our common stock at a conversion price of $2.50 per share as summarized in
the following table:
Number of Shares
----------------------------------------
Series B-2
Preferred Common
Conversion Date Stock Stock
--------------------------------------------------------------- ----------------- -----------------
April 26, 2001 250 100,000
May 7, 2001 160 64,000
May 8, 2001 80 32,000
May 10, 2001 38 15,200
----------------- -----------------
Total 528 211,200
================= =================
NOTE 8 - CONVERSION OF 10% CONVERTIBLE NOTE PAYABLE
During May and June, 2001, the holder of our 10% convertible note
payable converted $580,000 of principal and $45,189 of principal-in-kind notes
and accrued interest into 250,075 shares of our common stock at a conversion
price of $2.50 per share as summarized in the following table:
PIK Notes and
Principal Accrued Shares of
Amount Interest Common
Conversion Date Converted Converted Stock Issued
---------------------------------------- ----------------- ----------------- -----------------
May 11, 2001 $ 125,000 9,075 53,630
May 15, 2001 100,000 7,370 42,948
June 6, 2001 125,000 9,966 53,986
June 12, 2001 115,000 9,357 49,743
June 14, 2001 115,000 9,421 49,768
----------------- ----------------- -----------------
Total $ 580,000 45,189 250,075
================= ================= =================
In addition, during July 2001, the holder of the note converted
$100,000 of principal and $6,630 of principal-in-kind notes and accrued interest
into 42,652 shares of our common stock at a conversion price of $2.50 per share
(See Note 12).
NOTE 9 - STOCK BASED COMPENSATION EXPENSE
During the six months ended June 30, 2001, we issued common stock and
options to purchase our common stock as described below and recorded expenses as
set forth in the following table:
Number of
Shares or Deferred
Warrants Compensation
Issued Expense Expense
---------------------------------------- ----------------- ----------------- ------------------
Stock options issued to consulting
company (A) 120,000 $ 73,381 $ 146,767
Stock options issued to financial
services company (B) 100,000 99,443 74,081
Common stock issued to financial
services company (B) 7,500 20,900 -
Reset of series B preferred stock
common stock purchase
14
warrants (C) - 61,746 -
Acceleration of stock option vesting
date (D) - 27,646 -
Amortization of previous years
deferred compensation - 212,421 33,881
---------------- ---------------- -----------------
Totals 120,000 $ 495,557 $ 254,729
================ ================ =================
(A) In March 2001, we issued a three-year option to purchase 120,000
shares of our common stock at an exercise price of $2.813 per share to a
consulting company in connection with investor relation services to be rendered
to Webb. The options vest one third on the grant date and one third on each of
the next two anniversary dates of the agreement. The option agreement provides
for accelerated vesting for the unvested options provided the consulting company
meets certain specified objectives. We valued the options at $220,148 and
applied variable plan accounting pursuant to SFAS 123 and related interpretation
EITF-96-18 to the 80,000 unvested options, utilizing the Black-Scholes option
pricing model using the following assumptions:
40,000 80,000
Options Options
----------------- -----------------
Exercise price $ 2.813 $ 2.813
Fair market value of common stock on valuation date $ 2.813 $ 2.450
Option life 3 years 3 years
Volatility rate 121% 127%
Risk-free rate of return 6.0% 6.0%
Dividend rate 0% 0%
Because variable plan accounting requires us to revalue the unvested
options at each balance sheet date, the value of the option and related expense
in future periods may increase significantly if our stock price increases.
(B) In April 2001, we entered into a six-month agreement with a
consulting company to provide Webb with investor relation services. In
connection with the agreement, the consulting company will receive 2,500
restricted shares of our common stock at the end of each month commencing April
2001. During the three months ended June 30, 2001, we issued 7,500 shares of our
common stock at prices ranging from $2.45 to $3.36 per share and recorded
compensation expense totalling $20,900. In addition, we also issued options to
purchase 100,000 shares of our common stock at exercise prices ranging from
$2.50 to $5.00 per share with a three-year exercise term. The options vest
ratably over the term of the agreement. We valued the options at $173,524
applying variable plan accounting pursuant to SFAS 123 and related
interpretation EITF-96-18 utilizing the Black-Scholes option pricing model and
recorded compensation expense totalling $99,443 during the three months ended
June 30, 2001, based on the vesting terms of the options. We used the following
assumptions to calculate the value of the options:
25,000 25,000 50,000
Options Options Options
----------------- ----------------- -----------------
Exercise price $ 2.50 $ 3.00 $ 5.00
Fair market value of common stock on $ 1.250 to $ 1.250 to $ 1.250 to
valuation date $ 2.450 $ 2.450 $ 2.450
Option life 3 years 3 years 3 years
Volatility rate 127% 127% 127%
Risk-free rate of return 6.25% 6.25% 6.25%
Dividend rate 0% 0% 0%
Total value $ 49,670 $ 48,115 $ 75,749
(C) In May 2001, in accordance with the original terms of the warrant
agreements, the exercise price of the warrants issued in connection with the
sale of our series B preferred stock in February 2000, was reset from $3.75374
to $2.703 per share. As a result of the reset, we recorded a non-cash
compensation expense totalling
15
$27,550 during the three months ended June 30, 2001. The value of the warrant
was calculated using the Black-Scholes option pricing model utilizing the
following assumptions:
Immediately
Preceding Immediately
Reset After Reset
------------- -------------
Common stock issuable upon exercise of warrant 343,750 343,750
Exercise price $3.75374 $ 2.703
Fair market value of common stock on date of issuance $ 3.00 $ 2.990
Option life 5 years 5 years
Volatility rate 120% 120%
Risk-free rate of return 6.71% 6.71%
Dividend rate 0% 0%
Calculated value $853,222 $880,772
(D) In June 2001, we accelerated the vesting date on the last date of
employment for options to purchase 40,674 shares of our common stock for three
employees who were terminated in June 2001. As a result, we recorded
compensation expense totalling $27,646 during the three months ended June 30,
2001, which represents the intrinsic value of the accelerated options as
follows:
Exercise prices $ 1.875
Fair market value of common stock on acceleration date $ 3.240
Intrinsic value per share $ 1.365
Number of options 20,253
NOTE 10 - DISCONTINUED OPERATIONS
In September 2000, our e-banking segment was sold to a privately held
company. The sale of this segment is reflected as a sale of discontinued
operation in the accompanying condensed consolidated financial statements.
Accordingly, revenues, costs and expenses of this discontinued operation have
been excluded from the respective captions in the Consolidated Statement of
Operations and have been reported as "Loss from discontinued operations" for all
periods presented.
Summarized financial information for the discontinued operation is as
follows:
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ -----------------------
2001 2000 2001 2000
----------- ---------- ---------- ----------
Net revenues $ - $ 227,460 $ - $ 424,729
Net loss from discontinued operations $ - $ (27,065) $ - $ (61,857)
NOTE 11 - BUSINESS SEGMENT INFORMATION
Webb develops and supports products and services for small and medium
sized businesses by providing an interactive framework of local commerce and
community-based services comprised of publishing, content management,
community-building and communications. In addition, our subsidiary, Jabber, is
engaged in the early stages of several projects that are implementing the
Jabber.org XML-based open-source instant messaging platform for portal services,
enterprise messaging, financial services applications and enhanced mobile and
telephony integration. We have two reportable business segments: AccelX and
Jabber.
AccelX consists of XML-based online commerce and communication
solutions for small and medium sized business, with a particular emphasis on
local commerce interaction.
Jabber consists of XML-based open-source Internet application products
which incorporates instant messaging as a key application for commerce-oriented
dialogs between businesses and consumers.
16
June 30, December 31,
2001 2000
------------- ---------------
(As Restated - See
Note 13)
Assets
--------------------------------------------
AccelX $ 6,655,011 $ 15,022,246
Jabber 3,670,866 2,714,329
Eliminations (191,497) (1,315,838)
-------------- ---------------
Total assets $ 10,134,380 $ 16,420,737
============== ===============
Property and equipment, net
--------------------------------------------
AccelX $ 2,018,956 $ 2,566,359
Jabber 277,993 263,773
-------------- ---------------
Total $ 2,296,949 $ 2,830,132
============== ===============
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------------- -------------------------------------
2001 2000 2001 2000
--------------- --------------- ---------------- ----------------
(As Restated - (As Restated -
See Note 13) See Note 13)
-------------------------------
Net Revenues from Continuing
Operations
-------------------------------
AccelX $ 590,790 $ 885,199 $ 1,469,719 $ 1,697,752
Jabber 157,654 18,550 257,479 18,550
--------------- --------------- ---------------- ----------------
Total net revenue from
continuing operations $ 748,444 $ 903,749 $ 1,727,198 $ 1,716,302
=============== =============== ================ ================
Net Loss from Continuing
Operations
-------------------------------
AccelX $ (5,421,590) $ (7,115,642) $ (13,392,030) $ (12,669,761)
Jabber (2,094,935) (1,160,602) (4,094,994) (1,223,851)
Eliminations 2,049,815 1,160,602 3,914,795 1,223,851
--------------- --------------- ---------------- ----------------
Total net loss from
continuing operations $ (5,466,710) $ (7,115,642) $ (13,572,229) $ (12,669,761)
=============== =============== ================ ================
Depreciation and Amortization
-------------------------------
AccelX $ 686,584 $ 2,425,082 $ 1,365,111 $ 4,598,795
Jabber 393,459 3,896 779,268 4,172
--------------- --------------- ---------------- ----------------
Total depreciation and
amortization expense $ 1,080,043 $ 2,428,978 $ 2,144,379 $ 4,602,967
=============== =============== ================ ================
June 30, December 31,
2001 2000
---------------- ----------------
Property and equipment additions
-------------------------------------------
AccelX $ 74,679 $ 1,286,191
17
Jabber 66,183 267,945
---------------- -----------------
Total $ 140,862 $ 1,554,136
================ =================
NOTE 12 - SUBSEQUENT EVENTS
Sale of Jabber Preferred Stock-
On July 17, 2001, FTTI acquired 2,441 shares of the series B
convertible preferred stock of Jabber, a subsidiary of Webb, from Jabber in
exchange for and in cancellation of principal and interest on an outstanding
loan to Jabber of $2,441,000 (See Note 6) and acquired directly from Webb
750,000 shares of series A convertible preferred stock of Jabber in
consideration for which FTTI paid Webb $750,000. The Jabber preferred stock
acquired by FTTI represents, on an as-if-converted basis, approximately 15% of
Jabber's outstanding capital stock following the transactions.
The Stock Purchase Agreement among FTTI, Jabber and Webb, provides that
FTTI will purchase an additional 1,750 shares of series B convertible preferred
stock for an aggregate consideration of $1,750,000 on or about September 1,
2001, subject to the satisfaction of various conditions set forth in the Stock
Purchase Agreement. In addition, subject to the satisfaction of various
conditions set forth in the Stock Purchase Agreement, on or about January 31,
2002, FTTI may purchase an additional 2,000 shares of the series B convertible
preferred stock for an aggregate consideration of $2,000,000, depending upon
Jabber's 2001 net revenues. If Jabber's 2001 net revenues are equal to or
greater than $3,962,000 but less than or equal to $6,603,000, then: (i) Jabber
will have the option to require FTTI to purchase the 2,000 shares of series B
convertible preferred stock, and (ii) if Jabber does not exercise such option,
then FTTI will have the option to purchase the 2,000 shares. If Jabber's 2001
net revenues are less than $3,962,000, then FTTI will have the option to
purchase the 2,000 shares of series B convertible preferred stock. If Jabber's
2001 net revenues are greater than $6,603,000, then Jabber will have the option
to require FTTI to purchase the 2,000 shares of series B convertible preferred
stock.
Under the terms of the July 2001, agreement with FTTI, use of the proceeds
from the potential sale of the 1,750 and 2,000 shares of Jabber preferred stock
are restricted to the working capital requirements of Jabber and are not
available to Webb to fund general corporate expenses and expenses related to the
Company's AccelX product. As of August 20, 2001, the amount of cash Jabber had
on hand which is subject to this restriction totalled approximately $470,000.
In addition to the foregoing, FTTI has loaned Jabber $100,000 pursuant
to a convertible promissory note, which is secured by: (i) a security interest
in substantially all of the assets of Jabber; (ii) a guarantee given by Webb;
and (iii) a pledge by Webb of a portion of its Jabber securities. Webb has
pledged to FTTI, 1,400,000 shares of its series A-2 convertible preferred stock
to secure its guarantee of the convertible promissory note and Webb's
representations and warranties and covenants contained in the Stock Purchase
Agreement. During the term of the pledge, FTTI has the right to vote the shares
of the preferred stock pledged by Webb, provided that FTTI cannot vote the
shares for a merger or sale of Jabber or for an amendment to Jabber's charter
documents without Webb's prior consent and FTTI is required to vote the shares
for election to Jabber's Board of Directors, comprised of five members, as
indicated by Webb two affiliates of Webb and two independent nominees designated
by Webb. The series A-2 convertible preferred stock of Jabber is entitled to ten
(10) votes per share. The combination of the 1,400,000 shares of series A-2
convertible preferred stock pledged to FTTI with the series B convertible
preferred stock and series A-1 convertible preferred stock acquired by FTTI
represents in excess of fifty percent (50%) of Jabber's outstanding voting
shares. The principal and interest of the convertible note payable are
convertible into shares of the series B convertible preferred stock at $1,000
per share.
The Stockholders Agreement to which FTTI and Webb are parties: (i)
provides that Webb shall not, without the prior written consent of FTTI, sell a
number of its shares of Jabber's securities representing more than twenty
percent (20%) of Jabber's then outstanding capital stock to named competitors of
FTTI unless, for certain of the named competitors, the sales price per share is
at least three times the price FTTI paid for its preferred shares (on an
as-converted basis); (ii) grants to FTTI a right of first refusal to purchase
proposed sales of Jabber common stock by Webb (A) to certain named competitors
of Jabber if the sales price is at least three times the price FTTI paid for its
preferred shares (on an as-converted basis) or (B) if the proposed sale is not
to such named competitors but represents twenty percent (20%) or more of
Jabber's then outstanding shares of capital stock; and (iii) gives FTTI the
right to participate with Webb on a proportional basis in a proposed sale by
Webb. In addition, the Investor Rights Agreement to which FTTI and Jabber are
parties, grants to FTTI the right to participate in future Jabber financings to
the extent required for FTTI to maintain its then percentage ownership of
Jabber's capital stock.
18
Assuming FTTI completes the purchase of all of the series B convertible
preferred stock as described above and converts the note and accrued interest
into shares of the series B convertible preferred stock, FTTI would own Jabber
preferred stock convertible into approximately 7,050,000 shares of Jabber common
stock. On a pro forma as-if-converted basis, assuming purchase of all of
the Jabber preferred stock by FTTI as described above and conversion of all of
Jabber's then outstanding shares of preferred stock, the percentage of Jabber's
then outstanding shares of common stock owned by each of its shareholders would
be as follows: Webb - 64.8%; FTTI - 28.7%; DiamondCluster International, Inc. -
2.8%; and all other current common stockholders as a group - 3.7%.
Jabber is authorized to issue up to 20,000,000 shares of $0.01 per
share par value preferred stock and has designated the following series (shares
outstanding are as of August 20, 2001):
Shares Issued and
Designation Shares Authorized Outstanding
----------------------------------------- --------------------------- ---------------------------
Series A-1 8,800,000 7,400,000
Series A-2 1,400,000 1,400,000
Series B 12,000 3,131
Series C 12,000 7,871
Each share of series A-1 convertible preferred stock (the "series A-1
preferred stock") is currently convertible into one share of Jabber's common
stock at the election of the holders, or automatically prior to the closing of a
firm commitment underwritten public offering in which the gross proceeds are at
least $30 million. The conversion rate is subject to adjustment for stock
splits, stock dividends and other similar transactions. The holders of the
series A-1 preferred stock are entitled to vote together with Jabber's common
stockholders. Each share of series A-1 preferred stock entitles the holders to
the number of votes per share equal to the largest number of whole shares the
series A-1 preferred stock could be converted into common stock. In addition,
the agreement signed with FTTI provides that FTTI can participate, on a
proportional ownership basis, in sales of series A-1 preferred stock owned by
Webb. Webb has also agreed not to sell more than 20% of Jabber's outstanding
securities to up to 10 named competitors of FTTI. At August 20, 2001, Webb owns
6,650,000 shares and FTTI owns 750,000 shares of series A-1 preferred stock.
Each share of series A-2 convertible preferred stock (the "series A-2
preferred stock") is currently convertible into one share of Jabber's common
stock at the election of the holders, or automatically upon the occurrence of
any of the following: (i) the termination of the Pledge Agreement dated July 6,
2001 by and between Webb and FTTI; (ii) FTTI's failure to cure timely a breach
of the Stock Purchase Agreement, Investor Rights Agreement or Stockholders
Agreement, all of which are dated July 6, 2001; or (iii) immediately prior to
closing of a firm commitment underwritten public offering in which the gross
proceeds are at least $30 million. The conversion rate is subject to adjustment
for stock splits, stock dividends and other similar transactions. The holders of
the series A-2 preferred stock are entitled to vote together with Jabber's
common stockholders. Each share of series A-2 preferred stock entitles the
holders to the number of votes per share equal to 10 times the largest number of
whole shares the series A-2 preferred stock could be converted into common
stock. At August 20, 2001, Webb owns all 1,400,000 series A-1 shares.
The series B convertible preferred stock (the "series B preferred
stock") provides for an 8% cumulative dividend. Each share of series B preferred
stock is currently convertible into 1,000 shares of Jabber's common stock at the
election of the holders, or automatically prior to the closing of a firm
commitment underwritten public offering in which the gross proceeds are at least
$30 million. The conversion rate is subject to anti-dilution protection if
Jabber issues its common or series A-1 or series C preferred stock for less than
the conversion price of the series B preferred stock (currently $1.50 per
share), and is also subject to adjustment for stock splits, stock dividends and
other similar transactions. The holders of the series B preferred stock are
entitled to vote together with Jabber's common stockholders. Each share of
series B preferred stock entitles the holders to the number of votes per share
equal to the largest number of whole shares the series B preferred stock could
be converted into common stock. In addition, the holders of the series B
preferred stock vote as a separate class on any change in the terms of the
series B preferred stock; any increases in the authorized number of shares of
common stock or preferred stock; any authorization of a class of preferred stock
ranking in a parity with the series B preferred stock; any redemption of common
stock or preferred stock junior in rights to the series B preferred stock; any
merger with another company resulting in a change of 50% or more in the
ownership of Jabber; a sale of the intellectual property of Jabber other than in
the normal course of business; or the sale of 20% or more of Jabber to up to 10
named competitors of FTTI. The series B preferred stock also provides for a
right of first refusal and participation rights in the event of transfers of
Jabber stock by certain shareholders, and the holders are entitled to a seat on
Jabber's board of directors. At August 20, 2001, FTTI owns 2,441 shares and
DiamondCluster owns 690 shares of series B preferred stock.
The series C convertible preferred stock (the "series C preferred
stock") provides for an 8% cumulative dividend. Each share of series C preferred
stock is currently convertible into 1,000 shares of Jabber's common stock at the
election of the holders, or automatically prior to the closing of a firm
commitment underwritten public offering in which the gross proceeds are at least
$30 million. The conversion rate is subject to anti-dilution protection if
Jabber issues its common stock for less than the conversion price of the series
C preferred stock (currently $1.586 per share), and is also to adjustment for
stock splits, stock dividends and other similar transactions. The holders of the
series C preferred stock are entitled to vote together with Jabber's common
stockholders. Each share of series C preferred stock entitles the holders to the
number of votes per share equal to the largest number of whole shares the series
C preferred stock could be converted into common stock. At August 20, 2001, Webb
owns 7,846 shares and a third-party owns 25 shares of series C preferred stock.
If Jabber liquidates, dissolves or winds up its business, whether
voluntarily or involuntarily, the holders of the series B preferred stock will
be entitled to receive, before any distribution to holders of Jabber's common or
other classes of preferred stock, the amount of $1,000 per share plus accrued
and unpaid dividends. Thereafter, the holders of the series A-1, A-2 and C are
on equal basis and are entitled to receive, before any distribution to holders
of Jabber's common stock, the amount of $0.50 per share for the series A-1 and
A-2 preferred stock and $1,000 per share for the series C preferred stock. After
the series B, A-1, A-2 and C preferred shares have received their liquidation
preference, the holders of all classes of preferred stock are entitled to share
in any distribution of remaining assets with the holders of common stock.
Conversion of 10% Convertible Note Payable-
During July 2001, the holder of our 10% convertible note payable
converted $100,000 of principal and $6,630 of principal-in-kind notes and
accrued interest into 42,652 shares of or common stock at a conversion price of
$2.50 per share.
Sale of Jabber Stock and Short-Term Loan-
During August 2001, we sold 25 shares of our series C convertible
preferred stock of Jabber for $25,000 and obtained a commitment for a short-term
loan in the amount of $300,000. The loan is to be repaid within 60 days of the
closing, will bear interest at 10% per annum and will be secured by a pledge of
3,800,000 shares of our series A-1 convertible preferred stock of Jabber. The
maker of this loan will also be granted a warrant to purchase 25,000 shares of
our common stock at $2.50 per share.
Pro Forma Stockholders' Equity-
Our stockholders' equity at June 30, 2001, adjusted to reflect the
conversion of a portion of the 10% convertible note payable during July 2001,
as described above, would have been approximately $2.52 million.
NOTE 13 - RESTATEMENT
In December 1999, we issued a warrant to the holder of our 10% note
payable in connection with amending the terms of our 10% note payable. This
warrant was issued in connection with the sale of our series B preferred stock,
which we completed in February 2000. We originally recorded the warrant, valued
at $2,311,475, as a series B preferred stock offering cost. We have now
determined that it is appropriate to re-characterize this warrant as additional
consideration to the note holder, and have revised our accounting for this
warrant to reflect it as a deferred financing asset related to the 10% note
payable. Accordingly, the results of operations for periods after December 1999,
have been restated to reflect such capitalization and amortization of the
$2,311,475 as additional non-cash interest expense from the date of issuance to
the date of maturity for the 10% convertible note payable, August 25, 2002. This
restatement has no effect on previously reported cash flows from operations,
investing activities, or financing activities.
As a result of the re-characterization of the warrant as noted above,
the relative fair value of the series B preferred stock and the warrant issued
therewith was also affected, resulting in additional proceeds being allocated to
warrants and an equal reduction in proceeds allocated to additional paid-in
capital, with no net impact on total stockholder's equity.
During July and September 2000, we issued 912,500 shares of common
stock of our subsidiary, Jabber, to Jabber employees, an officer of Webb and
members of the Jabber advisory boards for services provided to Jabber and to be
rendered in future periods. Certain of the shares were vested immediately, and
certain shares vest over a periods ranging from one month to two years. We
recorded the estimated fair value of these shares and the related deferred
compensation totalling $523,700 on the grant date. Through December 31, 2000, we
recorded compensation expense totalling $276,337. In our previously reported
results for the year ended December 31, 2000, we recorded minority interest on
our balance sheet equal to the total value of the common stock and did not
allocate any of Jabber's losses to the minority shareholders of Jabber. We have
revised our accounting for the minority interest to reflect the minority share
of Jabber's losses in an amount equal to the minority interest share of Jabber's
net assets.
19
This restatement and its impact on previously reported quarterly
amounts are presented below.
Condensed Consolidated Balance Sheet:
December 31, 2000
--------------------------------------
As Filed As Restated
----------------- -----------------
ASSETS
Current assets $ 6,264,566 $ 6,721,948
Other assets 9,340,870 8,883,488
Deferred financing costs (Note 1) 104,893 815,301
----------------- -----------------
Total assets $ 15,710,329 $ 16,420,737
================= =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities $ 6,199,421 $ 6,199,421
----------------- -----------------
Minority interest in subsidiary (Note 4) 523,700 -
----------------- -----------------
Stockholders' equity:
Preferred stock: 912,286 912,286
Common stock (Note 2) 85,986,641 85,506,004
Warrants and options (Note 3) 13,740,819 15,450,237
Deferred compensation (Note 4) (402,137) (154,774)
Other accumulated comprehensive income 1,371 1,371
Accumulated deficit (91,251,772) (91,493,808)
----------------- -----------------
Total stockholders' equity 8,987,208 10,221,316
----------------- -----------------
Total liabilities and stockholders' equity $ 15,710,329 $ 16,420,737
================= =================
Unaudited Condensed Consolidated Statement of Operations:
Three Months Ended Six Months Ended
June 30, 2000 June 30, 2000
------------------------------------- --------------------------------------
As Reported As Restated As Reported As Restated
---------------- ---------------- ----------------- -----------------
Loss from operations $(7,118,958) $(7,118,958) $(12,465,584) $(12,465,584)
Interest income 283,486 283,486 445,373 445,373
Interest expense (172,961) (280,170) (347,951) (649,550)
---------------- ---------------- ----------------- -----------------
Net loss from continuing operations (7,008,433) (7,115,642) (12,368,162) (12,669,761)
Net loss from discontinued
operations (27,065) (27,065) (61,857) (61,857)
---------------- ---------------- ----------------- -----------------
Net loss (7,035,498) (7,142,707) (12,430,019) (12,731,618)
Preferred stock dividends - - (373,126) (373,126)
Accretion of preferred stock to
redemption value - - (12,500,000) (12,500,000)
---------------- ---------------- ----------------- -----------------
Net loss applicable to common
stockholders $(7,035,498) $(7,142,707) $(25,303,145) $(25,604,744)
================ ================ ================= =================
Net loss per share, basic and
diluted $ (0.77) $ (0.78) $ (2.85) $ (2.88)
================ ================ ================= =================
Weighted average shares
outstanding, basic and diluted 9,112,440 9,112,440 8,888,848 8,888,848
================ ================ ================= =================
20
Three Months Ended Nine Months Ended
September 30, 2000 September 30, 2000
------------------------------------ -------------------------------------
As Reported As Restated As Reported As Restated
------------------ -------------- ------------------ -----------------
Loss from operations $(6,749,146) $(6,749,146) $(19,215,645) $(19,215,645)
Interest income 70,761 70,761 508,096 508,096
Interest expense (109,571) (217,658) (457,523) (867,509)
------------------ -------------- ------------------ -----------------
Net loss from continuing
operations (7,136,037) (7,244,424) (19,505,115) (19,915,101)
Net loss from discontinued
operations (203,372) (203,372) (265,129) (265,129)
------------------ -------------- ------------------ -----------------
Net loss (7,339,409) (7,447,796) (19,770,244) (20,180,230)
Preferred stock dividends - - (373,126) (373,126)
Accretion of preferred stock to
redemption value - - (12,500,000) (12,500,000)
------------------ -------------- ------------------ -----------------
Net loss applicable to common
stockholders $(7,339,409) $(7,447,796) $(32,643,370) $(33,053,356)
------------------ -------------- ------------------ -----------------
Net loss per share, basic and
diluted $ (0.80) $ (0.81) $ (3.63) $ (3.67)
------------------ -------------- ------------------ -----------------
Weighted average shares
outstanding, basic and diluted 9,217,471 9,217,471 8,999,188 8,999,188
------------------ -------------- ------------------ -----------------
Year Ended
December 31, 2000
-------------------------------------
As Reported As Restated
---------------- ----------------
Loss from operations $(35,578,433) $(35,578,433)
Interest income 731,808 731,808
Interest expense (605,638) (1,124,011)
Loss on foreign currency
transactions (130,357) (130,357)
Loss on write-off of investment in
common stock (448,172) (448,172)
Loss on disposition of property and
equipment (344,341) (344,341)
---------------- ----------------
Net loss from continuing operations (36,375,133) (36,893,506)
Net loss from discontinued
operations (203,372) (203,372)
---------------- ----------------
Net loss before minority interest (36,578,505) (37,096,878)
Minority interest in losses of
subsidiary - 276,337
---------------- ----------------
Net loss (36,578,505) (36,820,541)
Preferred stock dividends (373,126) (373,126)
Accretion of preferred stock to
redemption value (11,660,000) (11,660,000)
---------------- ----------------
Net loss applicable to common
stockholders $(48,611,631) $(48,853,667)
================ =================
Net loss per share, basic and
diluted $ (5.37) $ (5.39)
================ =================
Weighted average shares
outstanding, basic and diluted 9,060,437 9,060,437
================ ================
21
Note 1: The increase in deferred financing costs represents the value of the
warrant of $2,311,475 less amortization expense from date of issuance through
December 31, 2000, totalling $518,373 and a reduction of $1,082,694 related to
the conversion of one-half of the 10% note payable in February 2000.
Note 2: The decrease in common stock represents the $1,082,694 for the portion
of the unamortized deferred financing costs taken against equity for conversion
of one-half of the principal balance of the 10% note payable, offset by the
$602,057 increase attributable to the beneficial conversion feature of the
series B preferred stock after reallocation of the relative fair values of the
securities issued in February 2000.
Note 3: The increase in warrants and options represents the increase in the
warrant to purchase common stock issued with the series B preferred stock of
$1,709,418 after reallocation of the relative fair values of the securities.
Note 4: The reduction in minority interest of $523,700 and deferred compensation
of $247,363 at December 31, 2001, represents the allocation of the losses in
Jabber to their minority shareholders equal to the minority interest share in
the net assets of Jabber, which totalled $276,337 for the year ended December
31, 2001.
22