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 1934.
For the period ended September 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.
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(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 October 31, 2001, Registrant had 10,886,317 shares of common
stock outstanding.
_________________
.
WEBB INTERACTIVE SERVICES, INC. AND SUBSIDIARIES
Index
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Page
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Part I. Financial Information
Item 1. Unaudited Condensed Financial Statements
Consolidated Balance Sheets as of September 30, 2001 and December 31, 2000 3
Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2001 and 2000 4
Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2001 and 2000 5-6
Notes to Consolidated Financial Statements 7-28
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 29-43
Part II. Other Information
Items 1 to 5. Not Applicable 44
Item 6. Exhibits and Reports on Form 8-K 44-45
Signatures 46
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This report contains forward-looking statements within the meaning of Section
21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the
Securities Act of 1933, as amended, and is subject to the safe harbors created
by those sections. These forward-looking statements are subject to significant
risks and uncertainties, including those identified in the section of this Form
10-QSB entitled "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Factors That May Affect Future Operating Results,"
which may cause actual results to differ materially from those discussed in such
forward-looking statements. The forward-looking statements within this Form
10-QSB are identified by words such as "believes," "anticipates," "expects,"
"intends," "may," "will" and other similar expressions. However, these words are
not the exclusive means of identifying such statements. In addition, any
statements which refer to expectations, projections or other characterizations
of future events or circumstances are forward-looking statements. The Company
undertakes no obligation to publicly release the results of any revisions to
these forward-looking statements which may be made to reflect events or
circumstances occurring subsequent to the filing of this Form 10-QSB with the
Securities and Exchange Commission ("SEC"). Readers are urged to carefully
review and consider the various disclosures made by the Company in this report
and in the Company's other reports filed with the SEC that attempt to advise
interested parties of the risks and factors that may affect the Company's
business.
2
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
WEBB INTERACTIVE SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
September 30, December 31,
2001 2000
---------------- -----------------
(As Restated -
See Note 15)
ASSETS
Current assets:
Cash and cash equivalents $ 1,916,075 $ 4,827,030
Restricted cash 475,000 525,000
Accounts receivable, net of allowance for doubtful accounts of $27,000 and
$6,000, respectively 191,535 152,269
Prepaid expenses 139,727 57,025
Notes receivable and accrued interest from Company officers 178,498 198,444
Short-term deposits and other current assets 6,106 370,522
-------------- --------------
Total current assets 2,906,941 6,130,290
Property and equipment, net of accumulated depreciation of $1,748,200 and
$670,023, respectively 1,838,306 1,124,450
Intangible assets, net of accumulated amortization of $1,980,629 and
$823,744, respectively 1,117,167 2,274,052
Deferred financing costs 334,931 815,301
Other assets 46,362 51,689
Long-term assets of discontinued operation 1,436,000 5,433,297
-------------- --------------
Total assets $ 7,679,707 $ 15,829,079
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current portion of 10% convertible note payable, net of discount of
$117,678 $ 1,814,421 $ -
Short-term notes payable, net of discount of $7,869 332,131 -
Convertible note payable and accrued interest payable 102,134 -
Capital leases payable 117,915 227,876
Accounts payable and accrued liabilities 1,344,039 1,811,240
Accrued salaries and payroll taxes payable 617,381 936,596
Accrued interest payable 51,840 63,014
Customer deposits and deferred revenue 107,770 -
Current liabilities of discontinued operation, net 277,280 210,603
-------------- --------------
Total current liabilities 4,764,911 3,249,329
10% convertible note payable, net of discount of $295,676 - 2,358,434
Commitments and contingencies
Minority interest in subsidiary 5,713,989 -
Stockholders' equity (deficit)
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, 10,886,317 and
10,354,473 shares issued and outstanding, respectively 92,558,830 85,506,004
Warrants and options 14,918,853 15,450,237
Deferred compensation (18,739) (154,774)
Accumulated other comprehensive income (loss) (3,986) 1,371
Accumulated deficit (113,123,884) (91,493,808)
-------------- --------------
Total stockholders' equity (deficit) (2,799,193) 10,221,316
-------------- --------------
Total liabilities and stockholders' equity (deficit) $ 7,679,707 $ 15,829,079
============== ==============
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 Nine Months Ended
September 30, September 30,
--------------------------------- -------------------------------------
2001 2000 2001 2000
-------------- -------------- ---------------- ----------------
(As Restated (As Restated -
-See Note 15) See Note 15)
Net revenues $ 245,733 $ 247,645 $ 503,212 $ 276,195
Cost of revenues 183,098 104,853 665,019 117,810
------------- ------------- --------------- ---------------
Gross margin 62,635 142,792 (161,807) 158,385
------------- ------------- --------------- ---------------
Operating expenses:
Sales and marketing expenses 277,645 149,167 739,209 178,919
Product development expenses 805,956 507,774 2,172,192 786,921
General and administrative expenses 1,407,057 2,587,391 4,527,976 6,718,780
Depreciation and amortization 575,307 566,943 1,675,070 778,447
------------- ------------- --------------- ---------------
3,065,965 3,811,275 9,114,447 8,463,067
------------- ------------- --------------- ---------------
Loss from operations (3,003,330) (3,668,483) (9,276,254) (8,304,682)
Interest income 12,630 58,535 118,970 495,832
Gain (loss) on disposal of property and equipment 11,232 (348,081) 1,330 (340,043)
Other income (loss) (2,452) 12,226 21,916 12,265
Interest expense (212,397) (217,958) (3,106,544) (867,509)
------------- ------------- --------------- ---------------
Net loss from continuing operations (3,194,317) (4,163,761) (12,240,582) (9,004,137)
Net loss from discontinued operations (2,200,006) (3,284,035) (6,725,968) (11,176,093)
------------- ------------- --------------- ---------------
Net loss before minority interest (5,394,323) (7,447,796) (18,966,550) (20,180,230)
Minority interest in losses of subsidiary 72,550 - 251,090 -
------------- ------------- --------------- ---------------
Net loss (5,321,773) (7,447,796) (18,715,460) (20,180,230)
Preferred stock dividends (57,989) - (57,989) (373,126)
Accretion of preferred stock to redemption value - - (2,856,627) (12,500,000)
------------- ------------- --------------- ---------------
Net loss applicable to common stockholders $ (5,379,762) $ (7,447,796) $ (21,630,076) $ (33,053,356)
============= ============= =============== ===============
Net loss applicable to common stockholders from
continuing operations per share, basic and diluted $ (0.30) $ (0.45) $ (1.41) $ (2.43)
============= ============= =============== ===============
Net loss applicable to common stockholders per share
from discontinued operations, basic and diluted $ (0.20) $ (0.36) $ (0.63) $ (1.24)
============= ============= =============== ===============
Net loss per share, basic and diluted $ (0.50) $ (0.81) $ (2.04) $ (3.67)
============= ============= =============== ===============
Weighted average shares outstanding, basic and
diluted 10,872,058 9,217,471 10,605,041 8,999,188
============= ============= =============== ===============
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)
Nine Months Ended
September 30,
----------------------------------------
2001 2000
----------------- ------------------
(As Restated -
See Note 15)
Cash flows from operating activities:
Net loss $ (18,715,460) $ (20,180,230)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation expense 938,261 1,124,950
Amortization expense 2,660,522 6,233,936
Impairment loss 1,019,301 -
Minority interest in losses of subsidiary (251,090) -
Stock and stock options issued for services 627,195 634,690
(Gain) loss on sale and disposal of property and equipment (1,330) 340,640
Bad debt expense 67,073 62,000
Accrued interest payable on convertible note payable 43,134 -
Accrued interest income on notes receivable (10,054) -
Interest expense on 10% convertible note from beneficial conversion
feature 2,394,234 -
Notes payable issued for interest on 10% convertible note payable 9,809 154,110
Amortization of 10% convertible note payable discount 118,155 152,231
Amortization of short-term note payable discount 7,869 -
Amortization of 10% convertible note payable financing costs 326,894 466,459
Amortization of short-term notes payable financing costs 10,500 -
Changes in operating assets and liabilities:
(Decrease) increase in restricted cash 50,000 (453,624)
Decrease (increase) in accounts receivable 128,837 (1,509,284)
Decrease in prepaid expenses 45,547 223,877
Decrease (increase) in short-term deposits and other assets 371,000 (44,826)
Increase in accounts payable and accrued liabilities 114,111 126,521
(Decrease) increase in accrued salaries and payroll taxes payable (433,207) 431,231
Decrease in accrued interest payable (11,175) (126,028)
(Decrease) increase in customer deposits and deferred revenue (3,606) 143,503
----------------- ------------------
Net cash used in operating activities (10,493,480) (12,219,844)
----------------- ------------------
Cash flows from investing activities:
Proceeds from the sale of property and equipment 22,293 49,382
Purchase of property and equipment (198,721) (2,111,800)
Collection of (advance for) notes receivable from Company officers 30,000 (100,000)
----------------- ------------------
Net cash used in investing activities (146,428) (2,162,418)
----------------- ------------------
Cash flows from financing activities:
Payments on capital leases (109,961) (198,197)
Proceeds from exercise of stock options and warrants 24,219 7,235,008
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 Jabber preferred stock 2,525,000 -
Proceeds from issuance of short-term notes payable 340,000 -
Proceeds from issuance of series B preferred stock and warrants - 12,500,000
Short-term notes payable financing costs (21,000) -
Preferred stock cash offering costs (50,000) (840,000)
----------------- ------------------
Net cash provided by financing activities 7,708,258 18,696,811
----------------- ------------------
Net (decrease) increase in cash and cash equivalents (2,931,650) 4,314,549
Effect of foreign currency exchange rate changes on cash (5,357) -
Cash and cash equivalents, beginning of period 4,856,686 4,164,371
Cash in discontinued operations (3,604) -
----------------- ------------------
Cash and cash equivalents, end of period $ 1,916,075 $ 8,478,920
================= ==================
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)
Nine Months Ended
September 30,
---------------------------------------
2001 2000
---------------- ----------------
(As Restated -
See Note 15)
Supplemental disclosure of cash flow information:
Cash paid for interest $ 201,031 $ 220,555
================ ================
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 dividends issued by Jabber $ 57,989 $ -
Preferred stock and prior period cumulative dividends converted to
common stock $ 492,553 $ 1,023,028
10% note payable converted to common stock $ 568,938 $ 1,886,263
Proceeds from sale of discontinued e-banking operations received in cash $ - $ 448,172
Capital leases for equipment $ - $ 263,788
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
SEPTEMBER 30, 2001 AND DECEMBER 31, 2000
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited interim condensed 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, Inc. subsidiary
("Jabber") is recorded based upon the minority interest share in the net assets
of Jabber. For this purpose, holders of Jabber's series B preferred stock do not
share in the net assets of Jabber until such time the series B preferred stock
is converted into shares of Jabber's common stock. The accompanying condensed
consolidated financial statements have been prepared without audit pursuant to
rules and regulations of the SEC 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/A for the year
ended December 31, 2000 filed with the SEC, as well as any filing made to update
or amend our Annual Report.
The accompanying condensed 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 and substantial short-term liabilities,
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 accountants, 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.
Following the France Telecom Technologies Investissements ("FTTI") purchase
of Jabber preferred stock in July and September 2001 (See Note 7), the Jabber
business is being funded separately from our other business activities. We
believe the proceeds from the sales of Jabber preferred stock to FTTI in July
and September 2001, are adequate to sustain Jabber's operations through at least
March 2002. In addition to the $4.25 million already invested by FTTI, the
preferred stock purchase agreement executed in July 2001, provides for, subject
to certain conditions, the sale to FTTI of an additional $2 million worth of
Jabber preferred stock. We believe the additional proceeds from this transaction
would be adequate to sustain Jabber's operations throughout 2002. However, the
additional sale of $2 million worth of Jabber's preferred stock may not occur.
Therefore, there can be no guarantee that this financing will be completed, or
if completed, that the terms of any such future financing will be acceptable. If
we are not successful in obtaining funding in appropriate amounts or on
appropriate terms, we would consider additional reductions in our operating
activities.
On October 16, 2001, we terminated our AccelX local commerce business. The
accompanying condensed consolidated financial statements reflect the sale of
this segment as a discontinued operation (See Note 11). In connection with the
termination of this business, Webb's number of employees was reduced by sixteen
to five full-time equivalents and operating costs have been significantly
reduced. However, Webb does not currently have a source of revenue other than
the proceeds from the license of AccelX software and sale of assets at the time
of the
7
termination of this business. We believe that the proceeds we have received from
the this license and sale of assets are adequate to sustain our Webb operations
to January 2002. However, the purchaser may not meet the required conditions and
we may not receive any additional proceeds. We have begun discussion with
private investors for an additional $7.5 million of financing for Webb through
the sale of Webb stock. However, we have no commitments for the $7.5 million
financing. Therefore, there can be no guarantee that this financing will be
completed, or if completed, that the terms of any such financing will be
acceptable to us. If we are not successful in obtaining funding in appropriate
amounts or on appropriate terms, we would consider the sale of all or a portion
of our Jabber interest.
As discussed in Note 15, 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
Revenues are derived from the license of Jabber 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.
Revenue is recognized on software arrangements only when persuasive
evidence of an agreement exists, delivery and customer acceptance, if any, have
occurred, the 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.
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.
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
8
and it is feasible for the customer to either run the software on its own
hardware or contract with a party not related to the licensor 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, Jabber applies 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, Jabber recognizes the residual revenue attributed to the delivered
elements when all other criteria for revenue recognition for those elements have
been met.
We believe Jabber's 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 Nine Months Ended
September 30, September 30,
---------------------------------- -------------------------------------
2001 2000 2001 2000
--------------- --------------- ---------------- ----------------
Net revenues
Licenses $ 220,000 $ 15,000 $ 353,746 $ 25,000
Services 25,733 232,645 149,466 251,115
--------------- --------------- ---------------- ----------------
Total net revenues: $ 245,733 $ 247,645 $ 503,212 $ 276,195
=============== =============== ================ ================
Jabber had one customer representing 87% of revenues and two customers
representing 82% of revenues for the three and nine months ended September 30,
2001, respectively. Jabber had two customers representing 72% of revenues and
two customers representing 66% of revenues for the three and nine months ended
September 30, 2000.
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. Including amortization
expense of intangible assets related to our AccelX segment, we recorded
amortization expense of $940,071 and $2,103,891 for the three months ended
September 30, 2001 and 2000, respectively, and $2,660,522 and $6,233,936 for the
nine months ended September 30, 2001 and 2000, respectively. Subsequent to
acquisitions which result in intangible assets and goodwill, we continually
evaluate whether later events and 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
9
over the remaining life of the intangible assets and goodwill in measuring
whether the intangible assets and goodwill are recoverable.
As a result of the values indicated during negotiations for licensing of
AccelX software and sale of AccelX assets which we completed on October 16,
2001, (See Note 11), we have determined that the carrying values of the
intangible assets recorded in connection with the acquisition of Update Systems,
Inc. exceeded their fair market value and, accordingly, we recorded an
impairment loss at September 30, 2001, totalling $1,019,301. We compared the
licence revenue and the sale price of AccelX after allocating a portion of these
amounts to the fair market value of tangible assets sold and deducting selling
costs to the carrying value of the intangible assets and computed the impairment
loss as follows:
Sale price/license revenue $ 1,500,000
Less:
Fair value of tangible assets sold 225,262
Assumed liabilities and deferred revenue (107,113)
Selling costs 177,174
-----------------
Amount allocated to fair value of intangible assets 1,204,677
Carrying value of intangible assets as of September 30, 2001 2,223,978
-----------------
Impairment loss $ 1,019,301
=================
After the termination of our AccelX business, the remaining intangible
assets consists of intangible assets related to our Jabber products which
totalled $1,117,167 at September 30, 2001. We have concluded, based upon the
values established in the transaction with FTTI, that the intangible assets and
goodwill related to Jabber's 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 that 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. As a result of the termination of our AccelX business on October
16, 2001, we no longer have goodwill determined in accordance with APB 16
recorded on our balance sheet.
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.
10
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.
September 30,
----------------------------------------
2001 2000
----------------- -----------------
Stock options 3,586,358 3,771,610
10% convertible note payable 772,877 263,362
Warrants and underwriter options 1,255,315 768,728
Series C-1 preferred stock 1,000,000 -
Series B-2 preferred stock 180,000 -
Series B preferred stock - 1,225,000
----------------- -----------------
Total 6,794,550 6,028,700
================= =================
The number of shares excluded from the earnings per share calculation
because they are anti-dilutive, using the treasury stock method, were 104,710
and 147,380 for the three and nine months ended September 30, 2001,
respectively, and 463,430 and 2,976,934 for the three and nine months ended
September 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 $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 price for of our common stock was $0.65 per share. 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 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.
11
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
Price Exercise Conversion or
Immediately Exercise Price
Preceding Series C-1 Immediately After
Preferred Stock Series C-1 Preferred
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% Convertible Series B-2
Note Payable Preferred 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
12
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 Purchase
Warrant 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 - SHORT-TERM NOTES PAYABLE
On August 29, 2001, Webb executed a 60 day promissory note for which we
received $300,000. The promissory note accrued interest at an annual rate of 10%
and was secured by a pledge of 3,000,000 shares of Webb's series A-1 convertible
preferred stock of Jabber. On October 29, 2001, we repaid the promissory note,
including accrued interest of $5,014.
In addition, we issued the holder of the promissory note a warrant to
purchase 25,000 shares of our common stock at $2.50 per share. The warrant may
be exercised by the holder at any time from the date of issuance through August
29, 2004. We valued the warrant at $15,738 using the Black-Scholes option
pricing model with the assumption summarized in the following table. The fair
value of the warrant was recorded as a discount to the promissory note and is
being amortized to interest expense over the term of the note. At September 30,
2001, we recorded $7,869 of such interest expense.
Black-Scholes option pricing model assumptions:
Exercise price $2.50
Fair market value of common stock on measurement date $1.01
Option life 3 years
Volatility rate 127%
Risk free rate of return 6.5%
Dividend rate 0%
We also paid $21,000 in financing costs associated with the execution of
the promissory note. The financing costs were recorded as deferred financing
costs and are being amortized to interest expense over the term of the note. At
September 30, 2001, we recorded $10,500 of such interest expense.
13
On August 20, 2001, Webb executed a demand promissory note with a former
officer of the Company for which we received $40,000. The promissory note
accrued interest at an annual rate of 10%. On October 22, 2001, we repaid the
promissory note, including accrued interest of $449.
NOTE 7 - SALE OF JABBER SECURITIES AND CONVERTIBLE NOTE PAYABLE
On May 2, 2001, pursuant to a letter of intent between 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.
On July 17, 2001, FTTI acquired 2,441 shares of the series B convertible
preferred stock of Jabber from Jabber in exchange for and in cancellation of
principal and interest on the outstanding loan to Jabber of $2,441,000 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.
On September 13, 2001, FTTI purchased an additional 1,750 shares of series
B convertible preferred stock for an aggregate consideration of $1,750,000. 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. The Jabber preferred
stock acquired by FTTI represents, on an as-if-converted basis, at September 30,
2001, approximately 22% of Jabber's outstanding capital stock following the
transactions.
At September 30, 2001. Jabber owed FTTI $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; however, FTTI's ability to vote these shares is restricted in
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 in accordance with Webb's instructions related to
the selection of directors to Jabber's Board of Directors, to be comprised of
five members; two affiliates of Webb, two independent nominees designated by
Webb, and one selected by FTTI. The restrictions on these voting rights are
lifted if there is an event of default as defined in the pledge agreement. 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 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 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 20% or more of Jabber's then outstanding shares of capital stock;
and (iii) gives
14
FTTI the right to participate with Webb on a proportional basis in a proposed
sale of Jabber securities 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.
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 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
substantially as follows: Webb - 65%; FTTI - 29%; DiamondCluster International,
Inc. - 3%; and all other current common stockholders as a group - 4%.
Under the terms of the July 2001, agreement with FTTI, use of the proceeds
from the sale of the shares of Jabber preferred stock to FTTI are restricted to
the working capital requirements of Jabber and are not available to Webb. As of
September 30, 2001, the amount of cash Jabber had on hand which is subject to
this restriction totalled approximately $1.8 million.
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 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 4,881
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 common
stock into which of the series A-1 preferred stock could be converted. 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 September 30, 2001, Webb
owns 6,650,000 shares and FTTI owned 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 of common stock into which the series A-2 preferred stock could be
converted. At September 30, 2001, Webb owned all 1,400,000 series A-2 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
15
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, series
A-1 or series C preferred stock for less than the conversion price of the series
B preferred stock (currently $1.00 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 of common
stock into which the series B preferred stock could be converted. 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 of series B preferred stock are entitled to elect
one person to Jabber's board of directors. At September 30, 2001, FTTI owned
4,191 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 $1.00 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 of common
stock into which the series C preferred stock could be converted. At September
30, 2001, Webb owned 7,846 shares and a third-party owned 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.
NOTE 8 - CONVERSION OF SERIES B-2 PREFERRED STOCK
During April and May, 2001, the holder of Webb's 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 9 - CONVERSION OF 10% CONVERTIBLE NOTE PAYABLE
16
During the second and third quarters of 2001, the holder of our 10%
convertible note payable converted $680,000 of principal and $51,819 of
principal-in-kind notes and accrued interest into 292,727 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 Stock
Conversion Date Converted Converted 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
July 18,2001 100,000 6,630 42,652
---------------- ---------------- ----------------
Total $ 680,000 $ 51,819 292,727
================ ================ ================
NOTE 10 - STOCK BASED COMPENSATION EXPENSE
During the nine months ended September 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 $ 82,242 $ 15,777
Stock options issued to financial
services company (B) 100,000 121,642 -
Common stock issued to financial
services company (B) 15,000 28,750 -
Reset of series B preferred stock
common stock purchase warrants (C) - 96,938 -
Acceleration of stock option vesting
date (D) - 27,646 -
Amortization of previous years
deferred compensation - 259,977 2,962
---------------- ---------------- -----------------
Totals 235,000 $ 617,195 $ 18,739
================ ================ =================
(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 $98,019 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 Options 80,000 Options
---------------- ----------------
Exercise price $2.813 $2.813
Fair market value of common stock on valuation date $2.813 $ 0.50
Option life 3 years 3 years
Volatility rate 121% 127%
17
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 earned 2,500 restricted shares of
our common stock at the end of each month commencing April 2001. During the term
of the agreement, we issued 15,000 shares of our common stock and recorded
compensation expense totalling $28,750. 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 recorded non-cash compensation
expense based on the vesting terms valued at $121,642 applying variable plan
accounting pursuant to SFAS 123 and related interpretation EITF-96-18 utilizing
the Black-Scholes option pricing model. We used the following assumptions to
calculate the value of the options:
25,000 Options 25,000 Options 50,000 Options
---------------- ---------------- ----------------
Exercise price $2.50 $3.00 $5.00
Fair market value of common stock on
valuation date $0.50 to $2.45 $0.50 to $2.45 $0.50 to $2.45
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 $33,284 $31,996 $56,362
(C) In May and August 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 and then to $1.547 per share for which we recorded non-cash
compensation expense totalling $96,938. The value of the warrant was calculated
using the Black-Scholes option pricing model utilizing the following
assumptions:
May 2001 August 2001
--------------------------------------- ----------------------------------------
Immediately Immediately
Preceding Immediately Preceding Immediately
Reset After Reset Reset After Reset
--------------- --------------- ---------------- ----------------
Common stock issuable upon
exercise of warrant 343,750 343,750 343,750 343,750
Exercise price $3.75374 $2.703 $2.703 $1.547
Fair market value of
common stock on date
of issuance $2.99 $2.99 $1.35 $1.35
Option life 5 years 5 years 5 years 5 years
Volatility rate 120% 120% 120% 120%
Risk-free rate of return 6.71% 6.71% 6.71% 6.71%
Dividend rate 0% 0% 0% 0%
Calculated value $853,222 $880,772 314,226 $349,418
(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:
18
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 11 - DISCONTINUED OPERATIONS
On October 16, 2001, we terminated our AccelX local commerce business.
In connection with the termination of this business, we granted a perpetual
license for software used in this business to Nextron Communications, Inc.
("Nextron") for a license fee of $1 million (See Note 14). The terms of this
perpetual License transfers substantially all of our rights and their related
valve for this technology. In addition, we sold assets used in this business to
Nextron for an initial purchase price of $500,000. In the event that Nextron
completes a qualifying financing transaction by January 31, 2002, Nextron will
pay Webb an additional $750,000 for the assets. If the financing transaction is
not completed by January 31, 2002, but is completed by June 30, 2002, Nextron
will pay Webb an additional $350,000 for the assets. If the financing
transaction is not completed by June 30, 2002, Webb will not receive any
additional consideration for the assets.
Our decision to terminate the AccelX business was based on the
following factors:
. We were not able to raise the additional funds required to fund
this business on terms acceptable to the Company;
. Market conditions for the AccelX products and services remained
depressed, contrary to our earlier expectations;
. Funding the AccelX business under current market conditions would
result in an unacceptable dilution in the value of the Company's
Jabber subsidiary to current shareholders; and
. We needed to raise cash to satisfy outstanding obligations.
As a result of the termination of this segment, based upon the
indicated fair value of these assets, we recorded an impairment loss of
$1,019,301 for the three months ended September 30, 2001, related to intangible
assets we acquired from Update Systems, Inc. in January 2000 (See Note 3). We
expect to recognize a nominal gain from the sale of the tangible and intangible
assets after deducting selling expenses of approximately $177,000. The receipt
of any additional proceeds as indicated above will increase the gain we
recognize from the sale of these assets.
In September 2000, we sold our e-banking segment to a privately held
company.
The sales of these segments are reflected as a sale of discontinued
operations in the accompanying condensed consolidated financial statements.
Accordingly, the assets, liabilities; and revenues, costs and expenses of these
discontinued operation have been excluded from the respective captions in the
Condensed Consolidated Balance Sheets and Condensed Consolidated Statement of
Operations and have been reported as "Long-term assets of discontinued
operations," "Current liabilities from discontinued operations, net" and "Loss
from discontinued operations" for all periods presented.
Assets and liabilities of the AccelX discontinued operations consists
of the following:
September 30, December 31,
2001 2000
------------------ ----------------
Long-term assets of discontinued operations:
Property and equipment, net $ 231,322 $1,705,682
Intangible assets and goodwill, net 1,204,678 3,727,615
------------------ ----------------
Total long-term assets of discontinued operations $ 1,436,000 $5,433,297
================== ================
Current liabilities of discontinued operations, net:
Current assets of discontinued operations:
19
Cash $ 3,604 $ 29,656
Accounts receivable, net 80,935 317,370
Prepaid expenses 116,383 244,632
--------------- -------------
Total current assets of discontinued operations 200,922 591,658
--------------- -------------
Accounts payable and accrued liabilities 232,800 331,491
Accrued salaries and payroll taxes payable 182,256 296,248
Customer deposits and deferred revenue 63,146 174,522
--------------- -------------
Total current liabilities of discontinued operations 478,202 802,261
--------------- -------------
Current liabilities of discontinued operations, net $ 277,280 $ 210,603
=============== =============
Summarized financial information for the discontinued operations are
as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------------- --------------------------------------
AccelX Business Segment: 2001 2000 2001 2000
---------------- ---------------- ----------------- -----------------
Net revenues $ 296,782 $ 1,415,094 $ 1,766,541 $ 3,102,845
---------------- ---------------- ----------------- -----------------
Costs and expenses:
Cost of revenues 581,569 676,572 2,562,889 2,015,536
Sales and marketing expenses 90,566 931,158 767,440 2,094,634
Product development expenses 251,172 944,717 2,030,579 3,222,685
General and administrative
expenses 48,939 213,497 544,356 559,578
Depreciation and amortization 536,568 1,729,913 1,581,743 6,121,376
Impairment loss 1,019,301 - 1,019,301 -
---------------- ---------------- ----------------- -----------------
Total costs and expenses 2,528,115 4,495,857 8,506,308 14,013,809
---------------- ---------------- ----------------- -----------------
Operating loss (2,231,333) (3,080,763) (6,739,767) (10,910,964)
Other income and expenses:
Gain (loss) on foreign currency
transactions (868) - (18,386) -
Other income 32,195 - 32,185 -
---------------- ---------------- ----------------- -----------------
Loss from discontinued operations $ (2,200,006) $ (3,080,763) $ (6,725,968) $ (10,910,964)
================ ================ ================= =================
E-banking Business Segment:
Net revenues $ - $ 73,092 $ - $ 497,821
Costs and expenses: - 276,364 - 762,950
---------------- ---------------- ----------------- -----------------
Net loss from discontinued
operations $ - $ (203,272) $ - $ (265,129)
================ ================ ================= =================
NOTE 12 - PARENT ONLY FINANCIAL INFORMATION
The stock purchase agreement under which FTTI (See Note 7) made an
investment in Jabber requires that these investment proceeds be used only by
Jabber and that they may not be used to fund any of our other business
activities, including corporate activities. As a result, we believe that
financial information for Webb on a stand-alone basis could be beneficial to an
investor's understanding of Webb.
20
CONDENSED CONSOLIDATING BALANCE SHEETS
AS OF SEPTEMBER 30, 2001
(UNAUDITED)
WEBB JABBER ELIMINATIONS CONSOLIDATED
------------ ----------- ---------------- --------------
ASSETS
Current assets:
Cash and cash equivalents $ 63,966 $ 1,852,109 $ - $ 1,916,075
Restricted cash 475,000 - - 475,000
Accounts receivable, net - 191,535 - 191,535
Prepaid expenses 118,993 20,734 - 139,727
Notes receivable and accrued interest
from Company officers 178,498 - - 178,498
Intercompany receivable - 30,867 (30,867) (A) -
Short-term deposits and other current
assets 6,106 - 6,106
-------------- -------------- -------------- ---------------
Total current assets 842,563 2,095,245 (30,867) 2,906,941
Investment in subsidiary (2,284,553) - 2,284,553 (B) -
Property and equipment, net 1,535,667 302,639 - 1,838,306
Intangible assets, net - 1,117,167 - 1,117,167
Deferred financing costs 334,931 - - 334,931
Other assets 46,362 46,362
Long-term assets of discontinued operations 1,436,000 - - 1,436,000
-------------- -------------- -------------- ---------------
Total assets $ 1,910,970 $ 3,515,051 $ 2,253,686 $ 7,679,707
============== ============== ============== ===============
LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT)
Current liabilities:
Current portion of 10% convertible note
payable, net $ 1,814,421 $ - $ - $ 1,814,421
Short-term notes payable, net 332,131 - 332,131
Convertible note payable and accrued
interest payable - 102,134 - 102,134
Capital leases payable 117,915 - - 117,915
Accounts payable and accrued liabilities 1,045,035 258,192 40,812 (A) 1,344,039
Accrued salaries and payroll taxes payable 224,861 392,520 - 617,381
Accrued interest payable 51,840 - - 51,840
Intercompany payable 71,679 - (71,679) (A) -
Customer deposits and deferred revenue - 107,770 - 107,770
Current liabilities of discontinued
operations, net 277,280 - - 227,280
-------------- ------------- -------------- ---------------
Total current liabilities 3,935,162 860,616 (30,867) 4,764,911
Commitments and contingencies
Minority interest in subsidiary - - 5,713,989 (C) 5,713,989
Stockholders' equity (deficit)
Series C-1 convertible preferred stock 2,450,000 - - 2,450,000
Series B-2 convertible preferred stock 419,733 - - 419,733
Series A convertible preferred stock - 4,400,000 (4,400,000) (C) -
Series B convertible preferred stock - 4,938,989 (4,938,989) (C)
Series C convertible preferred stock - 8,131,600 (8,131,600) (C) -
Common stock 92,558,830 564,627 (564,627) (C) 92,558,830
Warrants and options 14,888,853 30,000 - 14,918,853
Deferred compensation (18,739) (37,200) 37,200 (D) (18,739)
Accumulated other comprehensive losses (3,986) - - (3,986)
Accumulated deficit (112,318,883) (15,373,581) 14,568,580 (E) (113,123,884)
-------------- ------------- -------------- ---------------
Total stockholders' equity
(deficit) (2,024,192) 2,654,435 (3,429,436) (2,799,193)
-------------- ------------- -------------- ---------------
Total liabilities and
stockholders' equity (deficit) $ 1,910,970 3,515,051 $ 2,253,686 $ 7,679,707
============== ============= ============== ===============
21
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 2001
(UNAUDITED)
WEBB JABBER ELIMINATIONS CONSOLIDATED
-------------- ------------ ---------------- ---------------
Net revenues $ - $ 503,212 $ - $ 503,212
Cost of revenues - 665,019 - 665,019
------------ ------------ ------------ ------------
Gross margin - (161,807) - (161,807)
------------ ------------ ------------ ------------
Operating expenses:
Sales and marketing expenses - 739,209 - 739,209
Product development expenses - 2,172,192 - 2,172,192
General and administrative expenses 2,719,736 1,808,240 - 4,527,976
Depreciation and amortization 433,489 1,241,581 - 1,675,070
------------ ------------ ------------ ------------
3,153,225 5,961,222 - 9,114,447
------------ ------------ ------------ ------------
Loss from operations (3,153,225) (6,123,029) - (9,276,254)
Interest income 102,258 16,712 - 118,970
Loss from subsidiary (5,959,029) - 5,959,029 (F) -
Gain on disposal of property and equipment 1,330 - - 1,330
Gain on sale of Jabber securities 775,000 (775,000) (H) -
Other income (loss) 24,368 (2,452) - 21,916
Interest expense (3,063,183) (43,361) - (3,106,544)
------------ ------------ ------------ ------------
Loss form continuing operations (11,272,481) (6,152,130) 5,184,029 (12,240,582)
Loss from discontinued operations (6,725,968) - - (6,725,968)
------------ ------------ ------------ ------------
Net loss before minority interest (17,998,449) (6,152,130) 5,184,029 (18,966,550)
Minority interest in losses of subsidiary - - 251,090 (G) 251,090
------------ ------------ ------------ ------------
Net loss (17,998,449) (6,152,130) 5,435,119 (18,715,460)
Preferred stock dividends - (318,490) 260,501 (I) (57,989)
Accretion of preferred stock to redemption value (2,856,627) - - (2,856,627)
------------ ------------ ------------ ------------
Net loss applicable to common stockholders $(20,855,076) $ (6,470,620) $ 5,695,620 $(21,630,076)
============ ============ ============ ============
CONSOLIDATING STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2001
(UNAUDITED)
WEBB JABBER ELIMINATIONS CONSOLIDATED
--------------- ------------- -------------- ----------------
Cash flows from operating activities:
Net loss $(17,998,449) $(6,152,130) $ 5,435,119 $(18,715,460)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation expense 853,565 84,696 - 938,261
Amortization expense 1,503,637 1,156,885 - 2,660,522
Impairment loss 1,019,301 - - 1,019,301
Gain on sale of Jabber securities (775,000) 775,000 (H) -
Loss in subsidiary 5,959,029 - (5,959,029) (F) -
Minority interest in losses of subsidiary - - (251,090) (G) (251,090)
Stock and stock options issued for
services 366,105 261,090 - 627,195
Gain on sale and disposal of property and
equipment (1,330) - - (1,330)
Bad debt expense 40,373 26,700 - 67,073
Accrued interest payable on convertible
note payable - 43,134 - 43,134
22
Accrued interest income on notes receivable (10,054) - - (10,054)
Interest expense on 10% convertible note
from beneficial conversion feature 2,394,234 - - 2,394,234
Notes payable issued for interest on 10%
convertible note payable 9,809 - - 9,809
Amortization of 10% convertible note
payable discount 118,155 - - 118,155
Amortization of short-term notes payable
discount 7,869 - - 7,869
Amortization of 10% convertible note
payable financing costs 326,894 - - 326,894
Amortization of short-term notes payable
financing costs 10,500 - - 10,500
Changes in operating assets and liabilities:
Decrease in restricted cash 50,000 - - 50,000
(Increase) decrease in accounts receivable 194,803 (65,966) - 128,837
(Increase) decrease in prepaid expenses 53,376 (7,829) - 45,547
Decrease in short-term deposits and other
assets 371,000 - - 371,000
(Decrease) increase in accounts payable
and accrued liabilities 253,025 (138,914) - 114,111
(Decrease) increase in accrued salaries
and payroll taxes payable (504,342) 71,135 - (433,207)
Decrease in accrued interest payable (11,175) - - (11,175)
(Decrease) increase in customer deposits
and deferred revenue (111,376) 107,770 - (3,606)
------------- -------------- -------------- -----------
Net cash used in operating activities (5,880,051) (4,613,429) - (10,493,480)
------------- -------------- -------------- -----------
Cash flows from investing activities:
Proceeds from the sale of property and
equipment 22,293 - - 22,293
Cash advances to subsidiary or parent (2,327,770) - 2,327,770 (A) -
Purchase of property and equipment (75,159) (123,562) - (198,721)
Collection of (advance for) notes receivable
from Company officers 30,000 - - 30,000
------------- -------------- -------------- -----------
Net cash used in investing activities (2,350,636) (123,562) 2,327,770 (146,428)
------------- --------------- -------------- -----------
Cash flows from financing activities:
Payments on capital leases (109,961) - - (109,961)
Cash investment from Webb - 2,327,770 (2,327,770) (A) -
Proceeds from exercise of stock options and
warrants 24,219 - - 24,219
Proceeds from short-term notes payable 340,000 - - 340,000
Proceeds from issuance of convertible note
payable - 2,500,000 - 2,500,000
Proceeds form sale of Jabber securities 775,000 1,750,000 - 2,525,000
Proceeds from issuance of series C-1
preferred stock and warrant 2,500,000 - - 2,500,000
Short-term notes payable financing costs (21,000) - (21,000)
Preferred stock cash offering costs (50,000) - - (50,000)
------------- --------------- -------------- -----------
Net cash provided by financing activities 3,458,258 6,577,770 (2,327,770) 7,708,258
------------- --------------- -------------- -----------
Net (decrease) increase in cash and cash
equivalents (4,772,429) 1,840,779 - (2,931,650)
Effect of foreign currency exchange rate changes
on cash (5,357) - - (5,357)
Cash in discontinued operations (3,604) - - (3,604)
Cash and cash equivalents, beginning of period 4,845,356 11,330 - 4,856,686
------------- -------------- -------------- -----------
Cash and cash equivalents, end of period $ 63,966 $ 1,852,109 $ - $ 1,916,075
============= =============== ============== ===========
Eliminating Entries:
- -------------------
(A) Eliminate intercompany receivable and payable and cash invested by Webb in
Jabber
23
(B) Eliminate Webb's investment in Jabber
(C) Eliminate Jabber issued securities and preferred stock dividends and record
minority interest for preferred stock
(D) Eliminate Jabber deferred compensation for unvested common stock granted to
employees and third parties
(E) Eliminate Webb's share of Jabber's accumulated deficit and record the sale
of Webb owned Jabber securities as minority interest
(F) Eliminate Webb's share of Jabber's losses
(G) Record minority shareholders' share of Jabber's net assets calculated as
the value of previously restricted common stock which vested during the
nine months ended September 30, 2001
(H) Eliminate gain from the sale of Jabber securities owned by Webb and reflect
value of securities as minority interest
(I) Eliminate preferred stock dividends on preferred stock owned by Webb
NOTE 13 - BUSINESS SEGMENT INFORMATION
Jabber is a commercial developer of real-time communications software and
instant messaging (IM) solutions. We have two reportable business segments:
Jabber and Webb.
Jabber is building upon the growing demand and adoption of the Jabber.org
open-source project by offering proprietary, scalable extensible IM solutions
for carriers, service providers; for OEM and ISV partners, and for large
enterprises.
Webb consists of corporate activities such as accounting, administration,
public reporting and financing activities.
September 30, December 31,
2001 2000
----------------- ----------------
(As Restated -
See Note 15)
Assets
- --------------------------------------------------------------------
Webb $ 1,910,970 $ 15,022,246
Jabber 3,515,051 2,714,329
Eliminations 2,253,686 (1,315,838)
-------------- -------------
Total assets $ 7,679,707 $ 16,420,737
============== =============
Property and equipment, net
- --------------------------------------------------------------------
Webb $ 1,535,667 $ 2,566,359
Jabber 302,639 263,773
-------------- -------------
Total $ 1,838,306 $ 2,830,132
============== =============
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- ------------------
24
2001 2000 2001 2000
--------------- --------------- --------------- ---------------
(As Restated - (As Restated -
See Note 15) See Note 15)
Net Revenues from
Continuing Operations
- -----------------------------
Jabber $ 245,733 247,645 $ 503,212 $ 266,195
Webb - - - 10,000
--------------- -------------- -------------- --------------
Total net revenue from
continuing operations
$ 245,733 $ 247,645 $ 503,212 $ 276,195
=============== ============== ============== ==============
Net Loss from Continuing
Operations
- -----------------------------
Webb $(2,404,667) $(4,991,630) $(11,272,481) $(8,608,155)
Jabber (2,057,225) (2,990,911) (6,152,130) (4,214,762)
Eliminations 1,267,575 3,818,780 5,184,029 3,818,780
--------------- --------------- --------------- ---------------
Total net loss from
continuing operations
$(3,194,317) $(4,163,761) $(12,240,582) $(9,004,137)
=============== =============== =============== ===============
Depreciation and
Amortization
- -----------------------------
Webb $ 112,994 $ 101,810 $ 433,489 $ 309,142
Jabber 462,313 465,133 1,241,581 469,305
--------------- --------------- --------------- ---------------
Total depreciation and
amortization expense
$ 575,307 $ 566,943 $ 1,675,070 $ 778,447
=============== =============== =============== ===============
Nine Months Ended
September 30,
--------------------------------------
2001 2000
----------------- ----------------
Property and equipment additions
- --------------------------------------------------------------------
Webb $ 75,159 $ 2,056,448
Jabber 123,562 55,352
------------- -------------
Total $ 198,721 $ 2,111,800
============= =============
NOTE 14 - SUBSEQUENT EVENTS
On October 16, 2001, we terminated our AccelX local commerce business.
In connection with the termination of this business, we granted a license for
software used in this business to Nextron for a license fee of $1 million. In
addition, we sold assets used in this business to Nextron for an initial
purchase price of $500,000. In the event that Nextron completes a qualifying
financing transaction by January 31, 2002, Nextron will pay Webb an additional
$750,000 for the assets. If the financing transaction is not completed by
January 31, 2002, but is completed by June 30, 2002, Nextron will pay Webb an
additional $350,000 for the assets. If the financing transaction is not
completed by June 30, 2002, Webb will not receive any additional consideration
for the assets.
As a result of the termination of this business, we recorded an
impairment loss of $1,019,301 at September 30, 2001, related to intangible
assets we acquired from Update Systems, Inc. in January 2000 (See Note 3).
25
We expect to recognize a nominal gain from the sale of the tangible and
intangible assets of $6,021 after deducting selling expenses of $177,174 as
summarized below:
Sale price $ 500,000
---------
Fair value of tangible assets sold 225,262
Fair value of intangible assets sold 198,656
Assumed liabilities and deferred revenue (107,113)
Selling costs 177,174
---------
Total fair value of assets sold and selling costs 493,979
---------
Gain on sale of tangible and intangible assets $ 6,021
=========
The receipt of any additional proceeds as indicated above will increase
the gain we recognize from the sale of these assets.
The selling costs consist of fees to a financial advisory firm for
which we issued a non-interest bearing note payable totalling $106,240, due and
payable at the earlier of July 31, 2002, or the date that Webb completes a
financing, and a three-year warrant to purchase 125,000 shares of our common
stock at an exercise price of $2.50 per share. Webb can purchase the warrant at
any time for $5.00 per share. We valued the warrant at $70,934 using the
Black-Scholes option pricing model utilizing the following assumptions:
Exercise price $2.50
Fair market value of common stock on valuation date $0.93
Option life 3 years
Volatility rate 127%
Risk-free rate of return 7.0%
Dividend rate 0%
We expect to recognize a loss of $6,021 from the sale of the perpetual
software license after we record an impairment loss for the intangible assets we
acquired from Update Systems, Inc. in January 2000, as summarized below:
Perpetual software license fee $1,000,000
Net book value of intangible assets 1,006,021
----------------
Loss $ (6,021)
================
NOTE 15 - 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,
through March 2001, 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.
26
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.
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 Nine Months Ended
September 30, 2000 September 30, 2000
-------------------------------- ---------------------------------
As Reported As Restated As Reported As Restated
----------- ----------- ------------ ------------
Loss from operations $(3,668,483) $(3,668,483) $ (8,304,682) $ (8,304,682)
Interest income 58,535 58,535 495,832 495,832
Other income 12,226 12,226 12,265 12,265
Loss on disposal of property and
equipment (348,081) (348,081) (340,043) (340,043)
Interest expense (109,571) (217,958) (457,523) (867,509)
----------- ----------- ------------ ------------
Net loss from continuing operations
(4,055,374) (4,163,761) (8,594,151) (9,004,137)
Net loss from discontinued
operations (3,284,035) (3,284,035) $(11,176,093) $(11,176,093)
----------- ----------- ------------ ------------
27
----------- ----------- ------------ ------------
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
=========== =========== ============ ============
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.
28
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
General
Webb is the founder and the majority stockholder of Jabber, a company in
the early stages of building extensible instant messaging software products and
services. We formed Jabber, in February 2000 to commercialize the Jabber.org
instant messaging system begun in 1998 by Jeremy Miller, the founder of this
open-source movement. We became the commercial sponsor of the Jabber.org open-
source movement in September 1999 in connection with our employment of Mr.
Miller.
Prior to October 16, 2001, we were also engaged in developing software
products and services designed to assist small businesses in developing,
maintaining and strengthening local buyer-seller relationships. This business
was terminated on October 16, 2001 as we were unable to obtain financing for
this business on acceptable terms and market conditions for these products and
services were continuing to develop at a slower rate than we had anticipated.
Our business plan for Jabber includes leveraging the large commercial
development network and the innovations being sponsored in the open-source
community as the primary sources for new customers and strategic relationships.
Under a July 17, 2001 stock purchase agreement with Jabber and us, France
Telecom Technologies Investissements has acquired approximately 22% of Jabber
for an investment of $5 million and may acquire another 7% of Jabber for an
additional $2 million. On October 31, 2001, we owned approximately 71% of
Jabber.
On October 16, 2001, we terminated our AccelX local commerce business,
granted a license for software used in this business to Nextron Communications,
Inc. for a license fee of $1 million and sold assets used in this business to
Nextron Communications for an initial purchase price of $500,000. If Nextron
Communications completes a financing for at least $2 million by January 31,
2002, it will pay us an additional $750,000 for these assets. If the financing
transaction is not completed by January 31, 2002, but is completed by June 30,
2002, then Nextron Communications will pay us an additional $350,000 for the
assets. If the financing transaction is not completed by June 30, 2002, then we
will not receive any additional consideration for the assets. We recorded an
non-cash impairment loss of $1,019,301 because the fair value of the intangibles
that were part of our AccelX business indicated that the carrying amount of
those assets were impaired, primarily related to the goodwill and intangible
assets from the acquisition of Update Systems, Inc. in 2000. Unless we receive
additional proceeds, we will record a net zero gain in the fourth quarter of
2001 from the sale of the assets.
We reduced the number of our employees by 16 in connection with the
termination of the AccelX business. Thirteen of these employees, including Perry
Evans, our chief executive officer and a director, and Susan Dalton, vice
president of AccelX operations, were hired by Nextron Communications. Mr. Evans
resigned as our chief executive officer, president and as a director, but
continues to serve as a director of Jabber. Nextron Communications has agreed to
sublease for up to one year approximately 3,500 square feet in our corporate
offices in Denver, Colorado for approximately $10,000 per month. At October 31,
2001, we employed 48 persons, including nine administrative and support
personnel employed by Webb and 39 persons employed by Jabber, Inc.
Jabber projects revenues of from $600,000 to $900,000 during the fourth
quarter of 2001, for revenues to increase significantly during 2002 compared to
2001 and to achieve positive cash flow from operations during 2003. Jabber's
revenues in the current year have been derived primarily from software license
sales. Revenue in 2000 were derived primarily from professional services.
We have incurred losses from operations since inception. At September 30,
2001, we had an accumulated deficit of approximately $113 million. The
accumulated deficit at September 30, 2001, included approximately $59.7 million
of non-cash expenses related to the following:
. Beneficial conversion features related to convertible notes payable,
preferred stock and preferred stock dividends;
29
. Resets of warrant exercise prices;
. Stock and stock options issued for services;
. Warrants issued to customers, lenders and investors;
. Interest expense on a convertible note paid by the issuance of similar
notes;
. Amortization of intangible assets acquired in consideration for the
issuance of our securities;
. Impairment loss on acquired intangible assets and goodwill; and
. Write-off of securities received for our e-banking business.
As a result of the $2.5 million preferred stock private placement we
completed in February 2001, we recorded non-cash expense totalling approximately
$2 million associated with issuance of our series C-1 preferred stock. In
addition, we recorded non-cash expenses totalling approximately $3.3 million
associated with the reset of conversion prices for our series B-2 preferred
stock and 10% convertible note payable as well as the reset of exercise prices
for certain warrants issued in connection with our series B preferred stock
private placement. If we issue shares of our series C-2 preferred stock and
warrants, or other securities with similar provisions, we will record
substantial additional non-cash charges.
The accompanying condensed 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, and substantial short-term liabilities
raises substantial doubt about our ability to continue as a going concern. 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
accountants, issued with regard to our financial statements 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 Jabber's ability to market its products and services and
generate revenues sufficient to exceed our expenses. Because of the new and
evolving nature of the Internet, and Jabber's early stage of development, we
cannot predict whether our revenue model will prove to be viable, whether demand
for Jabber's products and services will materialize at the prices Jabber
expect to charge, or whether current or future pricing levels will be
sustainable.
RESULTS OF OPERATIONS
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.
During July and September 2000, Jabber issued 912,500 shares of common
stock of its 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
30
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.
This restatement and its impact on previously reported quarterly amounts
are presented below.
Unaudited Condensed Consolidated Statement of Operations:
Three Months Ended Nine Months Ended
September 30, 2000 September 30,2000
------------------------------------- --------------------------------------
As Reported As Restated As Reported As Restated
---------------- ---------------- ----------------- -----------------
Loss from operations $ (3,668,483) $ (3,668,483) $ (8,304,682) $ (8,304,682)
Interest income 58,535 58,535 495,832 495,832
Other income 12,226 12,226 12,265 12,265
Loss on disposal of property and
equipment (348,081) (348,081) (340,043) (340,043)
Interest expense (109,571) (217,958) (457,523) (867,509)
------------ ------------ ------------ ------------
Net loss from continuing operations (4,055,374) (4,163,761) (8,594,151) (9,004,137)
Net loss from discontinued
operations (3,284,035) (3,284,035) (11,176,093) (11,176,093)
------------ ------------ ------------ ------------
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
============ ============ ============ ============
Due to the termination of the our AccelX business segment on October 16,
2001, continuing operations of Webb refer to the Jabber business segment and
Webb's corporate activities. Jabber commenced operations in May 2000, and was a
development stage enterprise through March 2001, at which time it released its
initial proprietary IM software products. Prior to July 2001, Jabber earned
revenue primarily from professional service engagements in which Jabber
customized its commercial server software and the open-source IM software for
customers.
Revenues:
Components of net revenues from continuing operations and cost of revenues
are as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- -----------------------------
2001 2000 2001 2000
------------ ------------ ------------ ------------
Net revenues
Licenses $ 220,000 $ 15,000 $ 353,746 $ 25,000
Services 25,733 232,645 149,466 251,195
---------- --------- --------- ---------
Total net revenues: 245,533 247,645 503,212 276,195
31
Cost of revenues:
Cost of licenses 45 906 120 906
Cost of services 183,053 103,947 664,899 116,904
--------- --------- --------- ---------
Total cost of revenues 183,098 104,853 665,019 117,810
--------- --------- --------- ---------
Gross margin $ 62,635 $ 142,792 $(161,807) $ 158,385
========== ========= ========= =========
License revenues represent fees earned for granting customers licenses to
use Jabber software products. During the second quarter of 2001, Jabber began
licensing products based on a perpetual license, concurrent user pricing model.
During the 2001 three-month period Jabber recognized $200,000 of software
license revenue from a license to Buena Vista Internet Group, a Walt Disney
Company. In addition, during the second quarter of 2001, Jabber recognized
$73,746 of software revenue from a license to France Telecom and $50,000 from a
sale to Buena Vista Internet Group. Software revenue recognized in the 2000
three-and-nine-month periods were from licenses of Jabber's IM client software.
Services revenues consist principally of revenue derived from fees for
ongoing maintenance and support, professional services for the customization of
Jabber's software and the IM open-source software to customer specifications,
and assisting Jabber's customers in configuring and integrating software
applications. Net revenues from services were $25,733 and $149,466 for the three
and nine months ended September 30, 2001, respectively, and were $232,645 and
$251,195 for the three and nine months ended September 30, 2000, respectively.
During the 2001 three-month period Jabber recognized revenue from maintenance
and support contracts ratably over the term of the agreements. Jabber is also
working on a professional services engagement valued at approximately $115,000
for which it will recognize revenue at the completion of the project, which it
expects to occur in the fourth quarter of 2001. In addition to recognizing
$51,841 from maintenance and support agreements during the 2001 nine-month
period, Jabber also recognized $76,425 in professional service revenue in the
first quarter of 2001 from the conclusion of one project. Service revenue for
the 2000 three-and-nine month periods are from professional service and
consulting engagements, primarily from two customers.
Cost of Revenues:
Cost of license revenues consists of shipping costs to deliver Jabber's
software products. Cost of service revenues consists of compensation costs and
consulting fees associated with performing custom programming, installation and
integration services for Jabber's customers and support services. Cost of
revenues as a percentage of net revenues from continuing operations was 75% for
the three months ended September 30, 2001, compared to 42% for the similar 2000
period and 132% for the nine months ended September 30, 2001, compared with 43%
for the similar 2000 period. During the third and fourth quarters of 2000,
Jabber established separate professional services and customer support
organizations in anticipation of higher sales volume. With the formation of
these two organizations, Jabber incurred $81,981 and $358,132 more in costs in
the 2001 three-and-nine-month periods, respectively, for these fixed costs which
were comprised primarily of employee compensation and other employee related
costs. At the beginning of September 2001, Jabber reduced these monthly fixed
costs by approximately $33,000 through the elimination of five positions and the
consolidation of responsibilities.
Operating Expenses:
Sales and marketing expenses consist primarily of employee compensation,
cost of travel, advertising and public relations, trade show expenses, and costs
of marketing materials. Sales and marketing expenses were $277,645 for the three
months ended September 30, 2001, or 113% of net revenues, compared with
$149,167, or 60% of net revenues for the similar 2000 period. Sales and
marketing expenses were $739,209 for the nine months ended September 30, 2001,
or 147% of net revenues, compared with $178,919 or 65% of net revenues, for the
similar 2000 period. The increases in absolute dollars for the 2001 three-and-
nine-month periods were primarily attributable to incurring $192,375 and
$542,523 more compensation costs, respectively, as Jabber hired five employees
during the fourth quarter of 2000 through the third quarter of 2001. During the
2001 nine-month period, Jabber also incurred $25,000 more in travel expenses in
support of sales efforts. These increases were partially off-
32
set by decreases in trade show expenses of $49,760 and $33,499 in the 2001
three-and-nine-month periods, respectively. Jabber also incurred $24,550 less in
the 2001 period for consulting expenses associated with marketing and public
relations. We expect sales and marketing expenses to increase on an absolute
dollar basis in future periods as Jabber continues to market its products,
develop business relationships and execute on its sales plan.
Product development expenses consist primarily of employee compensation
and programming fees relating to the development and enhancement of the features
and functionality of Jabber's software products and services. During the 2001
and 2000 periods, all product development costs were expensed as incurred.
Product development expenses were $805,956 for the three months ended September
30, 2001, or 328% of net revenues, compared with $507,774 or 205% of net
revenues, for the similar 2000 period. Product development expenses were
$2,172,192 for the nine months ended September 30, 2001, or 432% of net
revenues, compared with $786,921 or 285% of net revenues, for the similar 2000
period. The absolute dollar increase during the 2001 three-month period and the
increase during the 2001 nine-month period were due primarily to building a
product development organization. Jabber incurred $345,086 and $1,424,143 more
in employee compensation during the 2001 three-and-nine-month periods,
respectively, primarily due to the hiring of a total of 18 employees in product
development beginning in the third quarter of 2000 through the third quarter of
2001. Jabber incurred $13,464 in severance costs in the 2001 three-month period
in connection with the elimination of five positions. Jabber also incurred
$30,649 and $38,624 more in software support expense and third-party software we
purchased to include in its core product. These increases were partially off-set
by (i) reductions in employee recruiting expenses of $59,900 and 38,948 in the
2001 three-and-nine-month periods, respectively, as Jabber used an internal
recruiter to reduce outside search fees; and (ii) reductions in travel costs of
$43,749 and $46,400 in the 2001 three-and-nine month periods, respectively. We
believe that significant investments in product development are critical to
attaining Jabber's strategic objectives and, as a result, we expect product
development expenses to continue in future periods.
General and administrative expenses consist primarily of employee
compensation, consulting expenses, fees for professional services, and non-cash
expense related to stock and warrants issued for services. General and
administrative expenses were $1,407,057 for the three months ended September 30,
2001, or 573% of net revenues, compared with $2,587,391, or 1045% of net
revenues, for the similar 2000 period. General and administrative expenses for
the nine months ended September 30, 2001, were $4,527,976 or 900% of net
revenues, compared with $6,718,780 or 2433% of net revenues, for the similar
2000 period. General and administrative expenses for Jabber were $567,659 and
$1,808,240 for the three and nine months ended September 30, 2001, respectively,
and were $2,011,629 and $2,928,002 for the three and nine months ended September
30, 2000, respectively. The decreases in absolute dollars during the 2001
periods are primarily attributable to a reduction in consulting expenses. Jabber
incurred consulting fees from DiamondCluster totalling $1,212,525 and $1,996,108
in the 2000 three-and-nine-month periods, respectively. This decrease was
partially off-set by increases in employee compensation of $81,718 and $288,827
in the 2001 three-and-nine-month periods, respectively, primarily from the
addition of a chief executive officer in January 2001, and a chief financial
officer in July 2001. We expect Jabber's general and administrative expenses to
increase in future periods as Jabber continues to build the administrative
infrastructure needed to support its business.
General and administrative expenses for Webb were $839,398 and
$2,719,736 for the three and nine months ended September 30, 2001, respectively,
and $577,221 and $3,790,776 for the three and nine months ended September 30,
2000, respectively. The increase in the 2001 three-month period was primarily
attributable to registration penalty fees incurred to an investor of
$206,080 because of a delay in registering the shares of our common stock
issuable upon conversion of our series C-1 preferred stock. In addition, general
and administrative expenses for Webb for the third quarter of 2000 were reduced
by a one-time make-up allocation to Jabber of approximately $648,000,
representing its share of these expenses for the first and second as well as the
third quarters of 2000. Prior to the third quarter of 2000, none of these costs
had been allocated to Jabber. These increases were partially off-set by a
reduction in accrued employee bonuses in the 2001 period. The decrease in the
2001 nine-month period was primarily due to (i) reduced employee compensation
expenses totalling $291,446 as a result of the elimination of five positions;
(ii) a reduction in accrued bonuses of $307,315; (iii) a decrease in expenses
for Nasdaq listing fees of $74,239 we incurred in second quarter of 2000 to move
from the Smallcap market to the National market; (iv) a reduction in non-
cash compensation expense for the issuance of securities for services totalling
$206,586; (v) a reduction in expenses for our annual report and shareholders
meeting of $110,049; and (vi) a reduction in investor relation expenses of
$79,048. These decreases were partially off-set by the registration penalty fee
totalling
33
$206,080 in 2001, and an increase in rent expense totalling $143,276 as we moved
to a new office in May 2000, which resulted in both higher rental rates and an
increase in the amount of space rented. We expect general and administrative
expenses for Webb to be less than $100,000 per month beginning in 2002, as a
result of cost reductions associated with the termination of our AccelX business
in October 2001, and other cost reduction measures being implemented in the
fourth quarter of 2001.
Depreciation and amortization was $575,307 for the three months ended
September 30, 2001, compared to $566,943 for the similar 2000 period and
$1,675,070 for the nine months ended September 30, 2001, compared with $778,447
for the similar 2000 period. We recorded $703,000 more in amortization expense
during the 2001 nine-month period, from $454,064 in the 2000 period to
$1,156,885 in the 2001 period, as Webb contributed intangible assets to Jabber
at Webb's carryover basis during the third quarter of 2000 and the amortization
expense of these intangible assets prior to the contribution are included in net
loss from discontinued operations for the 2000 periods. Because our business has
never been profitable, and due to the other risks and uncertainties discussed
herein, it is possible that an analysis of these long-lived assets in future
periods could result in a conclusion that they are impaired, and the amount of
the impairment could be substantial. After the termination of our AccelX
business, the remaining intangible assets consists of intangible assets related
to our Jabber products which totalled $1,117,167 at September 30, 2001. We have
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 we determined that these assets were impaired, we would have to
record an impairment charge for these assets which could be as much as the
remaining net book value of the assets, which would substantially decrease our
reported tangible assets.
Other Income and Expenses:
Interest income was $12,630 for the three months ended September 30,
2001, compared to $58,535 for the similar 2000 period and $118,970 for the nine
months ended September 30, 2001, compared with $495,832 for the similar 2000
period. We recorded interest income on notes receivable form company officers
totalling $3,345 and $10,444 during the three and nine months ended September
30, 2001, respectively.
Interest expense was $212,397 for the three months ended September 30,
2001, compared with $217,958 for the similar 2000 period and $3,106,544 for the
nine months ended September 30, 2001, compared with $867,509 for the similar
2000 period. We recorded interest expense related to the convertible note
payable issued by Jabber totalling $11,478 and $43,362 for the three and nine
months ended September 30, 2001, respectively. In connection with the issuance
of Jabber preferred stock in July 2001, $41,000 of this interest was converted
into 41 shares of Jabber's series B preferred stock. We recorded $21,448 of
interest expense for the 2001 three-and-nine-month periods related to the
short-term notes payable, including $18,369 of non-cash interest expense for the
amortization of the associated deferred financing costs and discount. We
recorded interest expense related to the 10% convertible note payable as
follows:
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------------------- --------------------------------------
2001 2000 2001 2000
---------------- ---------------- ---------------- ---------------
(As Restated - (As Restated -
See Note 13) See Note 13)
Amortization of discount $ 33,423 $ 55,297 $ 118,155 $ 152,231
Amortization of financing
costs 91,865 83,958 326,894 466,459
Principal-in-kind notes 373 63,014 9,809 154,110
Beneficial conversion feature - - 2,394,234 -
Cash interest expense 49,486 - 170,934 -
---------------- ---------------- ---------------- ---------------
Total interest expense $ 175,147 $ 202,296 $ 3,020,026 $ 772,800
================ ================ ================ ===============
The 10% convertible note payable was initially convertible into shares
of our common stock at a conversion price of $10.07 per share. The conversion
price is subject to anti-dilution protection in the event we
34
issue common stock at prices less than the conversion price for the 10%
convertible note payable or the then current price for our common stock and for
stock splits, stock dividends and other similar transactions. As a result of the
private placement of preferred stock we completed in February 2001, the
conversion price was reset to $2.50 per share. As a result, we recorded non-cash
interest expense totalling $2,394,234 in the first quarter of 2001. If the
conversion price is further reduced, we may be required to record additional
charges against income and such charges may be significant.
In addition, the reduction of non-cash interest expense related to the
10% note payable discount and deferred financing costs in the 2001 periods is a
result of lower balances being amortized compared with the 2000 periods due to
conversions of the 10% convertible note payable. During the 2001
three-and-nine-month periods, we recorded a charge to additional paid in capital
which otherwise would have been recorded as interest expense in future periods
totalling $59,844 and $8,276, respectively, for the discount and $22,017 and
$164,021, respectively, for the deferred financing costs in connection with the
conversion of notes totalling $590,000. The remaining unamortized discount
totalling $117,678 and deferred financing costs totalling $324,431 will be
recorded as non-cash interest expense in future periods through the third
quarter of 2002, unless the note payable is converted before its maturity date
of August 25, 2002, in which event the then amount of the unamortized discount
and deferred financing costs would be charged to additional paid-in capital.
Discontinued Operations:
On October 16, 2001, we terminated our AccelX local commerce business.
In connection with the termination of this business, we granted a perpetual
license for software used in this business to Nextron Communications, Inc. for a
license fee of $1 million (See Note 14). The terms of this perpetual license
transfers substantially all of our rights and their related value for this
technology. In addition, we sold assets used in this business to Nextron for an
initial purchase price of $500,000. In the event that Nextron completes a
qualifying financing transaction by January 31, 2002, Nextron will pay Webb an
additional $750,000 for the assets. If the financing transaction is not
completed by January 31, 2002, but is completed by June 30, 2002, Nextron will
pay Webb an additional $350,000 for the assets. If the financing transaction is
not completed by June 30, 2002, Webb will not receive any additional
consideration for the assets.
As a result of the termination of this segment, we recorded an
impairment loss of $1,019,301 for the three months ended September 30, 2001,
related to intangible assets we acquired from Update Systems, Inc. in January
2000. We expect to recognize a nominal gain from the sale of the tangible and
intangible assets. The receipt of additional proceeds, if any, as indicated
above will increase the gain we recognize from the sale of these assets.
In September 2000, we sold our e-banking segment to a privately held
company.
The sales of these segments are reflected as a sale of discontinued
operations in the accompanying condensed consolidated financial statements.
Accordingly, the revenues, costs and expenses of these discontinued operation
have been excluded from the respective captions in the Condensed Consolidated
Statement of Operations and have been reported as "Loss from discontinued
operations" for all periods presented.
Summarized financial information for the discontinued operations are as
follows:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------------- --------------------------------------
AccelX Business Segment: 2001 2000 2001 2000
---------------- ---------------- ----------------- -----------------
Net revenues $ 296,782 $ 1,415,094 $ 1,766,541 $ 3,102,845
---------------- ---------------- ----------------- -----------------
Costs and expenses:
Cost of revenues 581,569 676,572 2,562,889 2,015,536
35
Sales and marketing expenses 90,566 931,158 767,440 2,094,634
Product development expenses 251,172 944,717 2,030,579 3,222,685
General and administrative
expenses 48,939 213,497 544,356 559,578
Depreciation and amortization 536,568 1,729,913 1,581,743 6,121,376
Impairment loss 1,019,301 - 1,019,301 -
---------------- ---------------- ----------------- -----------------
Total costs and expenses 2,528,115 4,495,857 8,506,308 14,013,809
---------------- ---------------- ----------------- -----------------
Operating loss (2,231,333) (3,080,763) (6,739,767) (10,910,964)
Other income and expenses:
Gain (loss) on foreign currency
transactions (868) - (18,386) -
Other income 32,195 - 32,185 -
---------------- ---------------- ----------------- -----------------
Loss from discontinued operations $ (2,200,006) $ (3,080,763) $ (6,725,968) $ (10,910,964)
================ ================ ================= =================
E-banking Business Segment:
Net revenues $ - $ 73,092 $ - $ 497,821
Costs and expenses: - 276,364 - 762,950
---------------- ---------------- ----------------- -----------------
Net loss from discontinued
operations $ - $ (203,272) $ - $ (265,129)
================ ================ ================= =================
Minority Interest:
Minority interest arises from the allocation of losses in Jabber to its
minority stockholders. Minority stockholders of Jabber include holders of
Jabber's common stock, holders of Jabber's series B preferred stock, the holder
of 750,000 shares of Jabber's series A-1 preferred stock and the holder of 25
shares of Jabber's series C preferred stock (See Note 7 of Notes to Condensed
Consolidated Financial Statements for information regarding the sale of Jabber
securities and the pledge of the series A-1 preferred stock). The capital and
voting structure of Jabber's common and preferred stock at September 30, 2001 is
as follows:
Preferred Preferred Preferred Preferred
Common A-1 A-2 B C
------------- ------------- ------------- ------------- -------------
Shares 912,500 7,400,000 1,400,000 4,881 7,781
Votes 912,500 7,400,000 14,000,000 4,881,000 7,781,000
Votes per share 1 1 10 1 1
Control of votes:
Webb - 6,650,000 14,000,000 - 7,846,000
FTTI - 750,000 - 4,191,000 -
Others 912,500 - - 690,000 25,000
------------- ------------- ------------- -------------
Total 912,500 7,400,000 14,000,000 4,881,000 7,781,000
============= ============= ============= ============= =============
36
We allocate a portion of Jabbers net losses to the minority
stockholders, excluding holders of Jabber's series B preferred stock, to the
extent of their share in net assets of Jabber. For the three and nine months
ended September 30, 2001, we allocated $72,550 and $251,090, respectively, of
Jabber's losses to its minority stockholders.
Preferred Stock Accretion Expense and Dividends:
The terms of our preferred stock grant the holders the right to convert
the preferred stock into shares of our common stock at specified conversion
prices. In each issuance of preferred stock, the conversion price has included a
beneficial conversion feature because the value of the common stock resulting
from a theoretical conversion of the preferred stock on the issuance date was
greater than the allocated value of the preferred stock. In addition, if the
conversion price of the preferred stock is reduced in future periods, accounting
principles generally accepted in the United States require us to re-compute the
beneficial conversion feature on the then outstanding shares of preferred stock.
Accounting principles generally accepted in the United States require
us to record the beneficial conversion feature, the value of warrants and, in
most instances, the cash offering costs as additional preferred stock dividends.
This non-cash charge to net loss applicable to common stockholders is labeled
"Accretion of preferred stock to stated value".
During the nine months ended September 30, 2001, we recorded accretion
expense totalling $2,856,627, including $1,970,558 related to the issuance of
our series C-1 preferred stock and $886,069 related to the reset of the
conversion price of our series B-2 preferred stock on February 28, 2001.
The series B-2 and series C-1 preferred stock are currently convertible
into shares of our common stock at $2.50 per share. The conversion prices are
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 prices are reduced, we may be
required to record additional charges against income and such charges may be
significant.
We may also incur additional preferred stock accretion expense in
future periods as a result of the convertible preferred stock we issue in
connection with the investment by FTTI in Jabber. We may also record additional
preferred stock accretion expense if we issue our series C-2 preferred stock as
contemplated in the securities purchase agreement we entered into on February
28, 2001, or for the issuance of other securities with similar terms. The
accretion expense, if any, in future periods as a result of these two
transactions may be significant.
The terms of Jabber's series B preferred stock provides for an 8%
cumulative dividend. For the three and nine months ended September 30, 2001, we
recorded $57,989 of preferred stock dividends. In addition, Jabber's series C
preferred stock also provides for an 8% cumulative dividend. The series C
preferred stock dividends totalling $260,501 for the three and nine months ended
September 30, 2001, were eliminated in consolidation.
Net Loss Applicable to Common Stockholders:
Net loss allocable to common stockholders was $5,379,762 for the three
months ended September 30, 2001, compared with $7,447,796 for the similar 2000
period and $21,630,076 for the nine months ended September 30, 2001, compared
with $33,053,356 for the similar 2000 period. Included in net losses allocable
to common stockholders are non-cash expenses for transactions related to
acquisitions, financing, and securities we issued for services as summarized in
the following table:
37
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------------------- --------------------------------------
2001 2000 2001 2000
----------------- ----------------- ----------------- ----------------
(As Restated - (As Restated -
See Note 13) See Note 13)
Amortization of intangible
assets and goodwill $ 940,731 $2,103,891 $ 2,660,522 $ 6,233,936
Impairment loss 1,019,301 - 1,019,301 -
Stock and warrants issued for
services 131,748 (20,825) 627,195 634,690
Beneficial conversion
feature, amortization
of discount and
financing costs to
interest expense and
non-cash interest
related to the 10%
convertible note
payable 125,661 202,296 2,849,092 772,800
Amortization of discount and
financing costs related
to short-term notes
payable 18,369 - 18,369 -
Preferred stock dividends 57,989 - 57,989 373,126
Accretion of preferred
stock
- - 2,856,627 12,500,000
----------------- ----------------- ----------------- ----------------
Total $2,293,799 $2,285,362 $ 10,089,095 $20,514,552
================= ================= ================= ================
The decrease in losses for the 2001 three-and-nine-month periods are a
result of recording $1,163,160 and $3,573,414, respectively, less in
amortization expense as well as incurring $707,516 and $665,467, respectively,
less in operating losses for our AccelX operations. In the 2001 three-month
period Jabber incurred $933,186 less in losses compared to the similar 2000
period. In the 2001 nine-month period, we recorded $7,863,849 less in non-cash
expenses related to interest expense, preferred stock dividends and preferred
stock accretion expense for beneficial conversion features related to financing
transactions. These reductions in the 2001 nine-month period were partially off-
set by an increase of $1,937,368 in losses for our Jabber subsidiary. This is
due to the time-lag associated with product development and market introduction
as well as the long sales cycle for most of Jabber's products and services. We
expect to continue to experience increased operating expenses during 2001, due
to the continuing development of the Jabber business.
LIQUIDITY AND CAPITAL RESOURCES
Following the FTT purchase of Jabber preferred stock in July and September
2001 (See Note 10 to Notes to Condensed Consolidated Financial Statements), our
Webb and Jabber business are being separately funded. Consequently, liquidity
and capital resources for each business is presented below. Refer to Note 12 to
Notes to Condensed Consolidated Financial Statements for the separate financial
statements for each business.
As of September 30, 2001, Jabber had cash and cash equivalents of
$1,852,109 and working capital of $1,234,629. We financed our Jabber operations
and capital expenditures and other investing activities during 2001 primarily
through the sale of preferred stock to FTTI as well as cash investments by Webb
totaling $2,327,770.
Jabber used $4,613,429 in cash to fund its operations for the nine months
ended September 30, 2001, compared to $3,604,609 for the similar 2000 period.
The increase in the 2001 nine-month period is due to increased employee
compensation of $2.9 million as a result of hiring 29 more employees from the
September 2000, to
38
September 2001. This increase was partially off-set by a reduction in consulting
expense as Jabber incurred $2 million in fees to DiamondCluster in the 2000
period.
Jabber used $123,562 in investing activities for the purchase of property
and equipment compared with $138,915 for the similar 2000 period. Jabber does
not plan to purchase a significant amount of property and equipment during the
remainder of 2001.
We believe that the $4.25 million investment by FTTI in Jabber will be
sufficient to fund Jabber's activities into the first quarter of 2002. In
addition to the $4.25 million already invested by FTTI, the preferred stock
purchase agreement executed in July 2001, provides for, subject to certain
conditions, the sale to FTTI of an additional $2 million worth of Jabber
preferred stock. We believe the additional proceeds from this transaction would
be adequate to sustain our Jabber operations through at least 2002. In addition
to the funds that FTTI may provide, we intend to seek up to an additional $3
million to fund Jabber's business from other investors . There can be no
assurances that Jabber will satisfy the revenue conditions for the additional $2
million investment from FTTI or that any additional funding will be available to
Jabber. If Jabber is not successful in obtaining funding in appropriate amounts
or on appropriate terms, we would consider additional reductions in Jabber's
operating activities.
As of September 30, 2001, Webb had cash and cash equivalents of $63,966 and
a working capital deficit of $(3,092,599). We financed our operations and
capital expenditures and other investing activities during 2001 primarily
through the sale of securities (See Notes 5, 6 and 7 to Notes to Condensed
Consolidated Financial Statements for information regarding sales of
securities).
We used $5,880,051 in cash to fund Webb's operations for the nine months
ended September 30, 2001, compared to $8,615,235 for the similar 2000 period.
The decrease in the 2001 nine-month period is primarily a result of cost
reduction measures we implemented beginning in the second quarter of 2001, with
reductions in Webb's workforce, including layoffs in our AccelX business and
corporate segment, as well as reductions in other employee related expenses such
as travel. From June 2001 through September 30, 2001, these cost reductions
resulted in lower expenses of approximately $5.4 million. In addition, with the
termination of our AccelX business in October 2001, Webb's monthly cash
operating expenses are estimated to be less than $100,000 per month beginning in
2002.
We used $2,350,636 in investing activities compared with $5,792,671 for the
similar 2000 period. During the nine months ended September 30, 2001, Webb
invested $2,327,770 in Jabber, compared with $3,743,524 for the similar 2000
period. Webb purchased $75,159 of property and equipment in the first nine
months of 2001 compared with $1,972,885 for the similar 2000 period. During the
2000 period, property and equipment purchases included $921,600 for leasehold
improvements, office furnishings and a server room build-out for our new offices
which we occupied in May 2000, as well as $617,000 for computer hardware and
$420,000 for third-party software for software development and accounting.
During the 2000 period, we also loaned $100,000 to a company officer. In the
2001 period, we collected $30,000 from a loan we made to an officer of the
company in the fourth quarter of 2000. We do not plan to purchase a significant
amount of property and equipment during the remainder of 2001 or in 2002.
During October 2001, we terminated our AccelX business for and received
$1.5 million in connection with the licensing of AccelX software and the sale of
AccelX assets. The asset purchase agreement provides for the purchaser to pay
Webb additional proceeds ranging from $350,000 to $750,000 if the purchaser
completes a financing transaction no later than June 30, 2002 (See Note 14 to
Notes to Condensed Consolidated Financial Statements). We believe that these
proceeds received will be sufficient to fund Webb's operations only until
January 2002. We need to raise at least $4 million to pay trade payables
($935,000), provide a reserve for the payment of the convertible note due in
August 2002 ($2 million), and fund Webb's operating expenses throughout 2002. We
have begun discussions for an additional $7.5 million of funding for Webb. These
funds would be used to fund our both Webb and Jabber operations for fiscal 2002.
However, we have no commitments for financing and there can be no assurances
that these funds will be available or if available, that they will be available
on acceptable terms.
In the event that we are not able to obtain additional operating capital
for Webb, we will be required to sell all or a portion of our interest in Jabber
to raise additional working capital for this business. Further sales of our
39
interest in Jabber could have a material adverse effect on our operating results
and financial condition. In its report accompanying the audited financial
statements as of and for the year ended December 31, 2001, Arthur Andersen LLP
expressed substantial doubt about our ability to continue as a going concern.
FACTORS THAT MAY AFFECT FUTURE RESULTS
Factors that may affect our future results include, but are not limited to,
the following items as well as the information in "Item 1 - Financial
Statements - Notes to the Condensed Consolidated Financial Statements" and "Item
2 -Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Our independent public accountants have indicated that we may not have
sufficient cash to fund future losses from operations. In the report issued by
our independent public accountants accompanying our financial statements for the
year ended December 31, 2000, they indicated there was substantial doubt about
our ability to continue as a going concern. Their report notes that, among other
factors affecting our ability to continue as a going concern, we have incurred
significant and recurring losses from operations and our operations have used
substantial amounts of cash. These losses are expected to continue and we will
require additional capital to fund these operating losses. The availability of
additional capital is uncertain. Our financial statements have been prepared
assuming that we will continue as a going concern and may be of limited utility
to an investor because they do not include any adjustments relating to the
recoverability and classification asset carrying amounts or the amount and
classification of liabilities that might result should we be unable to continue
as a going concern.
Our limited operating history makes it difficult to evaluate our business.
We were founded in March 1994 and began sales in February 1995. Subsequently,
our business model has changed periodically to reflect changes in technology and
markets. We have a limited operating history for our current business model upon
which you may evaluate us. Our business is subject to the risks, exposures and
difficulties frequently encountered by early-stage companies with a limited
operating history including:
. Limited ability to respond to competitive developments;
. Exaggerated effect of unfavorable changes in general economic and
market conditions;
. Limited ability to adjust our business plan to address marketplace
and technological changes; and
. Difficulty in obtaining operating capital.
We expect to incur net losses into 2003. We have incurred net losses since
we began our business totaling approximately $113.1 million through September
30, 2001, including approximately $59.7 million of non-cash expenses. We expect
to incur additional substantial operating and net losses in 2001 and 2002, and
do not expect to achieve positive cash flow from operations until at least 2003.
We expect to incur these additional losses because:
. We intend to incur capital expenditures and operating expenses in
excess of revenues of more than $2 million during the fourth quarter of
2001 and 2002 to cover the increasing activities of Jabber;
. We expect to spend more than $1.5 million during the fourth quarter of
2001 and the year 2002 to finance operating expenses in addition to
those for Jabber; and
. We may continue to incur significant non-cash expenses due to
financing and other equity-based transactions. The current competitive
business and capital environments likely will result in our issuance
of similar securities in future financing transactions.
If we are unable to raise additional working capital, we may not be able to
sustain our operations. Because our present cash and cash equivalents, working
capital and commitments for additional equity investments will, based on current
estimates, be adequate to sustain operations for Jabber, until March 2002 and
for our other operations until January 2002, we will need to obtain additional
capital to fund our business. Operating expenses for Jabber, currently exceed
revenues by more than $300,000 per month. In addition, operating expenses for
our corporate activities to be funded separately from those for Jabber, are
expected to be approximately $1 million per year and we have outstanding
payables of approximately $900,000 and a convertible note payable for
approximately $2 million due in August 2002, which are also to be funded
separately from Jabber. There is no assurance that we will be able to raise
additional funds in amounts required or upon acceptable
40
terms. If we cannot raise additional funds when needed, we may be required to
curtail or scale back our operations or sell some of our assets.
We may not earn revenues sufficient to remain in business. Our ability to
become profitable depends on whether we can sell our products and services for
more than it costs to produce and support them. Our future sales also need to
provide sufficient margin to support our ongoing operating activities. The
success of our revenue model will depend upon many factors including:
. The extent to which consumers and businesses use our products and
services; and
. The success of our distribution partners in marketing their products
and services.
Because of the new and evolving nature of the Internet, the early stage of
our Jabber products and our limited operating history, 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.
If the Internet does not develop into a significant source of business-
related communication, then our business will not be successful. Our business
plan assumes that the Internet will develop into a significant source of
business-related communication and communication interactivity. However, the
Internet market is new and rapidly evolving and there is no assurance that the
Internet will develop in this manner. If the Internet does not develop in this
manner, our business may not be successful.
We must continually develop new products which appeal to our customers. Our
products are subject to rapid obsolescence and our future success will depend
upon our ability to develop new products and services that meet changing
customer and marketplace requirements. There is no assurance that we will be
able to successfully:
. Identify new product and service opportunities; or
. Develop and introduce new products and services to market in a timely
manner.
Even if we are able to identify new opportunities, our working capital
constraints limit our ability to pursue them. If we are unable to identify and
develop and introduce new products and services on a timely basis, demand for
our products and services will decline.
We must identify and develop markets for our products and services. A
suitable market for our products and services may not develop or, if it does
develop, it may take years for the market to become large enough to support
significant business opportunities. Even if we are able to successfully
identify, develop, and introduce new products and services there is no assurance
that a suitable market for these products and services will materialize. The
following factors could affect the success of our products and services and our
ability to address sustainable markets:
. The failure of our business plan to accurately predict the types of
products and services the future Internet marketplace will demand;
. Our limited working capital may not allow us to commit the resources
required to adequately support the introduction of new products and
services.
. The failure of our business plan to accurately predict the estimated
sales cycle, price and acceptance of our products and services; or
. The development by others of products and services that makes our
products and services noncompetitive or obsolete.
There is a lot of competition in the Internet market which could hurt our
revenues or cause our expenses to increase. Our current and prospective
competitors include many companies, including Microsoft, Inc., and AOL Time
Warner, Inc., whose financial, technical, marketing and other resources are
substantially greater than ours. We may not have the financial resources,
technical expertise or marketing, sales and support capabilities to
41
compete successfully. The presence of these competitors in the Internet
marketplace could hurt our business by causing us to:
. Reduce the average selling price of our products and services; or
. Increase our spending on marketing, sales and product development.
We may not be able to offset the effects of price reductions or increases
in spending. Further, our financial condition may put us at a competitive
disadvantage relative to our competitors.
It usually takes a long time and significant expense before we are able to
make a sale of our products and services to a customer. While our sales cycle
varies from customer to customer, it is long, typically ranging from two to six
months or more, and unpredictable. Our pursuit of sales leads typically involves
an analysis of our prospective customer's needs, preparation of a written
proposal, one or more presentations and contract negotiations. We often provide
significant education to prospective customers about the use and benefits of our
Internet technologies and services. Our sales cycle may also be affected by a
prospective customer's budgetary constraints and internal acceptance reviews,
over which we have little or no control.
Offering proprietary products based on the Jabber.org open-source movement
may jeopardize our relationship with open-source communities. An important
element of the business model for Jabber is based upon Jabber's ability to offer
proprietary products compatible with Jabber.org open-source instant messaging
systems. A key element of open-source software development movements is that the
software and its code be offered to other developers and users free, provided
that anyone who makes an improvement or modification to the software and who
intends to commercialize the improvement or modification, makes them available
for free to the community and other users. If the Jabber.org open-source
community or other open-source communities withdraw their support for either
Jabber or Jabber instant messaging products, demand for Jabber instant messaging
products will likely decline.
We may be unable to reduce our expenses if sales do not occur as expected.
Because of our limited operating history, we do not have historical financial
data for a sufficient number of periods on which to base planned operating
expenses. Our expense levels are based in part on our expectations of future
sales and to a large extent are fixed. We typically operate with little backlog
and the sales cycles for our products and services may vary significantly. We
may be unable to adjust spending in a timely manner to compensate for any
unexpected sales shortfalls. If we were unable to so adjust, any significant
shortfall of demand for our products and services in relation to our
expectations would result in operating losses or reduced profitability. Further,
we intend to incur significant capital expenditures and operating expenses to
fund the operations of Jabber. If these expenditures are not subsequently
followed by increased sales with substantial margin, then we will need to raise
additional capital to stay in business.
An investment in our common stock is risky because the price of our stock
is highly volatile. Our common stock closed as high as $6.25 per share and as
low as $0.50 per share between January 1, 2001 and October 31, 2001.
Historically, the over-the-counter markets for securities such as our common
stock have experienced extreme price and volume fluctuations. Some of the
factors leading to this volatility include:
. Price and volume fluctuations in the stock market at large that do not
relate to our operating performance;
. Fluctuations in our quarterly revenue and operating results;
. Increases in outstanding shares of common stock upon exercise or
conversion of derivative securities.
These factors may continue to affect the price of our common stock in the
future.
We have issued numerous options, warrants, and convertible securities to
acquire our common stock that could have a dilutive effect on our shareholders.
As of October 31, 2001, we had issued warrants and options to acquire
approximately 5,429,410 shares of our common stock, exercisable at prices
ranging from $0.65 to $58.25 per share, with a weighted average exercise price
of approximately $4.46 per share. We had also reserved
42
1,952,959 shares of common stock for issuance upon conversion of our 10%
convertible notes and series B-2 and C-1 convertible preferred stock. During the
terms of these derivative securities, the holders will have the opportunity to
profit from an increase in the market price of our common stock with resulting
dilution to the holders of shares who purchased shares for a price higher than
the applicable exercise or conversion price. The increase in the outstanding
shares of our common stock because of the exercise or conversion of these
derivative securities could result in a significant decrease in the percentage
ownership of our common stock by current and future holders of our common stock.
The significant number of shares issuable upon conversion of our
convertible securities could make it difficult to obtain additional financing.
1,952,959 shares of our common stock may be issued if our 10% notes and
series B-2 and C-1 convertible preferred stock are converted. This number could
increase due to future financings. Due to this significant potential increase in
the number of our outstanding shares of common stock, new investors may either
decline to make an investment in Webb due to the potential negative effect this
additional dilution could have on their investment or require that their
investment be on terms at least as favorable as the terms of the notes or
convertible preferred stock. If we are required to provide similar terms to
obtain required financing in the future, the onerous terms and significant
dilution of these financings could be perpetuated and significantly increased.
In addition, the current price of our common stock may make it difficult to
raise capital as a result of the terms of the notes and the convertible
preferred stock, because issuances of common stock below prices specified in the
notes and the convertible preferred stock would result in substantial additional
shares being issued to holders of these securities, and substantial dilution to
other shareholders. For example, if we were required to raise operating capital
at current market prices for our common stock, the number of shares issuable
upon conversion of these securities could increase to more than 6,000,000
shares.
Future sales of our common stock in the public market could depress the
price of our common stock. Actual or potential future sales of substantial
amounts of common stock in the public market could depress the market price for
shares of our common stock and could impair the ability of purchasers of our
common stock to recoup their investment or make a profit. As of October 31,
2001, these shares consist of:
. Up to 1,952,959 shares issuable upon conversion of the 10% convertible
notes and series B-2 and C-1 preferred stock; and
. Approximately 5,429,410 shares issuable to warrant and option holders.
Future sales of our common stock in the public market could limit our
ability to raise capital. Actual or potential future sales of substantial
amounts of our common stock in the public by our officers and directors, or upon
exercise or conversion of derivative securities could affect our ability to
raise capital through the sale of equity securities.
The trading volume of our common stock may diminish significantly if our
common stock is delisted from the Nasdaq National Market. Although our shares
are traded on the Nasdaq National Market, there is no assurance that they will
remain eligible to be included on Nasdaq. At October 31, 2001, we failed to meet
either the tangible net worth or minimum stock price requirements for continued
listing on the Nasdaq stock market system. On November 13, 2001, we received a
Nasdaq Staff Determination indicating that we failed to comply with the net
tangible assets requirement for continued listing on the Nasdaq National Market
and that our common stock is, therefore, subject to delisting from the Nasdaq
National Market. We intend to request a hearing before the Nasdaq Listing
Qualifications board to review the staff determination. There can be no
assurance that the panel will grant our request for continued listing. If our
common stock was no longer eligible for quotation on Nasdaq, it could become
subject to rules adopted by the Securities and Exchange Commission, regulating
broker/dealer practices in transactions in low-priced stocks. If our common
stock became subject to the penny stock rules, many brokers may be unwilling to
engage in transactions in our common stock because of the added regulation,
making it more difficult for purchasers of our common stock to dispose of their
shares.
The issuance of convertible securities has resulted in significant non-cash
expenses which has increased significantly our net loss applicable to common
shareholders. We recorded a non-cash expense of approximately $2.9 million as
additional interest expense for the nine months ended September 30, 2001 due to
the issuance of our 10% convertible notes in 1999. We also recorded a $2.9
million non-cash expense for the nine months ended September 30, 2001 for
preferred dividends due to the terms of our series C-1 issued during the first
quarter of 2001 and B-2 preferred stock issued during the first quarter of 2000.
We may incur significant additional non-cash expenses due to future financings.
43
PART II
OTHER INFORMATION
Items 1 to 5. Not Applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Listing of Exhibits:
3.1 Articles of Incorporation, as amended, of Webb (1)
3.2 Bylaws of Webb (2)
4.1 Specimen form of Webb's Common Stock certificate (3)
4.2 Stock Option Plan of 1995 (2)
4.3 Form of Incentive Stock Option Agreement for Stock Option
Plan of 1995 (2)
4.4 Form of Nonstatutory Stock Option Agreement for Stock Option
Plan of 1995 (2)
4.5 Stock Option Plan of 2000, including forms of Incentive and
Nonstatutory Stock Option Agreements (10)
4.6 Jabber, Inc. Stock Option Plan of 2000, including forms of
Incentive and Nonstatutory Stock Option Agreements (10)
10.1 Form of Nondisclosure and Nonsolicitation Agreement between
Webb and its employees (1)
10.2 Office Lease for Webb's principal offices commencing May
2000 (5)
10.3 Form of Change of Control Agreement between Webb and certain
employees (4)
10.4 Securities Purchase Agreement dated August 25, 1999 between
Webb and Castle Creek (6)
10.5 Promissory Note dated August 25, 1999 issued by Webb to
Castle Creek (6)
10.6 Amendment dated December 18, 1999 to Securities Purchase
Agreement dated August 25, 1999 between Webb and Castle
Creek (7)
10.7 First Amendment dated December 18, 1999 to Promissory Note
dated August 25, 1999 issued by Webb to Castle Creek (7)
10.8 Stock Purchase Warrant dated December 18, 1999 issued by
Webb to Castle Creek (2)
10.9 Securities Purchase Agreement dated December 31, 1999,
between Webb, Marshall Capital Management and Castle Creek.
Included as exhibits to the Securities Purchase Agreement
are the proposed form of Warrant and the Registration Rights
Agreement (8)
10.10 Letter Agreement dated as of September 14, 2000 between Webb
and Castle Creek. (9)
10.11 Articles of Amendment setting forth the terms of the series
B-2 convertible preferred stock (9)
10.12 Exchange Agreement dated as of September 14, 2000, between
Webb and Castle Creek (9)
10.13 Securities Purchase Agreement dated as of February 28, 2001,
between Webb and Castle Creek Technology Partners LLC.
Included as exhibits thereto are the Articles of Amendment
setting forth the terms of the Series C-1 Convertible
Preferred Stock, the form of Articles of Amendment for the
Series C-2 Convertible Preferred Stock, the forms of Series
C-1 and C-2 Warrants and the Registration Rights Agreement
(11)
10.14 Articles of Amendment setting forth the terms of the Series
C-1 Convertible Preferred Stock (11)
10.15 Note Purchase Agreement, Series B Convertible Preferred
Stock Agreement, effective May 2, 2001, between Jabber. Inc,
a majority-owned subsidiary of Webb, and France Telecom
Technologies (12)
10.16 Stock Purchase Agreement dated July 6, 2001, by and among
Jabber, Inc. ("Jabber"), France Telecom Technologies
Investissements ("FTTI"), and Webb Interactive Services,
Inc. ("Webb"). Included as exhibits to the Stock Purchase
Agreement are Certificates of Designation for Jabber, Inc.
Series A and Series B Convertible Preferred Stock, Investor
Rights Agreement and Stockholders Agreement. (13)
10.17 First Amendment to Note Purchase Agreement dated July 6,
2001, by and among Jabber, FTTI and Webb (13)
10.18 First Amendment to Convertible Promissory Note dated July 6,
2001, between Jabber and FTTI (13)
10.19 First Amendment to Security Agreement dated July 6, 2001,
between Jabber and FTTI (13)
44
10.20 First Amendment to Pledge and Security Agreement dated July
6, 2001, by and among Jabber, FTTI and Webb (13)
10.21 Ratification and Amendment to Corporate Guaranty dated July
6, 2001, between Webb and FTTI (13)
10.22 Articles of Amendment for Webb's subsidiary, Jabber. Inc.,
setting forth the terms of its series B and series C
convertible preferred stock (13)
10.23 Asset Purchase Agreement dated as of October 16, 2001,
between Webb and Nextron Communications, Inc. (14)
10.24 License Agreement dated as of October 16, 2001, between Webb
and Nextron Communications, Inc. (14)
_______________
(1) Filed with the Form 10-KSB Annual Report for the year ended December
31, 1997, Commission File No. 0-28462.
(2) Filed with the Form 8-K Current Report, filed January 14, 2000,
Commission File No. 0-28642.
(3) Filed with the Form 10-QSB for the quarter ended June 30, 1999,
Commission File No. 0-28642.
(4) Filed with the Registration Statement on Form S-3, filed January 29,
1999, Commission File No. 333-71503.
(5) Filed with the initial Registration Statement on Form SB-2, filed
April 5, 1996, Commission File No. 333-3282-D.
(6) Filed with the Registration Statement on Form S-3, filed September 24,
1999, Commission File No. 333-86465.
(7) Filed with the Form 10-KSB Annual Report for the year ended December
31, 1998, Commission File No. 0-28462.
(8) Filed with the Form 8-K Current Report, filed September 2, 1999,
Commission File No. 0-28642.
(9) Filed with Amendment No. 2 to Webb's Registration Statement on Form S-
3, filed January 3, 2000, Commission File No. 333-87887
(10) File with the Form 10-KSB Annual Report for the year ended December
31, 2000, Commission File No. 0-28462.
(11) Filed with the Form 8-K Current Report, filed March 1, 2001,
Commission File No. 0-28642.
(12) Filed with the Form 8-K Current Report, filed May 10, 2001, Commission
File No. 0-28642.
(13) Filed with the Form 8-K Current Report, filed August 1, 2001
commission File No. 0-28642.
(14) Filed with the Form 8-K, filed November 1, 2001, Commission File No.
000-28462
(b) Reports on Form 8-K: The Company filed a report on Form 8-K
under Item 5 of Form 8-K on August 1, 2001.
45
Signatures
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
WEBB INTERACTIVE SERVICES, INC.
Date: November 14, 2001 By /s/ William R. Cullen
-----------------------------
Chief executive Officer - Chief
Financial Officer
/s/ Stuart Lucko
-----------------------------
Controller
46