U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________________
FORM 10-QSB
Quarterly Report under Section 13 or 15(d)
of the Securities and Exchange Act of 1934
For quarterly period ended December 31, 1998
Commission file number 10039
DYNAMICWEB ENTERPRISES, INC.
(Exact name of registrant as specified in this charter)
New Jersey 22-2267658
(State or other Jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
271 Route 46 West, Building F
Suite 209, Fairfield, New Jersey 07004
(Address of Principal Executive Offices)
(973) 244-3100
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15 (d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports) and (2) has been subject to such filing
requirements for the past 90 days. YES [ X ] NO [ ]
As of December 31, 1998, there were 2,351,737 shares of common
stock, $0.001 par value, of the registrant outstanding.
<PAGE>
PART I
FINANCIAL INFORMATION
Item 1. Condensed Financial Statements
Condensed Consolidated Balance Sheets as at
December 31, 1998 (unaudited) and
September 30, 1998.
Condensed Consolidated Statements of Operations
for the three months ended
December 31, 1998 and 1997 (unaudited).
Condensed Consolidated Statements of Cash Flows
for the three months ended December 31, 1998 and
1997 (unaudited).
Notes to Condensed Financial Statements.
<PAGE>
DYNAMICWEB ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
December 31, September 30,
1998 1998
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $320,000 $290,000
Accounts receivable, less allowance
for doubtful accounts $48,000 and
$41,000 342,000 271,000
Prepaid expenses and other current
assets 48,000 26,000
Total current assets 710,000 587,000
Property and equipment, less
accumulated depreciation of
$173,000 and $157,000 324,000 450,000
Patents and trademarks, less
accumulated amortization of
$14,000 and $11,000 33,000 31,000
Software development costs less
accumulated amortization of
$38,000 and $27,000 115,000 123,000
Customer list, less accumulated
amortization of $42,000 and
$37,000 58,000 63,000
Cost in excess of fair value of
of net assets acquired net of
of accumulated amortization of
$34,000 and $21,000 474,000 487,000
Other Assets 9,000 9,000
Total Assets 1,723,000 1,750,000
========= =========
LIABILITIES
Current liabilities:
Accounts payable 489,000 239,000
Accrued expenses 144,000 118,000
Current maturities of long-term debt 4,000 6,000
Deferred revenue 108,000 17,000
Total current liabilities 745,000 380,000
Long-term debt, less current
maturities 181,000
Total liabilities 745,000 561,000
STOCKHOLDERS EQUITY
Preferred stock - par value
to be determined with each issue;
5,000,000 shares authorized:
Series A - 6% cumulative, convertible
preferred stock - aggregate liquidation
value $1,787,500 and $1,137,500,
respectively; $.001 par value;
1375 and 875 shares issued and
outstanding, respectively 563,000 402,000
Common stock - $.0001 par value;
50,000,000 shares authorized;
2,351,737 and 2,255,947 shares
issued and outstanding, respectively
Additional paid-in capital 7,785,000 7,408,000
Unearned portion of compensatory
stock options (180,000) (89,000)
Accumulated deficit (7,190,000) (6,532,000)
Total stockholder's equity
978,000 1,189,000
Total liabilities and stock-
holders equity
1,723,000 1,750,000
========= =========
The accompanying notes are an integral part of these financial
statements.
<PAGE>
DYNAMICWEB ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(unaudited)
THREE MONTHS ENDED
December 31,
1998 1997
Net sales:
Transaction/Subscription processing
revenues $141,000 $ 95,000
Consulting services 342,000 55,000
Network Development Revenues 57,000 17,000
Total 540,000 167,000
Cost of sales:
Transaction/Subscription processing
revenues 117,000 63,000
Consulting services 200,000 29,000
Network Development Revenues 66,000 14,000
Total 383,000 106,000
Gross profit 157,000 61,000
Expenses:
Marketing and sales 349,000 142,000
General and administrative 387,000 318,000
Research and development 95,000 62,000
Total 831,000 522,000
Operating (loss) (674,000) (461,000)
Interest expense (including $310,000,
amortization of deferred financing
fee and debt discount for 1997) (344,000)
Interest income 1,000
Other Income Sale of Real Estate 15,000
Net (loss)
(658,000) (805,000)
Adjustment:
Dividends on cumulative preferred
stock, including $144,000 of
imputed dividends (164,000)
Net loss attributed to common
stockholders (822,000) (805,000)
Net loss per common share - basic
and diluted $ (.36) $ (.43)
Weighted average number of shares
outstanding - basic and diluted 2,286,025 1,875,485
The accompanying notes are an integral part of these financial
statements.
<PAGE>
DYNAMICWEB ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
THREE MONTHS ENDED
December 31,
1998 1997
Cash flows from operating activities:
Net (loss) (658,000) (805,000)
Adjustments to reconcile net (loss)
to net cash (used in) operating
activities:
Gain on sale of office condo (15,000)
Depreciation and amortization 47,000 17,000
Stock options issued for compensa-
tion 52,000 29,000
Amortization of deferred financing
fee and debt discount 310,000
Changes in operating assets and
liabilities:
(Increase) decrease in accounts
receivable (71,000) 18,000
(Increase) decrease in prepaid
expenses and other current assets (22,000) 2,000
Increase in accounts payable 250,000 129,000
Increase in accrued expenses 3,000 67,000
Increase in deferred revenue 91,000 2,000
Net cash (used in) operating
activities: (323,000) (231,000)
Cash flows from investing activities:
Acquisition of property and equipment (14,000) (4,000)
Acquisition of patents and trademarks (2,000) (5,000)
Proceeds from sale of property net of
selling expense 189,000
Increase in capitalized software
development costs (48,000) (48,000)
Net cash provided by (used in)
investing activities: 125,000 (57,000)
Cash flows from financing activities:
Payment of long-term debt (187,000) (2,000)
Proceeds from loan-bank 73,000
Payment of loan - banks (1,000)
Proceeds from loan - officer 90,000
Refund of deferred registration costs 4,000
Proceeds from issuance of preferred
stock and warrants 415,000
Net cash provided by
financing activities 228,000 164,000
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 30,000 (124,000)
Cash and cash equivalents - beginning
of period 290,000 188,000
CASH AND CASH EQUIVALENTS - END OF
PERIOD 320,000 64,000
======= =======
The accompanying notes are an integral part of these financial
statements.
<PAGE>
DYNAMICWEB ENTERPRISES, INC. and SUBSIDIARIES
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(NOTE A) -- Basis of Presentation and the Company:
Basis of presentation:
The accompanying unaudited condensed financial statements
have been prepared in accordance with generally accepted
accounting principles for interim financial information and with
the instructions to Form 10-QSB and of Regulation S-B.
Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management,
all adjustments (consisting of normal recurring accruals)
considered necessary for fair presentation have been included.
Operating results of the three-month period ended December 31,
1998 are not necessarily indicative of the results that may be
expected for the year ended September 30, 1999.
The balance sheet at September 30, 1998 has been derived
from the audited financial statements at the date but does not
include all the information and footnotes required by generally
accepted accounting principles for complete financial statements.
For further information, refer to the audited financial
statements and footnotes thereto included in the annual report on
Form 10-KSB.
The Company:
The Company is involved in the business of electronic
commerce. The term electronic commerce is a shorthand expression
for how businesses use computers to electronically send and
receive business documents. Primarily, the Company provides
electronic commerce services, including computer equipment and
software for customers who want to engage in electronic commerce.
We function as the customer's data service center in support of
their electronic commerce transactions. Second, the Company
provides consulting services in the area of electronic commerce.
[1] Loss per share of common stock:
The Company adopted Statement of Financial Accounting
Standards No. 128 "Earnings Per Share" ("SFAS No. 128"), for the
year ended September 30, 1998. SFAS No. 128 replaced the
calculation of primary and fully diluted earnings per share with
basic and diluted earnings per share. Unlike primary earnings
per share, basic earnings per share excludes any dilutive effects
of options, warrants and convertible securities. In addition,
contingently issuable shares are included in basic earnings per
share when all necessary conditions have been satisfied. Diluted
earnings per share is very similar to fully diluted earnings per
share and gives effect to all dilutive potential common shares
outstanding during the reporting periods.
The Company adopted statement No. 128 and has retroactively
applied the effects thereof for all periods presented. The
impact on the per share amounts previously reported was not
significant. The effects of potential common shares such as
warrants, options, and convertible preferred stock has not been
included, if the effect will be antidilutive.
[2] Software development costs:
Costs relating to the conceptual formulation and design of
software are expensed as research and development. Costs
incurred subsequent to establishment of technological feasibility
to produce the finished product are generally capitalized.
Technological feasibility was established when a product design
and a working model were completed. Capitalized software costs
are amortized by the straight-line method over a maximum of five
years or the expected life of the product, whichever is less.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
The following discussion and analysis should be read in
conjunction with the financial statements included in this report
and in conjunction with the description of the Company's business
included in the Company's Form 10-KSB for the year ended
September 30, 1998. It is intended to assist the reader in
understanding and evaluating the financial position of the
Company.
This discussion contains, in addition to historical
information, forward looking statements that involve risks and
uncertainty. The Company's actual results could differ
materially from the results discussed in the forward-looking
statements. Factors that could cause or contribute to such
differences include those discussed in the Company's Form 10-KSB
for the year ended September 30, 1998.
Liquidity and Capital Resources
As of December 31, 1998, the Company had cash and cash
equivalents of approximately $320,000 and total current assets of
approximately $710,000.
The Company had a net loss of approximately $658,000 for the
three months ended December 31, 1998 and negative operating cash
flow of $323,000.
The Company's negative cash flow for the three months was
funded primarily by proceeds from a private placement transaction
with the Shaar Fund, Ltd. ("Shaar Fund"). On August 7, 1998, the
Company closed on the first tranche of that private placement.
It issued to the Shaar Fund 875 shares of Series A 6% Convertible
Preferred Stock and 87,500 Common Stock Purchase Warrants for an
aggregate price of $875,000. It received net proceeds of
approximately $779,000. On December 3, 1998, the Company closed
on the second tranche of that private placement. It issued to
the Shaar Fund 625 shares of the Series A 6% Convertible
Preferred Stock and 50,000 Common Stock Purchase Warrants for an
aggregate price of $500,000. It received net proceeds of
approximately $455,000.
Management believes that the above resources will be
adequate to finance the Company's activities only until March
1999. The Company is presently experiencing operating cash flow
deficiencies of approximately $200,000 per month. Management
expects that the Company's operating cash flow deficiency will
continue during 1999. Therefore, the Company will require
substantial additional financing during the 1999 calendar year to
continue its operations. There is no assurance that the Company
will receive the required additional financing.
Results of Operations
The Company had revenues of approximately $540,000 for the
quarter ended December 31, 1998, compared to approximately
$167,000 during the quarter ended December 31, 1997 for an
increase of $373,000 or 223%. Revenue classifications include
Consulting Services, Network Development Revenues, and
Transaction/Subscription Processing Revenues. Previously, the
Company classified revenues as Transaction Processing, Consulting
Services, or Other. Accordingly, some revenues have been
reclassified from where they were previously reflected which is
reflected in the following analysis.
Consulting Services revenues represent fees from contract
computer programming. Revenues for the quarter ended
December 31, 1998 were approximately $342,000 an increase of
$287,000 or 522% from the $55,000 earned for the quarter ended
December 31, 1997. Approximately, $79,000 or 144% of the
increase is attributable to Design Crafting, Inc., which was
acquired on May 1, 1998. The remaining increase of approximately
$208,000 resulted from additional customers coupled with an
increase in the average amount billed per programmer.
Network Development revenues primarily relate to the
development of EDI maps and to the custom development of
EDIxchange, or EDIxchangeBuy and EDIxchangeSell (extranets) from
which the Transaction/Subscription Processing revenues are
derived. Revenues for the quarter ended December 31, 1998 were
approximately $57,000 an increase of $40,000 or 235% from the
$17,000 earned for the quarter ended December 31, 1997. This
increase is attributable to maps developed for customers using
the Company's EDIxchange Suite of Services.
Transaction/subscription processing revenues include the
initial subscription fees, as well as monthly transaction fees.
Revenues for the quarter ended December 31, 1998 were
approximately $141,000 an increase of $46,000 or 48% from the
$95,000 earned for the quarter ended December 31, 1997. The
increase from the prior period is primarily attributable to both
the initial subscription fees from customers who use the
EDIxchange Suite of Services, as well as the subsequent monthly
transaction fees.
Overall, Cost of Sales increased to approximately $383,000
from approximately $106,000 in the preceding year's quarter, an
increase of approximately $277,000 or 261%. A portion of the
increase in Cost of Sales for both groups is attributable to
salary increases that took effect in the second and third
quarters of fiscal 1998. The aggregate salary increased consists
of the salary expense of the addition of three new employees and
normal course of business pay raises for all other employees. In
order to remain competitive, the Company has committed to
compensating its employees at prevailing market rates. In
addition, certain amounts previously recorded as operating
expenses in the quarter ending December 31, 1997 have been
reclassified as Cost of Sales.
Cost of Consulting Services were approximately $200,000 for
the three months ended December 31, 1998 compared to
approximately $29,000 for the prior year's quarter resulting in
gross margins of 41.5% and 47.3% for the quarter ending
December 31, 1998 and December 31, 1997 respectively. The gross
margin decrease is primarily attributable to the higher
compensation noted above.
Costs of Network Development revenues were approximately
$66,000 for the three months ended December 31, 1998 compared to
approximately $14,000 for the prior year's quarter resulting in
gross margins of (15.7%) and 17.6% for the quarter ending
December 31, 1998 and December 31, 1997 respectively. The gross
margin is primarily attributable to the development of additional
staff and the higher compensation noted above. The Company
incurred the higher expenses for the conversion effort to convert
existing maps to comply with revised Year 2000 compliant EDI
Transaction sets.
Transaction/subscription processing costs were approximately
$117,000 for the three months ended December 31, 1998 compared to
approximately $63,000 for the prior year's quarter resulting in
gross margins of 17% and 33.7% for the quarter ending
December 31, 1998 and December 31, 1997 respectively. The gross
margin decrease from fiscal 1998's is primarily attributable to a
major upgrade of the company's Network Infrastructure resulting
in higher fixed costs. The installation of additional equipment
increased the system's salability and reliability that is needed
for continued revenue growth.
Quarterly marketing and sales expenses increased by
approximately $207,000 from approximately $142,000 for the three
months ending December 31, 1997 to approximately $349,000 in the
first quarter of fiscal 1999. The increase is attributable to
attendance at trade shows by more Company personnel, an increase
in advertising expenses and the addition of two telemarketing
employees. A portion of the increase is also attributable to
salary increases that took effect on June 1, 1998.
General and administration expenses increased by
approximately $69,000 from approximately $318,000 for the three
months ending December 31, 1997 to approximately $387,000 for the
period ending December 31, 1998. The increase is attributable to
salary increases that took effect in the second and third
quarters of fiscal 1998, as well as the addition of an
administrative person to support the new hires in other
departments and compensation expense for options issued to
consultants.
Research and development expenses increased by approximately
$33,000 for the quarter, from approximately $62,000 for the three
months ending December 31, 1997 to approximately $95,000 for the
corresponding period in fiscal 1999. The increase is attributable
to expanded development of existing services, and ongoing
development of new services such as EDIxchangeConnect,
EDIxchangeEnabler, EDIxchangeASN as well as the salary increases
noted above. The amounts referred to in the above analysis are
net of the reclassifications among the operating expense
categories and cost of sales discussed earlier.
As a result of the public offering in March of 1998, the
company repaid its outstanding borrowings, thereby eliminating
interest expense. Accordingly, Interest Income reflects earnings
on the company's cash and cash equivalents. Additionally, in
November 1998 the Company sold property that was previously used
by its Consulting Services group. The gain reflected in the
accompanying financial statements is net of all transaction
related costs. The employees are now located at the company's
headquarters.
<PAGE>
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable
Item 2. Changes in Securities
(a) Private Placement. On December 3, 1998, the Company
issued 625 shares of Series A 6% Convertible Preferred Stock, par
value $0.001 per share (the "Series A Preferred Stock") together
with 50,000 Common Stock Warrants (the "Warrants"), to the Shaar
Fund, Ltd., an institutional investor, in a private placement.
The total offering price was $500,000, and the Company received
net proceeds of approximately $455,000. This private placement
transaction did not involve an underwriter, although the Malachi
Group, Inc. and Zazoff Associates, L.L.C. acted as placement
agents and received fees of $24,000 and common stock purchase
warrants as compensation in connection therewith.
This transaction was deemed to be exempt from
registration under the Securities Act of 1933, as amended, by
virtue of Section 4(2) or Regulation D promulgated thereunder.
The purchaser represented its intention to acquire the securities
for investment only and not with a view to the distribution
thereof. Required disclosure was provided, or access to
information in lieu of disclosure was present. Required legends
are affixed to the securities issued in such transaction.
The terms of exercise and conversion are as follows:
The Warrants have a term of three years and an exercise price of
$6.00 per share. The Series A Preferred Stock has a conversion
value of $1,000 per share. That conversion value is credited
towards the purchase of shares of common stock at an agreed-upon
purchase or conversion price. The applicable purchase or
conversion price is a discount to the "market price" of the
common stock at the time of conversion. For these purposes, the
"market price" is the average of the lowest 3 days closing bid
prices of the common stock for the 20 trading days immediately
preceding the conversion.
Therefore, the higher the market price of DynamicWeb common
stock at the time of conversion, the fewer number of shares will
be acquired; and the lower the market price of DynamicWeb common
stock at the time of conversion, the greater number of shares
will be acquired. Except for the conversion price falling to one
cent per share, there is no ceiling on the maximum number of
shares that the Shaar Fund might acquire upon conversion of the
Series A Preferred Stock.
The applicable purchase or conversion prices are as follows:
(1) For preferred stock converted up to 180 days after
purchase, the lesser of $5.50 per share or 85% of the market
price of DynamicWeb common stock.
(2) For preferred stock converted between 180-360 days
after purchase, 80% of the market price of DynamicWeb common
stock.
(3) For preferred stock converted 360 days or more
after purchase, 78% of the market price of DynamicWeb common
stock.
The Shaar Fund may elect when to convert the Series A
preferred stock, except that all the remaining shares will be
converted automatically on August 7, 2000.
(b) Conversion of Preferred Stock. Also on December 3,
1998, the Shaar Fund converted 125 shares of the Series A 6%
Convertible Preferred Stock into 95,420 shares of common stock.
This transaction was deemed to be exempt from registration under
the Securities Act of 1933, as amended, by virtue of Section 4(2)
or Regulation D promulgated thereunder. The purchaser
represented its intention to acquire the underlying common stock
for investment only and not with a view to the distribution
thereof. Required legends are affixed to the common stock issued
in such transaction.
Item 3. Defaults Upon Senior Securities
Not applicable
Item 4. Submission of Matters to a Vote of Securities
Holders
Not applicable
Item 5. Other Information
Not applicable
Item 6. Exhibits and Reports on Form 8 -K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
The Company filed Form 8-K/A No. 1 on November 11, 1998 to report
a change in accounting method for the acquisition of Design
Crafting, Inc., and to provide restated financial information.
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities
Exchange of 1934, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly
authorized.
DynamicWeb Enterprises, Inc.
(Registrant)
February 16, 1998 By:/s/Steven L. Vanechanos, Jr.
Steven L. Vanechanos, Jr.
Chief Executive Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary information extracted from the
Consolidation
Statements of Operations and Consolidated Balance Sheets of
DynamicWeb
Enterprises, Inc. and is qualified in its entirety by reference
to such
financial statements.
</LEGEND>
<CIK> 0000317788
<NAME> DYNAMICWEB ENTERPRISES, INC.
<S> <C>
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<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 320,000
<SECURITIES> 0
<RECEIVABLES> 390,000
<ALLOWANCES> 48,000
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<PP&E> 497,000
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<TOTAL-ASSETS> 1,723,000
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0
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<SALES> 540,000
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<CGS> (383,000)
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