<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------------------
FORM 10-QSB
Quarterly Report under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended September 30, 2000
Commission file number 10039
eB2B COMMERCE, INC.
-----------------------------------
(Exact name of small business issuer as specified in its charter)
NEW JERSEY 22-2267658
---------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
757 THIRD AVENUE
NEW YORK, NY 10017
----------------------------------
(Address of Principal Executive Offices)
(212) 703-2000
--------------
(Issuer's telephone number, including area code)
29 WEST 38TH STREET
NEW YORK, NY 10018
------------------
(Former address, if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports) and (2) has been
subject to such filing requirements for the past 90 days. YES [ X ] NO [ ]
As of November 7, 2000, there were 13,105,658 shares of Common Stock, $0.0001
par value per share, of the registrant outstanding.
Transitional Small Business Disclosure format Yes No x .
-------- --------
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
eB2B COMMERCE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
September 30, December 31,
2000 (unaudited) 1999
ASSETS
<S> <C> <C>
Current Assets
Cash and cash equivalents $ 14,844 $ 9,907
Investments available-for-sale -- 15,986
Accounts receivable, net 1,342 --
Other current assets 860 2,260
--------- --------
Total Current Assets 17,046 28,153
Property and equipment, net 3,942 167
Goodwill, net 56,370 --
Other intangibles, net 2,738 --
Other assets 621 744
--------- --------
Total Assets $ 80,717 $ 29,064
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Current maturities of long-term debt $ 1,000 $ --
Accounts payable 3,160 --
Accrued and other 5,674 1,055
Deferred income 440 --
--------- --------
Total Current Liabilities 10,274 1,055
Long-term debt 1,500 --
Capital lease obligations 227 --
--------- --------
Total Liabilities 12,001 1,055
--------- --------
Commitments and contingencies
Stockholders' equity
Undesignated preferred stock - no par value; 45,998,000 shares
authorized; no shares issued and outstanding -- --
Preferred stock, Series A - $.0001 par value; 2,000 shares authorized;
7 and 300 shares issued and outstanding at September 30, 2000
and December 31, 1999, respectively -- --
Preferred stock, Series B - $.0001 par value; 4.0 million shares
authorized; 3,270,299 and 3,299,999 shares issued and
outstanding at September 30, 2000 and December 31, 1999,
respectively -- --
Common stock - $.0001 par value; 200,000,000 shares authorized;
13,105,658 and 7,253,820 shares issued and outstanding at
September 30, 2000 and December 31, 1999, respectively 1 1
Additional paid-in capital 142,832 63,611
Accumulated deficit (69,412) (35,603)
Unearned stock-based compensation (4,705) --
--------- --------
Total Stockholders' Equity 68,716 28,009
--------- --------
Total Liabilities and Stockholders' Equity $ 80,717 $ 29,064
========= ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
2
<PAGE>
eB2B COMMERCE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue $ 1,713 $ - $ 3,718 $ -
----------- ---------- ----------- ----------
Costs and expenses
Cost of revenue 855 - 1,991 -
Marketing and selling
(exclusive of stock-based
compensation expense of $259
and $1,213 for the three and
nine months ended September
30, 2000, respectively) 1,007 - 2,023 -
Product development costs
(exclusive of stock-based
compensation expense of $63
and $189 for the three and nine
months ended September 30,
2000, respectively) 672 50 2,456 548
General and administrative
(exclusive of stock-based
compensation expense of $970
and $13,463 for the three and
nine months ended September
30, 2000, and $675 for the three
and nine months ended
September 30, 1999,
respectively) 3,857 790 10,722 1,254
Amortization of goodwill and
other intangibles 3,368 - 6,195 -
Stock-based compensation
expense 1,292 675 14,865 675
----------- ---------- ----------- ----------
Total costs and expenses 11,051 1,515 38,252 2,477
----------- ---------- ----------- ----------
Loss from operations (9,338) (1,515) (34,534) (2,477)
Interest and other, net 160 (1) 725 (5)
----------- ---------- ----------- ----------
Net loss $ (9,178) $ (1,516) $ (33,809) $ (2,482)
=========== ========== =========== ==========
Net loss per common share $ (0.71) $ (0.23) $ (3.18) $ (0.39)
=========== ========== =========== ==========
Weighted average number of
common shares outstanding 13,004,153 6,514,684 10,629,495 6,308,435
========== ========= ========== =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
eB2B COMMERCE, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (UNAUDITED)
(IN THOUSANDS EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
Series A Preferred Series B Preferred Common Stock Additional Unearned
Stock Stock Paid-In Stock-Based Accumulated
Shares Amount Shares Amount Shares Amount Capital Compensation Deficit Total
------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C<
BALANCE AT JANUARY 300 $ - 3,299,999 $ - 7,253,820 $ 1 $ 63,611 - $(35,603) $ 28,009
1, 2000
Netlan merger - - - - 325,000 - 3,347 $ (2,050) - 1,297
DynamicWeb reverse
acquisition - - - - 4,807,330 - 57,847 - - 57,847
Conversion of Series
A preferred stock (293) - - - 389,690 - - - - -
Conversion of Series
B preferred stock - - (29,700) - 143,640 - - - - -
Exercise of stock
options and warrants - - - - 114,600 - 144 - - 144
Unearned stock-based
compensation - - - - - - 17,520 (17,520) - -
Amortization of
unearned stock-
based compensation - - - - - - - 14,865 - 14,865
Other - - - - 71,578 - 363 - - 363
Net loss - - - - - - - - (33,809) (33,809)
-----------------------------------------------------------------------------------------------------------
BALANCE AT
SEPTEMBER 30, 2000 7 $ - 3,270,299 $ - 13,105,658 $ 1 $ 142,832 $ (4,705) $(69,412) $ 68,716
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
eB2B COMMERCE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Nine Months ended September 30,
2000 1999
---- ----
<S> <C> <C>
Operating Activities
Net loss $(33,809) $ (2,482)
Adjustments to reconcile net loss to net cash used in
operating activities
Depreciation and amortization 8,998 186
Stock-based compensation expense 14,775 675
Write-down of assets 57 374
Shares and warrants issued for services 90 439
Management of operating assets and liabilities
Accounts receivable, net (214) --
Accounts payable 1,213 --
Accrued and other 2,634 650
Other (785) (7)
-------- --------
Net cash used in operating activities (7,041) (165)
-------- --------
Investing Activities
Cash acquired in acquisitions, net 419 --
Proceeds from maturity of investments available-for-sale 15,986 --
Purchase of software (2,200) (174)
Purchase of property and equipment (989) (65)
Product development costs (1,647) --
-------- --------
Net cash provided by (used in) investing activities 11,569 (239)
-------- --------
Financing Activities
Proceeds from borrowings 2,500 --
Repayment of borrowings (2,116) (3)
Payment of capital lease obligations (119) --
Proceeds from issuance of shares and warrants -- 460
Proceeds from exercise of options and warrants 144 --
-------- --------
Net cash provided by financing activities 409 457
-------- --------
Net increase in cash 4,937 53
Cash and cash equivalents at beginning of period 9,907 10
-------- --------
Cash and cash equivalents at end of period $ 14,844 $ 63
======== ========
Non-cash transactions
Common stock, options and warrants issued or exchanged in
connection with acquisitions $ 59,145 $ --
Shares and warrants issued for services $ 387 $ 439
Equipment acquired under capital lease $ 340 $ --
Preferred stock issued in exchange for note payable $ -- $ 15
Common stock issued in exchange for domain name $ -- $ 2
Cash paid during the period for
Interest $ 44 $ --
Income taxes $ -- $ --
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE>
eB2B COMMERCE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1. BASIS OF PRESENTATION, ORGANIZATION AND OTHER MATTERS
On April 18, 2000, eB2B Commerce, Inc., a Delaware corporation ("eB2B"), merged
with and into DynamicWeb Enterprises, Inc., a New Jersey corporation and an SEC
registrant ("DWeb"), with the surviving company using the name "eB2B Commerce,
Inc." (the "Company"). Pursuant to the Agreement and Plan of Merger between eB2B
and DWeb (the "Merger"), the shareholders of DWeb retained their shares in DWeb,
while the shareholders of eB2B received shares, or securities convertible into
shares, of common stock of DWeb representing approximately 89% of the equity of
the Company, on a fully diluted basis. The transaction was accounted for as a
reverse acquisition.
The reverse acquisition was accounted for as a "purchase business combination"
in which eB2B is the accounting acquirer and DWeb is the legal acquirer. The
management of eB2B remained the management of the Company. As a result of the
reverse acquisition, (i) the historical financial statements of the Company for
periods prior to the date of the Merger are no longer the historical financial
statements of DWeb, and, therefore, DWeb's historical financial statements are
no longer presented; (ii) the historical financial statements of the Company for
periods prior to the date of the Merger are those of eB2B; (iii) all references
to the financial statements of the "Company" apply to the historical financial
statements of eB2B prior to the Merger and to the consolidated financial
statements of the Company subsequent to the Merger; and (iv) any reference to
"eB2B" applies solely to eB2B Commerce, Inc., a Delaware corporation, and its
financial statements prior to the Merger.
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and pursuant to the rules and regulations of the
Securities and Exchange Commission ("SEC"). Accordingly, certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been omitted. In
the opinion of management, all material adjustments, consisting of normal
recurring adjustments, considered necessary for a fair presentation have been
included in the accompanying unaudited condensed consolidated financial
statements. All significant intercompany balances and transactions have been
eliminated in consolidation. Also, the stockholders' equity of eB2B as of
December 31, 1999 has been recast to give effect to the Merger. Certain other
prior period balances have been reclassified to conform with the current period
presentation.
The Company has changed its year-end from September 30 to December 31 to conform
to eB2B's year-end. Operating results for the three and nine months ended
September 30, 2000 are not necessarily indicative of the results that may be
expected for the year ending December 31, 2000.
The Company provides Internet-based, business-to-business e-commerce solutions
that facilitate cost-effective end-to-end transactions between buyers and
suppliers within specific vertical industries. The Company's services include:
providing the necessary infrastructure and operational services to process
electronic transactions between buyers and suppliers, and consulting services to
businesses that wish to build, operate or outsource their own e-commerce
infrastructure. In addition, the Company provides authorized technical education
to its client base, and also designs and delivers custom computer and
internet-based training seminars.
6
<PAGE>
NOTE 2. ACQUISITIONS
On February 22, 2000, eB2B completed its acquisition of Netlan Enterprises, Inc.
and subsidiaries ("Netlan"). Pursuant to the Agreement and Plan of Merger (the
"Netlan Merger"), Netlan's stockholders exchanged 100% of their common stock for
46,992 shares of eB2B common stock (equivalent to 125,000 shares of Company
common stock). Additionally, 75,188 shares of eB2B common stock (equivalent to
200,000 shares of Company common stock) were issued, placed into an escrow
account, and may be released to certain former shareholders of Netlan upon
successful completion of escrow requirements, including continued employment
with the Company. The aggregate value of such shares, or $2,050,000, has been
treated as stock-based compensation and is being amortized over the one year
vesting period from the date of acquisition. In connection with this
acquisition, eB2B incurred transaction costs consisting primarily of
professional fees of approximately $332,000, which have been included in the
purchase price of the Netlan Merger. A total of approximately $334,000 of the
purchase consideration was allocated to other intangibles, including assembled
workforce. The remaining purchase consideration, or $4,824,000, was recorded as
goodwill. The results of operations of Netlan have been included in the
Company's results of operations since March 1, 2000.
As described in Note 1 herein, the Merger of eB2B with and into DWeb was
accounted for as a reverse acquisition, utilizing the purchase business
combination method of accounting, in which eB2B acquired control of DWeb for
accounting purposes and DWeb acquired control of eB2B for legal purposes.
Pursuant to the Agreement and Plan of Merger, each share of common stock of DWeb
remained outstanding and each share of eB2B common stock was exchanged for the
equivalent of 2.66 shares of DWeb's common stock. In addition, shares of eB2B
preferred stock, warrants and options were exchanged for like securities of
DWeb, reflective of the 2.66 to 1 exchange ratio.
The purchase price of the Merger was approximately $60.1 million, which
primarily represents (i) the number of shares of DWeb's common stock outstanding
as of April 18, 2000, the date of the Merger, adjusted for common shares
issuable, valued at the market value of DWeb's common stock on December 1, 1999,
the date at which the parties signed the definitive merger agreement; (ii) the
aggregate market value of the shares of common stock and warrants principally
issued to a financial advisor (the "Financial Advisor") (see also Note 5,
Related Parties); and (iii) the market value of warrants issued to the Financial
Advisor in consideration for the advisory services rendered during the Merger
(see also Note 5, Related Parties). In connection with this acquisition, eB2B
also incurred transaction costs consisting primarily of professional fees of
approximately $343,000, which have been included in the purchase price of the
Merger. The purchase price was allocated to those assets acquired and
liabilities assumed based on the estimated fair value of DWeb's net assets as of
April 18, 2000. At that date, assets acquired and liabilities assumed had fair
values substantially equal to their historic book values. A total of
approximately $2.9 million of the purchase consideration was allocated to other
intangibles, including assembled workforce and customer list. Also, the Company
recorded liabilities totaling $1.1 million principally in relation to the
severance provided to certain employees as well as the settlement of a claim
existing at the time of the Merger (see Part II. Other Information, Item 1.
Legal Proceedings). The remaining purchase consideration, or $57.2 million, was
recorded as goodwill. The results of operations of DWeb have been included in
the Company's results of operations since April 19, 2000.
The goodwill resulting from the above business combinations is being amortized
over five years and other intangibles are being amortized over a three-year
period. At September 30, 2000,
7
<PAGE>
accumulated amortization related to the goodwill and other intangibles acquired
in the Netlan and DWeb acquisitions totaled approximately $6.2 million.
The business combinations described above were recorded using management's
estimates and preliminary evaluation. The actual purchase price accounting
adjustments to reflect the fair value of net assets and the related amortization
periods utilized will be based on management's final evaluation, therefore, the
information above is subject to change pending the final allocation of purchase
price.
The following represents the summary unaudited pro forma condensed consolidated
results of operations for the nine-month periods ended September 30, 2000 and
1999 as if the acquisitions had occurred at the beginning of each of the periods
presented (in thousands, except per share data):
<TABLE>
<CAPTION>
Nine months ended
September 30,
2000 1999
---- ----
<S> <C> <C>
Revenue $5,323 $5,531
Net loss (41,179) (26,719)
Net loss per common share (3.27) (2.34)
</TABLE>
For the purpose of presenting pro forma condensed consolidated results of
operations for the nine-month period ended September 30, 1999, the Company
excluded Netlan's computer network design, consulting, implementation,
integration, procurement and support activities that had been discontinued on
October 31, 1999. For the nine months ended September 30, 1999, the loss from
these discontinued operations was approximately $875,000 and revenue was
approximately $5,348,000.
The pro forma results are not necessarily indicative of what would have occurred
if the acquisitions had been in effect for the periods presented. In addition
the pro forma results are not necessarily indicative of the results that will
occur in the future and do not reflect any potential synergies that might arise
from combined operations.
NOTE 3. NET LOSS PER COMMON SHARE
Basic net loss per common share is computed by dividing net loss by the
weighted-average number of common shares outstanding during the period. Diluted
loss per common share has not been reflected since the assumed conversion of
options, warrants and preferred shares would have been antidilutive. Had the
Company reported net income at September 30, 2000 and 1999, options and warrants
to purchase 21,643,286 and 1,900,570 common shares, and preferred shares
convertible into 15,825,665 and 399,000 common shares, respectively, would have
been included in the computation of diluted earnings per common share, to the
extent they were not antidilutive.
The unaudited pro forma net loss per common share presented in Note 2 herein has
been computed in the same manner as net loss per common share.
The weighted-average number of shares outstanding for purposes of presenting net
loss per common share on a comparative basis has been retroactively restated to
the earliest period presented to reflect the 2.66 to 1 exchange ratio in the
reverse acquisition described in Note 2 herein.
8
<PAGE>
NOTE 4. PRODUCT DEVELOPMENT COSTS
Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use" requires companies to
capitalize qualifying computer software costs incurred during the application
development stage. All other costs incurred in connection with internal use
software were expensed as incurred. The useful life assigned to capitalized
product development costs should be based on the period such product is expected
to provide future utility to the Company. As of September 30, 2000 and December
31, 1999, capitalized product development costs, which have been classified as
other assets in the Company's balance sheets, were $449,000 and $738,000,
respectively. Total product development costs were approximately $2,456,000 and
$548,000, as expensed, for the nine-month periods ended September 30, 2000 and
1999, respectively. During the nine-month period ended September 30, 1999, eB2B
abandoned the use of the product development costs capitalized at December 31,
1998, and recorded a $374,000 write-down.
NOTE 5. RELATED PARTIES
A principal and the Chief Executive Officer of the Financial Advisor is a
director of the Company. Under an agreement between the Financial Advisor and
eB2B, upon completion of the Merger with DWeb on April 18, 2000, the Financial
Advisor received a finder's fee equal to 3% of the total number of shares
received by eB2B stockholders in the Merger. The fee was paid in the form of
720,282 shares of Company common stock and warrants to purchase 502,383 of such
shares. The shares of common stock and warrants have been included in the
purchase price of the Merger for an aggregate value of approximately $10.1
million (see also Note 2, Acquisitions). The value of the warrants was
determined using the Black-Scholes pricing model.
Also, eB2B issued the Financial Advisor warrants to purchase 470,000 shares of
eB2B common stock (equivalent to 1,250,200 shares of Company common stock) at an
exercise price of $5.50 per share (equivalent to $2.07 per share of Company
common stock) in consideration for the advisory services rendered during the
Merger. These warrants vested upon completion of the Merger on April 18, 2000
and have been included in the purchase price of the Merger, along with 30,000
additional warrants to purchase shares of eB2B common stock (equivalent to
79,800 shares of Company common stock) granted to a Board member and its
affiliate, for an aggregate value of approximately $10.1 million (see also Note
2, Acquisitions). The value of the warrants was determined using the
Black-Scholes pricing model.
The Chief Executive Officer of the Company has been granted options to purchase
500,000 shares of eB2B common stock (equivalent to 1,330,000 shares of Company
common stock) at an exercise price of $5.50 per share (equivalent to $2.07 per
share of Company common stock). These options vested upon the completion of the
Merger on April 18, 2000. In connection with such options, the Company recorded
a one-time charge classified as stock-based compensation expense of
approximately $8.8 million in the three-month period ended June 30, 2000.
9
<PAGE>
NOTE 6. SEGMENT REPORTING
The following information is presented in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 131, "Disclosures about Segments of an
Enterprise and Related Information", which established standards for reporting
information about operating segments in the Company's financial statements (in
thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue
Transaction processing and related services $ 950 $ -- $ 2,015 $ --
Training and client educational services 763 -- 1,703 --
------- ------- -------- -------
$ 1,713 $ -- $ 3,718 $ --
======= ======= ======== =======
Income (loss) from operations
Transaction processing and related services $(1,448) $ (50) $ (4,276) $ (548)
Training and client educational services 212 -- 551 --
------- ------- -------- -------
Total segment operating loss (1,236) (50) (3,725) (548)
Corporate (8,102) (1,465) (30,809) (1,929)
------- ------- -------- -------
$(9,338) $(1,515) $(34,534) $(2,477)
======= ======= ======== =======
</TABLE>
Transaction processing and related services include revenue for processing
transactions and consulting services. Revenue from transaction processing is
recognized on a "pay per transaction" basis or based on a monthly subscription
charge related to the overall number of transactions during the period. The
revenue from these services is recognized in the month in which the services are
rendered. Revenue from consulting services is recognized as services are
rendered over the contract term. The revenue derived from training and client
educational services is recognized as services are rendered for the respective
seminars, typically one to five days. Deferred income includes amounts billed
for the unearned portion of certain consulting contracts and training seminars.
NOTE 7. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities", was issued. SFAS No. 133 established accounting and reporting for
derivative and for hedging activities. The Company intends to adopt SFAS No. 133
on January 1, 2001 in accordance with SFAS No. 137, which delayed the required
implementation of SFAS No. 133 for one year. Additionally, in June 2000, SFAS
No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging
Activities, an Amendment of SFAS No. 133" was issued. The Company is evaluating
the impact SFAS No. 133 and 138 will have on its financial statements, if any.
In December 1999, the SEC issued Staff Accounting Bulletin ("SAB") No. 101,
"Revenue Recognition in Financial Statements", which summarizes certain of the
staff's views in applying generally accepted accounting principles to revenue
recognition in financial statements. The Company believes that its revenue
recognition principles comply with SAB No. 101.
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
FORWARD-LOOKING STATEMENTS
The following discussion and analysis should be read in conjunction with the
financial statements included in this report. It is intended to assist the
reader in understanding and evaluating the financial position of the Company.
This report contains, in addition to historical information, forward-looking
statements that involve risks and uncertainties. Words such as "may", "will",
"should", "could", "expects", "plans", "intends", "anticipates", "believes",
"estimates", "potential", or "continue" or the negative of such terms and other
comparable terminology are intended to identify forward-looking statements. The
Company's actual results could differ materially from the results discussed in
the forward-looking statements. Risk factors that could cause or contribute to
such differences include those discussed in DynamicWeb Enterprises, Inc.'s
("DWeb") annual report on Form 10-KSB for the year ended September 30, 1999,
DWeb's registration statement on Form S-4, effective in March 2000, and the
Company's quarterly reports on Form 10-QSB for the periods ended March 31, 2000
and June 30, 2000.
OVERVIEW
The Company provides Internet-based, business-to-business e-commerce solutions
that facilitate cost-effective end-to-end transactions between buyers and
suppliers within specific vertical industries. The Company's services include:
providing the necessary technological infrastructure and operational services to
process electronic transactions between buyers and suppliers, and related
consulting services to businesses that wish to build, operate or outsource their
e-commerce infrastructure. In addition, the Company provides authorized
technical education to its client base, and also designs and delivers custom
computer and internet-based training seminars.
Transaction processing and related services include revenue for processing
transactions and related consulting services. Revenue from transaction
processing is recognized on a "pay per transaction" basis or based on a monthly
subscription charge related to the overall number of transactions during the
period. The revenue from these services is recognized in the month in which the
services are rendered. Revenue from consulting services is recognized as
services are rendered over the contract term. The revenue derived from training
and client educational services is recognized as services are rendered for the
respective seminars, typically one to five days. Deferred income includes
amounts billed for the unearned portion of certain consulting contracts and
training seminars.
On April 18, 2000, eB2B Commerce, Inc., a Delaware corporation ("eB2B"), merged
with and into DWeb, a New Jersey corporation, with the surviving company using
the name "eB2B Commerce, Inc." (the "Company"). Pursuant to the Agreement and
Plan of Merger between eB2B and DWeb (the "Merger"), the shareholders of DWeb
retained their shares in DWeb, while the shareholders of eB2B received shares,
or securities convertible into shares, of common stock of DWeb representing
approximately 89% of the equity of the Company, on a fully diluted basis. The
transaction was accounted for as a reverse acquisition.
The reverse acquisition was accounted for as a purchase business combination in
which eB2B is the accounting acquirer and DWeb is the legal acquirer. As a
result of the reverse acquisition, (i) the historical financial statements of
the Company for periods prior to the date of the Merger are no longer the
historical financial statements of DWeb, and therefore, DWeb's historical
financial statements are no longer presented; (ii) the historical financial
statements of the Company for
11
<PAGE>
periods prior to the date of the Merger are those of eB2B; (iii) all references
to the financial statements of the "Company" apply to the historical financial
statements of eB2B prior to the Merger and to the consolidated financial
statements of the Company subsequent to the Merger; and (iv) any reference to
eB2B applies solely to eB2B Commerce, Inc., a Delaware corporation, and its
financial statements prior to the Merger. The purchase price of the Merger was
approximately $60.1 million, of which approximately $57.2 was recorded as
goodwill and $2.9 million was recorded as other intangibles.
On February 22, 2000, eB2B completed its acquisition of Netlan Enterprises, Inc.
and subsidiaries ("Netlan"). Pursuant to the Agreement and Plan of Merger (the
"Netlan Merger"), Netlan's stockholders exchanged 100% of their common stock for
46,992 shares of eB2B common stock (equivalent to 125,000 shares of Company
common stock). Additionally, 75,188 shares of eB2B common stock (equivalent to
200,000 shares of Company common stock) were issued, placed into an escrow
account, and may be released to certain former shareholders of Netlan upon
successful completion of escrow requirements, including continued employment
with the Company. The purchase price of the Netlan Merger was approximately $5.2
million. The Company recorded approximately $4,824,000 million of goodwill and
approximately $334,000 million of other intangibles in connection with this
transaction.
The goodwill resulting from the above business combinations is being amortized
over five years and other intangibles are being amortized over a three-year
period. At September 30, 2000, accumulated amortization related to the goodwill
and other intangibles acquired in the Netlan and DWeb acquisitions totaled
approximately $6.2 million.
The Company has changed its year-end from September 30 to December 31 to conform
to eB2B's year-end.
The Company's financial condition and results from operations were dramatically
different during the three and nine-month periods ended September 30, 2000 and
1999. eB2B did not recognize any revenue for the nine-month period ended
September 30, 1999. eB2B was a development stage company, which primarily
devoted its operations to recruiting and training of employees, development of
its business strategy, design of a business system to implement its strategy,
and development of business relationships with buyers and suppliers. For the
nine months ended September 30, 2000, the Company's results reflect the new
operations of the Company, the operations of Netlan since March 1, 2000 and the
operations of DWeb since April 19, 2000. As a result, the Company believes that
the results of operations for the three and nine-month periods ended September
30, 1999 are not comparable to the results of operations for the same periods in
2000 and the Company's anticipated financial condition and results of operations
going forward. Furthermore, the Company's limited operating history makes the
prediction of future operating results very difficult. The Company believes that
period-to-period comparisons of operating results should not be relied upon as
predictive of future performance. The Company's prospects must be considered in
light of the risks, expenses and difficulties encountered by companies at an
early stage of development, particularly companies in new and rapidly evolving
markets. The Company may not be successful in addressing such risks and
difficulties.
RESULTS OF OPERATIONS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
Total revenue for the three and nine-month periods ended September 30, 2000
amounted to $1,713,000 and $3,718,000, respectively. During both periods in
1999, the Company was a development stage company and did not recognize any
revenue.
12
<PAGE>
The Company's transaction processing and related services reportable segment
generated revenue of $950,000 and $2,015,000 for the three and nine-month
periods ended September 30, 2000, respectively. Such revenue includes fees paid
for processing transactions between buyers and suppliers and related consulting
revenue. The Company provides authorized technical education to its client base,
and also designs and delivers custom computer and internet-based training
through its training and client educational services' reportable segment. This
segment generated revenues of $763,000 and $1,703,000 during the three and nine
months ended September 30, 2000, respectively.
In the three and nine-month periods ended September 30, 2000, one customer
accounted for approximately 20% and 16% of the Company's total revenue,
respectively.
Cost of revenue consists primarily of salaries and benefits for employees
providing customer support and implementation services as well as salaries and
benefits of personnel providing consulting and training services to clients.
Total cost of revenue for the three and nine months ended September 30, 2000
amounted to $855,000 and $1,991,000, respectively.
Marketing and selling expenses consist primarily of employee salaries, benefits
and commissions, and the costs of promotional materials, trade shows and other
sales and marketing programs. Marketing and selling expenses (exclusive of
stock-based compensation) were approximately $1,007,000 and $2,023,000 for the
three and nine months ended September 30, 2000, respectively.
Product development expenses consist primarily of payments to outside
contractors and personnel and related costs associated with the development of
the Company's technological infrastructure necessary to process transactions,
including the amortization of certain capitalized costs. Product development
expenses (exclusive of stock-based compensation) were approximately $672,000 and
$2,456,000 for the three and nine months ended September 30, 2000. The Company
capitalizes qualifying computer software costs incurred during the application
development stage. Accordingly, the Company anticipates that products
development expenses will fluctuate from quarter to quarter as various
milestones in the development are reached and future versions are implemented.
General and administrative expenses consist primarily of employee salaries and
related expenses for executives, administrative and finance personnel, as well
as other consulting, legal and professional fees, and, to a lesser extent,
facility and communication costs. During the three and nine-month periods ended
September 30, 2000, total general and administrative expenses (exclusive of
stock-based compensation) amounted to $3,857,000 and $10,722,000, respectively.
During the three-month period ended September 30, 2000, non-recurring severance
charges chiefly associated with severance awarded to two officers of the Company
totaled approximately $600,000. During the first six months of 2000,
non-recurring outside contractor and consulting fees in relation with the design
and the implementation of the Company's strategy and management structure
totaled approximately $2.2 million.
As of September 30, 2000, the Company had approximately 86 full time equivalent
employees ("FTE's") as compared to approximately 123 FTE's as of June 30, 2000.
Such reduction is primarily attributable to efficiencies gained through the
consolidation of the companies acquired during the first four months of 2000.
Annualized savings from the reduction in FTE's are approximately $2.0 million.
13
<PAGE>
During the three-month period ended September 30, 2000, the Company entered into
a lease for new corporate office space expiring in April 2007. In October 2000,
the Company consolidated all its current locations into the new space. It is
anticipated that this consolidation will allow the Company to continue
streamlining its operations and reducing its overall cost structure in the
fourth quarter of 2000. However, there can be no assurance that these costs
savings will be realized.
Amortization of goodwill and other intangibles are non-cash charges associated
with the DWeb and Netlan business combinations. Such amortization expenses were
$3,368,000 and $6,195,000 for the three and the nine-month periods ended
September 30, 2000, respectively. The Company expects to incur quarterly
non-cash charges through March 2003 of approximately $3.4 million corresponding
to the amortization of such goodwill and other intangibles. Between June 2003
and March 2005, the quarterly amortization expense related to the Dweb and
Netlan business combinations is expected to be approximately $3.1 million. The
Company is still refining its purchase price allocation and some adjustments may
be recorded in the future, which might affect the amortization of goodwill and
other intangibles or the periods used for amortization purposes.
During the three and nine-month periods ended September 30, 2000, stock-based
compensation expense amounted to $1,292,000 and $14,865,000, respectively. The
deferred stock compensation is being amortized over the vesting periods of the
related options and warrants contingent upon continued employment of the
respective option or warrant holders. The vesting period of the options and
warrants ranges principally from two to four years with the exception of 500,000
options to purchase shares of eB2B common stock (equivalent to 1,330,000 shares
Company common stock) which vested upon the completion of the Merger and
generated a one-time charge of approximately $8.8 million in the three-month
period ended June 30, 2000. The balance of unearned stock-based compensation at
September 30, 2000 was approximately $4,705,000. This balance will be amortized
at varying amounts per quarter through March 2002.
Interest and other, net amounted to $160,000 and $725,000 for the three and
nine-month periods ended September 30, 2000, respectively. Such income, net of
other expenses, related primarily to interest earned on private placement
proceeds (See Liquidity and Capital Resources).
Net loss for the three and nine-month periods ended September 30, 2000 was
$9,178,000 and $33,809,000, respectively, compared to a net loss of $1,516,000
and $2,482,000 for the same respective periods in 1999. During the three and
nine-month periods ended September 30, 2000, the Company expensed non-cash items
including depreciation and amortization, stock-based compensation expense,
write-down of assets and the cost of shares and warrants issued for services
aggregating $5,581,000 and $23,920,000, respectively, compared to $1,109,000 and
$1,674,000 for the same respective periods in 1999.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception on November 6, 1998, the Company has incurred significant
operating losses, net losses and negative cash flows from operations, due in
large part to the start-up and development of its operations and the development
of technological infrastructure to process transactions. The Company expects
that its net losses and negative cash flows from operations will continue as it
implements its growth strategy. Historically, the Company has funded its losses
and capital expenditures through borrowings, capital contributions, and a
portion of the net proceeds of prior securities offerings. Since inception, net
proceeds of private sales of common stock and preferred stock totaled $29.9
million, of which net proceeds of $29.4 million were
14
<PAGE>
received in a private placement of Series B preferred stock in December 1999 at
the equivalent of $2.07 per share of Company common stock.
Net cash used in operating activities totaled approximately $7,041,000 for the
nine months ended September 30, 2000 as compared to net cash used in operating
activities of approximately $165,000 for the same period in 1999. Net cash used
in operating activities for the nine months ended September 30, 2000 resulted
primarily from the $33,809,000 net loss in the period offset by (i) an aggregate
of $23,920,000 of non-cash charges consisting primarily of depreciation,
amortization and stock-based compensation expense, and (ii) a combined
$3,847,000 increase in accounts payable and accrued expenses mainly attributable
to the acquisition of software licenses and, to a lesser extent, billings from
outside contractors working on the development of the Company's infrastructure
necessary to process transactions.
Net cash provided by investing activities totaled approximately $11,569,000 for
the nine months ended September 30, 2000 as compared to net cash used in
investing activities of approximately $239,000 for the same period in 1999. Net
cash provided by investing activities for the nine months ended September 30,
2000 resulted from the $15,986,000 net proceeds from maturity of investments
available-for-sale and the $419,000 net effect of the DWeb and Netlan business
combinations, mainly cash acquired, offset by (i) the acquisition of software
licenses for $2,200,000 and the purchase of capital assets for $989,000,
primarily computer and office equipment, and (ii) $1,647,000 in product
development costs consisting of fees of outside contractors and capitalized
salaries.
Net cash provided by financing activities totaled approximately $409,000 for the
nine months ended September 30, 2000 as compared to net cash provided by
financing activities of approximately $457,000 for the same period in 1999. In
February 2000, eB2B obtained a $2,500,000 term loan from a bank (the "Bank").
The term loan has a term of three years, is interest-only until December 1,
2000, and bears interest at a rate equal to LIBOR plus 1%. Beginning December 1,
2000, the term loan requires ten quarterly principal payments of $250,000. The
proceeds from the term loan were primarily used to refinance the $2,116,000 debt
of Netlan paid by eB2B in connection with the merger with Netlan. The Company
has also obtained a $6.0 million line of credit with the Bank. No amounts were
borrowed under the line of credit as of September 30, 2000. However, the line of
credit secures approximately $1.25 million of letters of credit that are
outstanding at September 30, 2000.
As of September 30, 2000, the Company's principal source of liquidity is
approximately $14.8 million of cash and cash equivalents. As of September 30,
2000, the Bank held a custody account with approximately $9.7 million as
security on the term loan and line of credit with the Bank. The Company expects
to be able to reduce the line of credit to $1.25 million, the amount of
outstanding letters of credit. It is anticipated that the security will be
reduced to equal the outstanding term loan balance and letters of credit in the
amount of $3.75 million during the fourth quarter. As the quarterly installments
on the term loan are made, it is anticipated that the required balance will be
reduced accordingly.
As of September 30, 2000, the Company had commitments for software licenses in
the amount of $2.2 million, of which $0.5 million were paid in October 2000. The
Company anticipates that the remaining $1.7 million in license fees and
approximately $1.1 million in development fees will be paid during the first six
months of 2001. Additionally, the Company has committed to a maintenance
contract of $0.4 million, which is expected to be paid during the second quarter
of 2001.
15
<PAGE>
Also, during the three-month period ended September 30, 2000, the Company
entered into several non-cancelable lease commitments for new office space and
computer equipment that will require payments of $6.1 million over the next five
years. As of September 30, 2000, the accounts payable balance included
approximately $0.3 million for additional leasehold improvements related to the
new office space. This amount was paid during October 2000.
The Company anticipates spending approximately $2.0 million on capital
expenditures over the next twelve months, primarily on capitalized product
development costs, including the $1.1 million in development fees noted above,
and technology infrastructure. In order to continue the Company's growth plan,
which includes the expansion into additional vertical industries, the Company
anticipates the need to raise additional funds during the next twelve months
through public or private financing, or other arrangements. Additional funding
might not be available on reasonable terms or at all. In the event that the
Company fails to secure the necessary capital to continue its growth plan into
other vertical industries, the Company anticipates modifying its plans, scaling
back its expansion and downsizing the operations to conserve necessary capital.
There can be no assurance that the Company can successfully scale back the
operations. Failure to raise capital when needed, or to successfully implement
the aforementioned actions, could harm the Company's business, financial
condition and results of operations.
16
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In September 2000, the Company and Sands Brothers & Co., Ltd. ("Sands Brothers")
agreed to settle a claim commenced by Sands Brothers against DynamicWeb
Enterprises, Inc. ("DWeb") in the United States District Court for the Southern
District of New York in December 1999. The action was based upon the terms of an
agreement to provide financial advisory, corporate finance, and merger and
acquisition advice. Sands Brothers alleged that it was entitled to compensation
under the agreement for introducing eB2B to Dweb. Pursuant to the settlement,
the Company agreed to pay Sands Brothers the following consideration: (i) a cash
payment of $60,000; (ii) the issuance of 10,000 shares of Company common stock;
and (iii) the issuance of a warrant to purchase 50,000 shares of the Company's
common stock at an exercise price of $4.00 per share.
In October 2000, Cintra Software & Services Inc. ("Cintra") commenced a civil
action against the Company in New York Supreme Court, New York County. The
complaint alleges that the Company acquired certain software from Cintra upon
the authorization of the Company's former Chief Information Officer. Cintra is
seeking damages of approximately $856,000. While the actions are at a very early
stage, the Company believes it has meritorious defenses to the allegations made
in the complaint and intends to defend the action vigorously.
The Company is not currently a party to any other material legal proceeding.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule (EDGAR filing only)
(b) Reports on Form 8-K
A Form 8-K was filed by the Company on July 10, 2000 with respect to the
termination of Richard A. Eisner & Company LLP as DynamicWeb Enterprises,
Inc.'s independent accountants.
A Form 8-K was filed on July 13, 2000 with respect to the appointment of
Deloitte & Touche LLP as the Company's new independent accountants.
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
eB2B Commerce, Inc.
-------------------
(Registrant)
November 13, 2000 By: /s/ Peter J. Fiorillo
----------------- ---------------------------
Chief Executive Officer
November 13, 2000 By: /s/ Victor L. Cisario
----------------- ---------------------------
Chief Financial Officer
17
