Unassociated Document
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
(Mark
One)
| x |
QUARTERLY REPORT
UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 |
| |
|
|
For the period ended
June 30, 2010
|
| |
|
| o |
TRANSITION REPORT
UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT |
For the
transition period from _________ to _________
Commission
file number: 0-27865
ICEWEB,
INC.
(Exact
name of issuer as specified in its charter)
|
Delaware
|
13-2640971
|
|
(State
or other jurisdiction of
incorporation
or organization)
|
(I.R.S.
Employer
Identification
No.)
|
22900
Shaw Road, Suite 111
Sterling, VA
20166
(Address
of principal executive offices)
(571)
287-2380
(Issuer’s
telephone number)
________________________________________________________________
(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.
Yes x No o
Indicate by check mark whether the
registrant has submitted electronically and posted on its corporate Web site, if
any, every Interactive Data File required to be submitted and posted pursuant to
Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12
months (or for such shorter period that the registrant was required to submit
and post such files).
Yes o No o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
|
Large accelerated filer
|
|
o
|
|
Accelerated filer
|
|
o
|
|
Non-accelerated
filer
|
|
o (Do not check if a
smaller reporting company)
|
|
Smaller reporting company
|
|
x
|
Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act).
Yes o No x
State the
number of shares outstanding of each of the issuer’s classes of common equity,
as of the latest practicable date: At August 13, 2010, there were 122,949,104 outstanding shares of
common stock, $.001 par value per share.
Transitional Small Business Disclosure
Format (Check one):
Yes o No x
CAUTIONARY
STATEMENT REGARDING FORWARD LOOKING INFORMATION
This
quarterly report contains forward-looking statements. These forward-looking
statements are subject to risks and uncertainties and other factors that may
cause our actual results, performance or achievements to be materially different
from the results, performance or achievements expressed or implied by the
forward-looking statements. You should not unduly rely on these statements.
Forward-looking statements can be identified by the fact that they do not relate
strictly to historical or current facts. They use words such as “anticipate,”
“estimate,” “expect,” “project,” “intend,” “plan,” “believe,” “project,”
“contemplate,” “would,” “should,” “could,” or “may.” With respect to any
forward-looking statement that includes a statement of its underlying
assumptions or bases, we believe such assumptions or bases to be reasonable and
have formed them in good faith, assumed facts or bases almost always vary from
actual results, and the differences between assumed facts or bases and actual
results can be material depending on the circumstances. When, in any
forward-looking statement, we express an expectation or belief as to future
results, that expectation or belief is expressed in good faith and is believed
to have a reasonable basis, but there can be no assurance that the stated
expectation or belief will result or be achieved or accomplished. All subsequent
written and oral forward-looking statements attributable to us, or anyone acting
on our behalf, are expressly qualified in their entirety by the cautionary
statements.
OTHER
PERTINENT INFORMATION
When used
in this quarterly report, the terms “IceWEB”, the “Company”, “we”, “our”, and
“us” refers to IceWEB, Inc., a Delaware corporation, and our subsidiaries. The
information which appears on our web site at www.iceweb.com is not part of this
quarterly report.
ICEWEB,
INC. AND SUBSIDIARIES
FORM
10-Q
QUARTERLY
PERIOD ENDED JUNE 30, 2010
INDEX
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Page
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PART
I - FINANCIAL INFORMATION
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Item
1 - Consolidated Financial Statements
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|
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Consolidated
Balance Sheets (unaudited) at June 30, 2010 and September 30,
2009
|
4
|
|
|
|
|
|
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Consolidated
Statements of Operations (unaudited)
For
the three and nine months ended June 30, 2010 and 2009
|
5
|
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|
Consolidated
Statements of Cash Flows (unaudited)
For
the nine months ended June 30, 2010 and 2009
|
6
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|
|
|
|
|
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Consolidated
Statements of Comprehensive Income (unaudited)
For
the three and nine months Ended June 30, 2010 and 2009
|
|
| |
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Notes
to Unaudited Consolidated Financial Statements
|
7-24
|
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Item
2 - Management’s Discussion and Analysis or Plan of
Operation
|
25-35
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Item
3 - Quantitative and Qualitative Disclosures About Market
Risk
|
35
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Item
4 - Controls and Procedures
|
35
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PART
II - OTHER INFORMATION
|
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Item
1 - Legal Proceedings
|
36
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|
|
|
|
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Item
1A - Risk Factors
|
36
|
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|
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Item
2 - Unregistered Sales of Equity Securities and Use of
Proceeds
|
36
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|
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Item
3 - Default upon Senior Securities
|
37
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|
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Item
4 - Submission of Matters to a Vote of Security Holders
|
38
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Item
5 - Other Information
|
38
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|
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Item
6 – Exhibits
|
38
|
|
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|
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|
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Signatures
|
39
|
PART
I - FINANCIAL INFORMATION
Item
1. Consolidated Financial Statements
ICEWEB,
Inc.
Consolidated
Balance Sheets
|
|
|
June
30,
2010
|
|
|
September
30,
2009
|
|
|
CURRENT
ASSETS:
|
|
(Unaudited)
|
|
|
|
(1)
|
|
|
Cash
|
|
$ |
1,276,863 |
|
|
$ |
3,310 |
|
|
Accounts
receivable, net
|
|
|
1,691,605 |
|
|
|
424,919 |
|
|
Inventory
|
|
|
114,746 |
|
|
|
151,361 |
|
|
Other
current assets
|
|
|
13,750 |
|
|
|
6,390 |
|
|
Prepaid
expenses
|
|
|
42,544 |
|
|
|
25,180 |
|
|
|
|
|
3,139,508 |
|
|
|
671,160 |
|
|
OTHER
ASSETS:
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
|
524,119 |
|
|
|
752,162 |
|
|
Deposits
|
|
|
13,320 |
|
|
|
13,320 |
|
|
Marketable
Securities
|
|
|
800,000 |
|
|
|
0 |
|
|
Intangible
assets, net
|
|
|
607,725 |
|
|
|
790,042 |
|
|
Total
Assets
|
|
$ |
5,084,672 |
|
|
$ |
2,226,684 |
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES:
|
|
|
|
|
|
|
|
|
|
Accounts
payable and accrued liabilities
|
|
$ |
1,903,186 |
|
|
$ |
1,971,376 |
|
|
Notes
payable
|
|
|
1,753,194 |
|
|
|
1,847,755 |
|
|
Deferred
revenue
|
|
|
47,584 |
|
|
|
10,261 |
|
|
|
|
|
3,703,964 |
|
|
|
3,829,392 |
|
|
LONG-TERM
LIABILITIES
|
|
|
|
|
|
|
|
|
|
Notes
Payable
|
|
|
1,057,554 |
|
|
|
934,756 |
|
|
|
|
|
|
|
|
|
|
|
|
Total
Liabilities
|
|
|
4,761,518 |
|
|
|
4,764,148 |
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS' EQUITY
(DEFICIT)
|
|
|
|
|
|
|
|
|
|
Series
B convertible preferred stock ($.001 par value; 1,253,334 shares issued
and outstanding)
|
|
|
626 |
|
|
|
626 |
|
|
Common
stock ($.001 par value; 1,000,000,000 shares authorized; 121,951,604
shares issued and 121,789,104 shares outstanding)
|
|
|
121,791 |
|
|
|
68,471 |
|
|
Additional
paid in capital
|
|
|
26,974,988 |
|
|
|
20,064,997 |
|
|
Accumulated
deficit
|
|
|
(27,430,251 |
) |
|
|
(22,658,558 |
) |
|
Accumulated
other comprehensive income
|
|
|
752,000 |
|
|
|
- |
|
|
Subscription
receivable
|
|
|
(83,000 |
) |
|
|
- |
|
|
Treasury
stock, at cost, (162,500 shares)
|
|
|
(13,000 |
) |
|
|
(13,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
Total
stockholders' equity (deficit)
|
|
|
323,154 |
|
|
|
(2,537,464 |
) |
|
|
|
|
|
|
|
|
|
|
|
Total
Liabilities and Stockholders Equity (Deficit)
|
|
$ |
5,084,672 |
|
|
$ |
2,226,684 |
|
(1)
Derived from audited financial statements
See
accompanying notes to unaudited consolidated financial statements
ICEWEB,
Inc.
Consolidated
Statements of Operations
(Unaudited)
|
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
|
June
30
|
|
|
June
30
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$ |
1,203,878 |
|
|
$ |
826,182 |
|
|
$ |
2,815,900 |
|
|
$ |
3,936,472 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales
|
|
|
613,287 |
|
|
|
404,641 |
|
|
|
1,343,006 |
|
|
|
2,478,707 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
590,591 |
|
|
|
421,541 |
|
|
|
1,472,894 |
|
|
|
1,457,765 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketing
and selling
|
|
|
404,443 |
|
|
|
357,596 |
|
|
|
1,189,661 |
|
|
|
864,184 |
|
|
Depreciation
and amortization expense
|
|
|
165,585 |
|
|
|
85,793 |
|
|
|
495,984 |
|
|
|
432,839 |
|
|
Research
and development
|
|
|
167,061 |
|
|
|
94,020 |
|
|
|
353,092 |
|
|
|
250,450 |
|
|
General
and administrative
|
|
|
1,130,005 |
|
|
|
688,154 |
|
|
|
3,783,654 |
|
|
|
1,739,492 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Operating Expenses
|
|
|
1,867,094 |
|
|
|
1,225,563 |
|
|
|
5,822,391 |
|
|
|
3,286,965 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
From Operations
|
|
|
(1,276,503 |
) |
|
|
(804,022 |
) |
|
|
(4,349,497 |
) |
|
|
(1,829,200 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expenses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain/(loss)
from sale of assets
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
3,452,236 |
|
|
Interest
income
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
1,142 |
|
|
Interest
expense
|
|
|
(147,240 |
) |
|
|
(144,884 |
) |
|
|
(422,196 |
) |
|
|
(510,178 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
other income (expenses):
|
|
|
(147,240 |
) |
|
|
(144,884 |
) |
|
|
(422,196 |
) |
|
|
2,943,200 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$ |
(1,423,743 |
) |
|
$ |
(948,906 |
) |
|
$ |
(4,771,693 |
) |
|
$ |
1,114,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
income (loss) per common share
|
|
$ |
(0.01 |
) |
|
$ |
(0.02 |
) |
|
$ |
(0.05 |
) |
|
$ |
0.03 |
|
|
Diluted
income (loss) per common share
|
|
$ |
(0.01 |
) |
|
$ |
(0.02 |
) |
|
$ |
(0.05 |
) |
|
$ |
0.03 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding basic
|
|
|
110,570,437 |
|
|
|
38,794,632 |
|
|
|
92,635,584 |
|
|
|
35,431,837 |
|
|
Weighted
average common shares outstanding diluted
|
|
|
110,570,437 |
|
|
|
38,794,632 |
|
|
|
92,635,584 |
|
|
|
37,637,725 |
|
See
accompanying notes to unaudited consolidated financial statements
ICEWEB,
Inc.
Consolidated
Statements of Cash Flows
(Unaudited)
| |
|
Nine
Months Ended
|
|
| |
|
June
30,
|
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
NET
CASH USED IN OPERATING ACTIVITIES
|
|
$ |
(2,900,065 |
) |
|
$ |
(1,396,144 |
) |
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
Purchase
of property and equipment
|
|
|
(85,624 |
) |
|
|
(28,318 |
) |
|
Investment
in marketable securities
|
|
|
(48,000 |
) |
|
|
- |
|
|
NET
CASH USED IN INVESTING ACTIVITIES
|
|
|
(133,624 |
) |
|
|
(28,318 |
) |
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
Repayment
of equipment financing
|
|
|
- |
|
|
|
(45,114 |
) |
|
Proceeds
from the sale of restricted common stock
|
|
|
2,320,630 |
|
|
|
97,000 |
|
|
Proceeds
from notes payable
|
|
|
985,900 |
|
|
|
7,060,871 |
|
|
Payments
on notes payable
|
|
|
(957,662 |
) |
|
|
(6,122,036 |
) |
|
Proceeds
from exercise of common stock options
|
|
|
1,898,374 |
|
|
|
454,300 |
|
|
|
|
|
|
|
|
|
|
|
|
NET
CASH PROVIDED BY FINANCING ACTIVITIES
|
|
|
4,247,242 |
|
|
|
1,445,021 |
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCREASE IN CASH
|
|
|
1,213,553 |
|
|
|
20,559 |
|
|
|
|
|
|
|
|
|
|
|
|
CASH
- beginning of period
|
|
|
63,310 |
|
|
|
4,780 |
|
|
|
|
|
|
|
|
|
|
|
|
CASH
- end of period
|
|
$ |
1,276,863 |
|
|
$ |
25,339 |
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
Cash
paid for :
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$ |
402,056 |
|
|
$ |
365,294 |
|
|
Income
taxes
|
|
|
|
|
|
|
|
|
See
accompanying notes to unaudited consolidated financial statements
ICEWEB,
INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2010
NOTE
1 - NATURE OF BUSINESS
Headquartered
just outside of Washington, D.C., we manufacture and market Unified Data
Storage, purpose built appliances, network and cloud attached storage solutions
and deliver on-line cloud computing application services. Our
customer base includes U.S. government agencies, enterprise companies, and small
to medium sized businesses (SMB). We have three key product
offerings:
|
|
|
IceWEB
Storage Systems
|
| |
|
|
|
|
|
Custom
Built Appliances
|
| |
|
|
|
|
|
Cloud
Based Software and Services
|
IceWEB Storage
Systems
IceWEB is
a provider of high performance Unified Network Storage solutions. We
believe that our product offerings have broad appeal in the small to medium
enterprise (SME) and federal marketplaces, and are used as core building blocks
(enabling technologies) within business critical storage infrastructure for a
diverse group of data-intensive key vertical market segments such as geospatial
information systems, entertainment, security and defense, higher education,
Internet Service Providers (ISP’s), Managed Service Providers (MSP’s), oil and
gas, and health care. Our innovative storage systems deliver levels
of performance, scalability, versatility and simplicity that exceed existing
network storage alternatives at a significantly lower price
point. Our Unified Network Storage offering is deployed as storage
operating system software on our Network-Attached Storage (NAS) and Storage Area
Network (SAN) systems. This IceWEB Unified Network Storage
environment empowers companies to quickly and easily deploy large, complex data
storage infrastructure environments; to reduce administrative costs for managing
their storage by making complex technical tasks far more simple to accomplish;
to reduce hardware and capital expenditure costs by more effectively using the
storage within the system and repurposing older legacy hardware; to protect
their business critical data by leveraging the IceWEB 5000 built-in data
replication features; and to integrate with the leading server virtualization
software (VMware, Citrix Xen and Microsofts HyperV) to better manage those
solutions.
The
IceWEB Unified Storage products replace complex and performance-limited products
with high performance, scalable and easy to use systems capable of handling the
most data intensive applications and environments.
Custom Built
Appliances
IceWEB
has been building Purpose Built Network and Data Appliances for several
years. Purpose Built Network and Data Appliances are systems which
provide computing resources (processors and memory), data storage, and specific
software for a dedicated application. Historically, the appliance
products that IceWEB has built have supported a single large business partner,
ESRI Corporation. In this relationship, IceWEB and ESRI have
collaborated to create a family of ultra-high performance IceWEB/ESRI Geographic
Information System (GIS) appliances that give customers access to massive
amounts of data with unprecedented levels of performance. IceWEB
creates, builds and ships a line of GIS appliances for ESRI which includes a
full set of ESRI GIS data pre-loaded on internal storage. ESRI
Corporation has the responsibility for marketing these appliances to their
customers and business partners via their worldwide sales and consultancy
organization. IceWEB also periodically distributes updates for these
GIS appliances, which is a source of recurring revenue for the
Company.
IceWEB,
in an effort to capitalize on what has been a successful model built within the
Geographical Information System space, with ESRI has expanded our marketing of
our appliance design, manufacturing and support capabilities to additional
prospective partners. In October 2009 IceWEB, Spot Image (a large
satellite GIS data provider based in France), and Google Corporation agreed that
IceWEB would build an appliance to deliver GIS imagery from Spot Image satellite
data, powered by Google Earth Enterprise. This Google Earth Engine
appliance will be marketed worldwide through existing Spot Image and Google
business partners. IceWEB has also recently introduced a Cloud
Storage Appliance, a device which allows organizations and/or service providers
to rapidly and easily deploy cloud based storage services to their constituents
and customers. We are aggressively pursuing other Purpose Built
Appliance opportunities and hope that this strategy will begin to contribute
significantly to our business ramping over the next six months. Our
goal is that the Appliance business segment be grown to contribute approximately
35% of overall business revenue by the end of Fiscal Year 2010. We
expect to achieve this through our ongoing sales, marketing and research and
development efforts, funded by operations.
Cloud Based Software and
Services
In
December 2005, IceWEB launched IceMAILTM, a
software service that provides network–hosted groupware, email, calendaring and
collaboration functionality. Typical customers are organizations
desiring to deploy Microsoft Exchange and Outlook who wish to avoid the overhead
associated with procurement, maintainence and management of their own equipment
and software. These online services subsequently were expanded
to include IcePORTALTM, which
provides customers with a complete Intranet portal, and IceSECURETM, a
hosted email encryption service. Formerly referred to as “Software as
a Service” (SaaS), we refer to these hosted services today as Cloud Computing or
Cloud Services. The benefits of Cloud Computing are
many. First, adoption of an application, infrastructure or storage
environment is available on demand requiring no capital expenditures by the
customer. This represents an attractive proposition from a financial
perspective. Second, this model significantly diminishes the need for
the customer to retain highly-paid internal technical staff to support these
traditional IT functions, freeing these critical resources to focus on tasks
related to the core business. Finally, the application software,
hardware, and infrastructure needs of organizations are constantly growing and
evolving – Cloud Computing allows ad-hoc allocation of resources, cost free
software upgrades and freedom from hardware/infrastructure
obsolescence.
Sale
of IceWEB Virginia, Inc. (doing business as IceWeb Solutions Group)
As
described elsewhere herein, in March 2009 we sold our interest in IceWEB
Virginia, Inc. (dba IceWEB Solutions Group) subsidiary to an unrelated third
party in exchange for the assumption of approximately $3.2 million in
liabilities and 1,000,000 shares of our common stock valued at
$80,000. IceWEB Virginia, Inc. was a provider of computer network
security products and services such as access control, wide area network
optimization, content filtering, email security, intrusion detection, to the
Federal, State, and Local government entities. This subsidiary
accounted for 43% and 91% of our revenues for fiscal years 2009 and 2008,
respectively. We sold this business in order for us to be able to
focus on our high margin storage business.
Research
and development
Research
and development expenses consist primarily of personnel-related expenses, costs
of prototype equipment, costs of using contractors, allocated facility and IT
overhead expenses and depreciation of equipment used in research and development
activities. We expense research and development costs as incurred. We intend to
continue to invest significantly in our research and development efforts which
we believe are essential to maintaining our competitive position. As a result,
we expect research and development expenses to increase in absolute dollars,
although we expect these expenses to decrease as a percentage of
revenue.
ICEWEB,
INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2010
NOTE
1 - NATURE OF BUSINESS (continued)
Intellectual
Property
Success
in our technological markets depends, in part, upon our ability to obtain and
maintain proprietary protection for its products, technology and
know-how. This must be accomplished without infringing the
proprietary rights of others and while simultaneously preventing others from
infringing upon our proprietary rights.
IceWEB
seeks to protect its proprietary positions by, among other methods, filing
patent applications. Patent efforts are focused in the United States and, when
justified by cost and strategic importance, we plan to file related foreign
patent applications in jurisdictions such as the European Union and Japan. The
company has retained an Intellectual Property Law firm and is in the process of
preparing filings for two or more provisional patents (Cloud Storage Appliance
and WISCSI technologies respectively).
Pending
patent applications relate to the rapid ingestion of massive amounts of video
and other data and other network storage concepts. It is unknown if
any of the patent applications will issue as patents. The patent
applications may be opposed, contested, circumvented, designed around by a
third-party, or found to be invalid or unenforceable.
Copyright
law, trademarks and trade secret agreements are also used to protect and
maintain proprietary positions. Our proprietary information is
protected by internal and external controls, including contractual agreements
with employees, end-users and channel partners. There is no assurance that these
parties will abide by the terms of their agreements.
Trademarks
are used on some of the IceWEB products and these distinctive marks may be an
important factor in marketing the products. Inline® and Inline logo
trademarks have been registered in the United States.
Purchase
of Interest in VOIS Inc.
As also described later in this
section, in November 2009 we purchased for $48,000 an approximately 16% interest
in VOIS Inc. (OTCBB: VOIS), a development stage company that operates a social
commerce website where people can find and do business with buyers and sellers
of on-demand work or manufacturing around the world. We acquired a
strategic interest in VOIS to enter the Cloud Computing marketplace and deploy
our storage products in conjunction with VOIS’ product offerings. In
exchange for this strategic interest, VOIS received access to distribute
IceMAIL, IcePORTAL, and IceSECURE to their existing and prospective new user
base, and IceWEB’s cloud storage network.
ICEWEB,
INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2010
NOTE 2 - BASIS OF PRESENTATION
AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
The
unaudited consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of America
(“GAAP”) and with the instructions to Securities and Exchange Commission (“SEC”)
Form 10-Q and Article 10 of SEC Regulation S-X. Accordingly, they do
not include all the information and footnote disclosures required by GAAP for
complete financial statements. For further information, these financial
statements should be read in conjunction with the audited consolidated financial
statements and related notes contained in the Company’s Annual Report on Form
10-K (File No. 000-27865) for the year ended September 30, 2009 (“Form
10-K”).
The
unaudited consolidated financial statements contain all normal recurring
accruals and adjustments that, in the opinion of management, are necessary to
state fairly the Company’s consolidated financial position at June 30, 2010, and
the consolidated results of its operations for the three and nine months ended
June 30, 2010 and 2009, and the consolidated cash flows for the three and nine
months ended June 30, 2010 and 2009. The results of operations for the three and
nine months ended June 30, 2010 are not necessarily indicative of the results to
be expected for the full year.
The
consolidated balance sheet at September 30, 2009 has been derived from the
audited consolidated financial statements at that date but does not include all
footnote disclosures required by GAAP.
The
Company’s significant accounting policies are disclosed in the Company’s Form
10-K. These financial statements consider subsequent events through
the date of filing with the Securities and Exchange Commission.
Fiscal
Year
The
fiscal year ends on September 30. References to fiscal 2010, for example, refer
to the fiscal year ending September 30, 2010.
Recent
Accounting Pronouncements
Subsequent
Events: In February 2010, the Financial Accounting Standards
Board (FASB) issued Accounting Standards Update (ASU) No. 2010-09 “Subsequent Events (Topic 855) –
Amendments to Certain Recognition and Disclosure
Requirements.” ASU 2010-09 amends the subsequent events
disclosure guidance. The amendments include a definition of an SEC
filer, requires an SEC filer or conduit bond obligor to evaluate subsequent
events through the date the financial statements are issued, and removes the
requirement for an SEC filer to disclose the date through which subsequent
events have been evaluated. ASU 2010-09 was effective upon issuance
except for the use of the issued date for conduit debt obligors. The
impact of ASU 2010-09 on our disclosures is reflected in Note 15 - Subsequent
Events.
Fair Value Measurements and
Disclosures: In January 2010, the FASB issued ASU No. 2010-06
“Fair Value Measurements and
Disclosures (Topic 820) – Improving Disclosures about Fair Value
Measurements.” ASU 2010-06 amends the fair value disclosure
guidance. The amendments include new disclosures and changes to
clarify existing disclosure requirements. ASU 2010-06 was effective
for interim and annual reporting periods beginning after December 15, 2009,
except for the disclosures about purchases, sales, issuances, and settlements of
Level 3 fair value measurements. Those disclosures are effective for
fiscal years beginning after December 15, 2010, and for interim periods within
those fiscal years. The impact of ASU 2010-06 on our disclosures is
reflected in Note 10 - Fair Value Measurements.
Consolidations: In
December 2009, the FASB issued ASU No. 2009-17 (formerly Statement No. 167),
“Consolidations (Topic 810) –
Improvements to Financial Reporting for Enterprises involved with Variable
Interest Entities”. ASU 2009-17 amends the consolidation guidance
applicable to variable interest entities. The amendments to the consolidation
guidance affect all entities, as well as qualifying special-purpose entities
(QSPEs) that are currently excluded from previous consolidation guidance. ASU
2009-17 was effective as of the beginning of the first annual reporting period
that begins after November 15, 2009. ASU 2009-17 did not have an impact on our
financial condition, results of operations, or disclosures.
Accounting for Transfers of
Financial Assets: In December 2009, the FASB issued ASU No.
2009-16 (formerly Statement No. 166), “Transfers and Servicing (Topic 860)
– Accounting for Transfers of Financial Assets”. ASU 2009-16 amends the
derecognition accounting and disclosure guidance. ASU 2009-16 eliminates the
exemption from consolidation for QSPEs and also requires a transferor to
evaluate all existing QSPEs to determine whether they must be consolidated. ASU
2009-16 was effective as of the beginning of the first annual reporting period
that begins after November 15, 2009. ASU 2009-16 did not have an impact on our
financial condition, results of operations, or disclosures.
Reclassifications
Certain
reclassifications have been made to previously reported amounts to conform to
fiscal 2010 amounts.
Going
Concern
The
Company’s auditors stated in their report on the consolidated financial
statements of the Company for the years ended September 30, 2009 and 2008 that
the Company is dependent on outside financing and has had losses since inception
that raise doubt about its ability to continue as a going concern. For the nine
months ended June 30, 2010, the Company had a net loss of $4,771,693 which
included noncash expenses of $2,669,644. Cash used in operations
totaled $2,900,065. The consolidated financial statements do not
include any adjustments related to the recovery and classification of recorded
assets, or the amounts and classification of liabilities that might be necessary
in the event the Company cannot continue in existence.
Management
has established plans intended to increase the sales of the Company’s products
and services. Management intends to seek new capital from new equity securities
offerings to provide funds needed to increase liquidity, fund growth, and
implement its business plan. However, no assurances can be given that the
Company will be able to raise any additional funds.
Use
of estimates
The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates. Significant estimates in 2010 and
2009 include the allowance for doubtful accounts, the valuation of stock-based
compensation, the useful life of intangible assets and property and equipment,
and the valuation of inventory.
Cash
and Cash Equivalents
The
Company considers all highly liquid debt instruments with original maturities of
three months or less to be cash equivalents.
Accounts
Receivable
Accounts
receivable consists of normal trade receivables. The Company recorded a bad debt
allowance of $9,000 as of June 30, 2010. Management performs ongoing evaluations
of its accounts receivable. Management believes that all remaining receivables
are fully collectable. Bad debt expense amounted to $0 and $0 for the three and
nine months ended June 30, 2010 and 2009, respectively.
ICEWEB,
INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2010
NOTE 2 - BASIS OF PRESENTATION
AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (continued)
Intangible
Assets
Intangible
assets, net consists of the cost of acquired customer relationships. We
capitalize and amortize the cost of acquired intangible assets over their
estimated useful lives on a straight-line basis. The estimated useful life of
our acquired customer relationships is five years.
We have
adopted ASC 350 for the assessment of impairment of goodwill and indefinite life
intangibles on an annual basis. The potential impairment of finite life
intangibles is assessed whenever events or a change in circumstances indicate
the carrying value may not be recoverable. Factors we consider important which
could trigger an impairment review include the following:
|
·
|
significant
underperformance relative to historical or expected projected future
operating results;
|
| |
|
|
·
|
significant
changes in the manner of our use of the acquired assets or the strategy
for our overall business;
|
| |
|
|
·
|
significant
negative industry or economic
trends;
|
| |
|
|
·
|
significant
decline in our stock price for a sustained period of
time; and
|
| |
|
|
·
|
our
market capitalization relative to net book
value.
|
When we
determine that the carrying value of goodwill and indefinite life intangibles
may not be recoverable based upon the existence of one or more of the above
indicators of impairment, we measure any potential impairment based on a
projected discounted cash flow method using a discount rate determined by our
management to be commensurate with the risk inherent in our current business
model.
Property
and Equipment
Property
and equipment is stated at cost, net of accumulated depreciation. Depreciation
is provided by using the straight-line method over the estimated useful lives of
the related assets.
Long-lived
Assets
In
accordance with ASC Topic 360, “Property, Plant, and Equipment” (formerly
SFAS 144, “Accounting for the Impairment or Disposal of Long-Lived
Assets”), we review the carrying value of intangibles and other long-lived
assets for impairment at least annually or whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of long-lived assets is measured by comparison of
its carrying amount to the undiscounted cash flows that the asset or asset group
is expected to generate. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the property, if any, exceeds its fair market value.
ICEWEB,
INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2010
NOTE
2 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
Revenue
Recognition
We follow
the guidance of Accounting Standards Codification (ASC) Topic 605, “Revenue
Recognition” (formerly Staff Accounting Bulletin (SAB) No. 104, “Revenue
Recognition”) for revenue recognition. In general, we record revenue when
persuasive evidence of an arrangement exists, services have been rendered or
product delivery has occurred, the sales price to the customer is fixed or
determinable, and collectability is reasonably assured. The following policies
reflect specific criteria for our various revenues streams:
Revenues
from sales of products are generally recognized when products are shipped unless
we has obligations remaining under sales or licensing agreements, in which case
revenue is either deferred until all obligations are satisfied or recognized
ratably over the term of the contract.
Revenue
from services is recorded as it is earned. Commissions earned on third party
sales are recorded in the month in which contracts are awarded. Customers are
generally billed every two weeks based on the units of production for the
project. Each project has an estimated total which is based on the estimated
units of production and agreed upon billing rates. Amounts billed in advance of
services being provided are recorded as deferred revenues and recognized in the
consolidated statement of operations as services are provided.
Earnings
per Share
We compute earnings per share in
accordance with ASC Topic 260, “Earnings Per Share” (formerly SFAS No. 128,
“Earnings per Share”) Under the provisions of ASC Topic 260, basic earnings per
share is computed by dividing the net income (loss) for the period by the
weighted average number of common shares outstanding during the period. Diluted
earnings per share is computed by dividing the net income (loss) for the period
by the weighted average number of common and potentially dilutive common shares
outstanding during the period. Potentially dilutive common shares consist of the
common shares issuable upon the exercise of stock options and warrants (using
the treasury stock method) and upon the conversion of convertible preferred
stock (using the if-converted method). Potentially dilutive common shares are
excluded from the calculation if their effect is antidilutive. At
June 30, 2010, there were options and warrants to purchase 14,126,304 shares of
common stock, 626,667 shares issuable upon conversion of Series B preferred
stock, and no shares of Series C preferred stock outstanding which could
potentially dilute future earnings per share.
Stock-Based
Compensation
Prior to
October 1, 2005, we accounted for stock options issued under the Plan under the
recognition and measurement provisions of APB Opinion No. 25, Accounting for Stock Issued to
Employees , and related interpretations, as permitted by ASC Topic 718,
“Compensation – Stock Compensation (Formerly SFAS No. 123 (R),
“Share-Based Payments. No stock-based compensation cost related to employee
stock options was recognized in the Consolidated Statement of Operations for the
year ended September 30, 2005 as all options granted under the Plan had an
exercise price equal to the market value of the underlying common stock on the
date of grant.
Effective
October 1, 2005, we adopted the fair value recognition provisions of ASC Topic
718, “Compensation – Stock Compensation (Formerly SFAS No. 123 (R),
“Share-Based Payments using the modified-prospective-transition
method. Under that transition method, compensation cost recognized in
the year ended September 30, 2006 includes: (a) compensation cost for all
share-based payments granted prior to, but not yet vested as of September 30,
2005, based on the grant date fair value estimated in accordance with the
original provisions of Statement 123, and (b) compensation cost for all
share-based payments granted subsequent to October 1, 2005, based on the
grant-date fair value estimated in accordance with the provisions of Statement
123(R). Financial results for the year ended September 30, 2005 have not been
restated.
ICEWEB,
INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2010
NOTE
3 - PROPERTY AND EQUIPMENT
Property
and equipment, net, consists of the following:
|
|
Estimated
Life
|
|
June
30,
2010
|
|
|
September
30,
2009
|
|
|
Office
equipment
|
5
years
|
|
$ |
699,282 |
|
|
$ |
637,920 |
|
|
Computer
software
|
3
years
|
|
|
612,379 |
|
|
|
607,278 |
|
|
Furniture
and fixtures
|
5
years
|
|
|
261,385 |
|
|
|
261,385 |
|
|
Leasehold
improvements
|
2 -
5 years
|
|
|
1,026,470 |
|
|
|
1,007,250 |
|
|
|
|
|
|
2,599,516 |
|
|
|
2,513,833 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Less:
accumulated depreciation
|
|
|
|
(2,075,397 |
) |
|
|
(1,761,671 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
524,119 |
|
|
$ |
752,162 |
|
Depreciation
expense for the nine months ended June 30, 2010 and 2009 was $313,666 and
$204,608 respectively.
NOTE
4 - INVENTORY
Inventory
consisted of the following:
|
|
|
June
30,
2010
|
|
|
September,
30,
2009
|
|
|
Raw
materials
|
|
$ |
91,797 |
|
|
$ |
78,966 |
|
|
Work
in progress
|
|
|
17,212 |
|
|
|
14,862 |
|
|
Finished
goods
|
|
|
5,737 |
|
|
|
57,533 |
|
|
|
|
|
114,746 |
|
|
|
151,361 |
|
|
Less:
reserve for obsolescence
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
114,746 |
|
|
$ |
151,361 |
|
ICEWEB,
INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2010
NOTE
5 - ACQUISITION AND DISPOSITIONS
On
December 22, 2007, we acquired 100% of the outstanding stock of Inline for
$2,412,731 in cash, plus 503,356 shares of IceWEB common stock valued at
$276,846, the fair market value on the date of acquisition. The acquisition was
accounted for using the purchase method of accounting. The results of operations
are included in the financial statements of operations from the date of
acquisition. Inline is a leading provider of intelligent enterprise data storage
solutions and services for the geospatial intelligence marketplace. Inline’s
proprietary products include reliable, high performance Storage Area Network
Solutions, Network Attached Storage, and Direct Attached Storage and the rapidly
expanding OEM Storage Centric Appliances. Today, Inline has developed its fifth
generation of advanced data storage solutions, marketed under the brands TruEnterprise and FileStorm . All Inline
systems function in a heterogeneous operating system environment, including
Windows, UNIX and Linux. The purchase of Inline Corporation included the
acquisition of assets of $3,904,245, and liabilities of $614,668. The aggregate
purchase price consisted of the following:
|
Cash
payment to seller
|
|
$ |
2,412,731 |
|
|
Fair
value of common stock issued to seller
|
|
|
276,846 |
|
|
Estimated
direct transaction fees and expenses
|
|
|
600,000 |
|
|
|
|
$ |
3,289,577 |
|
The
following table summarizes the estimated fair values of Inline’s assets acquired
and liabilities assumed at the date of the acquisition:
|
Cash
|
|
$ |
487,603 |
|
|
Accounts
Receivable
|
|
|
866,455 |
|
|
Lease
Deposits
|
|
|
20,500 |
|
|
Inventory,
net
|
|
|
394,863 |
|
|
Property
and equipment, net
|
|
|
919,374 |
|
|
Intangible
assets
|
|
|
1,215,450 |
|
|
Accounts
payable and accrued expenses
|
|
|
(614,668
|
) |
|
|
|
$ |
3,289,577 |
|
Intangible
assets acquired from Inline were assigned the following values: value
of manufacturing GSA schedule with an assigned valued of $750,000 amortized
straight line over five years; value of customer relationships with an assigned
value of $465,450 amortized straight line over five years. Intangible assets
acquired from Inline had the following unamortized values at June 30, 2010:
value of manufacturing GSA schedule of $412,500; value of customer relationships
of $255,998.
On March
30, 2009, we completed the sale of IceWEB Virginia, Inc., a wholly owned
subsidiary, to ABC Networks, Inc., a privately held U.S. company. Pursuant to
the terms of the transaction, ABC Networks, Inc. acquired 100% of the
outstanding common stock of IceWEB, Virginia, Inc.
The
aggregate sales price consisted of the following:
|
Common
stock issued to purchaser
|
|
$
|
80,000
|
|
|
Net
book value of disposed subsidiary
|
|
|
(2,746,236
|
)
|
|
|
|
$
|
(2,666,236
|
)
|
The
following table summarizes the estimated fair values of IceWeb Virginia’s assets
and liabilities disposed of at the date of the sale:
|
Intangible
assets, net
|
|
$
|
(53,565
|
)
|
|
IceWEB,
Inc. common stock
|
|
|
(80,000
|
)
|
|
Accounts
payable and accrued liabilities
|
|
|
2,799,801
|
|
|
Estimated
gain on the sale
|
|
$
|
2,666,236
|
|
ICEWEB,
INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2010
NOTE 6 - NOTES
PAYABLE
Sand Hill Finance,
LLC
On
December 19, 2005, the Company entered into a Financing Agreement with Sand Hill
Finance, LLC pursuant to which, together with related amendments, the Company
may borrow up to 80% on the Company’s accounts receivable balances up to a
maximum of $1,800,000. In conjunction with the acquisition of Inline Corporation
in December, 2008, the lending limit on the credit facility was increased to
$2,750,000. In addition, the Company and Sand Hill Finance, LLC entered into a
36 month term note agreement in the amount of $1,000,000. Amounts borrowed under
the Financing Agreement are secured by a first security interest in
substantially all of the Company’s assets. At June 30, 2010, the principal
amount due under the Financing Agreement amounted to $1,753,294.
In
November, 2008, in connection with the term note the Company executed a
convertible debenture agreement with Sand Hill Finance, LLC in the amount of
$1,170,767. The debenture bears interest at 18% and will allow Sand Hill
Finance, LLC to convert the outstanding obligation into shares of IceWEB common
stock at a fixed floor conversion price of $0.30 per share. The principal amount
due under the convertible debenture amounted to $1,057,554 at June 30,
2010.
Interest
on the accounts receivable-based borrowings is payable at a rate of 1.75% per
month on the average loan balance outstanding during the year, equal to an
annual interest of approximately 21% per year. The Company also agreed to pay an
upfront commitment fee of 1% of the credit line upon signing the Financing
Agreement, half of which was due and paid upon signing (amounting to $9,000) and
half of which is due on the first anniversary of the Financing Agreement. In
addition, the Company is obligated to pay a commitment fee of 1% of the credit
limit annually, such amounts are payable on the anniversary of the
agreement.
In
connection with the Financing Agreement, the Company issued Sand Hill Finance,
LLC, a seven-year common stock purchase warrant to purchase 25,000 shares of our
common stock at an exercise price of $1.00 per share. The exercise price was
subsequently reduced to $0.50 per share pursuant to Warrant Amendment Agreement
which was executed in conjunction with the convertible debenture. The warrant
contains a cashless exercise provision which means that at the option of the
holder, the warrant is convertible into a number of shares of our common stock
as determined by dividing the aggregate fair market value of the Company’s
common stock minus the aggregate exercise price of the warrant by the fair
market value of one share of common stock. The number of shares issuable upon
the exercise of the warrant and the exercise price are subject to adjustment in
the event of stock dividends, stock splits and reclassifications. The fair value
of the warrant of $16,250 has been recorded as an addition to paid-in capital
and interest expense during the year ended September 30, 2008.
In
connection with the term note, the Company issued Sand Hill Finance, LLC a
seven-year common stock purchase warrant to purchase 120,000 shares of our
common stock at an exercise prices $1.00 per share. The exercise price was
subsequently reduced to $0.50 per share pursuant to Warrant Amendment Agreement
which was executed in conjunction with the convertible debenture. The warrant
contains a cashless exercise provision which means that at the option of the
holder, the warrant is convertible into a number of shares of our common stock
as determined by dividing the aggregate fair market value of the Company’s
common stock minus the aggregate exercise price of the warrant by the fair
market value of one share of common stock. The number of shares issuable upon
the exercise of the warrant and the exercise price are subject to adjustment in
the event of stock dividends, stock splits and reclassifications. The fair value
of the warrant of $13,587 has been recorded as an addition to paid-in capital
and deferred finance costs during the year ended September 30,
2008.
ICEWEB,
INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2010
NOTE
6 - NOTES PAYABLE (continued)
The
Financing Agreement has a term of one year, subject to mutual extension by both
parties. As a result, the balance due to Sand Hill Finance, LLC is classified as
a current liability on the accompanying consolidated balance sheet.
The terms
of the Financing Agreement also restrict the Company from undertaking certain
transactions without the written consent of the creditor including (i) permit or
suffer a change in control involving 20% of its securities, (ii) acquire assets,
except in the ordinary course of business, involving payment of $100,000 or
more, (iii) sell, lease, or transfer any of its property except for sales of
inventory and equipment in the ordinary course of business, (iv) transfer, sell
or license any intellectual property, (v) declare or pay a dividend on stock,
except payable in the form of stock dividends (vi) incur any indebtedness other
than trade credit in the ordinary course of business and (vii) permit any lien
or security interest to attach to any collateral.
Third
party guarantee - In November 2006, the Company sold its interest in one of its
subsidiaries (Integrated Power Solutions, Inc. or IPS) to a shareholder of the
Company and related party. IPS is a party to the Financing Agreement and can
borrow against receivables transferred to Sand Hill Finance, LLC under the terms
of the Financing Agreement. The Company remains liable for any such amounts
borrowed under the Financing Agreement by IPS which is no longer under the
Company’s control. To date, IPS has not borrowed any funds under the Financing
Agreement.
In
August, 2008, the Company borrowed $187,500 from an accredited investor. The
note bears interest at 16% and had a term of four months, and can be repaid in
either cash or IceWEB common stock. As of December 31, 2008 the Company had
repaid the full amount of the note through the sale of 2,226,101 shares of
Iceweb common stock.
NOTE
7 - EQUIPMENT FINANCING PAYABLE
On July
6, 2006, we entered into a sale and leaseback agreement with respect to certain
computer and office equipment. We received gross proceeds of $300,000 from the
sale of the equipment to a third party. As part of the same transaction, we
entered into an agreement to lease the equipment back from the third party for
36 monthly rent payments of $10,398 until August 2009. We are accounting for
this equipment financing arrangement as a capital lease. In connection with the
agreement, we made an initial security deposit of $30,000. The equipment had a
net book value of $37,846 on the date of the transaction. In connection with the
financing, we did not record any gain or loss. Imputed interest on this
financing is 20% per annum. This agreement terminated in August,
2009. We are in default under this agreement, and the remaining
estimated amount owed under this agreement is included in accounts payable and
accrued liabilities on the accompanying balance sheet.
NOTE
8 - CONCENTRATION OF CREDIT RISK
Bank
Balances
The
Company maintains its cash bank deposits at various financial institutions
which, at times, may exceed federally insured limits. Accounts are guaranteed by
the Federal Deposit Insurance Corporation (FDIC) up to $250,000. The
Company has not experienced any losses in such accounts.
ICEWEB,
INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2010
(a)
Summary of Investments
The
following tables summarize the Company’s investments at June 30,
2010:
|
|
|
Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Fair
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Publicly
traded equity securities
|
|
$ |
48,000 |
|
|
$ |
752,000 |
|
|
$ |
- |
|
|
$ |
800,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
48,000 |
|
|
$ |
752,000 |
|
|
$ |
- |
|
|
$ |
800,000 |
|
(b)
Gains and Losses on Investments
The
following table summarizes the realized net gains (losses) associated with the
Company’s investments:
|
|
|
Three
Months Ended
|
|
|
Nine
months Ended
|
|
|
|
|
June
30
|
|
|
June
30
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
gains/(loss) on investments in publicly traded equity
securities
|
|
$ |
(1,120,000 |
) |
|
$ |
- |
|
|
$ |
752,000 |
|
|
$ |
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
gains on investments
|
|
$ |
(1,120,000 |
) |
|
$ |
- |
|
|
$ |
752,000 |
|
|
$ |
- |
|
We
categorize the securities as investments in marketable securities available for
sale. These securities are quoted either on an exchange or
inter-dealer quotation (pink sheet) system. The securities are restricted and
cannot be readily resold by us absent a registration of those securities under
the Securities Act of 1933 (the “Securities Act”) or the availabilities of an
exemption from the registration requirements under the Securities Act. Our
policy is to liquidate the securities on a regular basis. As these
securities are often restricted, we are unable to liquidate them until the
restriction is removed. Unrealized gains or losses on marketable
securities available for sale a are recognized on a quarterly basis as an
element of comprehensive income based on changes in the fair value of the
security. Once liquidated, realized gains or losses on the sale of marketable
securities available for sale are reflected in our net income for the period in
which the security was liquidated.
Under
the guidance of ASC 320, “Investments”, we periodically evaluate
other-than-temporary impairment (OTTI) of securities to determine whether a
decline in their value is other than temporary. Management utilizes
criteria such as the magnitude and duration of the decline, in addition to the
reasons underlying the decline, to determine whether the loss in value is other
than temporary. The term “other-than-temporary” is not intended to indicate that
the decline is permanent. It indicates that the prospects for a near
term recovery of value are not necessarily favorable, or that there is a lack of
evidence to support fair values equal to, or greater than, the carrying value of
the investment. Once a decline in value is determined to be other than
temporary, the value of the security is reduced and a corresponding impairment
charge to earnings is recognized. In the assessment of OTTI for
various securities at September 30, 2009 the guidance in ASC 320, “the
Investment-Debt and Equity Securities,” is carefully
followed.
There
were no impairment charges on investments in publicly traded equity securities
for the nine months ended June 30, 2010 or for the nine months ended June 30,
2009.
The
Company has evaluated its publicly traded equity securities as of June 30, 2010,
and has determined that there were no unrealized losses that indicate an
other-than-temporary impairment. This determination was based on several
factors, which include the length of time and extent to which fair value has
been less than the cost basis and the financial condition and near-term
prospects of the issuer, and the Company’s intent and ability to hold the
publicly traded equity securities for a period of time sufficient to allow for
any anticipated recovery in market value.
ICEWEB,
INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2010
NOTE
10- COMPREHENSIVE INCOME (LOSS)
Comprehensive
income is comprised of net income and other comprehensive income or loss. Other
comprehensive income or loss refers to revenue, expenses, gains and losses that
under accounting principles generally accepted in the United States are included
in comprehensive income but excluded from net income as these amounts are
recorded directly as an adjustment to stockholders’ equity.
Our other
comprehensive income consists of unrealized gains on marketable securities
available for sale of $752,000.
NOTE
11 – COMMITMENTS
We lease
office space in Sterling, Virginia under a two-year operating lease that expires
on June 30, 2011. The office lease agreement has certain escalation
clauses and renewal options. Additionally, we have lease agreements for computer
equipment and an office copier/fax machine. Future minimum rental payments
required under these operating leases are as follows:
|
Years
ending September 30:
|
|
|
|
|
2010
(remaining three months)
|
|
$
|
18,806
|
|
|
2011
|
|
|
37,611
|
|
|
2012
|
|
|
-
|
|
|
2013
|
|
|
-
|
|
|
2014
and thereafter
|
|
|
-
|
|
|
|
|
$
|
56,417
|
|
NOTE
12 - STOCKHOLDERS’ EQUITY
On May
18, 2010 we executed an Exclusive Finders’ Agreement pursuant to which the
Finder acted as the exclusive Finder with respect to sales by us in a private
placement transaction of up to $5 million in aggregate principal amount of
Equity, Equity-related or debt securities. In the aggregaten in
connection with the finders’ fee agreemen, we sold 13,080,000 units in exchange
for gross proceeds of $2,316,000. These sales were made in a private
transaction exempt from registration under the Securities Act of 1933 in
reliance on an exemption provided by Section 4(2) of the Act and Regulation D
thereunder.
Jesup
& Lamont Securities Incorporated, a broker-dealer and member of FINRA, acted
as finder for us in the Offering. Under the terms of a Finder’s Agreement
with the firm, we paid Jesup & Lamont Securities Incorporated a fee of
$162,370 and issued them one-year common stock purchase warrants to purchase an
aggregate of 877,100 shares of our common stock at an exercise price of $0.40
per share. In addition, we paid Jesup & Lamont Securities
Incorporated legal expenses totaling $25,000 incurred in the preparation of the
various transactional documents. We are using the net proceeds of this
offering for general working capital.
Terms of
the private placement
We
offered for sale restricted stock units, each Restricted Stock Unit (“Unit”)
being defined as one (1) share of our Common Stock (the “Shares”) and a
warrant (the “Warrants”) to purchase an additional 0.50 shares of our
common stock. The Warrants have a term of twelve (12) months, with an
exercise price of $0.40/share. The Warrant is callable by us in the event
the closing price of our Common Stock on the OTCBB exchange closes above
$0.50/share for ten (10) consecutive trading days.
Under the
terms of the Securities Purchase Agreement we also indemnified the purchasers
and each of their officers, directors, shareholders, partners, employees, agents
and control persons from any losses or damages as a result of a breach of the
agreement by us or any action instituted against a purchaser by any of our
shareholders who are not an affiliate of the purchasers with respect to this
Offering, other than in the instance of gross negligence or fraud by the
purchaser.
During
the nine months ended June 30, 2010, in connection with the exercise of
24,087,800 stock options, the Company issued 24,087,800 shares of common stock
for cash proceeds of $1,898,374.
During
the nine months ended June 30, 2010, we issued 2,000,000 shares of common stock
at a per share price of $0.042, valued at $83,000 to an accredited investor. As
of June 30, 2010 the Company had not yet received the proceeds from the investor
and as a result the Company recorded the subscription receivable as a contra
equity account on its balance sheet. The issuance was exempt from registration
under the Securities Act of 1933 in reliance on an exemption provided by Section
4(2) of that act.
During
the nine months ended June 30, 2010, we issued 1,000,000 shares of common stock
at a per share price of $0.15, valued at $150,000 to an accredited investor as
part of a settlement agreement to settle litigation. The issuance was
exempt from registration under the Securities Act of 1933 in reliance on an
exemption provided by Section 4(2) of that act.
During
the nine months ended June 30, 2010, we issued 300,000 shares of common stock at
a per share price of $0.20, valued at $60,000 to an accredited investor as part
of a settlement agreement to settle litigation. The issuance was
exempt from registration under the Securities Act of 1933 in reliance on an
exemption provided by Section 4(2) of that act.
During
the nine months ended June 30, 2010, we issued 150,000 shares of common stock at
an average per share price of $0.269, valued at $40,285 to an accredited
investor for investor relations activity. The issuance was exempt
from registration under the Securities Act of 1933 in reliance on an exemption
provided by Section 4(2) of that act.
During
the nine months ended June 30, 2010, we sold 1,000,000 shares of common stock,
valued at $130,000 to a Director for $40,000, and recognized stock based
compensation expense of $90,000. The issuance was exempt from registration under
the Securities Act of 1933 in reliance on an exemption provided by Section 4(2)
of that act.
During
the nine months ended June 30, 2010, we sold 1,500,000 shares of common stock at
a per share price of $0.10, valued at $150,000 to an accredited investor, and
the issuance was exempt from registration under the Securities Act of 1933 in
reliance on an exemption provided by Section 4(2) of that act.
During
the nine months ended June 30, 2010, we issued 1,000,000 shares of common stock
at a per share price of $0.17, valued at $170,000 to an accredited investor. The
issuance was exempt from registration under the Securities Act of 1933 in
reliance on an exemption provided by Section 4(2) of that act.
During
the nine months ended June 30, 2010 we issued 9,001,687 shares of restricted
common stock at a per share price of $0.089, valued at $802,865, in lieu of pay
to our employees. The issuances were exempt from registration under
the Securities Act of 1933 in reliance on an exemption provided by Section 4(2)
of that act.
ICEWEB,
INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2010
NOTE
12 - STOCKHOLDERS’ DEFICIT (continued)
Common
Stock Warrants
A summary
of the status of the Company’s outstanding common stock warrants as of June 30,
2010 and changes during the period ending on that date is as
follows:
|
|
|
|
|
|
Weighted
Average
|
|
| |
|
Number
of
|
|
|
Exercise
|
|
|
|
|
Warrants
|
|
|
Price
|
|
|
Common Stock
Warrants
|
|
|
|
|
|
|
|
Balance
at beginning of year
|
|
|
225,000 |
|
|
$ |
1.78 |
|
|
Granted
|
|
|
7,992,100 |
|
|
|
0.40 |
|
|
Exercised
|
|
|
— |
|
|
|
— |
|
|
Forfeited
|
|
|
(75,000 |
) |
|
|
6.00 |
|
|
Balance
at end of period
|
|
|
8,142,100 |
|
|
|
0.40 |
|
|
|
|
|
|
|
|
|
|
|
|
Warrants
exercisable at end of period
|
|
|
8,142,100 |
|
|
|
0.40 |
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average fair value of warrants granted or re-priced during the
period
|
|
|
|
— |
|
The
following table summarizes information about common stock warrants outstanding
at June 30, 2010:
| |
|
|
Warrants Outstanding
|
|
|
Warrants
Exercisable
|
|
| |
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
| |
|
|
Number
|
|
Average
|
|
Weighted
|
|
|
Number
|
|
|
Weighted
|
|
|
Range
of
|
|
|
Outstanding
at
|
|
Remaining
|
|
Average
|
|
|
Exercisable
at
|
|
|
Average
|
|
|
Exercise
|
|
|
June
30,
|
|
Contractual
|
|
Exercise
|
|
|
June
30,
|
|
|
Exercise
|
|
|
Price
|
|
|
2010
|
|
Life
|
|
Price
|
|
|
2010
|
|
|
Price
|
|
| $ |
.20 |
|
|
|
200,000 |
|
0.82
Years
|
|
$ |
0.20 |
|
|
|
200,000 |
|
|
$ |
0.20 |
|
| $ |
.40 |
|
|
|
7,792,100 |
|
0.9
Years
|
|
$ |
0.40 |
|
|
|
7,792,100 |
|
|
$ |
0.40 |
|
| $ |
.50 |
|
|
|
145,000 |
|
3.59
Years
|
|
$ |
0.50 |
|
|
|
145,000 |
|
|
$ |
0.50 |
|
| $ |
2.00 |
|
|
|
5,000 |
|
1.06
Years
|
|
$ |
2.00 |
|
|
|
5,000 |
|
|
$ |
2.00 |
|
| |
|
|
|
|
8,142,100 |
|
|
|
$ |
0.40 |
|
|
|
8,142,100 |
|
|
$ |
0.40 |
|
NOTE
13 - STOCK OPTION PLAN
In August
2000, the Board of Directors adopted the 2000 Management and Director Equity
Incentive and Compensation Plan (the “Plan”) for directors, officers and
employees that provides for non-qualified and incentive stock options to be
issued enabling holders thereof to purchase common shares of the Company at
exercise prices determined by the Company’s Board of Directors. The Plan was
approved by the Company’s stockholders in August 2001.
The
purpose of the Plan is to advance the Company’s interests and those of its
stockholders by providing a means of attracting and retaining key employees,
directors and consultants. In order to serve this purpose, the Company believes
the Plan encourages and enables key employees, directors and consultants to
participate in its future prosperity and growth by providing them with
incentives and compensation based on its performance, development and financial
success. Participants in the Plan may include the Company’s officers, directors,
other key employees and consultants who have responsibilities affecting our
management, development or financial success.
ICEWEB,
INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2010
NOTE
13 - STOCK OPTION PLAN (continued)
Awards
may be made under the Plan in the form of Plan options, shares of the Company’s
common stock subject to a vesting schedule based upon certain performance
objectives (“Performance Shares”) and shares subject to a vesting schedule based
on the recipient’s continued employment (“restricted shares”). Plan options may
either be options qualifying as incentive stock options under Section 422 of the
Internal Revenue Code of 1986, as amended or options that do not so qualify. Any
incentive stock option granted under the Plan must provide for an exercise price
of not less than 100% of the fair market value of the underlying shares on the
date of such grant, but the exercise price of any incentive option granted to an
eligible employee owning more than 10% of our common stock must be at least 110%
of such fair market value as determined on the date of the grant. Only persons
who are officers or other key employees are eligible to receive incentive stock
options and performance share grants. Any non-qualified stock option granted
under the Plan must provide for an exercise price of not less than 50% of the
fair market value of the underlying shares on the date of such
grant.
As
amended in April, 2008, the Plan permits the grant of options and shares for up
to 10,000,000 shares of the Company’s common stock. The Plan terminates 10 years
from the date of the Plan’s adoption by the Company’s stockholders.
The term
of each Plan option and the manner in which it may be exercised is determined by
the Board of Directors, provided that no Plan option may be exercisable more
than three years after the date of its grant and, in the case of an incentive
option granted to an eligible employee owning more than 10% of the Company’s
common stock, no more than five years after the date of the grant. The exercise
price of the stock options may be paid in either cash, or delivery of
unrestricted shares of common stock having a fair market value on the date of
delivery equal to the exercise price, or surrender of shares of common stock
subject to the stock option which has a fair market value equal to the total
exercise price at the time of exercise, or a combination of the foregoing
methods.
The fair
value of stock options granted was estimated at the date of grant using the
Black-Scholes options pricing model. The Company used the following assumptions
for determining the fair value of options granted under the Black-Scholes option
pricing model:
|
|
|
June
30,
|
|
|
|
2010
|
|
2009
|
|
Expected
volatility
|
|
135%
- 325%
|
|
87%
- 198%
|
|
Expected
term
|
|
0 -
5 Years
|
|
1 -
5 Years
|
|
Risk-free
interest rate
|
|
0.03%
- 0.45%
|
|
2.34%
- 2.45%
|
|
Forfeiture
Rate
|
|
0%
- 45%
|
|
0%
- 45%
|
|
Expected
dividend yield
|
|
0%
|
|
0%
|
ICEWEB,
INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2010
NOTE
13 - STOCK OPTION PLAN (continued)
The
expected volatility was determined with reference to the historical volatility
of the Company’s stock. The Company uses historical data to estimate option
exercise and employee termination within the valuation model. The expected term
of options granted represents the period of time that options granted are
expected to be outstanding. The risk-free interest rate for periods within the
contractual life of the option is based on the U.S. Treasury rate in effect at
the time of grant.
For the
nine months ended June 30, 2010, total stock-based compensation charged to
operations for option-based arrangements amounted to$1,288,156. At June 30,
2010, there was approximately $493,907 of total unrecognized compensation
expense related to non-vested option-based compensation arrangements under the
Plan.
A summary
of the status of the Company’s outstanding stock options as of June 30, 2010 and
changes during the period ending on that date is as follows:
|
|
|
|
|
|
Weighted
Average
|
|
| |
|
Number
of
|
|
|
Exercise
|
|
|
|
|
Options
|
|
|
Price
|
|
|
Stock
options
|
|
|
|
|
|
|
|
Balance
at beginning of period
|
|
|
10,944,483 |
|
|
$ |
0.27 |
|
|
Granted
|
|
|
25,750,000 |
|
|
|
0.08 |
|
|
Exercised
|
|
|
(24,087,800 |
) |
|
|
0.08 |
|
|
Forfeited
|
|
|
(549,479 |
) |
|
|
0.22 |
|
|
Balance
at end of period
|
|
|
12,057,204 |
|
|
$ |
0.27 |
|
|
|
|
|
|
|
|
|
|
|
|
Options
exercisable at end of period
|
|
|
9,775,937 |
|
|
$ |
0.30 |
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average fair value of options granted during the year
|
|
|
|
|
|
$ |
0.08 |
|
The
following table summarizes information about employee stock options outstanding
at June 30, 2010:
| |
|
|
Options Outstanding
|
|
|
Options
Exercisable
|
|
| |
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
| |
|
|
Number
|
|
Average
|
|
Weighted
|
|
|
Number
|
|
|
Weighted
|
|
|
Range
of
|
|
|
Outstanding
at
|
|
Remaining
|
|
Average
|
|
|
Exercisable
at
|
|
|
Average
|
|
|
Exercise
|
|
|
June
30,
|
|
Contractual
|
|
Exercise
|
|
|
June
30,
|
|
|
Exercise
|
|
|
Price
|
|
|
2010
|
|
Life
|
|
Price
|
|
|
2010
|
|
|
Price
|
|
| $ |
0.001-
$ 0.25 |
|
|
|
8,072,200 |
|
1.52
Years
|
|
$ |
0.11 |
|
|
|
5,997,933 |
|
|
$ |
0.11 |
|
| |
0.30-0.48 |
|
|
|
695,000 |
|
1.39
Years
|
|
|
0.43 |
|
|
|
535,600 |
|
|
|
0.45 |
|
| |
0.51-0.60 |
|
|
|
2,475,004 |
|
2.15
Years
|
|
|
0.58 |
|
|
|
2,427,554 |
|
|
|
0.59 |
|
| |
0.61-0.80 |
|
|
|
815,000 |
|
1.34
Years
|
|
|
0.68 |
|
|
|
814,850 |
|
|
|
0.70 |
|
| |
|
|
|
|
12,057,204 |
|
|
|
$ |
0.24 |
|
|
|
9,775,937 |
|
|
$ |
0.30 |
|
ICEWEB,
INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2010
NOTE
14 - SEGMENT REPORTING
Although
the Company has two operating divisions, separate segment data has not been
presented as they meet the criteria for aggregation as permitted by ASC Topic
280, “Segment Reporting” (formerly Statement of Financial Accounting Standards
(SFAS) No. 131, “Disclosures About Segments of an Enterprise and Related
Information”).
Our chief
operating decision-maker is considered to be our Chief Executive Officer (CEO).
The CEO reviews financial information presented on a consolidated basis for
purposes of making operating decisions and assessing financial performance. The
financial information reviewed by the CEO is identical to the information
presented in the accompanying consolidated statements of operations. Therefore,
the Company has determined that it operates in a single operating segment,
specifically, web communications services. For the periods ended June 30, 2010
and 2009 all material assets and revenues of the Company were in the United
States.
NOTE
15 – SUBSEQUENT EVENTS
For
purposes of determining whether a post-balance sheet event should be evaluated
to determine whether it has an effect on the financial statements for the three
months ended June 30, 2010, subsequent events were evaluated by the Company
through the date the unaudited consolidated financial statements for the three
months ended June 30, 2010, were issued.
No
recognized or non-recognized subsequent events were noted.
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The
following analysis of our consolidated financial condition and results of
operations for the three and nine months ended June 30, 2010 and 2009 should be
read in conjunction with the consolidated financial statements, including
footnotes, appearing elsewhere in this quarterly report.
OVERVIEW
Since
2005, the Company has been focused on serving the commercial and federal markets
with network security products and proprietary on-line software solutions. In
fiscal 2008, the Company acquired INLINE Corporation (now known as IceWEB
Storage Corporation), a data storage manufacturing company.
In March,
2009, the Company sold its wholly owned subsidiary, IceWEB Virginia, Inc. to an
unrelated 3 rd party,
and in the process exited its low-margin IT re-seller business products business
to further focus on the higher margin data storage manufacturing
business.
At the
close of fiscal year 2009, the Company has three key product
offerings:
|
|
|
IceWEB
Unified Network Storage Solutions
|
|
|
|
Purpose
Built Network/Data Appliances
|
|
|
|
Cloud
Computing Products/Services
|
In
addition, we offer small and medium sized businesses (“SMBs”) hosted access to
enterprise-class applications delivered via the Internet for a reasonable
monthly fee. These rapidly growing Cloud Computing offerings include such hosted
applications as Microsoft Exchange Server, Sharepoint, BlackBerry Enterprise
Server, Good Messaging Server, SPAM and Virus protection, and advanced Email
Encryption services. Our current customer base consists of nearly 900
organizations worldwide in both the public and private sectors.
|
|
|
On
November 15, 2006, the Company acquired the assets of True North Federal
Solutions Group for $350,000 of which $250,000 was paid in cash and
$100,000 due upon future terms of the agreement. Under the terms of the
agreement, IceWEB acquired the customer database, forecast, contract
renewals, and GSA schedule of True North Federal. The revenue generated to
IceWEB from this division since the acquisition, exceeded the revenue
from the discontinued PatriotNet and IPS
operations.
|
|
|
|
On
December 22, 2007, we acquired 100% of the outstanding stock of Inline
Corporation for $2,412,731 in cash, plus 503,356 shares of IceWEB common
stock valued at $276,846, the fair market value on the date of
acquisition. The acquisition was accounted for using the purchase method
of accounting. The results of operations are included in the financial
statements from the date of acquisition. Inline is a leading provider of
intelligent enterprise data storage solutions and services for the
geospatial intelligence marketplace. Inline’s proprietary products include
reliable, high performance Storage Area Network Solutions, Network
Attached Storage, and Direct Attached Storage and the rapidly expanding
OEM Storage Centric Appliances. Today, Inline has developed its fifth
generation of advanced data storage solutions, marketed under the brands
TruEnterprise and
FileStorm. All
Inline systems function in a heterogeneous operating system environment,
including Windows, UNIX and Linux. The purchase of Inline Corporation
included the acquisition of assets of $2,688,795, and liabilities of
$614,668.
|
|
|
|
On
June 30, 2009, we sold our interest in IceWEB Virginia, Inc. (dba IceWEB
Solutions Group, which included the assets acquired from True North
Federal Solutions Group) subsidiary to an unrelated third party in
exchange for the assumption of approximately $3.2 million in liabilities
and 1,000,000 shares of our common stock valued at $80,000. IceWEB
Virginia, Inc. was a provider of computer network security products and
services such as access control, wide area network optimization, content
filtering, email security, intrusion detection, to the Federal, State, and
Local government entities. This subsidiary accounted for 43% and 91% of
our revenues for fiscal years 2009 and 2008, respectively. We sold this
business in order for us to be able to focus on our high margin storage
business.
|
We
generate revenues from the manufacture and sale of data storage appliances and
servers, the sale of software services, application development, network
integrated technology, and third party hardware sales. We believe that the key
factors to our continued growth and profitability include the
following:
|
|
|
Continued
focus on the GIS market and expanding our channels of distribution with
OEM partners
|
| |
|
|
|
|
|
Continued
investment in product development and research efforts
|
| |
|
|
|
|
|
Raising
approximately $3 million of additional working capital to expand our
marketing, research and development, and restructure our
debt.
|
| |
|
|
|
|
|
Hiring
additional qualified, technical employees, and
|
| |
|
|
|
|
|
Improving
our internal financial reporting systems and
processes.
|
CRITICAL
ACCOUNTING POLICIES
The
discussion and analysis of our financial condition and results of operations are
based upon our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States.
The preparation of these consolidated financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses, and related disclosure of contingent assets and
liabilities. On an on-going basis, we evaluate our estimates based on historical
experience and on various other assumptions that are believed to be reasonable
under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
A summary
of significant accounting policies is included in Note 1 to the audited
consolidated financial statements included for the year ended September 30, 2009
and notes thereto contained on Form 10-K of the Company as filed with the
Securities and Exchange Commission. Management believes that the application of
these policies on a consistent basis enables us to provide useful and reliable
financial information about the company’s operating results and financial
condition.
Financial
Reporting Release No. 60, which was released by the U.S. Securities and Exchange
Commission, encourages all companies to include a discussion of critical
accounting policies or methods used in the preparation of financial statements.
Our consolidated financial statements include a summary of the significant
accounting policies and methods used in the preparation of our consolidated
financial statements. Management believes the following critical accounting
policies affect the significant judgments and estimates used in the preparation
of the financial statements.
Use of
Estimates - Management’s Discussion and Analysis or Plan of Operations is based
upon our unaudited consolidated financial statements, which have been prepared
in accordance with accounting principles generally accepted in the United States
of America. The preparation of these consolidated financial statements requires
management to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues, and expenses, and related disclosure of
contingent assets and liabilities. On an ongoing basis, management evaluates
these estimates, including those related to allowances for doubtful accounts
receivable, the carrying value of property and equipment and long-lived assets,
and the value of stock-option based compensation. Management bases these
estimates on historical experience and on various other assumptions that are
believed to be reasonable under the circumstances, the results of which form the
basis of making judgments about the carrying value of assets and liabilities
that are not readily apparent from other sources. Actual results may differ from
these estimates under different assumptions or conditions.
Accounting
for Stock Based Compensation - Effective October 1, 2005, we adopted the fair
value recognition provisions of ASC Topic 718, “Compensation – Stock
Compensation (Formerly SFAS No. 123 (R), “Share-Based Payments using
the modified-prospective-transition method. ASC Topic 718 establishes the
financial accounting and reporting standards for stock-based compensation plans.
As required by ASC Topic 718, we recognize the cost resulting from all
stock-based payment transactions including shares issued under our stock option
plans in the financial statements. The adoption of ASC Topic 718 will have a
negative impact on our future results of operations.
Revenue
Recognition - We follow the guidance of Accounting Standards Codification (ASC)
Topic 605, “Revenue Recognition” (formerly Staff Accounting Bulletin (SAB)
No. 104, “Revenue Recognition”) for revenue recognition. In general, we
record revenue when persuasive evidence of an arrangement exists, services have
been rendered or product delivery has occurred, the sales price to the customer
is fixed or determinable, and collectability is reasonably assured. The
following policies reflect specific criteria for our various revenues
streams:
|
|
|
Revenues
from sales of products are generally recognized when products are shipped
unless the Company has obligations remaining under sales or licensing
agreements, in which case revenue is either deferred until all obligations
are satisfied or recognized ratably over the term of the
contract.
|
|
|
|
Revenue
from services is recorded as it is earned. Commissions earned on third
party sales are recorded in the month in which contracts are awarded.
Customers are generally billed every two weeks based on the units of
production for the project. Each project has an estimated total which is
based on the estimated units of production and agreed upon billing
rates.
|
|
|
|
Amounts
billed in advance of services being provided are recorded as deferred
revenues and recognized in the consolidated statement of operations as
services are provided.
|
THREE
AND NINE MONTHS ENDED JUNE 30, 2010 COMPARED TO THE THREE AND NINE MONTHS ENDED
JUNE 30, 2009
The
following table provides an overview of certain key factors of our results of
operations for the three and nine months ended June 30, 2010 as compared to the
three and nine months ended June 30, 2009:
|
|
|
Three
months ended
June
30,
|
|
|
Nine
months ended
June
30,
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
Net
Revenues
|
|
$ |
1,203,878 |
|
|
$ |
826,182 |
|
|
$ |
2,815,900 |
|
|
$ |
3,936,472 |
|
|
Cost
of sales
|
|
|
613,287 |
|
|
|
404,641 |
|
|
|
1,343,006 |
|
|
|
2,478,707 |
|
|
Operating
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketing
and selling
|
|
|
404,443 |
|
|
|
357,596 |
|
|
|
1,189,661 |
|
|
|
864,184 |
|
|
Depreciation
and amortization
|
|
|
165,585 |
|
|
|
85,793 |
|
|
|
495,984 |
|
|
|
432,839 |
|
|
Research
and development
|
|
|
167,061 |
|
|
|
94,020 |
|
|
|
353,092 |
|
|
|
250,450 |
|
|
General
and administrative
|
|
|
1,130,005 |
|
|
|
688,154 |
|
|
|
3,783,654 |
|
|
|
1,739,492 |
|
|
Total
operating expenses
|
|
|
1,867,094 |
|
|
|
1,225,563 |
|
|
|
5,822,391 |
|
|
|
3,286,965 |
|
|
Loss
from operations
|
|
|
(1,276,503 |
) |
|
|
(804,022 |
) |
|
|
(4,349,497 |
) |
|
|
(1,829,200 |
) |
|
Total
other income (expense)
|
|
|
(147,240 |
) |
|
|
(144,884 |
) |
|
|
(422,196 |
) |
|
|
2,943,200 |
|
|
Net
income (loss)
|
|
$ |
(1,423,743 |
) |
|
$ |
(948,906 |
) |
|
$ |
(4,771,693 |
) |
|
$ |
1,114,000 |
|
Other Key
Indicators:
|
|
|
Three
months ended
|
|
|
Nine
months ended
|
|
|
|
|
June
30,
|
|
|
June
30,
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
Cost
of sales as a percentage of revenues
|
|
|
50.94 |
% |
|
|
48.98 |
% |
|
|
47.69 |
% |
|
|
62.97 |
% |
|
Gross
profit margin
|
|
|
49.06 |
% |
|
|
51.02 |
% |
|
|
52.31 |
% |
|
|
37.03 |
% |
|
General
and administrative expenses as a percentage of revenues
|
|
|
93.86 |
% |
|
|
83.29 |
% |
|
|
134.37 |
% |
|
|
44.19 |
% |
|
Total
operating expenses as a percentage of revenues
|
|
|
155.09 |
% |
|
|
148.34 |
% |
|
|
206.77 |
% |
|
|
83.50 |
% |
Nine
Month Period ended June 30, 2010
Revenues
For the
nine months ended June 30, 2010, we reported revenues of $2,815,900 as compared
to revenues of $3,936,472 for the nine months ended June 30, 2009, a decrease of
$1,120,572 or approximately 28.5%. The decrease is primarily due to the
Company’s focus on our high margin data storage business unit and the related
decrease in our third party product sales through IceWEB Solutions Group.
Storage revenue accounted for approximately 94.7% of our revenue for the nine
month period ended June 30, 2010 as compared to 53% in the year-ago
period.
Cost
of Sales
Our cost
of sales consists primarily of component parts for the manufacture of our
storage products. For the nine months ended June 30, 2010, cost of sales was
$1,343,006, or approximately 47.7% of revenues, compared to $2,478,707, or
approximately 63% of revenues, for the nine months ended June 30, 2009. The
decrease in costs of sales as a percentage of revenue and the corresponding
increase in our gross profit margin for the nine months ended June 30, 2010 as
compared to the nine months ended June 30, 2009 was the result of improved mix
of higher margin storage products during the nine months ended June 30, 2010 as
a percentage of total revenue. We anticipate that our gross profit margins will
continue to improve through the balance of fiscal 2010.
Total
Operating Expenses
Our total
operating expenses increased approximately 77% to $5,822,391for the nine months
ended June 30, 2010 as compared to $3,286,965 for the nine months ended June 30,
2009. These changes include:
· Sales and marketing
expense. Sales and marketing expense includes salaries, commission,
occupancy, telephone, travel, and entertainment expenses for direct sales
personnel. For the nine months ended June 30, 2010, sales and
marketing costs were $1,189,661 as compared to $864,184 for the nine months
ended June 30, 2009, an increase of $325,477or approximately 38%. The increase
was due primarily to hiring additional sales and marketing personnel to support
our channel distribution sales and marketing approach during the nine months
ended June 30, 2010.
· Depreciation and
amortization expense. For the nine months ended June 30, 2010,
depreciation and amortization expense amounted to $495,894 as compared to
$432,839 for the nine months ended June 30, 2009, an increase of $63,145 or
15%.
· Research and
Development. For the nine months ended June 30, 2010, research and
development costs were $353,092 as compared to $250,450 for the nine months
ended June 30, 2009, an increase of $102,642 or approximately 41%.
· General and administrative
expense. For the nine months ended June 30, 2010, general and
administrative expenses were $3,783,654 as compared to $1,739,492 for the nine months
ended June 30, 2009, an increase of $2,044,162 or approximately 118%.
For the nine months ended June 30, 2010 and 2009 general and administrative
expenses consisted of the following:
|
|
|
Fiscal
Q3
|
|
|
Fiscal
Q3
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Occupancy
|
|
$ |
16,065 |
|
|
$ |
21,383 |
|
|
Consulting
|
|
|
172,872 |
|
|
|
70,415 |
|
|
Employee
compensation
|
|
|
2,958,365 |
|
|
|
1,324,193 |
|
|
Professional
fees
|
|
|
175,120 |
|
|
|
137,602 |
|
|
Internet/Phone
|
|
|
8,575 |
|
|
|
31,272 |
|
|
Travel/Entertainment
|
|
|
24,374 |
|
|
|
3,399 |
|
|
Investor
Relations
|
|
|
265,337 |
|
|
|
49,278 |
|
|
Insurance
|
|
|
34,761 |
|
|
|
26,889 |
|
|
Other
|
|
|
128,185 |
|
|
|
75,061 |
|
|
|
|
$ |
3,783,654 |
|
|
$ |
1,739,492 |
|
|
|
|
For
the nine months ended June 30, 2010, Occupancy expense decreased to
$16,065 as compared to $21,383. Occupancy expense is lower due to the
Company’s relocation to its manufacturing facility in Sterling,
Virginia.
|
| |
|
|
|
|
|
For
the nine months ended June 30, 2010, Consulting expense increased to
$172,872 as compared to $70,415. Consulting expense increased primarily as
a result of recruiting costs incurred to hire engineering, sale and
marketing personnel.
|
| |
|
|
|
|
|
For
the nine months ended June 30, 2010, salaries and related expenses
increased to $2,958,365 as compared to $1,324,193, an increase of
$$1,634,172. The increase is due primarily to an increase in non-cash
compensation expense of $1,779,332.
|
| |
|
|
|
|
|
For
the nine months ended June 30, 2010, Professional fees expense increased
to $175,120 as compared to $137,602. Professional fees expense increased
due to increase costs related to intellectual property patent applications
and other legal fees.
|
| |
|
|
|
|
|
For
the nine months ended June 30, 2010, travel and entertainment expense
increased to $24,374 as compared to $3,399. This increase is
primarily due to the increased travel by senior management related to
business development activities and investor relations.
|
| |
|
|
|
|
|
For
the nine months ended June 30, 2010 Other expense amounted to $128,185 as
compared to $75,061for the nine months ended June 30, 2009, an increase of
$53,124.
|
| |
|
|
|
|
|
For
the nine months ended June 30, 2010 Investor relations expense increased
to $265,337 as compared to $49,278 for the nine months ended June 30,
2009. The increase is due to increased investor relations
activity.
|
We
anticipate that general and administrative expenses will decline for the balance
of fiscal 2010, as we expect to incur lower of share-based
expenses.
LOSS
FROM OPERATIONS
We
reported a loss from operations of $4,349,497 for the nine months ended June 30,
2010 as compared to a loss from operations of $1,829,200 for the nine months
ended June 30, 2009, an increased loss of $2,520,297 or approximately
137.8%.
OTHER
INCOME (EXPENSES)
Gain from sale of
subsidiary. The gain on sale of subsidiary of $3,452,236 resulted from
the sale of IceWEB Virginia, Inc. in March, 2009. We did not have a
similar transaction in the nine month period ended June 30, 2010.
Interest Income. We
did not earn any interest income for the nine months ended June 30, 2010, as
compared to interest income of $1,142 in the nine month period ended June 30,
2009. Interest income represented interest earned on interest bearing
cash accounts.
Interest
Expense. For the nine months ended June 30, 2010, interest
expense amounted to $422,196 as compared to $510,178 for the nine months ended
June 30, 2009, a decrease of $87,982 or 17.2%. The decrease
in interest expense is primarily attributable to the decrease in borrowings and
certain interest bearing liabilities related to our notes payable. Also, during
the nine months ended June 30, 2010, we amortized deferred financing costs of
$13,265, as compared to $40,233 during the nine months ended June 30,
2009.
NET
INCOME/ LOSS
Our net
loss was $4,771,693 for the nine months ended June 30, 2010 compared to net
income of $1,114,000 for the nine months ended June 30, 2009.
Three
Month Period ended June 30, 2010
Revenues
For the
three months ended June 30, 2010, we reported revenues of $1,203,878 as compared
to revenues of $826,182 for the three months
ended June 30, 2009, a decrease of $377,696 or approximately
45.7%. The decrease is primarily due to the Company’s focus on our
high margin data storage business unit and the related decrease in our third
party product sales through IceWEB Solutions Group. For the three months ended
June 30, 2010, storage revenue accounted for approximately 95% of our revenue as
compared to 66% of our revenue during the three months ended June 30,
2009.
Cost
of Sales
Our cost
of sales consists of component parts for the manufacture of our storage
products. For the three months ended June 30, 2010, cost of sales was $613,287,
or approximately 51% of revenues, compared to $404,641, or approximately 49% of
revenues, for the three months ended June 30, 2009. The decrease in costs of
sales as a percentage of revenue and the corresponding increase in our gross
profit margin for the three months ended June 30, 2010 as compared to the three
months ended June 30, 2009 was the result of improved mix of higher margin
storage products during the three months ended June 30, 2010 as a percentage of
total revenue.
Total
Operating Expenses
Our total
operating expenses increased approximately 52.3% to $1,867,094 for the three
months ended June 30, 2010 as compared to $1,225,563 for the three months ended
June 30, 2009. These changes include:
· Sales and marketing
expense. For the three months ended June 30, 2010, sales and marketing
expenses were $404,443 as compared to $357,596 for the three months ended June
30, 2009, an increase of $46,847 or approximately 13.1%. The increase was due to
increased headcount and sales and marketing expense related to the roll-out of
our channel sales program during the three months ended June 30,
2010.
· Depreciation and
amortization expense. For the three months ended June 30, 2010,
depreciation and amortization expense amounted to $165,585 as compared to
$85,793 for the three months ended June 30, 2009, an increase of $79,792 or
93%.
· General and administrative
expense. For the three months ended June 30, 2010, general and
administrative expenses were $1,130,005 as compared to $688,154 for the three
months ended June 30, 2009, an increase of $441,851 or approximately 64.2%.
For the three months ended June 30, 2010 and 2009 general and administrative
expenses consisted of the following:
|
|
|
Fiscal
Q3
|
|
|
Fiscal
Q3
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Occupancy
|
|
$ |
5,403 |
|
|
$ |
13,517 |
|
|
Consulting
|
|
|
89,969 |
|
|
|
10,273 |
|
|
Employee
compensation
|
|
|
593,657 |
|
|
|
461,258 |
|
|
Professional
fees
|
|
|
120,571 |
|
|
|
123,408 |
|
|
Internet/Phone
|
|
|
3,427 |
|
|
|
5,551 |
|
|
Travel/Entertainment
|
|
|
23,858 |
|
|
|
3,400 |
|
|
Investor
Relations
|
|
|
235,374 |
|
|
|
29,500 |
|
|
Insurance
|
|
|
10,808 |
|
|
|
6,000 |
|
|
Other
|
|
|
46,938 |
|
|
|
35,247 |
|
|
|
|
$ |
1,130,005 |
|
|
$ |
688,154 |
|
|
|
|
For
the three months ended June 30, 2010, Occupancy expense increased to
$5,403 as compared to $13,517.
|
| |
|
|
|
|
|
For
the three months ended June 30, 2010, Consulting expense increased to
$89,969 as compared to $10,273, an increase of $79,696 or 775.8%.
Consulting expense increased as a result of increased support costs for
internal accounting systems.
|
| |
|
|
|
|
|
For
the three months ended June 30, 2010, salaries and related expenses
increased to $593,657 as compared to $461,258, an increase of $132,399.
The increase is due primarily to an increase in non-cash compensation
expense of $25,420, which is comprised of increased stock-based
compensation expense, and higher salaries.
|
| |
|
|
|
|
|
For
the three months ended June 30, 2010, Professional fees expense decreased
to $120,571 as compared to $123,408. Professional fees expense
increased primarily as a result of legal fees incurred related to business
development and on-going litigation activities.
|
| |
|
|
|
|
|
For
the three months ended June 30, 2010, travel and entertainment expense
increased to $23,858 as compared to $3,400. Travel and entertainment
expense increased due to increased business development and investor
relations activity.
|
| |
|
|
|
|
|
For
the three months ended June 30, 2010 Other expense amounted to $46,938 as
compared to $35,247 for the three months ended June 30, 2009, an increase
of $11,691. The increase was due primarily to increase hosting
fees and other headcount related expenses, as we have added resources to
support our channel sales strategy.
|
| |
|
|
|
|
|
For
the three months ended June 30, 2010 Investor relations expense increased
to $235,374 as compared to $29,500 for the three months ended June 30,
2009.
|
LOSS
FROM OPERATIONS
We
reported a loss from operations of $1,276,503 for the three months ended June
30, 2010 as compared to a loss from operations of $804,022 for the three months
ended June 30, 2009, an increase of $472,481or approximately 58.8%.
OTHER
INCOME (EXPENSES)
Interest Expense. For
the three months ended June 30, 2010, interest expense amounted to $147,240 as
compared to $144,884 for the three months ended June 30, 2009, an increase of
$2,356.
NET
INCOME/ LOSS
Our net
loss was $1,423,743 for the three months ended June 30, 2010 compared to a net
loss of $948,906 for the three months ended June 30, 2009.
LIQUIDITY
AND CAPITAL RESOURCES
Liquidity
is the ability of a company to generate funds to support its current and future
operations, satisfy its obligations and otherwise operate on an ongoing basis.
The following table provides an overview of certain selected balance sheet
comparisons between June 30, 2010 and September 30, 2009:
| |
|
June
30,
|
|
|
September
30,
|
|
|
$
|
|
|
%
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Change
|
|
|
Change
|
|
|
Working
Capital
|
|
$ |
(564,456 |
) |
|
$ |
(3,158,232 |
) |
|
$ |
2,593,776 |
|
|
|
(82.1 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
|
1,276,863 |
|
|
|
63,310 |
|
|
|
1,213,553 |
|
|
|
1916.9 |
% |
|
Marketable
Securities
|
|
|
800,000 |
|
|
|
- |
|
|
|
800,000 |
|
|
|
N/A |
|
|
Accounts
receivable, net
|
|
|
1,691,605 |
|
|
|
424,919 |
|
|
|
1,266,686 |
|
|
|
298.1 |
% |
|
Inventory
|
|
|
114,746 |
|
|
|
151,361 |
|
|
|
(36,615 |
) |
|
|
(24.2 |
%) |
|
Total
current assets
|
|
|
3,139,508 |
|
|
|
671,160 |
|
|
|
2,468,348 |
|
|
|
367.8 |
% |
|
Property
and equipment, net
|
|
|
524,119 |
|
|
|
752,162 |
|
|
|
(228,043 |
) |
|
|
(30.3 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangibles,
net
|
|
|
607,725 |
|
|
|
790,042 |
|
|
|
(182,317 |
) |
|
|
(23.1 |
%) |
|
Total
assets
|
|
$ |
5,084,672 |
|
|
$ |
2,226,684 |
|
|
$ |
2,857,988 |
|
|
|
128.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
payable and accrued liabilities
|
|
|
1,903,186 |
|
|
|
1,971,376 |
|
|
|
(68,190 |
) |
|
|
(3.5 |
%) |
|
Notes
payable-current
|
|
|
1,753,194 |
|
|
|
1,847,755 |
|
|
|
(94,561 |
) |
|
|
(5.1 |
%) |
|
Deferred
revenue
|
|
|
47,584 |
|
|
|
10,261 |
|
|
|
37,323 |
|
|
|
363.7 |
% |
|
Total
current liabilities
|
|
|
3,703,964 |
|
|
|
3,829,392 |
|
|
|
(125,428 |
) |
|
|
(3.3 |
%) |
|
Notes
payable-long term
|
|
|
1,057,554 |
|
|
|
934,756 |
|
|
|
122,798 |
|
|
|
13.1 |
% |
|
Total
liabilities
|
|
|
4,761,518 |
|
|
|
4,764,148 |
|
|
|
(2,630 |
) |
|
|
(0.1 |
%) |
|
Accumulated
deficit
|
|
|
(27,430,251 |
) |
|
|
(22,658,558 |
) |
|
|
(4,771,693 |
) |
|
|
21.1 |
% |
|
Stockholders’
deficit
|
|
|
323,154 |
|
|
|
(2,537,464 |
) |
|
|
2,860,618 |
|
|
|
(112.7 |
%) |
Net cash
used in operating activities was $2,900,065 for the nine months ended June 30,
2010 as compared to net cash used in operating activities of $1,396,144 for the
nine months ended June 30, 2009, an increase of $1,563,921. For the
nine months ended June 30, 2010, we had a loss of $1,423,743 offset by non-cash
items such as depreciation and amortization expense of $495,984, share-based
compensation expense of $2,181,020, amortization of deferred finance costs of
$7,360, and decreases from changes in assets and liabilities of $798,017. During
the nine months ended June 30, 2010 we experienced an increase in accounts
receivable of $1,266,686, and a decrease in accounts payable during the period
of $412,095. For the nine months ended June 30, 2009, we had
net income of $1,114,000 and non-cash items such as depreciation and
amortization expense of $432,839, share-based compensation expense of $855,357,
amortization of deferred finance costs of $21,108, offset by the gain on sale of
our IceWEB Virginia subsidiary in the amount of $3,398,671, and decreases from
changes in assets and liabilities of $457,278. During the nine months ended June
30, 2009 we experienced a decrease in accounts receivable of $2,234,488, which
was offset by a decrease in accounts payable during the period of $2,953,466.
For the nine months ended June 30, 2008, we used cash to fund our net loss of
$4,540,382 offset by non-cash items such as depreciation and amortization
expense of $409,261, share-based compensation expense of $1,873,089, and offset
by changes in assets and liabilities of $806,470.
Net cash
used in investing activities for the nine months ended June 30, 2010 was
$133,624 as compared to net cash used in investing activities of 28,318 for the
nine months ended June 30, 2009. During the nine months ended June 30, 2010, we
used cash of $85,624 for property and equipment purchases and $48,000 to acquire
160,000,000 shares of VOIS Inc. common stock. During the nine months
ended June 30, 2009, we used cash of $28,318 for property and equipment
purchases.
Net cash
provided by financing activities for the nine months ended June 30, 2010 was
$4,247,242 as compared to net cash provided of $1,445,021 for the nine months
ended June 30, 2009. For the nine months ended June 30, 2010, net
cash provided by financing activities related to proceeds received from the sale
of restricted stock of $2,320,630, proceeds from notes payable of $985,900 which
were advances under our factoring line with Sand Hill Finance LLC, proceeds from
the exercise of common stock options of $1,898,374, and proceeds from the sale
of restricted stock of $2,320,630, offset by repayments on notes payable of
$957,662 which were to pay down the balance on the Sand Hill Finance LLC
factoring line. For the nine months ended June 30, 2009, net cash
provided by financing activities related to proceeds received from notes payable
of $7,060,871 which were advances under our factoring line with Sand Hill
Finance LLC, proceeds from the exercise of common stock options of $454,300, and
proceeds from the sale of common stock of $97,000, offset by repayments on notes
payable of $(6,122,036) which were to pay down the balance on the Sand Hill
Finance LLC factoring line, and repayments of equipment financing of
$45,114.
At June
30, 2010 we had a working capital deficit of $564,456 and an accumulated deficit
of $27,430,251. The report from our independent registered public
accounting firm on our audited financial statements for the fiscal year ended
September 30, 2009 contained an explanatory paragraph regarding doubt as to our
ability to continue as a going concern as a result of our net losses in
operations. While our sales decreased significantly during the nine months ended
June 30, 2010, our gross profit margin was approximately 52% and our sales were
not sufficient to pay our operating expenses. We reported a net loss of
$4,771,693 for the nine months ended June 30, 2010. There are no
assurances that we will report income from operations in any future
periods.
Historically,
our revenues have not been sufficient to fund our operations and we have relied
on capital provided through the sale of equity securities, and various financing
arrangements and loans from related parties. At June 30, 2010 we had cash on
hand of$1,276,863. In fiscal 2006, we entered into a receivable
factoring agreement with Sand Hill Finance, LLC under which we can sell certain
accounts receivable to the lender on a full recourse basis at 80% of the face
amount of the receivable up to an aggregate of $3.0 million. At June 30, 2010 we
owed Sand Hill Finance, LLC $1,753,194 under this accounts receivable
line.
We do not
have any commitments for capital expenditures. In connection with our annual
report for our fiscal year ending September 30, 2010 our management will be
required to provide an assessment of the effectiveness of our internal control
over financial reporting, including a statement as to whether or not internal
control over financial reporting is effective. In order to comply with this
requirement we will need to engage a consulting firm to undertake an analysis of
our internal controls. We have yet to engage such a consulting firm and are
unable at this time to predict the costs associated with our compliance with
Section 404 of Sarbanes-Oxley Act of 2002. We do not presently have any external
sources of working capital other than what may be available under the factoring
agreement with Sand Hill Finance and loans from related parties. Our working
capital needs in future periods are dependent primarily on the rate at which we
can increase our revenues while controlling our expenses and decreasing the use
of cash to fund operations. Additional capital may be needed to fund
acquisitions of additional companies or assets, although we are not a party to
any pending agreements at this time and, accordingly, cannot estimate the amount
of capital which may be necessary, if any, for acquisitions.
As long
as our cash flow from operations remains insufficient to completely fund
operations, we will continue depleting our financial resources and seeking
additional capital through equity and/or debt financing. Under the terms of the
financing agreement with Sand Hill Finance, LLC we agreed not to incur any
additional indebtedness other than trade credit in the ordinary course of
business. These covenants may limit our ability to raise capital in future
periods.
There can
be no assurance that acceptable financing can be obtained on suitable terms, if
at all. Our ability to continue our existing operations and to continue growth
strategy could suffer if we are unable to raise the additional funds on
acceptable terms which will have the effect of adversely affecting our ongoing
operations and limiting our ability to increase our revenues and maintain
profitable operations in the future. If we are unable to secure the necessary
additional working capital as needed, we may be forced to curtail some or all of
our operations.
Recent
Accounting Pronouncements
None.
Item
3. Quantitative
and Qualitative Disclosures About Market Risk
None.
Item
4. Controls
and Procedures
Evaluation of disclosure controls
and procedures. Our Chief Executive Officer (“CEO”) and Chief Financial
Officer (“CFO”) have evaluated the effectiveness of our disclosure controls and
procedures (as defined in the Exchange Act Rules 13a-15(e) and 15d-15(e)) as of
the end of the period covered by the Quarterly Report (the “evaluation date’).
They have concluded that, as of the evaluation date, these disclosure controls
and procedures were effective in providing reasonable assurance that information
required to be disclosed in our reports under the Securities Exchange Act of
1934 is recorded, processed, summarized and reported within the time periods
prescribed by SEC rules and regulations, and that such information is
accumulated and communicated to our management, including our CEO and CFO to
allow timely decisions regarding required disclosure.
As disclosed in our Annual Report on
Form 10-K for the year ended September 30, 2009 our management had previously
concluded that our disclosure controls and procedures were not effective as a
result of material weaknesses in our internal controls over financial
reporting. Our management had concluded that our internal controls
over financial reporting were not effective as a result of insufficient written
policies and procedures for accounting and financial reporting with respect to
the requirements and application of US GAAP and SEC disclosure requirements as
well as ineffective controls over period end financial disclosure and reporting
processes. In order to remediate these material weaknesses, beginning in our
fiscal second quarter, we have hired additional staff, and prepared and
implemented additional written policies and checklists setting forth procedures
for accounting and financial reporting with respect to the requirements and
application of US GAAP and SEC disclosure requirements, including:
|
|
·
|
Implementation
of policies that improve the documentation, review, and approval of the
calculation of stock option expense, and
|
| |
|
|
|
|
·
|
Implementation
of additional controls over inventory
management
|
As a result of these remediation
efforts, our management was able to determine at the evaluation date that our
disclosure controls and procedures were effective.
Changes in internal control over
financial reporting. There have been no changes to internal
controls over financial reporting during the three months ended June 30, that
have materially affected, or are reasonably likely to materially impact, our
internal controls over financial reporting.
PART
II - OTHER INFORMATION
Item
1. Legal
Proceedings
At June
30, 2010 we are the subject of, or party to, three known, pending or threatened,
legal actions. As of the date of this report on Form 10-Q, none of
the legal proceedings have been resolved. Following is a discussion
of each:
|
|
1.
|
We
were named as the defendant in a legal proceeding brought by Charles
Rothermel (the plaintiff) in the Equal Opportunity Commission. The
plaintiff asserts that Iceweb discriminated against him on the basis of
age. The case was filed on May 22, 2009. Plaintiff seeks reinstatement to
his job.
|
|
|
2.
|
We were
named as the defendant in a legal proceeding brought by FCN, Inc. (the
plaintiff) in the Circuit Court for Montgomery County, Maryland. The
plaintiff asserts that Iceweb failed to pay certain invoices for goods or
services. FCN prevailed in the Circuit Court and this claim is being
appealed to the Court of Special Appeals. The case was filed July 21,
2009. Plaintiff sought $114,038.82.
|
|
|
3.
|
We
were named as the defendant in a legal proceeding brought by Charles
Rothermel (the plaintiff) in the Circuit Court of Loudoun County,
Virginia. The plaintiff asserts that Iceweb failed to pay certain
commissions and salary payments and is seeking $59,065.16. We have filed
counterclaims to this claim. The case was filed December 12,
2009.
|
From time
to time, we may become involved in various lawsuits and legal proceedings, which
arise in the ordinary course of business. However, litigation is subject to
inherent uncertainties, and an adverse result in these or other matters may
arise from time to time that may harm our business. We do not expect that the
identified legal proceedings, individually, or in the aggregate, will have a
material adverse impact on our company’s financial condition, results of
operations, or liquidity.
In
addition to the other information set forth in this report, you should carefully
consider the factors discussed under the heading “Risk Factors” in our Annual
Report on Form 10-K filed on December 29, 2009, which could materially affect
our business operations, financial condition or future results. Additional risks
and uncertainties not currently known to us or that we currently deem to be
immaterial also may materially adversely affect our business operations and/or
financial condition. There have been no material changes to our risk factors
since the filing of our Form 10-K.
Item
2. Unregistered
Sales of Equity Securities and Use of Proceeds
On May
18, 2010 we executed an Exclusive Finders’ Agreement pursuant to which the
Finder acted as the exclusive Finder with respect to sales by us in a private
placement transaction of up to $5 million in aggregate principal amount of
Equity, Equity-related or debt securities. We sold 13,080,000 units
in exchange for gross proceeds of $2,316,000. These sales were made in a
private transaction exempt from registration under the Securities Act of 1933 in
reliance on an exemption provided by Section 4(2) of the Act and Regulation D
thereunder.
Jesup
& Lamont Securities Incorporated, a broker-dealer and member of FINRA, acted
as finder for us in the Offering. Under the terms of a Finder’s Agreement
with the firm, we paid Jesup & Lamont Securities Incorporated a fee of
$162,370 and issued them one-year common stock purchase warrants to purchase an
aggregate of 877,100 shares of our common stock at an exercise price of $0.40
per share. In addition, we paid Jesup & Lamont Securities
Incorporated legal expenses totaling $25,000 incurred in the preparation of the
various transactional documents. We are using the net proceeds of this
offering for general working capital.
Terms of
the private placement
We
offered for sale restricted stock units, each Restricted Stock Unit (“Unit”)
being defined as one (1) share of our Common Stock (the “Shares”) and a
warrant (the “Warrants”) to purchase an additional 0.50 shares of our
common stock. The Warrants have a term of twelve (12) months, with an
exercise price of $0.40/share. The Warrant is callable by us in the event
the closing price of our Common Stock on the OTCBB exchange closes above
$0.50/share for ten (10) consecutive trading days.
Under the
terms of the Securities Purchase Agreement we also indemnified the purchasers
and each of their officers, directors, shareholders, partners, employees, agents
and control persons from any losses or damages as a result of a breach of the
agreement by us or any action instituted against a purchaser by any of our
shareholders who are not an affiliate of the purchasers with respect to this
Offering, other than in the instance of gross negligence or fraud by the
purchaser.
During
the nine months ended June 30, 2010, we issued 2,000,000 shares of common stock
at a per share price of $0.042, valued at $83,000 to an accredited investor. As
of June 30, 2010 the Company had not yet received the proceeds from the investor
and as a result the Company recorded the subscription receivable as a contra
equity account on its balance sheet. The issuance was exempt from registration
under the Securities Act of 1933 in reliance on an exemption provided by Section
4(2) of that act.
During
the nine months ended June 30, 2010, we issued 1,000,000 shares of common stock
at a per share price of $0.15, valued at $150,000 to an accredited investor as
part of a settlement agreement to settle litigation. The issuance was
exempt from registration under the Securities Act of 1933 in reliance on an
exemption provided by Section 4(2) of that act.
During
the nine months ended June 30, 2010, we issued 300,000 shares of common stock at
a per share price of $0.20, valued at $60,000 to an accredited investor as part
of a settlement agreement to settle litigation. The issuance was
exempt from registration under the Securities Act of 1933 in reliance on an
exemption provided by Section 4(2) of that act.
During
the nine months ended June 30, 2010, we issued 150,000 shares of common stock at
an average per share price of $0.269, valued at $40,285 to an accredited
investor for investor relations activity. The issuance was exempt
from registration under the Securities Act of 1933 in reliance on an exemption
provided by Section 4(2) of that act.
During
the nine months ended June 30, 2010, we sold 1,000,000 shares of common stock,
valued at $130,000 to a Director for $40,000, and recognized stock based
compensation expense of $90,000. The issuance was exempt from registration under
the Securities Act of 1933 in reliance on an exemption provided by Section 4(2)
of that act.
During
the nine months ended June 30, 2010, we sold 1,500,000 shares of common stock at
a per share price of $0.10, valued at $150,000 to an accredited investor, and
the issuance was exempt from registration under the Securities Act of 1933 in
reliance on an exemption provided by Section 4(2) of that act.
During
the nine months ended June 30, 2010, we issued 1,000,000 shares of common stock
at a per share price of $0.17, valued at $170,000 to an accredited investor. The
issuance was exempt from registration under the Securities Act of 1933 in
reliance on an exemption provided by Section 4(2) of that act.
During
the nine months ended June 30, 2010 we issued 9,001,687 shares of restricted
common stock at a per share price of $0.089, valued at $802,865, in lieu of pay
to our employees. The issuances were exempt from registration under
the Securities Act of 1933 in reliance on an exemption provided by Section 4(2)
of that act.
Item
3. Defaults
Upon Senior Securities
None.
Item
4. Submission
of Matters to a Vote of Security Holders
None.
Item
5. Other
Information
None.
|
Exhibit
Number
|
|
Description
|
|
31.1
|
|
Certification
of the Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 *
|
|
|
|
|
|
31.2
|
|
Certification
of the Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 *
|
|
|
|
|
|
32.1
|
|
Certification
of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 *
|
|
|
|
|
|
32.2
|
|
Certification
of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 *
|
* Filed
herein
SIGNATURES
In
accordance with the requirements of the Exchange Act, the registrant has caused
this report to be signed on its behalf by the undersigned thereunto duly
authorized.
| |
ICEWEB,
INC.
|
|
| |
|
|
|
|
|
By:
|
/s/
John R. Signorello |
|
| |
|
John
R. Signorello,
|
|
| |
|
Chief
Executive Officer, principal executive officer
|
|
| |
|
|
|
|
|
By:
|
/s/
Mark B. Lucky |
|
| |
|
Mark
B. Lucky
|
|
| |
|
Chief
Financial Officer, principal financial and accounting
officer
|
|
| |
|
|
|