NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2014
NOTE 1 - NATURE OF BUSINESS
With our acquisition of Computers & Telecom, Inc. and KCNAP, LLC, (collectively CTC) in October 2013, IceWEB is a
provider of wireless and fiber broadband service, co-location space and related services and operates a Network Access Point (NAP) where customers directly interconnect with a network ecosystem of partners and customers. This access to Internet routes provides CTC customers improved reliability and streamlined connectivity while significantly reducing costs by reaching a critical mass of networks within a centralized physical location. In addition, through our IceWEB Storage Corporation subsidiary we
deliver on-line cloud computing application services, and manufacture and market cloud-attached and network storage.
CTC operates a wireless internet service business, providing WIMAX broadband to small and medium size businesses in the metro Kansas-City, Missouri area. In addition CTC offers the following solutions: (i) premium data center co-location, (ii) interconnection and (iii) exchange and outsourced IT infrastructure services.
We leverage our NAP which allows our customers to increase information and application delivery performance while significantly reducing costs. Our platform enables scalable, reliable and cost-effective co-location, interconnection and traffic exchange thus lowering overall cost and increasing flexibility.
Our customer base includes U.S. government agencies, enterprise companies, and small to medium sized businesses (SMB).
Change in Fiscal Year End
On January 27, 2014 our board of directors approved a change in our fiscal year end from September 30
th
to June 30
th
. We are filing this Form 10-Q under the SEC rules for transitional filers.
NOTE 2 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying unaudited consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles and include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation.
Going Concern
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. The Company had net losses and net cash used in operating activities of $7,108,819 and $2,700,609, respectively, for the year ended September 30, 2013. The Company also had an accumulated deficit of $47,921,946 at September 30, 2013. For the nine months ended March 31, 2014 the Company had a net loss of $6,176,063 and net cash used in operations of $1,500,887. These matters raise substantial doubt about the Companys ability to continue as a going concern. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Management has established plans intended to increase the sales of our 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 we will be able to raise any additional funds.
Marketable Securities
IceWEB accounts for the purchase of marketable equity securities in accordance with FASB Accounting Standards Codification (ASC) 320, Investment Debt and Equity Securities with any unrealized gains and losses included as a net amount as a separate component of stockholders equity. However, those securities may not have the trading volume to support the stock price if the Company were to sell all their shares in the open market at once, so the Company may have a loss on the sale of marketable securities even though they record marketable equity securities at the current market value.
Cash and Cash Equivalents
We consider all highly liquid debt instruments with original maturities of three months or less to be cash equivalents.
8
ICEWEB, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2014
NOTE 2 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Use of Estimates
The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America 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 balance sheets and the reported amounts of sales and expenses during the reporting periods. Actual results could differ from those estimates. Significant estimates include the valuation of stock-based compensation, the allowance for doubtful accounts, the impairment of intangibles, the useful life of property and equipment, derivative liabilities, and litigation reserves.
Accounts Receivable
Accounts receivable consists of normal trade receivables. We recorded a bad debt allowance of $32,333 as of March 31, 2014. Management performs ongoing evaluations of its accounts receivable, and believes that all remaining receivables are fully collectable. Bad debt expense amounted to $114,918 and $0 for the nine months ended March 31, 2014 and 2013, respectively.
Inventory
Inventory is valued at the lower of cost or market, on an average cost basis.
Derivative Liability
The Company issued warrants to purchase the Companys common stock in connection with the issuance of convertible debt, which contain certain ratchet provisions that reduce the exercise price of the warrants or the conversion price in certain circumstances. In accordance with ASC 815 the Company determined that the warrants and/or the conversion features with provisions that reduce the exercise price of the warrants did not qualify for a scope exception under ASC 815 as they were determined not to be indexed to the Companys stock.
Derivatives are required to be recorded on the balance sheet at fair value (see Note 13). These derivatives, including embedded derivatives in the Companys structured borrowings, are separately valued and accounted for on the Companys balance sheet. Fair values for exchange traded securities and derivatives are based on quoted market prices. Where market prices are not readily available, fair values are determined using market based pricing models incorporating readily observable market data and requiring judgment and estimates.
Fair Value Measurements
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The established fair value hierarchy requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:
Level 1: Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2: Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities that are not active; and model-driven valuations whose inputs are observable or whose significant value drivers are observable. Valuations may be obtained from, or corroborated by, third-party pricing services.
Level 3: Unobservable inputs to measure fair value of assets and liabilities for which there is little, if any market activity at the measurement date, using reasonable inputs and assumptions based upon the best information at the time, to the extent that inputs are available without undue cost and effort.
Fair Value of Financial Instruments
The Companys financial instruments, including cash and cash equivalents, receivables, accounts payable and accrued liabilities and notes payable are carried at cost, which approximates their fair value, due to the relatively short maturity of these instruments.
Our derivative financial instruments, consisting of embedded conversion features in our convertible debt, which are required to be measured at fair value on a recurring basis under FASB ASC 815. As of March 31, 2014 our derivatives are measured at fair value, using a Black-Scholes valuation model which approximates a binomial lattice valuation methodology utilizing Level 3 inputs. Level 3 inputs are unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities (see Note 12).
9
ICEWEB, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2014
NOTE 2 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Other Receivables
We have a purchase order arrangement with a key vendor that provides us the flexibility to make purchases of inventory components on credit with our customer remitting payment to the vendor. This arrangement provides us with the cash needed to finance certain of our on-going costs and expenses, and provides that we collect on our receivables once the vendor has been paid. This vendor had collected $0 on our behalf that had not been remitted to us as of March 31, 2014.
Property and Equipment
Property and equipment is stated at cost, net of accumulated depreciation. Depreciation expense is recorded by using the straight-line method over the estimated useful lives of the related assets.
Product Warranties
The Companys products typically carry a warranty for periods of up to three years. We have not had any significant warranty claims on our products.
Software Development Costs
The costs for the development of new software products and substantial enhancements to existing software products are expensed as incurred until technological feasibility has been established, at which time any additional costs would be capitalized in accordance with the accounting guidance for software.
Because our current process for developing software is essentially completed concurrently with the establishment of technological feasibility, which occurs upon the completion of a working model, no costs have been capitalized for any of the periods presented.
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.
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.
It is our customary business practice to obtain a signed master sales agreement for recurring revenue sales, and/or a sales order for events and one-time services. Taxes collected from customers and remitted to governmental authorities are reported on a net basis and are excluded from revenue.
We derive the majority of our revenues from recurring revenue streams, consisting primarily of:
(1) Wireless and fiber broadband service ;
(2) co-location, which includes the licensing of cabinet space and power;
(3) interconnection services, such as cross connects;
(4) managed infrastructure services.
·
Revenues from recurring revenue streams are generally billed monthly and recognized ratably over the term of the contract, generally one to three years for data center space customers. We generally recognize revenue beginning on the date the customer commences use of our services.
·
Implementation and set-up fees are recognized at the time those services are completed, unless prior agreement was made for interim billings (for work completed).
·
For services that are billed according to customer usage, revenue is recognized in the month in which the usage is provided.
·
Professional services are recognized in the period services are provided.
·
Amounts that have been invoiced are recorded in accounts receivable and revenue.
10
ICEWEB, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2014
NOTE 2 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Our customers generally have the right to cancel their contracts by providing prior written notice to us of their intent to cancel the remainder of the contract term. The customer would be required to pay any charge for early cancellation that their contract specifies. In the event that a customer cancels their contract, they are not entitled to a refund for services already rendered. A customer can continue service on a month-to-month basis after their contract expires.
Advertising
Advertising costs are expensed as incurred and amounted to $25,105 and $154,496 for the nine months ended March 31, 2014 and 2013, respectively.
Barter Transactions
Barter activity is accounted for in accordance with ASC 845,
Nonmonetary Transactions
. Barter revenue relates to the exchange of wireless bandwidth and internet connectivity provided by CTC to business customers in exchange primarily for roof rights for antennae, advertising and other products and services that CTC would otherwise be required to buy for cash. Barter expenses reflect the expense offset to barter revenue. The amount of barter revenue and expense is recorded at the estimated fair value of the services received or the services provided, whichever is more objectively determinable, in the month the services are exchanged.
Prepaid expenses
Prepaid expenses are comprised primarily of prepaid costs related to the installation of new customers, prepaid advertising costs which are expensed when used, and deferred financing costs which are amortized over the life of the related financing.
Deferred Revenue
Amounts billed in advance of services being provided are recorded as deferred revenue and are recognized in the consolidated statement of operations as services are provided.
Deferred Financing Costs
Debt issuance costs incurred in connection with the issuance of debt are capitalized and amortized to interest expense based on the related debt agreements on a straight-line basis, which approximates the effective interest method. Unamortized amounts are included in prepaid expenses in the accompanying unaudited consolidated balance sheets.
Earnings per Share
We compute earnings per share in accordance with ASC Topic 260, 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 notes and preferred stock (using the if-converted method). Potentially dilutive common shares are excluded from the calculation if their effect is antidilutive. At March 31, 2014, there were options and warrants to purchase 337,699,733 shares of common stock, and 626,667 shares issuable upon conversion of Series B preferred stock outstanding which could potentially dilute future earnings per share.
Stock-Based Compensation
As more fully described in Note 16, we have two stock option plans that provide for non-qualified options to be issued to directors, officers, employees and consultants (the
2012 Equity Compensation Plan
and the 2013 Equity Plan (the Plans).
11
ICEWEB, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2014
NOTE 2 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS
In the first quarter of fiscal year 2013, the Company adopted Accounting Standards Update No. 2011-05,
Comprehensive Income (Topic 220)-Presentation of Comprehensive Income
and Accounting Standards Update No. 2011-12,
Comprehensive Income (Topic 220)-Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05.
The adoption of these amended standards impacted the presentation of other comprehensive income, as the Company elected to present two separate but consecutive statements, but did not impact our financial position or results of operations.
Various accounting standards that have been issued or proposed by FASB that do not require adoption until a future date are not expected to have a material impact on the consolidated financial statements upon adoption.
NOTE 3 - PROPERTY AND EQUIPMENT
Property and equipment, net, consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
|
|
March 31, 2014
|
|
|
September 30, 2013
|
|
Life
|
Office equipment
|
|
3 years
|
|
$
|
2,668,332
|
|
|
$
|
644,020
|
|
Furniture and Fixtures
|
|
3 years
|
|
|
17,232
|
|
|
|
-
|
|
Computer software
|
|
3 years
|
|
|
59,705
|
|
|
|
52,841
|
|
Vehicle
|
|
3 years
|
|
|
7,734
|
|
|
|
-
|
|
Leasehold improvements
|
|
5 years
|
|
|
1,044,162
|
|
|
|
1,033,495
|
|
|
|
|
|
|
3,797,165
|
|
|
|
1,730,356
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: accumulated depreciation
|
|
|
|
|
(3,061,753)
|
|
|
|
(1,422,488)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
735,412
|
|
|
$
|
307,868
|
|
Capitalized equipment under lease agreements totaled $1,983,854 at cost at March 31, 2014 and $0 as of September 30, 2013. The lease term of each capital equipment lease is 36 months.
Depreciation expense for the three months ended March 31, 2014 and 2013 was $180,493 and $52,977, respectively, and for the nine months ended March 31, 2014 and 2013, depreciation expense was $462,237 and $123,689, respectively.
NOTE 4 INVENTORY
Inventory consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2014
|
|
September, 30, 2013
|
Raw materials
|
$
|
172,130
|
|
$
|
130,534
|
Work in progress
|
|
-
|
|
|
24,476
|
Finished goods
|
|
-
|
|
|
8,158
|
|
$
|
172,130
|
|
$
|
163,168
|
- 12 -
ICEWEB, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2014
NOTE 5 - NOTES PAYABLE
Agility Ventures, LLC and UO! IP of NC, LLC
On October 1, 2013, in conjunction with the acquisition of Computers & Tele-com, Inc. and KCNAP, LLC, we entered into an equipment lease agreement with Agility Ventures, LLC in the principal amount of $1,678,562 which is secured by all of the assets of IceWEB, Inc. The lease agreement has a term of 36 months and bears interest at 15% per annum. We also issued Agility Ventures 1,000,000 shares of IceWEB, Inc. restricted common stock, and a Series T common stock warrant covering a total of 3,675,000 shares with a term of two years and a conversion price of $0.055 per share. We are currently in default under the terms of the lease agreement.
On March 1, 2014 Agility Ventures LLC sold and assigned the Master Lease and Equipment Schedule to a third party, UO! IP of NC, LLC. UO! IP of NC, LLC is a related party to the holder of the Series AA Preferred Stock,
UnifiedOnline! LLC. See Note 17.
NOTE 6 OTHER CURRENT ASSETS
Other current assets totaled $52,196 and $175,551 at March 31, 2014 and September 30, 2013, respectively. The balance at March 31, 2014 consists primarily of deferred loan fees related to the capitalized lease obligation to Agility Ventures, LLC. The balance at September 30, 2013 consisted of advances made to Computers & Tele-com, Inc. This amount was reimbursable to IceWEB in the event that the acquisition of Computers & Telecom, Inc. did not occur. IceWEB, Inc. successfully completed the acquisition of Computers & Telecom, Inc. in October, 2013.
NOTE 7 - CONCENTRATION OF CREDIT RISK
Bank Balances
The Company maintains cash in financial institutions insured by the Federal Deposit Insurance Corporation (FDIC), including non-interest bearing transaction account deposits protected in full in accordance with the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act). At March 31, 2014 all of the Companys cash balances were fully insured. The Company had not experienced any losses in such accounts.
Major Customers
Sales to 3 customers for the three and nine months ended March 31, 2014 and 2013, respectively were as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
March 31,
|
March 31,
|
|
|
2014
|
|
2013
|
|
2014
|
|
2013
|
Customer A
|
|
8%
|
|
42%
|
|
6%
|
|
30%
|
Customer B
|
|
5%
|
|
19%
|
|
5%
|
|
19%
|
Customer C
|
|
4%
|
|
14%
|
|
3%
|
|
9%
|
All Others
|
|
83%
|
|
25%
|
|
86%
|
|
42%
|
|
|
100%
|
|
100%
|
|
100%
|
|
100%
|
As of March 31, 2014 and September 30, 2013, respectively, approximately 50% and 92% of our accounts receivable was due from three customers.
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2014
|
|
September 30, 2013
|
Customer A
|
37%
|
|
47%
|
Customer B
|
9%
|
|
23%
|
Customer C
|
4%
|
|
22%
|
All others
|
54%
|
|
8%
|
|
100%
|
|
100%
|
- 13 -
ICEWEB, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2014
NOTE 8 - INVESTMENTS
(a) Summary of Investments
Marketable Equity Securities
:
As of March 31, 2014 and September 30, 2013, the Companys investments in marketable equity securities are based on the March 31, 2014 and September 30, 2013 stock price as reflected on the OTCBB stock, respectively. These marketable equity securities are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2014
|
|
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Fair
Value
|
|
|
|
|
|
|
|
|
|
|
|
Publicly traded equity securities
|
|
$
|
81,000
|
|
$
|
|
|
$
|
(80,996
|
)
|
$
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
81,000
|
|
$
|
|
|
$
|
(80,996)
|
|
$
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2013
|
|
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Fair
Value
|
|
|
|
|
|
|
|
|
|
|
|
Publicly traded equity securities
|
|
$
|
81,000
|
|
$
|
|
|
$
|
(80,180)
|
|
$
|
820
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
81,000
|
|
$
|
|
|
$
|
(80,180)
|
|
$
|
820
|
|
The unrealized gains are presented in comprehensive income in the unaudited consolidated statement of operations and comprehensive income.
(b) Unrealized Gains and Losses on Investments
The following table summarizes the unrealized net gains (losses) associated with the Companys investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
March 31
|
|
|
March 31
|
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
|
|
|
|
|
|
|
|
|
|
|
Net gains/(loss) on investments in publicly traded equity securities
|
|
$
|
(2)
|
|
|
$
|
(196,150)
|
|
|
$
|
(3,686)
|
|
|
$
|
15,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net gains on investments
|
|
$
|
(2)
|
|
|
$
|
(196,150)
|
|
|
$
|
(3,686)
|
|
|
$
|
15,800
|
- 14 -
ICEWEB, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2014
NOTE 9 FAIR VALUE MEASUREMENTS
Investment Measured at Fair Value on a Recurring Basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using:
|
|
|
|
Quoted
Prices
in Active
Markets
(Level 1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
March 31, 2014
|
|
|
|
|
|
|
|
|
|
Marketable Equity Securities
|
|
$
|
4
|
|
|
$
|
|
|
|
$
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liabilities, warrants
|
|
$
|
|
|
|
$
|
|
|
|
$
|
76,285
|
|
Derivative liabilities, convertible debt
|
|
$
|
|
|
|
$
|
|
|
|
$
|
457,078
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2013
|
|
|
|
|
|
|
|
|
|
Marketable Equity Securities
|
|
$
|
820
|
|
|
$
|
|
|
|
$
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liabilities, warrants
|
|
$
|
|
|
|
$
|
|
|
|
$
|
117,424
|
|
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. 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 are recognized 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.
There were no impairment charges on investments in publicly traded equity securities for the three months ended March 31, 2014 or 2013.
The Company has evaluated its publicly traded equity securities as of March 31, 2014, 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 Companys 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.
NOTE 10 - COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) is comprised of net income (loss) 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 accumulated other comprehensive loss consists of unrealized loss on marketable securities available for sale of $80,996 at March 31, 2014, and $80,180 at September 30, 2013.
- 15 -
ICEWEB, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2014
NOTE 11 ACQUISITION
On October 1, 2013 (the Closing Date), IceWEB, Inc. (the Company) entered into a share exchange agreement (the Exchange Agreement) by and among the Company, Computers and Tele-Comm., Inc., a Missouri corporation (CTCI), KC NAP, LLC (KC NAP), the stockholders of CTCI, and Streamside Partners, LLC, a third party, pursuant to which the Company purchased all of the outstanding common stock of CTCI and the outstanding membership interests in KC NAP, in exchange for 9,568,400 shares of our $0.001 par value common stock which represents 2.2% of the Companys issued and outstanding common stock, immediately following the Share Exchange. Concurrently, and as part of the share exchange agreement, the Company issued shares to retire an outstanding debt owing by CTCI to Streamside Partners, LLC, which totaled $155,000, and other third party debts of CTCI totaling $267,823, in exchange for 13,485,799 shares of our $0.001 par value common stock (such transactions taken together are sometimes referred to herein as the Share Exchange), which together totaled $422,823, at an effective exchange rate of $0.0314/share. As a result of the Share Exchange, we are now the holding company of CTCI and we now operate a company in the business of operating data centers and providing Information Technology (IT) services.
On October 1, 2013, in conjunction with the acquisition, we entered into an equipment lease agreement with Agility Ventures, LLC in the principal amount of $1,417,672 which is secured by all of the assets of IceWEB, Inc. The lease agreement has a term of 36 months and bears interest at 15% per annum. We also issued Agility Ventures 1,000,000 shares of IceWEB, Inc. restricted common stock, and a Series T common stock warrant covering a total of 3,675,000 shares with a term of two years and a conversion price of $0.055 per share.
The purchase of CTCI included the acquisition of assets of $2,927,724, and liabilities of $2,362,896. The aggregate purchase price consisted of the following:
|
|
|
|
|
Fair value of common stock issued to seller valued at quoted market price
|
$
|
234,426
|
|
Fair value of common stock issued in exchange for debt valued at quoted market price
|
|
330,402
|
|
|
|
$
|
564,828
|
|
The following table summarizes the estimated fair values of CTCIs assets acquired and liabilities assumed at the date of the acquisition:
|
|
|
|
|
|
Cash
|
|
$
|
3,609
|
|
|
Accounts Receivable
|
|
67,160
|
|
|
Prepaid expenses
|
|
93,802
|
|
|
Property and equipment, net
|
822,103
|
|
|
Intangible asset
|
|
1,941,050
|
|
|
Accounts payable and accrued expenses
|
(538,716
|
)
|
|
Deferred revenue
|
|
(59,396
|
)
|
|
Notes Payable
|
|
(1,764,784
|
)
|
|
|
|
$
|
564,828
|
|
|
|
In conjunction with the acquisition of CTCI, we recorded goodwill in the amount of $1,941,050. We subsequently performed an impairment test on goodwill which requires an analysis
based on estimates of future cash flows
, and an impairment loss is recognized for the difference between the carrying amount and the fair value of the asset. Based on this analysis we recorded an impairment expense of $1,941,050 during the three months ending December 31, 2013.
The following table summarizes the required disclosures of the pro forma combined entity, as if the acquisition of Computers & Telecom, Inc. and KCNAP, LLC, (collectively CTC) occurred at July 1, 2012.
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
March 31,
|
|
March 31,
|
|
2014
|
|
2013
|
|
2014
|
|
2013
|
|
|
|
|
|
|
|
|
Revenues, net
|
$ 176,483
|
|
$ 684,742
|
|
$ 669,057
|
|
$ 1,857,086
|
|
|
|
|
|
|
|
|
Net loss
|
$ (133,001)
|
|
$(2,675,100)
|
|
(6,038,800)
|
|
$ (3,576,774)
|
|
|
|
|
|
|
|
|
Net loss per common share basic and diluted
|
$ (0.00)
|
|
$ (0.00)
|
|
$ (0.02)
|
|
$ (0.00)
|
- 16 -
ICEWEB, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2014
NOTE 11 ACQUISITION (continued)
The above unaudited pro forma results have been prepared for comparative purposes only and do not purport to be indicative of results of operations that actually would have resulted had the acquisition occurred at July 1, 2012, nor is it necessarily indicative of future operating results.
NOTE 12 CONVERTIBLE NOTES
As of March 31, 2014 and September 30, 2013 the Company had the following convertible notes outstanding:
|
|
|
|
|
|
|
|
|
|
|
March 31, 2014
|
|
|
September 30, 2013
|
|
|
|
Principal (net)
|
|
|
Principal (net)
|
|
April, 2013 $124,444 Convertible Note, 12% interest, due June, 2014, net of debt discount of $0 and $2,328, respectively
|
|
$
|
-
|
|
|
$
|
122,116
|
(1)
|
June, 2013 $62,222 Convertible Note, 12% interest, due June 2014, net of debt discount of $38,064 and $2,460, respectively
|
|
|
21,012
|
|
|
|
59,762
|
(2)
|
December 2013 $83,500 Convertible Note, net of discount of $81,040 due August 2014
|
|
|
2,460
|
|
|
|
-
|
(3)
|
December 2013 $62,222 Convertible Note, 12% one-time interest, due July 2014, with a 10% original issue discount, net of debt discount of $43,355
|
|
|
18,867
|
|
|
|
-
|
(4)
|
December 2013 $43,821 Convertible Note, 10% interest, net of debt discount of $32,963 due November 2014
|
|
|
10,858
|
|
|
|
-
|
(5)
|
December 2013 $60,000 Convertible Note, 10% interest, net of debt discount of $45,134 due November 2014,
|
|
|
14,865
|
|
|
|
-
|
(6)
|
December 2013 $132,000 Convertible Note, 10% interest, due November 2014, with a 10% original issue discount, net of debt discount of $99,294
|
|
|
32,706
|
|
|
|
-
|
(7)
|
January 2014 $53,000 Convertible Note, due September 2014, net of debt discount of $22,132
|
|
|
30,868
|
|
|
|
-
|
(8)
|
March 2014 $32,500 Convertible Note, due November 2014, net of debt discount of $27,143
|
|
|
5,357
|
|
|
|
-
|
(9)
|
Total Convertible Notes Payable, Net
|
|
$
|
136,993
|
|
|
$
|
181,878
|
|
(1) The Company borrowed $124,444 in April 2013, originally due November 2013, but extended to June, 2014 with a one-time interest charge of 12%. The holder of the note has the right, after the first one hundred eighty days of the note to convert the note and accrued interest into common stock at a price per share equal to 60% (representing a discount rate of 40%) of the lowest trade price of the Company's common stock in the twenty-five days prior to the date of Conversion Notice, with a floor of $0.001 per share. The Company recorded a debt discount of $11,111 related to the conversion feature of the note, along with a derivative liability in November, 2013 when the note was amended to extend the term of the note. Interest expense for the amortization of the debt discounts is calculated on a straight-line basis over the seven month life of the original note term. During 2013 total amortization was recorded in the amount of $7,196 resulting in a debt discount of $2,328 at September 30, 2013. Also during 2013, interest expense of $8,635 was recorded for the note. During the three months ending March 31, 2014 total amortization was recorded in the amount of $2,328 resulting in a debt discount of $0 at March 31, 2014. Also during the three months ending March 31, 2014, interest expense of $2,794 was recorded for the note. Also, see Note 13.
From November, 2013 through March, 2014 the holder of the Convertible Debt instrument exercised their conversion rights and converted $44,910 of the outstanding principal and accrued interest balance.
(2) The Company borrowed $62,222 in June 2013, originally due January 2014, but extended to June, 2014 with a one-time interest charge of 12%. The holder of the note has the right, after the first one hundred eighty days of the note to convert the note and accrued interest into common stock at a price per share equal to 60% (representing a discount rate of 40%) of the lowest trade price of the Company's common stock in the twenty-five days prior to the date of Conversion Notice, with a floor of $0.001 per share. The Company recorded a debt discount of $5,556 related to the conversion feature of the note, along with a derivative liability in November, 2013 when the note was amended to extend the term of the note.. Interest expense for the amortization of the debt discounts is calculated on a straight-line basis over the seven month life of the original note term. During fiscal 2014 total amortization was recorded in the amount of $3,095 resulting in a debt discount of $2,460 at September 30, 2013. Also during 2013, interest expense of $3,714 was recorded for the note. During the nine months ending March 31, 2014 total amortization was recorded in the amount of $13,561 resulting in a debt discount of $38,064 at March 31, 2014. Also, see Note 13.
- 17 -
ICEWEB, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2014
NOTE 12 CONVERTIBLE NOTES (continued)
(3) The Company borrowed $83,500 in December 2013, due August 2014. The holder of the note has the right, after the first one hundred eighty days of the note to convert the note and accrued interest into common stock at a price per share equal to 60% of the average of the lowest three trading prices during the 10 trading days previous to the conversion, with a floor of $0.001 per share. The Company had the right to prepay the note during the first thirty days following the date of the note. During that time the amount of any prepayment would equal 115% of the outstanding principal balance of the note. The Company has the right to prepay the note and accrued interest during days 31-60. During that time the amount of any prepayment would equal 120% of the outstanding principal balance of the note. The Company has the right to prepay the note and accrued interest during days 61-90. During that time the amount of any prepayment would equal 123% of the outstanding principal balance of the note. The Company has the right to prepay the note and accrued interest during days 91-120. During that time the amount of any prepayment would equal 129% of the outstanding principal balance of the note. The Company has the right to prepay the note and accrued interest during days 131-150. During that time the amount of any prepayment would equal 135% of the outstanding principal balance of the note. The Company recorded a derivative liability at inception of the note of $81,040. Also, see Note 13.
(4) The Company borrowed $62,222 in December 2013, due July 2014, with a one-time interest charge of 12%. The holder of the note has the right, after the first one hundred eighty days of the note to convert the note and accrued interest into common stock at a price per share equal to 60% (representing a discount rate of 40%) of the lowest trade price of the Company's common stock in the twenty-five days prior to the date of Conversion Notice, with a floor of $0.001 per share. The Company recorded a debt discount of $5,556 related to the conversion feature of the note, along with a derivative liability in December, 2013. Interest expense for the amortization of the debt discounts is calculated on a straight-line basis over the seven month term of the note. During the nine months ending March 31, 2014 total amortization was recorded in the amount of $15,598 resulting in a debt discount of $43,355 at March 31, 2014. Also, see Note 13.
(5) The Company borrowed $43,821 in December 2013, due November 2014, with interest at 10%. The holder of the note has the right, after the first one hundred eighty days of the note to convert the note and accrued interest into common stock at a price per share equal to 60% (representing a discount rate of 40%) of the lowest trading price for the Common Stock during the fifteen trading day period ending one trading day prior to the date of Conversion Notice, with a floor of $0.001 per share. The Company has the right to prepay the note and accrued interest during the first one hundred eighty days following the date of the note. During that time the amount of any prepayment would equal 115% of the outstanding principal balance of the note. The Company has the right to prepay the note and accrued interest during days 31-60. During that time the amount of any prepayment would equal 120% of the outstanding principal balance of the note. The Company has the right to prepay the note and accrued interest during days 61-90. During that time the amount of any prepayment would equal 123% of the outstanding principal balance of the note. The Company has the right to prepay the note and accrued interest during days 91-120. During that time the amount of any prepayment would equal 129% of the outstanding principal balance of the note. The Company has the right to prepay the note and accrued interest during days 131-150. During that time the amount of any prepayment would equal 135% of the outstanding principal balance of the note. The Company recorded a derivative liability at inception of the note of $43,821. During the nine months ending March 31, 2014 total amortization was recorded in the amount of $10,955 resulting in a debt discount of $32,963 at March 31, 2014. Also, see Note 13.
(6) The Company borrowed $60,000 in December 2013, due November 2014, with interest at 10%. The holder of the note has the right, after the first one hundred eighty days of the note to convert the note and accrued interest into common stock at a price per share equal to 60% (representing a discount rate of 40%) of the lowest trading price for the Common Stock during the fifteen trading day period ending one trading day prior to the date of Conversion Notice, with a floor of $0.001 per share. The Company has the right to prepay the note and accrued interest during the first one hundred eighty days following the date of the note. During that time the amount of any prepayment would equal 115% of the outstanding principal balance of the note. The Company has the right to prepay the note and accrued interest during days 31-60. During that time the amount of any prepayment would equal 120% of the outstanding principal balance of the note. The Company has the right to prepay the note and accrued interest during days 61-90. During that time the amount of any prepayment would equal 123% of the outstanding principal balance of the note. The Company has the right to prepay the note and accrued interest during days 91-120. During that time the amount of any prepayment would equal 129% of the outstanding principal balance of the note. The Company has the right to prepay the note and accrued interest during days 131-150. During that time the amount of any prepayment would equal 135% of the outstanding principal balance of the note. The Company recorded a derivative liability at inception of the note of $60,000. During the nine months ending March 31, 2014 total amortization was recorded in the amount of $15,000 resulting in a debt discount of $45,134 at March 31, 2014. Also, see Note 13.
(7) The Company borrowed $132,000 in December 2013, due December 2014, with interest at 10%. The holder of the note has the right to convert the note and accrued interest into common stock at a price per share equal to 60% of the lowest trade price in the 15 trading days previous to the conversion, with a floor of $0.001 per share. The note has an original issue discount of 12,000 which has been added to the principal balance of the note and is being recognized in interest expense over the life of the note. The Company recorded a derivative liability at inception. Interest expense for the amortization of the debt discount is calculated on a straight-line basis over the twelve month life of the note. During the nine months ending March 31, 2014 total amortization was recorded in the amount of $33,000 resulting in a debt discount of $99,294 at March 31, 2014. Also, see Note 13.
- 18 -
ICEWEB, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2014
NOTE 12 CONVERTIBLE NOTES (continued)
(8) The Company borrowed $53,000 in January, 2014 due September 2014. The holder of the note has the right, after the first one hundred eighty days of the note to convert the note and accrued interest into common stock at a price per share equal to 60% of the average of the lowest three trading prices during the 10 trading days previous to the conversion, with a floor of $0.001 per share. The Company had the right to prepay the note during the first thirty days following the date of the note. During that time the amount of any prepayment would equal 115% of the outstanding principal balance of the note. The Company has the right to prepay the note and accrued interest during days 31-60. During that time the amount of any prepayment would equal 120% of the outstanding principal balance of the note. The Company has the right to prepay the note and accrued interest during days 61-90. During that time the amount of any prepayment would equal 123% of the outstanding principal balance of the note. The Company has the right to prepay the note and accrued interest during days 91-120. During that time the amount of any prepayment would equal 129% of the outstanding principal balance of the note. The Company has the right to prepay the note and accrued interest during days 131-150. During that time the amount of any prepayment would equal 135% of the outstanding principal balance of the note. The Company recorded a derivative liability at inception of the note of $44,264, and during the nine months ended March 31, 2014 recorded amortization of debt discount of $7,377 resulting in a debt discount of $22,132 at March 31, 2014. Also, see Note 13.
(9) The Company borrowed $32,500 in March, 2014 due November 2014. The holder of the note has the right, after the first one hundred eighty days of the note to convert the note and accrued interest into common stock at a price per share equal to 60% of the average of the lowest three trading prices during the 10 trading days previous to the conversion, with a floor of $0.001 per share. The Company had the right to prepay the note during the first thirty days following the date of the note. During that time the amount of any prepayment would equal 115% of the outstanding principal balance of the note. The Company has the right to prepay the note and accrued interest during days 31-60. During that time the amount of any prepayment would equal 120% of the outstanding principal balance of the note. The Company has the right to prepay the note and accrued interest during days 61-90. During that time the amount of any prepayment would equal 123% of the outstanding principal balance of the note. The Company has the right to prepay the note and accrued interest during days 91-120. During that time the amount of any prepayment would equal 129% of the outstanding principal balance of the note. The Company has the right to prepay the note and accrued interest during days 131-150. During that time the amount of any prepayment would equal 135% of the outstanding principal balance of the note. The Company recorded a derivative liability at inception of the note of $27,143, and during the nine months ended March 31, 2014 recorded amortization of debt discount of $0 resulting in a debt discount of $27,143 at March 31, 2014. Also, see Note 13.
NOTE 13 - DERIVATIVE LIABILITIES
Derivative liability - warrants
The Company has warrants issued in connection with our convertible notes payable outstanding with price protection provisions that allow for the reduction in the exercise price of the warrants in the event the Company subsequently issues stock or securities convertible into stock at a price lower than the exercise price of the warrants. Simultaneously with any reduction to the exercise price, the number of shares of common stock that may be purchased upon exercise of each of these warrants shall be increased or decreased proportionately, so that after such adjustment the aggregate exercise price payable for the adjusted number of warrants shall be the same as the aggregate exercise price in effect immediately prior to such adjustment. The Company accounted for its warrants with price protection in accordance with FASB ASC Topic 815.
Accounting for Derivative Warrant Liability
The Companys derivative warrant instruments have been measured at fair value at March 31, 2014 using the Black-Scholes model. The Company recognizes all of its warrants with price protection in its consolidated balance sheet as liabilities. The liability is revalued at each reporting period and changes in fair value are recognized currently in the consolidated statements of operations. The initial recognition and subsequent changes in fair value of the derivative warrant liability have no effect on the Companys cash flows.
- 19 -
ICEWEB, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2014
NOTE 13 - DERIVATIVE LIABILITIES (continued)
The derivative warrants outstanding at March 31, 2014 are all currently exercisable with a weighted-average remaining life of 2.50 years.
Derivative liability convertible notes
From November, 2013 through March 31, 2014 the Company issued convertible notes in the total principal amount of $379,703 and amended conversion terms of the previously existing convertible debenture in the amount of $186,667.
Upon the issuance of these convertible notes and as a consequence of their conversion features, the convertible notes give rise to derivative liabilities.
The Companys derivative liabilities related to its convertible notes payable have been measured at fair value at March 31, 2014 using the Black-Scholes model.
The revaluation of the warrants and convertible debt at each reporting period, as well as the charges associated with issuing additional warrants due to the price protection features, resulted in the recognition of income of $105,065 and $313,993 and income of $176,564 and $4,352,711 for the for the three and nine months ended March 31, 2014 and 2013, respectively, within the Companys consolidated statements of operations for the three and nine months ended March 31, 2014 and 2013, respectively, under the caption Gain (loss) on Change of fair value of derivative liability. The fair value of the warrants at March 31, 2014 is $76,285 which is reported on the consolidated balance sheet under the caption Derivative Liability-Warrants. The following summarizes the changes in the value of the derivative warrant liability from September 30, 2013 until March 31, 2014:
|
|
|
|
|
|
|
|
|
|
|
Value
|
|
|
No. of Warrants
|
|
Balance at September 30, 2013 Derivative warrant liability
|
|
$
|
117,424
|
|
|
|
88,018,721
|
|
Decrease in fair value of derivative warrant liability
|
|
|
(41,139)
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2014 Derivative warrant liability
|
|
$
|
76,285
|
|
|
|
316,330,209
|
|
|
|
|
|
|
|
|
|
Value
|
|
Balance at September 30, 2013 Derivative liability, convertible debt
|
|
$
|
-
|
|
Increase in derivative liability related to issuance of convertible debt
|
|
|
592,503
|
|
Decrease in fair value of derivative liability
|
|
|
(135,425)
|
|
|
|
|
|
|
Balance at March 31, 2014 Derivative liability, convertible debt
|
|
$
|
457,078
|
|
- 20 -
ICEWEB, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2014
NOTE 13 - DERIVATIVE LIABILITIES (continued)
Fair Value Assumptions Used in Accounting for Derivative Liability
The Company has determined its derivative liability to be a Level 3 fair value measurement and has used the Black-Scholes pricing model to calculate the fair value as of March 31, 2014. The Black-Scholes model requires six basic data inputs: the exercise or strike price, time to expiration, the risk free interest rate, the current stock price, the estimated volatility of the stock price in the future, and the dividend rate. Because the warrants contain the price protection feature, the probability that the exercise price of the warrants would decrease as the stock price decreased was incorporated into the valuation calculations. The key inputs used in the March 31, 2014 fair value calculations were as follows:
|
|
|
|
|
|
|
|
March 31,
|
|
|
|
|
2014
|
|
|
Current exercise price
|
|
$0.0033 - $0.028
|
|
|
Time to expiration
|
|
2.50 years
|
Risk-free interest rate
|
|
|
0.90
|
%
|
|
Estimated volatility
|
|
|
185.7
|
%
|
|
Dividend
|
|
|
-0-
|
|
|
Stock price on March 31, 2014
|
|
$
|
0.0055
|
|
|
Expected forfeiture rate
|
|
|
0% to 95%
|
|
|
NOTE 14 COMMITMENTS AND CONTINGENCIES
We lease office space in Kansas City, Missouri at two locations, totaling 6,875 square feet. These operating leases are standard commercial leases.
As of March 31, 2014, future minimum lease payments under these operating leases are as follows:
|
|
|
|
|
|
|
|
For the Year Ending
June 30,
|
Amount
|
|
2014
|
|
$ 18,463
|
|
2015
|
|
73,852
|
|
2016
|
|
41,141
|
|
2017
|
|
14,459
|
|
2018
|
|
-
|
|
Thereafter
|
|
-
|
|
Total
|
|
$ 147,915
|
|
Rent expense was $67,182 and $33,185 for the nine months ended March 31, 2014 and 2013.
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. There have been no material changes in the status of litigation since September 30, 2013.
- 21 -
ICEWEB, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2014
NOTE 15 STOCKHOLDERS DEFICIT
The Company has issued and outstanding Series O and Series Q warrants for 30,488,720 common shares, as adjusted, with a current exercise price of $0.028, as adjusted, which have price protection provisions that allow for the reduction in the current exercise price upon the occurrence of certain events, including the Companys issuance of common stock or securities convertible into or exercisable for common stock, such as options and warrants, at a price per share less than the exercise price then in effect. For instance, if the Company issues shares of its common stock or options exercisable for or securities convertible into common stock at an effective price per share of common stock less than the exercise price then in effect, the exercise price will be reduced to the effective price of the new issuance. The Company has issued and outstanding Series N warrants for 285,841,489 common shares, as adjusted, with a current exercise price of $0.0054, as adjusted, which have price protection provisions that allow for the reduction in the current exercise price upon the occurrence of certain events, including the Companys issuance of common stock or securities convertible into or exercisable for common stock, such as options and warrants, at a price per share less than the exercise price then in effect. Simultaneously with any reduction to the exercise price of the Series N warrants, the number of shares of common stock that may be purchased upon exercise of each of these warrants shall be increased proportionately, so that after such adjustment the aggregate exercise price payable for the adjusted number of warrants shall be the same as the aggregate exercise price in effect immediately prior to such adjustment.
The Companys issuance of the following securities will not trigger the price protection provisions of the warrants described above: (a) shares of common stock or standard options to the Companys directors, officers, employees or consultants pursuant to a board-approved equity compensation program or other contract or arrangement; (b) shares of common stock issued upon the conversion or exercise of any security, right or other instrument convertible or exchangeable into common stock (or securities exchangeable into common stock) issued prior to November 23, 2011; and (c) shares of common stock and warrants in connection with strategic alliances, acquisitions, mergers, and strategic partnerships, the primary purpose of which is not to raise capital, and which are approved in good faith by the Companys board of directors.
In conjunction with our acquisition of Computers & Telecom, Inc. and subsidiary in October, 2013, we issued a warrant to Agility Ventures, LLC
covering a total of 3,675,000 shares with a term of two years and a conversion price of $0.055 per share.
Issuance of Restricted Stock
In conjunction with our acquisition of Computers & Telecom, Inc. and subsidiary in October, 2013, we issued one million shares of IceWEB, Inc. common stock to Agility Ventures, LLC
, valued at $24,500.
In November, 2013, we issued 7,000,000 shares of common stock at a per share price of $0.01386, valued at $97,000 to an accredited investor for services rendered. 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.
In November, 2013, we issued 4,750,000 shares of common stock at a per share price of $0.016, valued at $76,000 to four employees as compensation. 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.
In November, 2013, we issued 4,117,652 shares of common stock at a per share price of $0.017, valued at $70,000 to the directors of IceWEB as board compensation. 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.
In January, 2014, we issued 2,000,000 shares of common stock at a per share price of $0.012, valued at $24,000 to an executive officer as compensation. 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.
In February, 2014, we issued 8,000,000 shares of common stock at a per share price of $0.0124, valued at $91,200 to an accredited investor for services rendered. 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.
All stock based transactions listed above were valued at fair market value (quoted market prices).
22
ICEWEB, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2014
NOTE 15 STOCKHOLDERS DEFICIT (continued)
A summary of the status of the Companys outstanding common stock warrants as of March 31, 2014 and changes during the nine month period ending on that date is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Weighted
|
|
Average
|
|
|
|
|
|
|
Average
|
|
Remaining
|
|
Aggregate
|
|
|
Number of
|
|
Exercise
|
|
Contractual
|
|
Intrinsic
|
|
|
Warrants
|
|
Price
|
|
Term
|
|
Value
|
Balance outstanding at June 30, 2013
|
|
113,254,128
|
|
$ 0.087
|
|
2.80
|
|
-
|
Granted
|
|
244,448,707
|
|
$ 0.055
|
|
2. 50
|
|
-
|
Exercised
|
|
(5,176,615)
|
|
$ -
|
|
-
|
|
-
|
Forfeited
|
|
(17,719,457)
|
|
$ 0.080
|
|
-
|
|
-
|
Balance outstanding at March 31, 2014
|
|
334,806,763
|
|
$ 0.046
|
|
2.50
|
|
-
|
NOTE 16 - STOCK OPTION PLAN
In August 2012, the Board of Directors adopted the 2012 Equity 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 Companys Board of Directors.
The purpose of the Plan is to advance the Companys 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 Companys officers, directors, other key employees and consultants who have responsibilities affecting our management, development or financial success.
Awards may be made under the Plan in the form of Plan options, shares of the Companys common stock subject to a vesting schedule based upon certain performance objectives (Performance Shares) and shares subject to a vesting schedule based on the recipients 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.
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 Companys 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.
23
ICEWEB, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2014
NOTE 16 - STOCK OPTION PLAN (continued)
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended March 31,
|
|
|
|
2014
|
|
|
2013
|
|
Expected volatility
|
|
13% - 278%
|
|
|
36% - 278%
|
|
Expected term
|
|
1 36 months
|
|
|
1 36 months
|
|
Risk-free interest rate
|
|
0.01% - 0.34%
|
|
|
0.72%
|
|
Forfeiture Rate
|
|
0%
|
|
|
0% - 45%
|
|
Expected dividend yield
|
|
0.00%
|
|
|
0.00%
|
|
The expected volatility was determined with reference to the historical volatility of the Companys 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 three and nine months ended March 31, 2014, total stock-based compensation charged to operations for option-based arrangements amounted to $37,592 and $378,111, respectively. At March 31, 2014, there was approximately $70,403 of total unrecognized compensation expense related to non-vested option-based compensation arrangements under the Plan.
A summary of the status of the Companys outstanding stock options as of March 31, 2014 and changes during the period ending on that date is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Weighted
|
|
Average
|
|
|
|
|
|
|
Average
|
|
Remaining
|
|
Aggregate
|
|
|
Number of
|
|
Exercise
|
|
Contractual
|
|
Intrinsic
|
|
|
Options
|
|
Price
|
|
Term
|
|
Value
|
Balance outstanding at June 30, 2013
|
6,767,970
|
|
$ 0.0824
|
|
3.91
|
|
$ -
|
Granted
|
|
50,250,000
|
|
0.016
|
|
-
|
|
-
|
Exercised
|
|
(51,250,000)
|
|
0.017
|
|
-
|
|
-
|
Forfeited
|
|
(2,875,000)
|
|
0.081
|
|
-
|
|
-
|
Balance outstanding at March 31, 2014
|
2,892,970
|
|
$ 0.084
|
|
3.47
|
|
$ -
|
24
ICEWEB, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2014
NOTE 17 - RELATED PARTY TRANSACTIONS
On November 2, 2012 IceWEB, Inc. entered into a Loan Agreement with IWEB Growth Fund, LLC, a Virginia limited liability company (IWEB Growth Fund) which was recently established by Messrs. Compton, Bush, Carosi, Pirtle and Stavish and General Soyster, our former independent directors. Ms. My Le Phuong, an employee of our company, serves as manager of the IWEB Growth Fund. Under the terms of the Loan Agreement, IWEB Growth Fund agreed to make one or more loans to us up to the total principal amount of $1.5 million. The lending of any amounts under the Loan Agreement is conditioned upon the negotiation of notes and related loan documents which contain terms and conditions that are acceptable to the lender to be determined at the time of the loans. We agreed to grant IWEB Growth Fund a security interest in our assets as collateral for these loans, which such security interest is subordinate to the interest of our primary lender Sand Hill Finance, LLC. In the event we should default under the terms of the Loan Agreement, IWEB Growth Fund is entitled to declare all amounts advanced under the various notes immediately due and payable. An event of default includes a breach by us of any covenant, representation or warranty in the Loan Agreement or a default under any note entered into with the lender.
Between November 9, 2012 and July 11, 2013, IWEB Growth Fund lent us an aggregate of $186,000 under the terms of 9 separate Confession of Judgment Promissory Notes. These notes, which are identical in their terms other than the dates and principal amounts, are for a one year term and bear interest at 12% per annum payable at maturity. Embodied in each of the notes is a confession of judgment which means that should we default upon the payment of the note, we have agreed to permit IWEB Growth Fund to enter a judgment against us in the appropriate court in Virginia before filing suit against us for collection of the amounts. Pursuant to the terms of the Loan Agreement, we paid IWEB Growth Funds expenses of $1,500 for the preparation of the Loan Agreement and related documents. We are using the net proceeds from these initial loans for general working capital.
On April 23, 2014, the six members of IceWEBs Board of Directors resigned, and was replaced by three directors appointed by the holder of our Series AA Preferred Stock. The Board of Directors consists of three directors as of April 23, 2014.
While two out of the three board members who were appointed on April 23, 2014 qualify as unrelated and independent, as they are independent from management and free from any interest, function, business or other relationship that could, or could reasonably be perceived to, materially interfere with the Directors ability to act in the our best interest, we do not have any policies or procedures for the review, approval or ratification of any related party transactions and no review or ratification of any of the foregoing related party transactions by our board has occurred.
NOTE 18 - SEGMENT REPORTING
Although the Company has a number of 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 March 31, 2014 and 2013 all material assets and revenues of the Company were in the United States.
NOTE 19 SUBSEQUENT EVENTS
On April 23, 2014, the Company authorized the creation of the Corporations Series AA Preferred Stock pursuant to the terms and conditions of that certain Certificate of Designations, Preferences and Rights and Limitations of Series AA Preferred Stock (the
Certificate of Designations
). The Corporation is authorized to issue 10,000,000 shares of preferred stock, of which 626,667 shares of Series B Convertible Preferred Stock have been previously issued and remain outstanding. Out of the remaining 9,373,333 authorized but unissued shares of preferred stock, the Certificate of Designations creates four hundred thousand (400,000) shares of Series AA Preferred Stock, $0.001 par value per share (the
Series AA Preferred Stock
), with the following powers and rights:
(i)
the holders of the Series AA Preferred Stock have five thousand (5,000) times that number of votes on all matters submitted to the shareholders of the Corporation that is equal to the number of shares of Common Stock of the Corporation;
(ii)
the holders of the Series AA Preferred Stock shall vote together with the holders of Common Stock as a single class upon all matters submitted to the holders of Common Stock of the Corporation;
25
ICEWEB, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2014
NOTE 19 SUBSEQUENT EVENTS (continued)
(iii)
the holders of the Series AA Preferred Stock are not entitled to receive dividends paid on the Common Stock of the Corporation;
(iv)
the holders of the Series AA Preferred Stock are not entitled to receive any preference over the holders of Common Stock of the Corporation following a liquidation, dissolution and winding up of the Corporation; and
(v)
on or after May 15, 2014, to the extent sufficient shares of Common Stock are authorized, the Series AA Preferred Stock is convertible into the shares of the Corporations fully diluted Common Stock, taking into account the exercise of all warrants, options or any other rights of issuance, of such number sufficient to provide the holders thereof, in the aggregate, ninety percent (90%) of all shares of Common Stock of the Corporation on a fully diluted basis.
On April 23, 2014, the Corporation entered into a Subscription Agreement (the
Subscription Agreement
) with UnifiedOnline! LLC, a Delaware limited liability company (the
Subscriber
), pursuant to which the Subscriber purchased four hundred thousand (400,000) shares of Series AA Preferred Stock of the Corporation (the
Shares
).
In consideration for the Shares, Subscriber (i) paid $16,754 in satisfaction of a contractual health insurance obligation of the Corporation, (ii) caused $99,333 to be paid on behalf of the Corporation to various vendors, and (iii) obtained the agreement of a certain related party lessor to temporarily forbear exercising non-payment default remedies.
In the Subscription Agreement, the Corporation has made customary representations and warranties regarding the organization of the Corporation, authority to enter into the Subscription Agreement, compliance with laws, indebtedness and required consents among others. Subscriber has made customary representations and warranties regarding its organization, authority to enter into the Subscription Agreement and financial risks.
The Corporation has agreed to indemnify Subscriber from and against any and all claims, damages and causes of action suffered or incurred by Subscriber that are related to any breach of any representation or warranty made by the Corporation in the Subscription Agreement.
In addition, Hal Compton, Raymond Pirtle, Jack Bush, Ed Soyster, Nicholas Carosi, and Mark Stavish resigned from their positions as members of the Companys board of directors. The Company appointed Rob Howe III, Bernie Stolar, and Marc I. Abrams to serve as the members of the Board of Directors.
In April and May, 2014 we issued 17 million shares of our common stock, related to the conversion of $35,220 of our convertible debt.
In April, 2014 we issued 3,773,585 shares of our common stock as payment of a commitment fee to one of our convertible debt holders, valued at $40,000.
26