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ICEWEB INC - 10-KT - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS(Edgar Glimpses Via Acquire Media NewsEdge) Our Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is provided in addition to the accompanying consolidated financial statements and notes to assist readers in understanding our results of operations, financial condition, and cash flows. It should be read in conjunction with the accompanying consolidated financial statements and notes. MD&A is organized as follows: ? Overview. Discussion of our business and overall analysis of financial and other highlights affecting the company in order to provide context for the remainder of MD&A. ? Results of Operations. An analysis of our financial results comparing the nine month transition period ended June 30, 2014 to Fiscal 2013. ? Liquidity and Capital Resources. An analysis of changes in our balance sheets and cash flows, and discussion of our financial condition and potential sources of liquidity. ? Off Balance-Sheet Arrangements. ? Recent Accounting Pronouncements. In addition to historical financial information, the following discussion contains forward-looking statements that reflect our plans, estimates and beliefs and are subject to a number of known and unknown risks and external factors that in addition to general, economic, competitive and other business conditions, could cause actual results, performance and achievements to differ materially from those described or implied in the forward-looking statements, as more fully discussed below and elsewhere in this filing. OVERVIEW IceWEB is a provider of high performance network services (wireless, wireline and fiber), ISP services, private networking services, datacenter services and storage solutions. Our wireless point-to-point network and private fiber ring provide customers with a unique capability for not only high speed business to business networking, but also redundant backup circuitry for disaster preparedness purposes. Our datacenter provides highly secure, power-dense rack and cross-connect capabilities to business customers seeking co-location, disaster recovery, managed services and business continuity capability. The efficiency of our location and our solar assisted power generation enables our low cost of operations. In addition to lower capital expenditures for the enterprise, by outsourcing IT capabilities through our networks to our datacenters, customers can increase the security of their data assets while increasing the availability to their users' off-premise. Utilizing our smart infrastructure, customers can also avail themselves of rapid deployment of event-based wireless capabilities saving them time and money and providing optimum time savings for broadband-remote locations. Through our acquisition of Computers & Telecom, Inc. and KCNAP, LLC, (collectively "CTC") in October 2013, IceWEB now provides these 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 highly efficient Internet routes provides customers improved reliability and streamlined connectivity while significantly reducing costs by reaching a critical mass of networks within a centralized physical location. CTC operates a wireless internet service business, providing wireless 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. Our platform enables scalable, reliable and cost-effective co-location, interconnection and traffic exchange. Our customer base includes U.S. government agencies, enterprise companies, and small to medium sized businesses in hospitality, healthcare, retail and other market spaces ("SMB"). We anticipate revenues for fiscal 2015 will increase as a result of organic growth, the introduction of new products and services, such as additional cloud services offerings through alliances and strategic partnerships with other ISPs and wireless providers, and other products sold through our resellers and OEM partners. There are no assurances, however, that our revenues will return to historic levels. 18--------------------------------------------------------------------------------RESULTS OF OPERATIONS NINE MONTH TRANSITION PERIOD ENDED JUNE 30, 2014 AS COMPARED TO FISCAL YEAR 2013 The following table provides an overview of certain key factors of our results of operations for the nine month transition period ended June 30, 2014 as compared to fiscal year 2013: Nine Months Ended Year Ended June 30, September 30, $ % 2014 2013 Change Change Net Revenues $ 722,784 $ 977,368 $ (254,584 ) (26.0 %) Cost of sales 472,552 555,228 (82,676 ) (14.9 %) Operating Expenses Sales and marketing 114,271 841,625 (727,354 ) (86.4 %) Depreciation 521,849 215,237 306,612 142.5 % Research and development 292,750 1,246,060 (953,310 ) (76.5 %) General and administrative 987,979 5,283,363 (4,295,384 ) (81.3 %) Total Operating Expenses 1,916,849 7,586,285 (5,669,436 ) (74.7 %) Loss from operations (1,666,617 ) (7,164,145 ) 5,497,528 (76.7 %) Total other income (expense) (3,227,661 ) 55,326 (3,282,987 ) (5933.9 %) Net loss $ (4,894,278 ) $ (7,108,819 ) $ 2,214,541 (31.2 %) Other Key Indicators: Nine Months Ended Year Ended June 30, September 30, 2014 2013 Cost of sales as a percentage of revenue 65.4 % 56.8 % Gross profit margin 34.6 % 43.2 % Sales and marketing expense as a percentage of sales 15.8 % 86.1 % General and administrative expenses as a percentage of sales 136.7 % 127.5 % Total operating expenses as a percentage of sales 265.2 % 776.2 % RevenuesThe decrease in sales is primarily due to a shift in the business' focus to the data center operations related to our acquisition of CTC in October 2013. Cost of Sales and Gross Profit Our cost of sales consists primarily of the costs of providing wireless and fiber bandwidth and colocation services. For the nine months ended June 30, 2014 cost of sales were $472,552 or approximately 65% of revenues compared to $555,228 or approximately 57% of revenues for Fiscal year 2013. The increase in costs of sales as a percentage of revenue and the corresponding decrease in gross profit margin was due to the change in focus of the business. We anticipate that gross profit margin will remain between 35% and 50% during Fiscal year 2015. Total Operating Expenses Our total operating expenses decreased approximately 75% for the nine month period ended June 30, 2014 as compared to the year ended September 30, 2013. The changes include: ? Sales and Marketing. Sales and marketing expense includes salaries, commission, telephone and travel and entertainment expenses for direct and indirect sales personnel. For the nine month period ended June 30, 2014, sales and marketing decreased approximately 86% from Fiscal 2013. The decrease was due primarily to decreased sales and marketing headcount during the nine month period ended June 30, 2014 as a result in a shift in the business focus of the company. 19--------------------------------------------------------------------------------? Depreciation expense. For the nine months ended June 30, 2014, depreciation expense was $521,849 compared to $215,237 for Fiscal 2013 due to the acquisition of CTC in October, 2013. ? Research and development expense. For the nine months ended June 30, 2014, research and development expenses decreased approximately 77% from Fiscal 2013 due to lower headcount and a shift in the business focus due to the acquisition of CTC in October, 2013. ? General and administrative expense. For the nine months ended June 30, 2014, general and administrative expenses decreased approximately 81% from Fiscal 2013. For the nine months ended June 30, 2014 and Fiscal 2013, general and administrative expenses consisted of the following: Nine Months Ended Year Ended June 30, September 30, 2014 2013 Occupancy $ 68,426 $ 33,144 Consulting 186,882 1,712,926 Employee compensation 119,886 2,106,373 Professional fees 139,163 238,480 Internet and phone 52,242 9,672 Travel and entertainment 34,692 37,603 Investor relations 132,844 737,323 Insurance 42,353 22,259 Other 211,491 385,583 $ 987,979 $ 5,283,363 The principal changes between the two periods include: ? For the nine months ended June 30, 2014, occupancy expense increased approximately 106% from Fiscal 2013 due to the acquisition of CTC in October 2013. ? For the nine months ended June 30, 2014, consulting expense decreased approximately 90% due to a reduced use of consultants for business development efforts as well as reduced non-recurring stock-based consulting fees related to merger and acquisition activity in Fiscal 2013. ? For the nine months ended June 30, 2014 employee compensation which includes related taxes and benefits decreased approximately $2 million primarily due to the return and cancellation of restricted share compensation which was expensed in the prior fiscal year. Excluding that adjustment, compensation expense during the nine month period totaled $442,886, which is lower than Fiscal 2013 due to reduced headcount and lower stock-based compensation expense. ? For the nine months ended June 30, 2014, professional fees decreased approximately 41% due to lower litigation and legal fees incurred in the normal course of business as compared to Fiscal 2013. ? For the nine months ended June 30, 2014, investor relations decreased approximately 81% as compared to Fiscal 2013 due to substantially lower general investor relations activity. ? For the nine months ended June 30, 2014, insurance expense increased approximately 90% from Fiscal 2013 due to higher premiums paid for directors and officer's insurance. ? For the nine months ended June 30, 2014, other expense decreased approximately 45% from Fiscal 2013 primarily due to a decrease in bad debt expense and other cost control measures. 20-------------------------------------------------------------------------------- Loss from Operations We reported a loss from operations of $1.7 million for the nine month period ended June 30, 2014 as compared to a loss from operations of $7.2 million for Fiscal 2013. Total Other Income (Expenses) Loss on change in derivative liability. For the nine month period ended June 30, 2014 we had a loss on the change in derivative liability of $61,221 as compared to a gain on the change in derivative liability of $987,075 in Fiscal 2013. This represents the change in the value of the derivative liability based on the Black-Scholes value of our outstanding variably-priced warrants. The variance is primarily attributable to the change in the Company's stock price. Loss on extinguishment of debt. For the nine month period ended June 30, 2014 we had a loss on extinguishment of debt of $265,311 related to the sale and assignment of the Agility 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, Unified Online! LLC. For Fiscal 2013 we had a loss on extinguishment of debt related to the payoff of our outstanding convertible debenture payable to Sand Hill Finance, LLC of $481,588. Impairment of Goodwill. For the nine months ended June 30, 2014, we incurred a loss on the impairment of intangible assets of $2.1 million which related to the acquisition of CTC in October 2013. We did not incur a similar expense in Fiscal 2013. Interest Expense. For the nine month period ended June 30, 2014, interest expense increased approximately 81%. The increase in interest expense is primarily attributable the interest expense on an equipment lease entered into on October 1, 2013. Net Loss Our net loss was $4.9 million for the nine month period ended June 30, 2014 compared to $7.1 million for Fiscal 2013, an improvement of $2.2 million or approximately 31%. LIQUIDITY AND CAPITAL RESOURCES Liquidity is the ability of a company to generate adequate amounts of cash to support its current and future operations, satisfy its obligations and otherwise operate on an ongoing basis. In summary, our cash flows are as follows: Nine months ended Year ended June 30, September 30, 2014 2013 Net cash used in operating activities $ (1,286,842 ) $ (2,700,609 ) Net cash used in investing activities (18,226 ) (23,319 ) Net cash provided by financing activities 1,352,243 2,463,986 Net increase (decrease) in cash $ 47,175 $ (259,942 ) At June 30, 2014, we had a working capital deficit of $3,147,603compared to a working capital deficit of $693,308 at September 30, 2013, an increase in the deficit of $2454,295. The increase in the deficit is primarily attributable to the increase in notes payable of $7641,475 due to an equipment lease entered into in October 2013, an increase in our related-party notes payable of $664,578, the increase in derivative liability of $654,273, a non-cash liability and an increase in accounts payable and accrued liabilities of $190,715. 21 -------------------------------------------------------------------------------- Net cash used in operating activities was $1.3 million for the nine month period ended June 30, 2014 as compared to net cash used in operating activities of $2.7 million for Fiscal 2013, a decrease of $1.5 million. For the nine month period ended June 30, 2014, our cash used in operations of $1.3 million consisted of a net loss of $4.9million offset by non-cash items totaling $3.6 million including items such as depreciation of $550,799, goodwill impairment of $2.1 million, loss on extinguishment of debt of $265,311, amortization of debt discount of $477,813 and other non-cash items of $74,939. Additionally, during the nine month period ended June 30, 2014, we had a decrease in operating liabilities offset by a decrease in operating assets which increased our net loss. For Fiscal 2013, our cash used in operations of $2.7 million consisted of a net loss of $7.1 million offset by non-cash items totaling $4.2 million including items such as depreciation of $215,237, stock based compensation of $969,600, the amortization of deferred compensation of $762,677, the loss on extinguishment of debt of $481,588, and the issuance of common stock for services of $2.5 million, offset by the change in fair value of derivative liability of $987,075 and other non-cash items of $226,205. Additionally, curing Fiscal 2013 we had a decrease in operating liabilities offset by a decrease in operating assets which increased our net loss. Net cash used in investing activities for the nine month period ended June 30, 2014 was $18,226 as compared to net cash used in investing activities for Fiscal 2013 of $23,319 for property and equipment purchases. Net cash provided by financing activities for the nine months ended June 30, 2014 $1.4 million as compared to $2.5 million for Fiscal 2013, a decrease of $1.2 million. In the nine months ended June 30, 2014, we received proceeds from the issuance of preferred stock of $116,087, proceeds from the sale of convertible notes of $427,821, proceeds from notes payable from a related party of $664,578 and proceeds from the exercise of common stock options of $271,167, offset by payments on notes payable of $127,410. In Fiscal 2013, we received proceeds from the sale of convertible notes of $168,000, proceeds from notes payable from a related party of $186,000, proceeds from the conversion of warrants of $53,480, proceeds from the exercise of common stock options of $1,726,360, the proceeds from the sale of common stock of $245,000, and proceeds from note payable of $297,940, offset by payments on notes payable of $212,794. At June 30, 2014 we had an accumulated deficit of $52.8 million and the report from our independent registered public accounting firm on our consolidated audited financial statements at June 30, 2014 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. In spite of our sales, there is no assurance that we will be able to maintain or increase our sales in Fiscal 2015 or that we will report net income in any future periods. In November 2012 we entered into a Loan Agreement with IWEB Growth Fund, LLC, a company which was established by Messrs. Compton, Bush, Carosi, Pirtle and Stavish and General Soyster, our former independent directors. 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 and as of the date hereof we have borrowed $186,000 from it under one year 12% secured notes. Under the terms of these loans, we granted IWEB Growth Fund a second position security interest in all of our assets and executed a confession of judgment. Any additional amounts to be lent to us under this master agreement are at the discretion of the lender and there are no assurances any additional funds will be available to us. In addition, there are no assurances that the terms of these loans are as favorable to us as we might have received from unrelated third parties. Lastly, should we fail to pay these obligations when due, the lender could seek to foreclose on our assets or otherwise obtain a judgment against us. 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 Fund's expenses of $1,500 for the preparation of the Loan Agreement and related documents. We used the net proceeds from these initial loans for general working capital. On April 23, 2014, we entered into a Subscription Agreement with UnifiedOnline! LLC (the "Subscriber"), a Delaware limited liability company, pursuant to which the Subscriber purchased 400,000 shares of Series AA Preferred Stock. In consideration for the Shares, Subscriber paid $116,087 to various vendors and obtained the agreement of a certain related party lessor to temporarily forbear exercising non-payment default remedies. Since entering into the Subscription Agreement, the Subscriber has advanced $664,578 bearing interest at 10% per annum to fund general working capital. 22 -------------------------------------------------------------------------------- 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, 2014 we had cash on hand of $56,827. We do not have any commitments for capital expenditures. Our working capital needs in future periods depend 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. 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 our 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. OFF BALANCE SHEET ARRANGEMENTS As of June 30, 2014 we did not have any off-balance-sheet arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K. RECENT ACCOUNTING PRONOUNCEMENTS In July 2013, the Financial Accounting Standards Board ("FASB") issued authoritative guidance that requires that an entity net its liability for unrecognized tax positions against a net operating loss carryforward, a similar tax loss or a tax credit carryforward when settlement in this manner is available under the tax law. The Company will adopt this guidance effective at the beginning of its 2015 fiscal year. The Company is currently evaluating the impact of this pronouncement on its financial statements. In February 2013, the FASB issued authoritative guidance that amends the presentation of accumulated other comprehensive income and clarifies how to report the effect of significant reclassifications out of accumulated other comprehensive income. The guidance, which becomes effective for the Company on a prospective basis at the beginning of its 2014 fiscal year, requires footnote disclosures regarding the changes in accumulated other comprehensive income by component and the line items affected in the statements of operations. The adoption of this updated authoritative guidance is not expected to have a significant impact on the Company's Consolidated Financial Statements. |