10-K 1 form10k.htm FORM 10K Converted by EDGARwiz

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

x         ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


For the fiscal year ended September 30, 2013

 

OR

 

¨          TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from __________ to __________

 

Commission File Number 000-27865

 

IceWEB, Inc.

(Exact name of registrant as specified in its charter)

 

Delaware

 

13-2640971

State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization

 

Identification No.)

 

324 E 11th, Suite 2425, Kansas City, MO

 

64106

(Address of principal executive offices)

 

(Zip Code

 

Registrants telephone number, including area code:  (571) 287-2388

 

Securities registered under Section 12(b) of the Exchange Act:

 

Title of each class

 

Name of each exchange on which registered

None

 

None

 

Securities registered under Section 12(g) of the Exchange Act:

 

Common Stock, $0.001 Par Value

(Title of class)

 

Indicate by checkmark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨    No þ

 

Indicate by checkmark if the registrant is not required to file reports pursuant to Section 13 or 15 (d) of the Act

Yes ¨    No þ

 

Indicate by checkmark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   

Yes x    No ¨

 

Indicate by checkmark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Date File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§229.405 of this chapter) during the preceding 12 months (or such shorter period that the registrant was required to submit and post such files).   Yes x    No ¨

 



Indicate by checkmark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained in this form, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨

 

Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a small reporting company. See the definitions of large accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ¨

Accelerated filer ¨

 

 

Non-accelerated filer ¨

Smaller reporting company x

 

Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yes ¨ No x

 

State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average of the bid and asked price of such common equity, as of the last business day of the registrants most recently completed second fiscal quarter. The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was sold on March 31, 2013, the last business day of the registrants most recently completed second fiscal quarter was $ 9,288,089.

 

Indicate the number of shares outstanding of each of the registrants classes of common equity, as of the latest practicable date. The number of common shares issued and outstanding as of January 14, 2014 was 473,460,779 shares.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

List hereunder the following documents if incorporated by reference and the part of the Form 10-K (e.g. Part I, Part II, etc.) into which the document is incorporated: (1) Any annual report to security holders; (2) Any proxy or information statement; and (3) Any prospectus filed pursuant to Rule 424(b) or (c) of the Securities Act of 1933. The listed documents should be clearly described for identification purposes (e.g., annual report to security holders for fiscal year ended December 24, 1980).  None

 

 

 

 




TABLE OF CONTENTS

 

PART I

 

3

ITEM 1.

BUSINESS.

3

ITEM 1A.

RISK FACTORS.

9

ITEM 1B.

UNRESOLVED STAFF COMMENTS.

17

ITEM 2:

PROPERTIES.

18

ITEM 3:

LEGAL PROCEEDINGS.

18

ITEM 4:

MINE SAFETY DISCLOSURES.

18

PART II

 

19

ITEM 5:

MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.

19

ITEM 6.

SELECTED FINANCIAL DATA.

21

ITEM 7:

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

22

ITEM 7A:

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

27

ITEM 8:

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

28

ITEM 9:

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

59

ITEM 9A:

CONTROLS AND PROCEDURES.

59

ITEM 9B:

OTHER INFORMATION.

60

PART III

 

61

ITEM 10:

DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE.

61

ITEM 11:

EXECUTIVE COMPENSATION.

66

ITEM 12:

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.

69

ITEM 13:

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.

70

ITEM 14:

PRINCIPAL ACCOUNTANT FEES AND SERVICES.

71

PART IV

 

72

ITEM 15:

EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

72

 

Cautionary Statement Regarding Forward Looking Statements

 

This Annual Report on Form 10-K contains statements that are considered forward-looking statements. Forward-looking statements give our current expectations and forecasts of future events. All statements other than statements of current or historical fact contained in this annual report, including statements regarding our future financial position, business strategy, budgets, projected costs and plans and objectives of management for future operations, are forward-looking statements. The words anticipate, believe, continue, estimate, expect, intend, may, plan, and similar expressions, as they relate to the Company, are intended to identify forward-looking statements. These statements are based on our current plans, and our actual future activities and results of operations may be materially different from those set forth in the forward-looking statements. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from the statements made. Any or all of the forward-looking statements in this report may turn out to be inaccurate. We have based these forward-looking statements largely on its current expectations and projections about future events and financial trends that it believes may affect its financial condition, results of operations, business strategy and financial needs. The forward-looking statements can be affected by inaccurate assumptions or by known or unknown risks, uncertainties and assumptions. We undertake no obligation to publicly revise these forward-looking statements to reflect events occurring after the date hereof. All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements contained in this report.

 

OTHER PERTINENT INFORMATION

 

When used in this report, the terms the Company, IceWEB, "we", "our", and "us" refers to IceWEB, Inc., a Delaware corporation, and our subsidiaries. When used in this report, fiscal year 2013 or fiscal 2013 means the year ended September 30, 2013, and fiscal year 2014 or fiscal 2014 means the year ending September 30, 2014. The information which appears on our Web sites is not part of this report.

 

2




PART I

ITEM 1. DESCRIPTION OF BUSINESS

 

BUSINESS OF ICEWEB

 

OVERVIEW

 

With our acquisition of Computers & Telecom, Inc. and KCNAP, LLC, (collectively CTC) in October 2013, IceWEB provides wireless and fiber broadband service, co-location space and related services and operate 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).

 

IceWEB unified data storage line of products

 

Our high performance unified data storage solutions make it possible to operate and manage files and applications from a single device. File-based and block-based access data are consolidated in a single storage platform which supports Fibre Channel SAN, IP-based SAN (iSCSI), and NAS (network attached storage).

 

Our unified storage system simultaneously enables storage of file data and handles the block-based I/O (input/output) of enterprise applications.  One advantage of unified storage is reduced hardware requirements. Instead of separate storage platforms, like NAS for file-based storage and a RAID disk array for block-based storage, unified storage combines both in a single device. Alternatively, a single device could be deployed for either file or block storage.

 

In addition to reduced capital expenditures for the enterprise, unified storage systems can also be simpler to manage than separate products since our IceWEB Storage System offers one platform for file and block data of all kinds.   Whether it is Microsoft Exchange, SQL Server or Oracle databases, virtualized environments, scanned images, files, video, pictures, graphics, or voice data, we believe our products maximize the efficiency of storage by centralizing all data on one platform secured with strong data protection capabilities.

 

The all-inclusive IceWEB Storage System includes de-duplication; unlimited snapshots; thin provisioning; local or remote, real-time or scheduled replication; capacity and utilization reporting, and integration with virtual server environments.  Unified storage systems enjoy the same level of reliability as dedicated file or block storage systems.

 

We believe our product offerings have broad appeal in the enterprise and federal marketplaces, and are used as core building blocks (enabling technologies) of business critical storage infrastructure for a diverse group of data intensive key vertical market segments such as geospatial information systems, entertainment, security and defense, higher education, Internet service providers, managed service providers, oil and gas, and health care. We believe our storage systems delivers levels of performance, scalability, versatility and simplicity that exceed existing network storage alternatives. Our unified network storage offering is deployed as storage operating system software on our NAS and our storage area network (SAN) hardware products.

 

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Our IceSTORMTM file management system replaces complex and performance-limited competitive products with high performance, scalable and easy to use systems capable of handling the most data-intensive applications and environments. We believe that our solution delivers three key benefits:

 

Performance   - which equals or exceeds all competitive products

Management   which requires less expertise and provides ease of use for overburdened technical staffers

Cost   our solutions typically can be deployed costing far less than those of ours competitors while delivering feature-rich performance with comprehensive, yet easy-to-use management.

 

Competitive Landscape

 

We compete with storage vendors such as NetApp, Inc., EMC, Inc., and many other companies in the markets we serve, including companies that offer a broad spectrum of IT products and services.

With the demand for data storage growing exponentially within all organizations, budgetary and common sense decision making is creating a second tier storage marketplace where our IceWEB data storage products are perceived as compelling data storage solutions. Based upon our review of the market, we believe some customers are searching for alternatives from the high costs and hardware replacement upgrades often required by the larger Tier 1 storage providers, who push expensive upgrades to satisfy to meet their billion dollar revenue growth commitments. Instead, some customers are opting to deploy our products with versatile and feature rich capabilities.

 

Cloud Computing Products and Services

 

Cloud Storage Appliances (CSA)

 

We have focused our engineering and research and development efforts on crafting our products to perform as scalable building blocks for those companies or service providers wishing to rapidly deploy high performance infrastructure to enable delivery of cloud-based services. In September 2009 we introduced a line of devices called cloud storage appliances or CSAs. A cloud storage appliance is a purpose built storage device configured for either branch office or central site deployment which allows the housing and delivery of customer data across not only their internal networking infrastructure, but also to make that data available to employees or business partners securely via the Internet, often called the cloud. The CSA line has been built to address concerns within the enterprise marketplace which revolve around hesitation to entrust corporate data to third party providers such as Amazon S3, Mozy, Nirvanix, and others. The CSA line also addresses additional concerns about data access latency and performance.

 

By implementing our CSA devices, we believe companies can gain all of the benefits of cloud computing, while mitigating the impact of long-term contracts frequently required by vendors, and reducing the potential for security breaches. High performance data transfers are maintained by back-hauling the data and replicating it from remote branch offices across existing wide area network links to the corporate IT infrastructure. We believe an additional benefit derived from the deployment of private or hybrid storage clouds on the CSA products is that companies may not be required to pay per-megabyte or per-gigabyte transfer and storage fees to third party service companies.


Customers

 

Our products have been sold to customers in the U.S., Canada and Europe across a broad range of industries, including GIS; oil and gas; state, local and federal government; and healthcare. We believe that our customers have a high level of satisfaction with our products and services. During the year ended September 30, 2013 two customers accounted for 40% of our consolidated revenue.


 

4

 





 

Sales and Marketing

 

We sell our products via full channel-based model and through a direct sales force.  In a channel-based sales model, companies with products or services build partnerships with systems integrators, other manufacturers, vertical companies and distributors and leverage the sales resources of those groups to drive sales of products/services. We believe that the value of a channel-based sales model is twofold. First it allows us to grow total sales volume significantly while keeping sales staff, and our general and administrative expenses, low. Rather than building a significant worldwide sales force of our own, this model allows us to build a small channel organization responsible for identification, training and support of partner organizations to ensure their success and productivity. The second value of the channel-based model is that partners bring their own knowledge of key accounts and have relationships already in place which compresses the sales cycle and increases the close ratio on new business, with the goal of generating more sales for our companys products and services.

 

We continue to aggressively pursue partner agreements to increase our sales and market exposure and footprint. These partner agreements typically take between three and six months to develop prior to materially increasing sales revenues.

 

Manufacturing

 

Historically, our manufacturing has been conducted at our headquarters in Sterling, Virginia.  Utilizing chassis from premium manufacturers such as AIC Corporation, Intel, SuperMicro, and others, all systems are built, burned-in, and tested at this facility by our in-house engineering and production staff.  We manufacture IceBOX appliances, data storage management platforms. We use best-of-breed, readily available, commercial off-the-shelf products sourced from various resellers and suppliers in our manufacturing process.  Subsequent to our acquisition of CTC, we now outsource the manufacture of our IceWEB Storage products to a third party contract manufacturer located in Northern Virginia.

 

Competition

 

The market for our storage is highly competitive and likely to become even more competitive in the future. Established companies have historically dominated the storage market, including EMC, Network Appliance, Dell, Hewlett-Packard, Sun Microsystems, Hitachi Data Systems and IBM. 

 

In addition, there is additional competition from smaller companies such as Compellent Technologies and Isilon. In the future, new competitors will emerge as well as increased competition, both domestically and internationally, from other established storage companies. The principal competitive market factors are:

 

Industry credibility

Product scalability, performance and reliability

 

Ease of installation and management

 

Software functionality

 

Total cost of ownership

 

Customer support

 

Market presence

 

 

We believe that we compete effectively across all of these factors. In particular, we believe that our product architecture provides significant competitive advantages in terms of performance, scalability, ease of management and low total cost of ownership. Historically, our OEM partners have provided us with a significant number of reference accounts which address credibility and helps in our marketing efforts to new customers.


Many of the competitors have longer operating histories, better name recognition, larger customer bases and significantly greater financial, technical, sales and marketing resources than we have. Competitors may also be able to devote greater resources to the development, promotion, sale and support of their products. Competitors may also have more extensive customer bases and broader customer relationships than we do, including relationships with potential our customers.

 

5

 



Research and Development 

 

Research and development expenses consist primarily of personnel-related expenses, costs of prototype equipment, costs of using contractors, allocated facility and IT overhead expenses and depreciation of equipment used in research and development activities. We expense research and development costs as incurred. Our research and development expenses were $1,246,060 and $1,046,026, in fiscal 2013 and fiscal 2012, respectively.  We anticipate that research and development activity will substantially decline in fiscal 2014 as we focus on selling and marketing our storage products and operate the businesses of CTC.

 

Intellectual Property

 

Success in our technological markets depends, in part, upon our ability to obtain and maintain proprietary protection for our products, technology and know-how. This must be accomplished without infringing the proprietary rights of others and while simultaneously preventing others from infringing upon our proprietary rights.

 

We seek to protect our proprietary positions by, among other methods, filing patent applications. Patent efforts are focused in the United States and, when justified by cost and strategic importance, we plan to file related foreign patent applications in jurisdictions such as the European Union and Japan.

 

Pending patent applications relate to various software development projects and to the rapid ingestion of massive amounts of video and other data and other network storage concepts.   It is unknown if any of the patent applications will issue as patents. The patent applications may be opposed, contested, circumvented, designed around by a third-party, or found to be invalid or unenforceable.

 

Copyright law, trademarks and trade secret agreements are also used to protect and maintain proprietary positions.  Our proprietary information is protected by internal and external controls, including contractual agreements with employees, end-users and channel partners. There is no assurance that these parties will abide by the terms of their agreements.

 

Trademarks are used on some of our products and these distinctive marks may be an important factor in marketing the products. Inline® and Inline logo trademarks have been registered in the United States. 

 

Our History

 

We were originally formed under the laws of the State of Delaware in February 1969. For many years, we were a wholesaler of custom one, two, three and four-color processed commercial printing, as well as disposable and durable office equipment including stock paper, fax paper, fax and copy machines, computers, file cabinets and safes. We conducted our business throughout the United States of America and Puerto Rico from our headquarters in New York.

 

In March 1999, we changed the focus of our business and closed a transaction by which we acquired 100% of the outstanding capital stock of North Orlando Sports Promotions, Inc., a privately held Florida corporation. From 1999 until July 2001, we operated a variety of Internet-related services; however, we were unable to generate positive cash flow from these Internet-related businesses.


In May 2001, we executed an Agreement and Plan of Reorganization and Stock Purchase Agreement with Disease S.I., Inc. Under the terms of the agreement, we acquired 100% of the issued and outstanding stock of Disease S.I., Inc. in exchange for 750,000 shares of our common stock. The transaction was accounted for as a reverse acquisition under the purchase method for business combinations. Accordingly, the combination of the two companies was recorded as a recapitalization of Disease S.I., Inc., pursuant to which Disease S.I., Inc. was treated as the continuing entity. Disease S.I., Inc. was a developmental stage biopharmaceutical clinical diagnostics company planning to employ a broad array of technologies to detect, identify and quantify substances in blood or other bodily fluids and tissues. It intended to derive revenues from patent sub-licensing fees, royalties from pharmaceutical sales, appropriate milestone payments and research and development contracts.

 

6

 

 




Following completion of the acquisition of Disease S.I., Inc., it became apparent to us that it would be in our best long-term interest that the Internet operations be conducted apart from the biopharmaceutical clinical diagnostics operations. On July 24, 2001, we sold a former officer and director 100% of our subsidiary North Orlando Sports Promotions, Inc., in exchange for the assumption of all liabilities related to North Orlando Sports Promotions, Inc. and its operations estimated at approximately $112,000, and which included the forgiveness of $91,500 in accrued compensation. Included in the sale along with the capital stock of North Orlando Sports Promotions, Inc. were fixed assets, rights to several domain names and various contractual rights and obligations.

 

On November 27, 2001, we acquired 9,050,833 shares of the common stock of Healthspan Sciences, Inc., a privately held California corporation in exchange for 5,000 shares of our common stock in a private transaction exempt from registration under the Securities Act of 1933 in reliance on Section 4(2) of that act. This agreement was rescinded on March 21, 2002. Pursuant to the rescission, Healthspan Sciences, Inc. returned all 5,000 shares of our common stock issued in the exchange and we returned all 9,050,833 shares of Healthspan Sciences, Inc. which we had received.

 

On March 21, 2002, we executed an Agreement and Plan of Merger with IceWEB Communications, Inc., a Delaware corporation and its security holders. Founded in 2000, IceWEB Communications, Inc. enabled interactive communications and education on the web. In June 2001, it had acquired the assets in bankruptcy of Learning Stream, Inc., a provider of streaming services. Pursuant to the agreement, each of the 22,720,500 shares of common stock of IceWEB Communications, Inc. issued and outstanding immediately prior to the merger were converted into the right to receive 0.13375 shares of our common stock, for an aggregate of 303,888 shares of common stock. Each of the warrants to purchase an aggregate of 680,125 shares of IceWEB Communications, Inc. common stock issued and outstanding immediately prior to the merger were converted into the right to receive one warrant to purchase 0.13375 shares of our common stock upon exercise of said warrant.

 

 In June 2003, we acquired 100% of the capital stock of Interlan Communications, Inc., a privately held corporation, in exchange for 25,000 shares of our common stock. In June 2003, we also acquired 100% of the capital stock of Seven Corporation in exchange for 37,500 shares of our common stock and cash consideration of $123,000. As described later in this section, we sold Seven Corporation in February 2007.

 

In October 2003, we acquired 19% of the capital stock of IceWEB 5000, Inc. of Virginia, together with substantially all of its assets including software licenses, source code, potential patents and trademarks for a combined stock and cash value of approximately $632,000 which included the issuance of 191,381 shares of our common stock and cash consideration of $65,500.

 

In May 2004, we acquired substantially all of the assets of DevElements, Inc. of Virginia, including software licenses, source code, potential patents and trademarks, cash, hardware, and equipment. As consideration for the purchase of the assets, we paid DevElements $100,000 and agreed to the assumption of liabilities up to an aggregate of $150,000. In exchange for the 19% interest in DevElements, we issued to the security holders of DevElements 187,500 shares of our common stock and options to purchase 187,500 shares of common stock exercisable at a price of $27.20 per share and expiring May 13, 2009. We issued to the security holders options to purchase 6,250 shares, which were contingently exercisable upon the satisfaction of certain performance criteria. The performance criteria, which required contracts, task orders and other work assignments involving billing of at least $840,000 during the six-month period ending November 13, 2004, was not met and the options were cancelled.


In March 2006 we acquired PatriotNet, Inc., an Internet service provider, for total consideration of $290,000 of which $190,000 was paid in cash and $100,000 was paid through the issuance of 100,000 shares of our common stock. We granted Patriot Computer Group, Inc., the seller in the transaction, certain piggyback registration rights for the 100,000 shares of our common stock issued as partial consideration in the transaction. At the time of the acquisition, the purchase price exceeded the fair value of the assets acquired by $390,600 which we treated as goodwill for accounting purposes. From the date of acquisition through September 30, 2007 revenues from PatriotNet were approximately $316,000 and represented approximately 6% of our consolidated revenues. On December 1, 2006 we sold PatriotNet to Leros Online, Inc., a third party, for $150,000 in cash and the assumption of $60,000 in liabilities. At September 30, 2007 we recorded goodwill impairment of $180,000 related to this transaction.



7

 

 




 

On December 1, 2006 we sold 100% of the capital stock of our wholly-owned subsidiary, Integrated Power Solutions, Inc. to Mr. John Younts, our Vice President of Integrated Power Solutions and a key employee, for the assumption of approximately $180,000 in liabilities and the payment of $12,000 we owed him. For the fiscal year ended September 30, 2006, revenues for Integrated Power Solutions were approximately $457,000, or approximately, 9.5%, of our total sales. 

 

On November 15, 2006, we acquired certain of the assets of True North Solutions related to its governmental customer business for $350,000 of which $250,000 was paid in cash and the balance was paid through the delivery of a $100,000 principal amount promissory note secured by collateral pledge of the assets, payable immediately upon accomplishment of the novation of the GSA Schedule. Under the terms of the agreement, we acquired the customers, forecast, contract renewals, and GSA schedule of True North Solutions. We permitted True North Solutions to use the purchased assets until December 31, 2006 pursuant to which we acted as the sellers subcontractor until the novation of the GSA Schedule was complete. The novation of the GSA schedule was completed in March, 2008.

 

On February 16, 2007 we sold 100% of the outstanding stock of our subsidiary, The Seven Corporation of Virginia, Inc., to PC NET in exchange for the waiver of approximately $11,000 we owed PC NET. Under the terms of the agreement we may not engage in any staffing services businesses as The Seven Corporation had conducted for a period of at least two years. For the fiscal year ended September 30, 2006 revenues from The Seven Corporation were $360,000 or approximately 7.5%, of our total sales.

 

On December 22, 2007, we acquired 100% of the outstanding stock of Inline Corporation for $2,412,731 in cash, plus 503,356 shares of our common stock valued at $276,846, the fair market value on the date of acquisition. The acquisition was accounted for using the purchase method of accounting.

 

On March 30, 2009, we completed the sale of IceWEB Virginia, Inc., a wholly owned subsidiary, to ABC Networks, Inc., a privately held U.S. company. Pursuant to the terms of the transaction, ABC Networks, Inc. acquired 100% of the outstanding common stock of IceWEB, Virginia, Inc.


On October 1, we acquired 100% of the outstanding stock of Computers and Tele-Comm., Inc., a Missouri corporation (CTCI), and its wholly owned subsidiary, KC NAP, LLC (KC NAP) in exchange for 9,568,400 shares.  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 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).  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.  The acquisition was accounted for using the purchase method of accounting.


 

EMPLOYEES

 

At January 13, 2014 we had 13 full-time employees, including our executive officers.  None of our employees are covered by collective bargaining agreements, and we believe our relationships with our employees to be good.




 

8

 

 




ITEM 1A. RISK FACTORS

 

An investment in our common stock involves a significant degree of risk. You should not invest in our common stock unless you can afford to lose your entire investment. You should consider carefully the following risk factors and other information in this annual report before deciding to invest in our common stock. If any of the following risks and uncertainties were to develop into actual events, our business, financial condition or results of operations could be materially adversely affected and you could lose your entire investment in our company.

 

 

RISKS RELATED TO OUR COMPANY

 

WE HAVE AN ACCUMULATED DEFICIT AND MAY HAVE CONTINUING LOSSES THAT WOULD RESULT IN SIGNIFICANT LIQUIDITY AND CASH FLOW PROBLEMS ABSENT MATERIAL INCREASES IN REVENUES.

 

We had an accumulated deficit of approximately $47.9 million at September 30, 2013. For the years ended September 30, 2013 and 2012, we had a net loss of approximately $7.1 million and approximately $6.485 million, respectively. In fiscal year 2013, cash used in operations was approximately $2.7 million.  The report of our independent registered public accounting firm on our consolidated financial statements for the fiscal year ended September 30, 2013 contains a qualification expressing substantial doubt as to our ability to continue as a going concern as a result of net losses and cash used in operations. We cannot assure prospective investors that sales will increase in future periods, nor can we assure prospective investors that they will not further decrease. We expect to potentially make significant expenditures related to the development of the business, potentially including hiring additional personnel relating to sales and marketing, customer service and support and technology development. As a result of these increased expenditures, we will be required to generate and sustain increased revenue to achieve profitability. As long as cash flow from operations remains insufficient to fund operations, we will continue depleting cash and other financial resources. Our failure to achieve profitable operations in future periods will adversely affect our ability to continue as a going concern. In this event, prospective investors could lose all of their investment in our company.

 

OUR SALES HAVE DECLINED SUBSTANTIALLY FROM PRIOR PERIODS AND THERE ARE NO ASSURANCES OUR SALES WILL RETURN TO HISTORIC LEVELS.

 

Due to the untimely passing of our Chief Executive Officer in May, 2012, we experienced a significant decrease in sales momentum as customers, vendors, and partners put their purchasing decisions on hold until we could reassure them that we were going to be able to provide them with products and services and were able to continue our operations. We cannot assure you that our operations will achieve the level of historic sales in future periods.

 

WE HAVE ENTERED INTO A LOAN ARRANGEMENT WITH A COMPANY CONTROLLED BY OUR INDEPENDENT DIRECTORS WHICH COULD CAUSE A CONFLICT OF INTEREST. 

 

In November 2012 we entered into a Loan Agreement with IWEB Growth Fund, LLC, a company which was recently established by Messrs. Compton, Bush, Carosi, Pirtle and Stavish and General Soyster, our 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. As the principals of the lender are members of our Board of Directors, there are no assurances that these potential conflicts of interests will be settled in a manner favorable to the Company.

 

9

 

 




WE MAY NEED ADDITIONAL FINANCING WHICH IT MAY NOT BE ABLE TO OBTAIN ON ACCEPTABLE TERMS, IF AT ALL. IF WE CANNOT RAISE ADDITIONAL CAPITAL AS NEEDED, OUR ABILITY TO EXECUTE OUR GROWTH STRATEGY AND TO FUND OUR ONGOING OPERATIONS MAY BE IN JEOPARDY.

 

Historically, our operations have been financed primarily through the issuance of equity and short-term loans. Capital is typically needed not only to fund ongoing operations and to pay existing obligations, but capital is also necessary if we wish to acquire additional assets or companies and for the effective integration, operation and expansion of these businesses. Future capital requirements, however, depend on a number of factors, including the ability to internally grow revenues, manage the business and control expenses. At September 30, 2013, we had a working capital deficit of $693,307 as compared to a working capital deficit of $2,904,559 at September 30, 2012. We may need to raise additional capital to fund ongoing operations, pay existing obligations and fund future growth. There are no assurances that additional working capital will be available in the future upon terms acceptable to us. If we do not raise funds as needed, our ability to provide for current working capital needs, make additional acquisitions, grow the company, and continue our existing business and operations may be in jeopardy. In this event, prospective investors could lose all of their investment in our company.

 

THE LOSS OF KEY SENIOR MANAGEMENT PERSONNEL, INCLUDING THE RECENT DEATH OF OUR CHAIRMAN AND CHIEF EXECUTIVE OFFICER, COULD NEGATIVELY AFFECT OUR BUSINESS.

 

In May 2012, our Chairman and Chief Executive Officer, John R. Signorello, passed away. Hal Compton, Sr., a member of the board of directors, assumed the role as interim Chief Executive Officer, and Mark Lucky, our Chief Financial Officer, served as interim Chief Operating Officer.  In July 2012 until January 14, 2014 Mr. Robert Howe III joined our company as Chief Executive Officer. Without Mr. Signorellos participation in our companys business and operations, we could experience negative impacts to our business, future operating profits and results of operations. In addition, we depend upon our senior management and other key personnel, including Messrs. Howe and Lucky. The loss of these individuals or any of our other current or future executive officers or key employees could harm our business, future operating prospects and results of operations. Additionally, we do not currently maintain key person life insurance policies on the lives of any of our executive officers. This lack of insurance means that we may not receive adequate compensation for the loss of services of these individuals.

 

WE RELY ON VALUE-ADDED RESELLERS AND OTHER DISTRIBUTION PARTNERS TO SELL OF OUR PRODUCTS. FAILURE TO DEVELOP AND MANAGE, OR DISRUPTIONS TO, OUR DISTRIBUTION CHANNELS WOULD ADVERSELY AFFECT OUR BUSINESS.

 

Our ability to maintain or increase revenue will depend in part on our ability to maintain arrangements with existing resellers and other distribution partners, which we refer to as channel partners, and to establish and expand arrangements with new channel partners. If we fail to do so, future revenue could be harmed. Additionally, by relying on channel partners, we have less contact with the ultimate users of our products, which may make it difficult for us to establish and increase brand awareness, ensure proper delivery and installation of our products, service ongoing customer requirements and respond to evolving customer needs.

 

Recruiting and retaining qualified channel partners and training them in our technology and product offerings requires significant time and resources. In order to develop and expand distribution channels, we must continue to scale and improve the processes and procedures that support these channels, including investment in systems and training. Those processes and procedures may become increasingly complex and difficult to manage as we expand our organization.

 

We have no minimum purchase commitments from any channel partners, and contracts with these channel partners do not prohibit them from offering products or services that compete with ours. Competitors may provide incentives to existing and potential channel partners to favor their products. Channel partners may choose not to offer our products exclusively or at all. Establishing relationships with channel partners who have a history of selling competitors products may also prove to be difficult. Failure to establish and maintain successful relationships with channel partners would seriously harm our business and operating results.

 



10

 



WE RECEIVE A SUBSTANTIAL PORTION OF REVENUE FROM A LIMITED NUMBER OF CUSTOMERS AND CHANNEL PARTNERS, AND THE LOSS OF, OR A SIGNIFICANT REDUCTION IN, ORDERS FROM ONE OR MORE OF OUR MAJOR CUSTOMERS WOULD HARM OUR BUSINESS.


Our future success is highly dependent upon establishing and successfully maintaining relationships with a large number of channel partners. We market and sell our IceWEB unified data storage products through an all-channel assisted sales model and we derive substantially all of our revenue from these channel partners. We receive a substantial portion of revenue from a limited number of channel partners. We anticipate that we will continue to receive a significant portion of revenue from a limited number of channel partners for the foreseeable future and, in some cases, a portion of revenue attributable to individual channel partners may increase in the future. The loss of one or more key channel partners or a reduction in sales through any major channel partner could harm our business.

 

IF WE ARE UNABLE TO CONTINUE TO DEVELOP AND INTRODUCE NEW PRODUCTS AND RESPOND TO TECHNOLOGICAL CHANGES, REVENUE COULD BE REDUCED.

 

Future growth depends on the successful development and introduction of new systems and software products. Due to the complexity of network storage systems, these products are subject to significant technical risks that may impact our ability to introduce these products successfully. Our new products also may not achieve market acceptance. In addition, new products must respond to technological changes and evolving industry standards. If we are unable for technological or other reasons to develop and introduce new products in a timely manner in response to changing market conditions or customer requirements, or if these products do not achieve market acceptance, revenue could be reduced.

 

IMPROVEMENTS IN ALTERNATIVE MEANS TO ACCELERATE STORAGE PERFORMANCE OR REDUCE STORAGE COSTS COULD HARM OUR BUSINESS AS THE DEMAND FOR OUR SYSTEMS MAY BE REDUCED.

 

Our products are designed to improve the performance of many applications, including applications that are based on Microsoft Corporations protocols. Accordingly, changes to Microsoft application protocols such as to accelerate storage performance or reduce storage costs may reduce the need for our products, adversely affecting our business, operating results and financial condition. Changes in other application protocols or in the Transmission Control Protocol, the set of rules used to send data in the form of message units between computers over the Internet, could have a similar effect.

 

IF WE ARE UNABLE TO CONTINUE TO CREATE ATTRACTIVE INNOVATIONS IN SOFTWARE AND HARDWARE, WE MAY NOT BE ABLE TO GENERATE HIGH-MARGIN REVENUE THAT WILL ENABLE US TO MAINTAIN OR INCREASE GROSS PROFITS, WHICH COULD ADVERSELY AFFECT OUR BUSINESS.

 

Our industry has a history of declining network storage hardware prices as measured on a dollar per gigabyte of storage capacity basis. To maintain or increase gross profits, we will need to continue to create attractive software that is included with network storage systems and/or sold separately as licensed software applications. Any new feature or application that we develop or acquire may not be introduced in a timely or cost- effective manner and may not achieve the broad market acceptance necessary to help increase overall gross margin. If we are unable to successfully develop or acquire and then market and sell additional software and hardware functionality, our business could be adversely affected.

 

OUR ABILITY TO SELL OUR PRODUCTS IS HIGHLY DEPENDENT ON THE QUALITY OF OUR SUPPORT SERVICES, AND ANY FAILURE TO OFFER HIGH-QUALITY SUPPORT SERVICES COULD REDUCE PRODUCT SALES AND REVENUE.

 

After our products are deployed within our customers networks, customers depend on our support services organization to resolve issues relating to our products and how they perform within the customers environment. High-quality support services are critical for the successful marketing and sale of our products. If we do not succeed in helping our customers to quickly resolve post-deployment issues and provide ongoing support if our partners do not effectively assist customers in deploying products, it would adversely affect our ability to sell products to existing customers and could harm prospects with potential customers. As a result, failure to maintain high-quality support services could reduce product sales and revenue.

  

11

 


OUR PRODUCTS ARE HIGHLY TECHNICAL AND MAY CONTAIN UNDETECTED SOFTWARE OR HARDWARE DEFECTS, WHICH COULD CAUSE DATA UNAVAILABILITY, LOSS OR CORRUPTION THAT MIGHT, IN TURN, RESULT IN LIABILITY TO CUSTOMERS, HARM TO ICEWEBS REPUTATION AND/OR A REDUCTION OF PRODUCT SALES AND REVENUE.

 

 

Our network storage products are highly technical and complex and are often used to store information critical to customers business operations. Our products have contained and may contain undetected errors, defects or security vulnerabilities that could result in data unavailability, loss or corruption or other harm to customers. Some errors in our products may only be discovered after they have been installed and used by customers. Any errors, defects or security vulnerabilities discovered in our products after commercial release, as well as any computer virus or human error on the part of our customer support or other personnel resulting in the unavailability, loss or corruption of a customers data, could result in a loss of customers or increased support and warranty costs, any of which may adversely affect our business, operating results and financial condition. In addition, we could face claims for product liability, tort or breach of warranty, including claims relating to changes to our products made by partners. Our contracts with customers contain provisions relating to warranty disclaimers and liability limitations, which may be difficult to enforce. Defending a lawsuit, regardless of its merit, could be costly and might divert managements attention and adversely affect the markets perception of our company and our products. In addition, if our business liability insurance coverage proves inadequate for a claim, or future coverage is unavailable on acceptable terms or at all, product sales and revenue could be reduced.

 

MANAGEMENT MAY BE UNABLE TO EFFECTIVELY INTEGRATE ACQUISITIONS AND TO MANAGE GROWTH AND ICEWEB MAY BE UNABLE TO FULLY REALIZE ANY ANTICIPATED BENEFITS OF THESE ACQUISITIONS.

 

Our business strategy includes growth through acquisition and internal development. We are subject to various risks associated with our growth strategy, including the risk that we will be unable to identify and recruit suitable acquisition candidates in the future or to integrate and manage the acquired companies. Acquired companies histories, geographical locations, business models and business cultures can be different from ours in many respects. Our directors and senior management face a significant challenge in their efforts to integrate the businesses and the business of the acquired companies or assets, and to effectively manage continued growth. There can be no assurance that efforts to integrate the operations of any acquired assets or companies acquired in the future will be successful, that we can manage growth or that the anticipated benefits of these proposed acquisitions will be fully realized. The dedication of management resources to these efforts may detract attention from day-to-day business. There can be no assurance that there will not be substantial costs associated with these activities or of the success of integration efforts, either of which could have a material adverse effect on operating results.


ECONOMIC CONDITIONS AND WORLD EVENTS COULD AFFECT OUR COMPANYS OPERATING RESULTS.

 

We and our customers could be adversely affected by an economic downturn such as changes in consumer and investor confidence, instability in the credit and financial markets, volatile corporate profits, and reduced business and consumer spending. The economy as a whole also may be affected by future world events such as acts of terrorism, developments in the war on terrorism, conflicts in international situations, and by natural disasters. These factors may affect our results of operations by reducing sales, gross profits and/or net income as a result of a slowdown in customer orders or order cancellations. In addition, political and social turmoil related to international conflicts and terrorist acts may put further pressure on economic conditions abroad. Unstable political, social and economic conditions may make it difficult for our company, our customers, and our suppliers to accurately forecast and plan future business activities. If such conditions persist, our business, financial condition, results of operations and cash flow could be negatively affected.

 

12

 

 





 

THE CONDITION OF THE U.S. AND GLOBAL FINANCIAL MARKETS HAS BEEN VOLATILE AND MAY CONTINUE TO BE VOLATILE.

 

Prospective investors should be aware that the U.S. and global financial markets are currently quite volatile and that the condition of the financial markets has become significantly weakened and destabilized in the past few years. Continued volatility and instability could adversely affect our ability to finance our business. Further, financial market instability could result in significant regulatory changes that would have an unpredictable effect on the financial markets in general.

 

OUR BUSINESS HAS INHERENT OPERATIONAL RISKS THAT CANNOT BE ADEQUATELY COVERED BY INSURANCE OR INDEMNITY.

 

We may face unanticipated risks of legal liability for damages caused by the actual or alleged failure of technologies and products that it supplies. We sell products to a variety of large entities, and because of our size, we have limited ability to negotiate favorable commercial terms in our product purchase/sale documentation. While we have attempted to secure appropriate insurance coverage at reasonable cost it is not possible to insure against all risks inherent in the markets we serve, nor can we assure investors that our insurers will pay a particular claim, or that we will be able to maintain coverage at reasonable rates in the future. Substantial claims resulting from a failure of a product to perform in excess of or not otherwise covered by indemnity or insurance could harm our financial condition and operating results. Insurance policies also contain deductibles, limitations and exclusions which increase our costs in the event of a claim.


WE MAY HAVE DIFFICULTY SCALING PRODUCTION TO LARGE VOLUMES. IF WE ARE UNABLE TO MEET DEMAND OR TO EFFICIENTLY INCREASE PRODUCTION, CUSTOMERS MAY TURN TO PRODUCTS OFFERED BY COMPETITORS AND OUR OPERATING RESULTS COULD BE ADVERSELY AFFECTED.

 

We may have difficulty dealing with rapid growth. If demand for products increases rapidly, we may need to expand internal production capacity or implement outsourcing. Success in developing, manufacturing and supporting products manufactured in small volumes does not assure comparable success in operations conducted on a larger scale. It may be necessary to expand capacity beyond existing space, personnel and equipment and we may be unable to do so. Modifying our facilities and operations to increase production capacity may delay delivery of products. Manufacturing efficiencies, yields and product quality may decline as production volumes increase. In addition, component costs, overhead and other production costs may rise. If we are unable to meet the demand of customers and deliver quality products quickly and cost effectively, customers may turn to our competitors. The costs associated with implementing new manufacturing technologies, methods and processes, including the purchase of new equipment, and any resulting delays, inefficiencies and loss of sales could harm results of operations.





 

13

 

 

 




OUR SUCCESS AND COMPETITIVE POSITION DEPENDS ON OUR ABILITY TO OBTAIN AND PROTECT INTELLECTUAL PROPERTY. FAILURE TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS WOULD IMPAIR OUR ABILITY TO COMPETE EFFECTIVELY AND DEFEND AGAINST THIRD PARTY CLAIMS THAT WE ARE INFRINGING ON THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS.

 

We maintain our proprietary technology and know-how as trade secrets as well as through the use of patents. Some of our proprietary technology may be covered by provisional patents. Our policy is to use confidentiality agreements, licensing agreements and similar arrangements to establish and protect intellectual property. For example, our policy is to maintain confidentiality agreements with our employees, consultants, vendors and business partners and this has controlled access to, and distribution of its product design documentation and other proprietary information. We intend to continue to protect existing and new processes and technologies that are developed as trade secrets but may not be able to do so. We hold or have filed patents related to several of our products and technology, however there is no guarantee that we will be able to enforce these patents or that the applications will be issued as patents. Failure to protect our intellectual property could affect our ability to secure additional contracts or preserve market advantages as we develop and commercialize our products.

 

Our efforts to protect our intellectual property rights may not:

 

 

prevent challenges to, or the invalidation or circumvention of, existing intellectual property rights;

 

prevent competitors from independently developing similar products or duplicating our products;

 

provide adequate protection for intellectual property rights;

 

prevent disputes with third parties regarding ownership of our intellectual property rights;

 

prevent disclosure of trade secrets and know-how to third parties or their release into the public domain; or

 

prevent our company from being subject to claims of infringement of the intellectual property rights of third-parties.

 

Others may attempt to copy or otherwise obtain and use our proprietary technologies without consent. Monitoring the unauthorized use of technologies is difficult. There is a significant risk that customers or their end-user customers may attempt to copy or otherwise obtain and use our proprietary technologies without our consent.

 

We may find it necessary to litigate against others, including customers, to protect our intellectual property and to challenge the validity and scope of the proprietary rights asserted by others, and the company could face counterclaims. Legal disputes with customers could adversely affect relationships and sales. Litigation is inherently uncertain, and an adverse outcome could subject us to significant liability for damages or invalidate our proprietary rights. The complexity of the technology involved and inherent uncertainty and cost of intellectual property litigation increases our risks.


Third parties may claim that we are infringing on their intellectual property rights, and we may already be unknowingly infringing. We may face additional liability if we agree to indemnify customers against third party infringement claims. If a third party establishes that we are infringing upon their intellectual property rights, we may be forced to modify products or manufacturing processes and such changes may be expensive or impractical. We may be forced to seek royalty or license agreements. If we are unable to agree on acceptable terms, we may be required to discontinue products or to halt other aspects of our operations. We may also be liable for significant damages. Even if intellectual property claims brought against us are without merit, the litigation may be costly and time consuming, and may divert management and key personnel from normal business operations.


 

14

 

 

 




OUR EFFORTS TO PROTECT OUR INTELLECTUAL PROPERTY MAY BE LESS EFFECTIVE IN SOME FOREIGN COUNTRIES WHERE INTELLECTUAL PROPERTY RIGHTS MAY NOT BE AS STRONG AS IN THE UNITED STATES.

 

We have not obtained and may not obtain patent or similar protection for our proprietary technologies or registration for our trademarks in foreign countries, which may impair our ability to use or protect our technology and brand in foreign jurisdictions. The laws of some foreign countries, including countries in which we have sold and/or plan to sell products, protect proprietary rights less broadly than do the laws of the United States. Many U.S. companies have encountered substantial problems in protecting their proprietary rights in such countries, and there is a risk that we may encounter similar problems. If our competitors in these countries copy our technology without our permission, our sales and operations may be harmed.

 

WE HAVE BEEN ENGAGED IN VARIOUS LEGAL DISPUTES WHICH COULD IMPACT OUR COMPANY AND OUR SUPPLIER RELATIONSHIPS.

 

We are currently engaged in four legal proceedings. These legal proceedings relate to non-payment of vendors. Claims relating to these proceedings currently total approximately between $50,000 and $100,000. These and/or the remaining and/or future potential legal proceedings could impact our financial position and/or our relationships with customers, vendors, suppliers, distributors and/or other parties.

 

RISKS RELATING TO ICEWEBS COMMON STOCK

 

THE EXERCISE OF WARRANTS AND OPTIONS AND THE CONVERSION OF SHARES OF OUR SERIES B CONVERTIBLE PREFERRED STOCK WILL BE DILUTIVE TO OUR EXISTING STOCKHOLDERS.

 

At January 13, 2014 we had outstanding:

 

 

473,460,779  shares of our common stock,

 

626,667 shares of Series B Convertible Preferred Stock owned by the estate of our former Chief Executive Officer which is convertible into 626,667 shares of our common stock,

 

common stock purchase warrants to purchase a total of 102,820,275 shares of our common stock with exercise prices ranging from $0.028 to $0.15 per share, and

 

Stock options granted under our 2012 Equity Compensation Plan and our 2013 Equity Compensation Plan which are exercisable into 3,417,970 shares of our common stock with a weighted average exercise price of $0.086 per share.

 

 

The exercise of the outstanding options and warrants or the conversion of the outstanding convertible securities will be dilutive to our security holders.

 

PROVISIONS OF OUR CERTIFICATE OF INCORPORATION AND BYLAWS MAY DELAY OR PREVENT A TAKE-OVER WHICH MAY NOT BE IN THE BEST INTERESTS OF OUR SECURITY HOLDERS.

 

Provisions of our certificate of incorporation and bylaws may be deemed to have anti-takeover effects, which include when and by whom special meetings of security holders may be called, and may delay, defer or prevent a takeover attempt. In addition, certain provisions of the Delaware General Corporations Law also may be deemed to have certain anti-takeover effects, including a provisions stipulating that control of shares acquired in excess of certain specified thresholds will not possess any voting rights unless these voting rights are approved by a majority of a corporations disinterested security holders.

 

In addition, our certificate of incorporation authorizes the issuance of up to 10,000,000 shares of preferred stock with such rights and preferences as may be determined from time to time by our board of directors.  We presently have outstanding 626,667 shares of Series B convertible preferred stock owned by the estate of former CEO and Chairman John R. Signorello.  Our board of directors may, without stockholder approval, issue additional series of preferred stock with dividends, liquidation, conversion, voting or other rights that could adversely affect the voting power or other rights of the holders of our common stock.


15



PUBLIC COMPANY COMPLIANCE MAY MAKE IT MORE DIFFICULT TO ATTRACT AND RETAIN OFFICERS AND DIRECTORS.

 

The Sarbanes-Oxley Act of 2002, the Dodd-Frank Act and rules subsequently implemented by the Commission have required changes in corporate governance practices of public companies. As a public company, we expect these rules and regulations to continue to increase compliance costs in 2013 and beyond and to make certain activities more time consuming and costly than if we were not a public company. As a public company, we also expect that these rules and regulations may make it more difficult and expensive to obtain director and officer liability insurance in the future and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. As a result, it may be more difficult to attract and retain qualified persons to serve on our board of directors or as executive officers.

 

OUR STOCK PRICE MAY BE VOLATILE IN RESPONSE TO MARKET AND OTHER FACTORS.

 

The market price of our common stock is likely to be highly volatile and could fluctuate widely in price in response to various factors, many of which are beyond our control, including the following:

 

 

competitive pricing pressures;

 

ability to obtain working capital financing;

 

additions or departures of key personnel;

 

limited public float in the hands of a small number of persons whose sales or lack of sales could result in positive or negative pricing pressure on the market price for our common stock;

 

sales of common stock

 

ability to execute our business plan;

 

operating results that fall below expectations;

 

loss of any strategic relationship;

 

regulatory or legal developments;

  

economic and other external factors; and

 

period-to-period fluctuations in our financial results.

 

In addition, the securities markets have from time to time experienced significant price and volume fluctuations that are unrelated to the operating performance of particular companies. These market fluctuations may also materially and adversely affect the market price of our common stock.

 

OUR COMMON STOCK IS A PENNY STOCK, WHICH WILL MAKE IT MORE DIFFICULT FOR INVESTORS TO SELL THEIR SHARES.

 

Our common stock is presently subject to the penny stock rules adopted under Section 15(g) of the Securities Exchange Act of 1934. The penny stock rules apply to companies whose common stock is not listed on a national securities exchange and trades at less than $5.00 per share or that have tangible net worth of less than $2,500,000, or $2,000,000 if the company has been operating for three or more years. In certain instances, these rules require, among other things, that brokers who trade penny stock to persons other than established customers complete certain documentation, make suitability inquiries of investors and provide investors with certain information concerning trading in the security, including a risk disclosure document and quote information under certain circumstances. In addition, many brokers and broker-dealers have decided not to trade penny stocks because of the requirements of the penny stock rules and, as a result, the number of broker-dealers willing to act as market makers in such securities is limited. If we continue to remain subject to the penny stock rules, it could have an adverse effect on the market, if any, for our common stock, and investors will find it more difficult to dispose of their securities.




 

16

 





OFFERS OR AVAILABILITY FOR SALE OF A SUBSTANTIAL NUMBER OF SHARES OF OUR COMMON STOCK MAY CAUSE THE PRICE OF OUR COMMON STOCK TO DECLINE.

 

If security holders sell substantial amounts of our common stock in the public market, or upon the expiration of any statutory holding period, under Rule 144, or expiration of lock-up periods applicable to outstanding shares, or issued upon the exercise of outstanding options or warrants, it could create a circumstance commonly referred to as an overhang and in anticipation of which the market price of our common stock could fall. The existence of an overhang, whether or not sales have occurred or are occurring, also could make it more difficult to raise additional financing through the sale of equity or equity-related securities in the future at a time and price that we deem reasonable or appropriate.

 

OUR COMMON STOCK MAY BE SUBJECT TO FURTHER DILUTION IF WE SELL ADDITIONAL SHARES OF OUR COMMON STOCK IN THE FUTURE AT PRICES BELOW THE PRICES IN ITS RECENT PRIVATE OFFERINGS.

 

If it becomes necessary for us to issue additional shares of common stock in the future at prices below the prices that trigger the anti-dilution protections in connection with previous private offerings, we will be required to issue such additional shares and lower the warrant exercise price of the existing warrants, in order to account for the dilutive impact of such future issuances. The anti-dilutive protections are known as full-ratchet protections, meaning that the additional shares of common stock to be issued, and the new exercise price of the warrants, will match the lowest price at which we issue additional shares of common stock in the future. These additional shares of common stock, and warrants to purchase additional shares of common stock, if exercised, could result in substantial future dilution to the holders of our common stock. We currently have warrants outstanding to purchase 36,088,554 shares of common stock which contain full-ratchet protections.

  

ITEM 1B. UNRESOLVED STAFF COMMENTS.

 

Not applicable to a smaller reporting company.







 

17

 

 




ITEM 2. PROPERTIES.

 

In February 2009, we entered into a two year lease for approximately 6,978 square feet of office space in which our principal executive offices are located for annual base rental of approximately $74,400.  We terminated our tenancy at this location on October 31, 2013.  Our Corporate offices have been moved to Kansas City, Missouri.  We currently have real estate leases at two locations, totaling 6,875 square feet.  These operating leases are standard commercial leases.

 

ITEM 3. LEGAL PROCEEDINGS.

 

At September 30, 2013 we are the subject of, or party to, four known, pending or threatened, legal actions. Following is a discussion of each:

 

1.    We were named as the defendant in a legal proceeding brought by Wolfe Axelrod Weinberger Associates, LLC (the plaintiff) in the Circuit Court of Fairfax County, Virginia (Case # 2013-4070). The plaintiff asserts that IceWEB failed to pay the full amount owed for investor relations services.

 

2.    We were named as the defendant in a legal proceeding brought by i-Cubed Information LLC (the plaintiff) in the General District Court of Fairfax County, Virginia (Case #GV12-019582-00). The plaintiff asserts that Iceweb failed to pay for delivery of services provided by plaintiff.


3.    We were named as the defendant in a legal proceeding brought by FedEx Customer Information Services, Inc. (the plaintiff) in the Circuit Court of Fairfax County, Virginia (Case # CL2010-7512). The plaintiff asserts that Iceweb failed to pay for delivery of services provided by plaintiff.


4.    We were named as the defendant in a legal proceeding brought by FedEx Customer Information Services, Inc. (the plaintiff) in the General District Court of Fairfax County, Virginia (Case #GV10-023543-00). The plaintiff asserts that Iceweb failed to pay for delivery of services provided by plaintiff.


 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.

 

ITEM 4. MINE SAFETY DISCLOSURE.

 

Not applicable to our operations.

 

18

 

 




PART II

 

ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

 

Our common stock is quoted on the OTCBB under the symbol IWEB. The reported high and low closing prices for the common stock as reported on the OTCBB are shown below for the periods indicated. The quotations reflect inter-dealer prices, without retail mark-up, markdown or commission, and may not represent actual transactions.

 

 

 

High

 

 

Low

 

 

Fiscal 2012

 

 

 

 

 

 

 

 

 

First quarter ended December 31, 2011

 

$

0.195

 

 

$

0.010

 

Second quarter ended March 31, 2012

 

$

0.1847

 

 

$

0.106

 

 

Third quarter ended June 30, 2012

 

$

0.181

 

 

$

0.107

 

 

Fourth quarter ended September 30, 2012

 

$

0.1399

 

 

$

0.050

 

 

 

 

 

 

 

 

 

 

 

 

Fiscal 2013

 

 

 

 

 

 

 

 

 

First quarter ended December 31, 2012

 

$

0.0825

 

 

$

0.0570

 

 

Second quarter ended March 31, 2013

 

$

0.0640

 

 

$

0.0320

 

 

Third quarter ended June 30, 2013

 

$

0.0421

 

 

$

0.0227

 

 

Fourth quarter ended September 30, 2013

 

$

0.0389

 

 

$

0.0225

 

 

 

As of January 13, 2014 the last sale price of our common shares as reported on the OTC Bulletin Board was $0.0135 per share. As of January 13, 2014, there were approximately 5,200 record owners of our common stock.  

 

Dividend Policy

 

We have never paid cash dividends on our common stock. Under Delaware law, we may declare and pay dividends on our capital stock either out of our surplus, as defined in the relevant Delaware statutes, or if there is no such surplus, out of our net profits for the fiscal year in which the dividend is declared and/or the preceding fiscal year. If, however, the capital of our company, computed in accordance with the relevant Delaware statutes, has been diminished by depreciation in the value of our property, or by losses, or otherwise, to an amount less than the aggregate amount of the capital represented by the issued and outstanding stock of all classes having a preference upon the distribution of assets, we are prohibited from declaring and paying out of such net profits any dividends upon any shares of our capital stock until the deficiency in the amount of capital represented by the issued and outstanding stock of all classes having a preference upon the distribution of assets shall have been repaired.

 

We do not anticipate that any cash dividends will be declared or paid on our common stock in the foreseeable future.

 

Recent Sales of Unregistered Securities

 

Fiscal 2013 Transactions

 

In November, 2012 we issued 918,919 shares at a share price of $0.074/share to our executive officers and recognized stock based compensation expense of $68,000. The issuance was exempt from registration under the Securities Act of 1933 in reliance on an exemption provided by Section 4(2) of that act.

In December, 2012, we issued 112,000 shares of common stock at a per share price of $0.074, valued at $8,228 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 December, 2012, we sold 500,000 shares of common stock at a per share price of $0.074, valued at $37,000 to an accredited investor.  The issuance was exempt from registration under the Securities Act of 1933 in reliance on an exemption provided by Section 4(2) of that act.


In January, 2013 we issued 216,216 shares at a share price of $0.074/share to our executive officers and recognized stock based compensation expense of $16,000. The issuance was exempt from registration under the Securities Act of 1933 in reliance on an exemption provided by Section 4(2) of that act.


19




In January, 2013 we sold 500,000 shares of common stock at a per share price of $0.074, valued at $37,000 to an accredited investor.  The issuance was exempt from registration under the Securities Act of 1933 in reliance on an exemption provided by Section 4(2) of that act.


In January, 2013, we issued 112,000 shares of common stock at a per share price of $0.074, valued at $8,228 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 February, 2013, we issued 175,000 shares of common stock at a per share price of $0.074, valued at $12,950 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 February, 2013 we issued 1,950,000 shares of common stock at a per share price of $0.0396, valued at $77,300 to two accredited investors 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 February, 2013, we issued 112,000 shares of common stock at a per share price of $0.039, valued at $4,368 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 March, 2013, we issued 5,000,000 shares of common stock at a per share price of $0.04, valued at $200,000 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 March, 2013 we sold 1,200,000 shares of common stock at a per share price of $0.021, valued at $25,000 to an accredited investor.  The issuance was exempt from registration under the Securities Act of 1933 in reliance on an exemption provided by Section 4(2) of that act.


In April, 2013 we issued 8,000,000 shares at a share price of $0.033/share to our executive officers and employees and recognized stock based compensation expense of $264,000. The issuance was exempt from registration under the Securities Act of 1933 in reliance on an exemption provided by Section 4(2) of that act.


In April, 2013 we issued 6,750,000 shares at a price of $0.075/share valued at $506,250 as a partial conversion of principal and interest due under a convertible debenture.  The recipient was an accredited investor and the issuance was exempt from registration under the Section Act of 1933 in reliance on an exemption provided by Section 4(2) of that act.


In April, 2013, we issued 2,250,000 shares of common stock at a per share price of $0.0305, valued at $68,675 to two 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 April, 2013, we sold 2,500,000 shares of common stock at a per share price of $0.021, valued at $50,000 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 May, 2013, we issued 224,000 shares of common stock at a per share price of $0.028, valued at $6,272 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 June, 2013, we issued 708,333 shares of common stock at a per share price of $0.0254, valued at $18,008 to two accredited investors 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 July, 2013 we issued 6,000,000 shares at a share price of $0.0236/share to our executive officers and employees and recognized stock based compensation expense of $141,600. 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.


20

 

In July, 2013, we issued 2,000,000 shares of common stock at a per share price of $0.0236, valued at $47,200 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.


In August, 2013, we issued 37,000,000 shares of our common stock in full satisfaction of $1,642,739 of principal and interest due under a convertible debenture. The recipient was an accredited investor and the issuance was exempt from registration under the Section Act of 1933 in reliance on an exemption provided by Section 4(2) of that act.


In September, 2013, we issued 5,000,000 shares of common stock at a per share price of $0.03, valued at $150,000 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.



Purchases of Equity Securities by the Issuer and Affiliated Purchasers

 

None.

 

ITEM 6. SELECTED FINANCIAL DATA

 

Not applicable for a smaller reporting company.

 

 

21

 




ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the accompanying consolidated financial statements and notes thereto. 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 unified data storage solutions.  Our storage systems make it possible to run and manage files and applications from a single device and consolidate file-based and block-based access in a single storage platform which supports Fibre Channel SAN, IP-based SAN (iSCSI), and NAS.

 

A unified storage system simultaneously enables storage of file data and handles the block-based I/O (input/output) of enterprise applications.  One advantage of unified storage is reduced hardware requirements. Instead of separate storage platforms, like NAS for file-based storage and a RAID disk array for block-based storage, unified storage combines both modes in a single device. Alternatively, a single device could be deployed for either file or block storage as required.

 

In addition to lower capital expenditures for the enterprise, unified storage systems can also be simpler to manage than separate products.  The IceWEB Storage System offers one platform for file and block data of all kindsWhether it's Microsoft Exchange, SQL Server or Oracle databases, virtualized environments, scanned images, files, video, pictures, graphics, or voice data, IceWEB maximizes the efficiency of storage by centralizing all data on one platform secured with strong data protection capabilities.

 

The IceWEB Storage System is an all-inclusive storage management system which includes de-duplication; unlimited snapshots; thin provisioning; local or remote, real-time or scheduled replication; capacity and utilization reporting, and integration with virtual server environments.  Unified storage systems enjoy the same level of reliability as dedicated file or block storage systems.

 

With our acquisition of Computers & Telecom, Inc. and KCNAP, LLC, (collectively CTC) in October 2013, IceWEB now provides wireless and fiber broadband service, co-location space and related services and operate 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).


 

22

 





As described elsewhere herein, we experienced a significant drop in our sales following the death of our Chief Executive Officer in May 2012. Mr. Signorello was the founder of our company and the primary point of contact for many of our customers, vendors and partners. As a result of Mr. Signorellos passing, many of our customers delayed making their buying decisions until there was greater certainty about our continuing prospects.  We anticipate revenues for fiscal 2014 will increase as a result of the acquisition of CTC in October, 2013 and the introduction of new products and services, including sales of our unified network storage solutions, the launch of additional cloud services offerings and other data storage products sold through our resellers and OEM partners. There are no assurances, however, that our revenues will return to historic levels.

 

 

Results of Operations

 

FISCAL YEAR 2013 AS COMPARED TO FISCAL YEAR 2012

 

The following table provides an overview of certain key factors of our results of operations for fiscal year 2013 as compared to fiscal year 2012:

 

 

 

Fiscal Year ended September 30,

 

 

$

 

 

%

 

 

 

2013

 

 

2012

 

 

Change

 

 

Change

 

Net Revenues

 

$

977,368

 

 

$

2,640,520

 

 

$

(1,663,152

)

 

 

(63.0

)%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of sales

 

 

555,228

 

 

 

1,780,246

 

 

 

(1,225,018

 

 

(68.8

)%

Operating Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales and marketing

 

 

841,625

 

 

 

1,116,340

 

 

 

(274,715

 

 

(24.6

)%

Depreciation

 

 

215,237

 

 

 

202,130

 

 

 

13,107


 

 

6.5

 %

Research and development

 

 

1,246,060

 

 

 

1,046,026

 

 

 

(200,033

 

 

(19.1

)%

General and administrative

 

 

5,283,363

 

 

 

2,722,048

 

 

 

2,561,315

 

 

 

94.1

%

Total operating expenses

 

 

7,586,285

 

 

 

5,086,545

 

 

 

2,499,740


 

 

49.1

 %

Loss from operation

 

 

(7,164,145

)

 

 

(4,226,271

)

 

 

(2,937,874

)

 

 

69.5

 %

Total other income (expense)

 

 

55,326


 

 

(2,258,777

)

 

 

2,314,103


 

 

(102.4

)%

Net loss

 

$

(7,108,819

)

 

$

(6,485,048

)

 

$

623,771


 

 

9.6

%

 

Other Key Indicators:

 

 

 

Fiscal

 

 

Fiscal

 

 

 

 

2013

 

 

2012

 

 

Cost of sales as a percentage of sales

 

 

56.81

%

 

 

67.42

%

Gross profit margin

 

 

43.19

%

 

 

32.58

%

 

Sales and marking expense as a percentage of sales

 

 

86.11

%

 

 

42.28

%

 

General and administrative expenses as a percentage of sales

 

 

540.57

%

 

 

103.09

%

 

Total operating expenses as a percentage of sales

 

 

776.20

%

 

 

192.63

%

 

 

Sales

 

The decrease in fiscal 2013 net sales from fiscal 2012 is primarily due to the impact of economic uncertainty on our customers budgets and IT spending capacity, as well as the uncertainty caused by the untimely passing of John Signorello, our Chief Executive Officer, in May, 2012.

 

Cost of Sales and Gross Profit

 

Our cost of sales consists primarily of products purchased to manufacture our storage products. The decrease in costs of sales as a percentage of sales and the corresponding increase in our gross profit margin for fiscal 2013 as compared to fiscal 2012 was the result of a decrease in the cost of certain components that go into our systems in fiscal 2013. We anticipate that our cost of sales as a percentage of revenue will remain in the 55% to 60% range in fiscal 2014, as we introduce new higher margin products and solutions to augment our storage business.

 

23

 



Total Operating Expenses

 

Our total operating expenses increased approximately 49% for fiscal 2013 as compared to fiscal 2012. The increase is primarily due to increased merger and acquisition activity and the related consulting expense. The changes include:

  

           Sales and Marketing. Sales and marketing expense includes salaries, commission, occupancy, telephone, travel, and entertainment expenses for direct and indirect sales personnel. For the fiscal year 2013, sales and marketing decreased approximately 25% from fiscal year 2012. The decrease was due primarily to decreased sales and marketing headcount during fiscal 2013.


           Depreciation expense. For fiscal 2013, depreciation expense increased approximately 6.5% from fiscal 2012.

 

           Research and development expense. For fiscal 2013, research and development expenses increased approximately 19% from fiscal 2012. This increase is related to research and development efforts related to our storage products.

        

           General and administrative expense.  For fiscal 2013, general and administrative expenses increased approximately 94% from fiscal 2012. This increase is primarily attributable to higher consulting expense related to our mergers and acquisition activity, and higher stock based compensation for our employees and consultants.  For fiscal 2013 and 2012, general and administrative expenses consisted of the following:

 

 

 

Fiscal

 

 

Fiscal

 

 

 

 

2013

 

 

2012

 

 

Occupancy

 

$

33,144

 

 

$

37,311

 

Consulting

 

 

1,712,926

 

 

 

76,730

 

 

Employee compensation

 

 

2,106,373

 

 

 

874,719

 

 

Professional fees

 

 

238,480

 

 

 

452,904

 

 

Internet/Phone

 

 

9,672

 

 

 

7,916

 

 

Travel/Entertainment

 

 

37,603

 

 

 

46,493

 

 

Investor Relations

 

 

737,323

 

 

 

978,332

 

 

Insurance

 

 

22,259

 

 

 

18,727

 

 

Other

 

 

385,583

 

 

 

228,915

 

 

 

 

$

5,283,363

 

 

$

2,722,047

 

 

 

The principal changes in fiscal 2013 as compared to fiscal 2012 include:

 

For fiscal 2013, occupancy expense decreased approximately 11.2% from fiscal 2012.

 

For fiscal 2013, employee compensation and related taxes and benefits increased $1,231,654, or approximately 141% from fiscal 2012. The increase was primarily attributable to a decrease in salary expense of $120,124, offset by an increase in stock based compensation, and expense recorded in accordance with ASC Topic 718, Compensation Stock Compensation (Formerly SFAS No. 123 (R), Share-Based Payments), for fiscal 2013 of $1,351,778, an increase of 677%.

 

For fiscal 2013, professional fees decreased $214,424, or approximately 47.3% from fiscal 2012. The decrease was primarily attributable to a decrease in legal fees incurred and the settlement of lawsuits against us in fiscal 2013 versus 2012.

 

For fiscal 2013, other expense increased approximately $156,668 or 68.4% from fiscal 2012. The increase is primarily due to an increase in bad debt expense of $114,918.

 

For fiscal 2013, consulting expense increased by approximately 2,132% from fiscal 2012. The increase was primarily due to non-recurring stock-based consulting fees related to merger and acquisition activity in fiscal 2013.

 

For fiscal 2013, internet and telephone expense increased approximately 22.2%. The increase was attributable to non-recurring costs incurred during the fiscal 2013.

 

24


For fiscal 2013, investor relations expense decreased $241,009, or approximately 25% from fiscal 2012. We expect that in fiscal 2014 our investor relations activity and related expense should experience a decrease from fiscal 2013.

 

 

For fiscal 2013, travel and entertainment expense decreased approximately 19.1%. The decrease was attributable to a decrease in general business travel-related activity.

 

For fiscal 2013, insurance expense increased approximately 18.9% from fiscal 2012. The increase was attributable to higher premiums paid for general business and directors and officers insurance.


LOSS FROM OPERATIONS

 

Our loss from operations increased approximately $2,937,874, or 69% in fiscal year 2013 as compared to fiscal year 2012.

 

TOTAL OTHER INCOME (EXPENSES)

 

Interest Expense.  For fiscal 2013, interest expense decreased approximately 84.5%. The decrease in interest expense is primarily attributable to the lower amortization of loan fees, debt discount, and derivative discount in fiscal 2013, versus fiscal 2012.


Loss on extinguishment of debt.  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. 


Gain on change in derivative liability.  For fiscal 2013 we had a gain on the change in derivative liability of $987,075, which represents the change in the value of the derivative liability based on the Black-Scholes value of our outstanding variably-priced warrants.

 

NET LOSS

 

 Our net loss was $7,108,819 for fiscal 2013 compared to $6,485,048 for fiscal 2012, an increase of $623,771 or approximately 10%.

 

LIQUIDITY AND CAPITAL RESOURCES

 

Liquidity is the ability of a company to generate adequate amounts of cash to meet its needs for cash. At September 30, 2013, we had a working capital deficit of $693,307 compared to a working capital deficit of $2,904,559 at September 30, 2012, an improvement of $2,211,252.  The decrease in the deficit is primarily attributable to the decrease in the note payable to Sand Hill Finance of $2,059,582, the decrease in derivative liability of $987,075, a non-cash liability, a decrease in accounts payable and accrued liabilities of $174,834, offset by an increase in our related-party notes payable of $186,000.  Also contributing was the decrease in accounts receivable of $505,152, and a decrease in inventory of $119,063.

 

Net cash used in operating activities was $2,700,609 for fiscal 2013 as compared to net cash used in operating activities of $4,067,538 for fiscal 2012, a decrease of $1,366,929.  For fiscal 2013, our cash used in operations of $2,700,609 consisted of a net loss of $7,108,819 offset by non-cash items totaling $4,201,005 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 $2,532,773, offset by the change in fair value of derivative liability of $987,075, and other non-cash items of $226,205.  Additionally, during fiscal 2013 we had a decrease in operating liabilities offset by a decrease in operating assets which incremented our net loss. This change in operating assets and liabilities primarily consisted of a decrease in accounts receivable of $505,152, and a decrease in inventory of $119,063, offset by an increase in prepaid expenses of $17,223, a decrease in accounts payable and accrued liabilities of $174,835, a decrease in other assets of $175,551,  and a decrease in deferred revenue of $21,901.

 

25

 





For fiscal 2012, our cash used in operations of $4,067,538 consisted of a net loss of $6,485,048 offset by non-cash items totaling $3,386,088 including items such as depreciation and amortization of $202,130, stock based compensation of $310,250, the amortization of deferred compensation of $62,228, shares issued for services of $533,628, interest on the amortization of debt discount of $2,315,337, the change in fair value of derivative liability of $645,501, and other non-cash items of $608,016.  Additionally, during fiscal 2012 we had a decrease in operating liabilities and an increase in operating assets which incremented our net loss. This change in operating assets and liabilities primarily consisted of a decrease in accounts receivable of $618,740, and a decrease in prepaid expenses of $10,545, offset by an increase in net inventory of $226,250, a decrease in accounts payable and accrued liabilities of $1,362,562 and an increase in deferred revenue of $19,993.

 

Net cash used in investing activities for fiscal 2013 was $23,319 as compared to net cash used in investing activities of $482,082 for fiscal 2012. During fiscal 2013 we used cash of $23,319 for property and equipment purchases.  During fiscal 2012 we used cash of $449,082 for property and equipment purchases, and $33,000 for the purchase of VOIS common stock.

 

Net cash provided by financing activities for fiscal 2013 was $2,463,986 as compared to $4,815,094 for fiscal 2012, a decrease of $2,351,109.  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.

 

In fiscal 2012, we received proceeds from the sale of convertible notes of $1,750,000, proceeds from subscriptions receivable of $1,171,520, proceeds from the conversion of warrants of $275,001, proceeds from the exercise of common stock options of $255,717, the proceeds from the sale of common stock of $2,249,860, and proceeds from note payable of $395,233, offset by payments on notes of $406,225, and the payment of deferred financing costs of $876,012.

 

At September 30, 2013 we had an accumulated deficit of $47,921,946 and the report from our independent registered public accounting firm on our audited financial statements at September 30, 2013 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 2013 or that we will report net income in any future periods.

 

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 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.

 

26

 





Historically, our sales 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 September 30, 2013 we had cash on hand of $9,652.  In addition to the cash necessary to fund our operating losses, research and development, marketing and general growth, we will need cash to satisfy certain obligations.

 

Our working capital needs in future periods depend primarily on the rate at which we can increase our sales 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 fund our working capital needs will 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 sales 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.

 

None.

 

 

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 Companys Consolidated Financial Statements.

 

In December 2011, the FASB issued updated authoritative guidance to amend the presentation of comprehensive income in financial statements. This new guidance allows companies the option to present other comprehensive income in either a single continuous statement or in two separate but consecutive statements. It eliminates the option to present components of other comprehensive income as part of the statement of changes in stockholders equity. Under both alternatives, companies are required to present each component of net income and comprehensive income. The amendment is effective for fiscal years and interim periods beginning on or after December 15, 2011 on a retrospective basis. The adoption of this guidance will not change the previously reported amounts of comprehensive income. The Company has presented other comprehensive income on the face of the condensed consolidated statements of operations for all periods presented. The adoption of this updated authoritative guidance had no effect on our financial condition, results of operations or cash flow.



ITEM 7A. QUANTATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

 

Not applicable to a smaller reporting company.

 

27

 



 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

IceWEB, Inc. and Subsidiaries

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 

CONTENTS

 

Report of Independent Registered Public Accounting Firm

31

 

 

Consolidated Financial Statements:

 

 

 

Consolidated Balance Sheets

33

 

 

Consolidated Statements of Operations

34

 

 

Consolidated Statements of Changes in Stockholders Deficit

35

 

 

Consolidated Statements of Cash Flows

36

 

 

Notes to Consolidated Financial Statements

37 - 58

 

28

 

 




REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors

IceWEB, Inc.

 

We have audited the accompanying consolidated balance sheets of IceWEB, Inc. and Subsidiaries as of September 30, 2013 and 2012 and the related consolidated statements of operations, changes in stockholders equity (deficit) and cash flows for each of the two years in the period ended September 30, 2013. These consolidated financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, audits of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purposes of expressing an opinion on the effectiveness of our internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of IceWEB, Inc. and Subsidiaries, as of September 30, 2013 and 2012 and the consolidated results of their operations and their cash flows for each of the two years in the period ended September 30, 2013, in conformity with accounting principles generally accepted in the United States of America.

 

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, 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.  These matters raise substantial doubt about the Companys ability to continue as a going concern. Managements plans in regards to these matters are also described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

 

/s/ DArelli Pruzansky, P.A.

 

Certified Public Accountants

 

Boca Raton, Florida

January 13, 2014

 

29

 

 

 

 




IceWEB, Inc. and Subsidiaries

Consolidated Balance Sheets

 

 

 

September 30, 2013

 

 

September 30, 2012

 

 

ASSETS:

 

 

 

 

 

 

 

 

 

CURRENT ASSETS:

 

 

 

 

 

 

 

 

 

Cash

 

$

9,652

 

 

$

269,594

 

Other receivable

 

 

28

 

 

 

-

 

 

Accounts receivable

 

 

58,140

 

 

 

563,320

 

 

Inventory

 

 

163,168

 

 

 

282,231

 

 

Marketable securities, current

 

 

820

 

 

 

72,000

 

 

Other current assets

 

 

175,551

 

 

 

6,875

 

 

Prepaid expenses

 

 

36,925

 

 

 

19,702

 

 

 

 

 

444,284

 

 

 

1,213,722

 

 

 

 

 


 

 

 

 

 

 

OTHER ASSETS:

 

 


 

 

 

 

 

 

Property and equipment, net of accumulated depreciation of $1,422,488 and $1,207,252, respectively

 

 

307,868

 

 

 

499,785

 

 

Deposits

 

 

13,320

 

 

 

13,320

 

 

Marketable Securities, net

 

 

-

 

 

 

237,600

 

 

Deferred financing costs, net

 

 

-

 

 


114,395

 

 

Other assets

 

 

1,545

 

 

 

1,545

 

 

Total Assets

 

$

767,017

 

 

$

2,080,367

 

 

 

 

 


 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS DEFICIT:

 

 


 

 

 

 

 

 

CURRENT LIABILITIES:

 

 


 

 

 

 

 

 

Accounts payable and accrued liabilities

 

$

649,294

 

 

$

824,128

 

 

Notes payable

 

 

-

 

 

 

2,059,582

 

 

Note payable, related parties



186,000




-


 

Deferred revenue

 

 

2,996

 

 

 

24,896

 

 

Convertible notes payable, net of discount

 

 

181,878

 

 

 

105,176

 

 

Derivative liability

 

 

117,424

 

 

 

1,104,499

 

 

Total Current Liabilities

 

 

1,137,592

 

 

 

4,118,281

 

 

 

 

 


 

 

 

 

 

 

Stockholders' Deficit

 

 


 

 

 

 

 

 

Series B convertible preferred stock ($0.001 par value; 10,000,000 shares authorized; 626,667 shares issued and outstanding)

 

 

626

 

 

 

626

 

 

Common stock ($.001 par value; 1,000,000,000 shares authorized; 410,424,772 shares issued and 410,262,272 shares outstanding, respectively and  216,443,809 shares issued and 216,281,309 shares outstanding, respectively)

 

 

410,262

 

 

 

215,945

 

 

Additional paid in capital

 

 

47,233,663

 

 

 

38,343,043

 

 

Accumulated deficit

 

 

(47,921,946

)

 

 

(40,813,128

)

 

Accumulated other comprehensive income (loss)

 

 

(80,180

 

 

228,600

 

 

Treasury stock, at cost, (162,500 shares)

 

 

(13,000

)

 

 

(13,000

)

 

 

 

 


 

 

 

 

 

 

Total stockholders' deficit

 

 

(370,575

)

 

 

(2,037,914

)

 

 

 

 


 

 

 

 

 

 

Total Liabilities and Stockholders Deficit

 

$

767,017

 

 

$

2,080,367

 

 

 

See accompanying notes to consolidated financial statements

 

30

 

 




IceWEB, Inc. and Subsidiaries

Consolidated Statements of Operations


 

 

For the Years Ended

 

 

 

 

September 30,

 

 

 

 

2013

 

 

2012

 

 

 

 

 

 

 

 

 

 

 

 

Sales

 

$

977,368

 

 

$

2,640,520

 

 

 

 

 

 

 

 

 

 

 

Cost of sales

 

 

555,228

 

 

 

1,780,246

 

 

 

 

 

 

 

 

 

 

 

 

Gross profit

 

 

422,140

 

 

 

860,274

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Sales and marketing expense

 

 

841,625

 

 

 

1,116,340

 

 

Depreciation and amortization expense

 

 

215,237

 

 

 

202,130

 

 

Research and development

 

 

1,246,060

 

 

 

1,046,026

 

 

General and administrative

 

 

5,283,363

 

 

 

2,722,049

 

 

Total operating expenses

 

 

7,586,285


 

 

 

5,086,545

 

 

 

 

 

 

 

 

 

 

 

 

Loss From Operations

 

 

(7,164,145

)

 

 

(4,226,271

)

 

 

 

 

 

 

 

 

 

 

 

Other income (expenses):

 

 

 

 

 

 

 

 

 

Gain on change in derivative liability

 

 

987,075

 

 

 

645,501

 

 

Loss on extinguishment of debt



(481,588

)



-


 

Interest income

 

 

-

 

 

 

22

 

 

Interest expense

 

 

(450,161

)

 

 

(2,904,300

)

 

 

 

 

 

 

 

 

 

 

 

Total other income (expenses):

 

 

55,326


 

 

(2,258,777

)

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(7,108,819

)

 

$

(6,485,048

)

 

 

 

 

 

 

 

 

 

 

 

Net loss per common share - basic and diluted

 

$

(0.02

)

 

$

(0.04

)

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding - basic and diluted

 

 

290,864,883

 

 

 

173,207,111

 

 

 

See accompanying notes to consolidated financial statements

 

31

 



ICEWEB, Inc.

Statement of Consolidated Comprehensive Loss




For the Years Ended



September 30,



2013

 

2012






Net loss

 

($7,108,819)

 

($6,485,048)






Other comprehensive loss, net of tax:

 

 

 

 






Unrealized gain (loss) on securities

 

(308,780)

 

161,400



 


 

Other comprehensive income (loss)

 

(308,780)

 

161,400



 


 

Comprehensive income (loss)

 

($7,417,599)

 

($6,323,648)



See accompanying notes to consolidated financial statements

 

32




IceWEB, Inc. and Subsidiaries

Consolidated Statements Of Stockholders Equity (Deficit) and Comprehensive Income (Loss)

For the years ended September 30, 2013 and 2012

 



















Accumulated










Series B





Additional






Other










Preferred Stock


Common Stock



Paid-In



Accumulated



Comprehensive


Treasury Stock





Shares



Amount


Shares



Amount



Capital



Deficit



Income


Shares



Amount



Total




























Balance at September 30, 2011

626,667

 

$

626

 

157,959,066

 

$

157,960

 

$

32,866,315

 

$

(34,328,080)

 

$

67,200

 

(162,500)

 

$

(13,000)

 

$

(1,248,979)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss for the year

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(6,485,048)

 

 

 

 

 

 

 

 

 

 

(6,485,048)

Unrealized gain on marketable securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

161,400

 

 

 

 

 

 

 

161,400

Comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(6,485,048)

 

 

161,400

 

 

 

 

 

 

 

(6,323,648)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of deferred compensation

 

 

 

 

 

 

 

 

 

 

 

62,228

 

 

 

 

 

 

 

 

 

 

 

 

 

62,228

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of common stock for cash

 

 

 

 

 

22,171,111

 

 

22,171

 

 

2,227,689

 

 

 

 

 

 

 

 

 

 

 

 

 

2,249,860

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock issued for services

 

 

 

 

 

5,137,105

 

 

5,137

 

 

528,491

 

 

 

 

 

 

 

 

 

 

 

 

 

533,628

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock issued to employees

 

 

 

 

 

3,634,871

 

 

3,635

 

 

306,615

 

 

 

 

 

 

 

 

 

 

 

 

 

310,250

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock issued for exercise of options

 

 

 

 

 

1,532,326

 

 

1,532

 

 

254,184

 

 

 

 

 

 

 

 

 

 

 

 

 

255,716




























Exercise of common stock warrants

 

 

 

 

 

3,169,628

 

 

3,170

 

 

271,831

 

 

 

 

 

 

 

 

 

 

 

 

 

275,001




























Common stock  issued as payment on convertible notes

 

 

 

 

 

22,339,702

 

 

22,340

 

 

1,825,691

 

 

 

 

 

 

 

 

 

 

 

 

 

1,848,031

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at September 30, 2012

626,667

 

$

626

 

215,943,809

 

$

215,945

 

$

38,343,044

 

$

(40,813,128)

 

$

228,600

 

(162,500)

 

$

(13,000)

 

$

(2,037,914)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss for the year

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(7,108,819)

 

 

 

 

 

 

 

 

 

 

(7,108,819)

Unrealized loss on marketable securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(308,780)

 

 

 

 

 

 

 

(308,780)

Comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(7,108,819)

 

 

(308,780)

 

 

 

 

 

 

 

(7,417,599)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of deferred compensation

 

 

 

 

 

 

 

 

 

 

 

762,677

 

 

 

 

 

 

 

 

 

 

 

 

 

762,677




























Loss on extinguishment of debt

 

 

 

 

 

 

 

 

 

 

 

481,588

 

 

 

 

 

 

 

 

 

 

 

 

 

481,588

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of common stock for cash

 

 

 

 

 

10,375,676

 

 

10,376

 

 

234,624

 

 

 

 

 

 

 

 

 

 

 

 

 

245,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock issued for services

 

 

 

 

 

13,329,657

 

 

13,330

 

 

473,155

 

 

 

 

 

 

 

 

 

 

 

 

 

486,485

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock issued to employees

 

 

 

 

 

30,297,630

 

 

30,296

 

 

939,304

 

 

 

 

 

 

 

 

 

 

 

 

 

969,600

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock issued for exercise of options

 

 

 

 

 

91,224,000

 

 

91,224

 

 

3,681,425

 

 

 

 

 

 

 

 

 

 

 

 

 

3,772,649

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Exercise of common stock warrants

 

 

 

 

 

1,910,000

 

 

1,910

 

 

51,570

 

 

 

 

 

 

 

 

 

 

 

 

 

53,480

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock  issued as payment on convertible notes

 

 

 

 

 

47,181,300

 

 

47,181

 

 

2,266,277

 

 

 

 

 

 

 

 

 

 

 

 

 

2,313,458

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at September 30, 2013

626,667

 

$

626

 

410,262,072

 

$

410,262

 

$

47,233,664

 

$

(47,921,947)

 

$

(80,180)

 

(162,500)

 

$

(13,000)

 

$

(370,575)

 

See accompanying notes to consolidated financial statements

 

33




IceWEB, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

 

 

 

For the Years Ended September 30,

 

 

 

 

2013

 

 

2012

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(7,108,819

)

 

$

(6,485,048

)

Adjustments to reconcile net loss to net cash provided by (used in) operating activities:

 

 

 

 

 

 

 

 

 

Depreciation

 

 

215,237

 

 

 

202,130

 

 

Share-based compensation

 

 

969,600

 

 

 

310,250

 

 

Amortization of deferred compensation

 

 

762,677

 

 

 

62,228

 

 

Loss on extinguishment of debt



481,588




-


 

Change in fair value of derivative liability

 

 

(987,075

)

 

 

(645,501

)

 

Common stock and options issued for services rendered

 

 

2,532,773

 

 

 

533,628

 

 

Write off of subscription receivable

 

 

-

 

 

 

83,000

 

 

Interest on amortization of debt discount

 

 

73,172

 

 

 

2,315,337

 

 

Amortization of deferred finance costs

 

 

153,033

 

 

 

525,016

 

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

 

(Increase) decrease in:

 

 

 

 

 

 

 

 

 

Accounts receivable

 

 

505,152

 

 

 

618,740

 

 

Prepaid expense

 

 

(17,223

 

 

10,545

 

 

Other

 

 

(175,551

)

 

 

(1,545

)

 

Inventory

 

 

119,063


 

 

(226,250

)

 

Increase (decrease) in:

 

 

 

 

 

 

 

 

 

Accounts payable and accrued liabilities

 

 

(174,835

)

 

 

(1,362,562

)

 

Deferred loan fees

 

 

(27,500

)

 

 

(27,500

)

 

Deferred revenue

 

 

(21,901

 

 

19,993

 

 

 

 

 

 

 

 

 

 

 

 

NET CASH USED IN OPERATING ACTIVITIES

 

 

(2,700,609

)

 

 

(4,067,538

)

 

 

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

 

 

Purchase of property and equipment

 

 

(23,319

)

 

 

(449,082

)

 

Investment in marketable securities

 

 

-


 

 

(33,000

)

 

 

 

 

 

 

 

 

 

 

 

NET CASH USED IN INVESTING ACTIVITIES

 

 

(23,319

)

 

 

(482,082

)

 

 

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

 

Proceeds from notes payable

 

 

297,940

 

 

 

395,233

 

 

Payments on notes payable

 

 

(212,794

)

 

 

(406,225

)

 

Proceeds from subscription receivable

 

 

-

 

 

 

1,171,520

 

 

Proceeds from conversion of warrants

 

 

53,480

 

 

 

275,001

 

 

Proceeds from convertible note payable

 

 

168,000

 

 

 

1,750,000

 

 

Payment of deferred finance costs

 

 

-


 

 

(876,012

)

 

Proceeds from notes payable, related party



186,000




-


 

Proceeds from sale of common stock

 

 

245,000

 

 

 

2,249,860

 

 

Proceeds from exercise of common stock options

 

 

1,726,360

 

 

 

255,717

 

 

 

 

 

 

 

 

 

 

 

 

NET CASH PROVIDED BY FINANCING ACTIVITIES

 

 

2,463,986

 

 

 

4,815,094

 

 

 

 

 

 

 

 

 

 

 

 

NET INCREASE (DECREASE) IN CASH

 

 

(259,942

 

 

265,474

 

 

 

 

 

 

 

 

 

 

 

 

CASH - beginning of year

 

 

269,594

 

 

 

4,120

 

 

 

 

 

 

 

 

 

 

 

 

CASH - end of year

 

$

9,652

 

 

$

269,594

 

 

 

 

 

 

 

 

 

 

 

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

 

 

Cash paid for:

 

 

 

 

 

 

 

 

 

Interest

 

$

15,075

 

 

$

395,233

 

 

Income taxes

 

$

-

 

 

$

 

 

 

 

 


 

 

 

 

 

 

NON-CASH INVESTING AND FINANCING ACTIVITIES:

 

 


 

 

 

 

 

 

Common stock issued for debt and interest

 

$

2,313,458

 

 

 $

1,848,031

 

 

 

See accompanying notes to consolidated financial statements

 

34

 

 




IceWEB, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years ended September 30, 2013 and 2012

 

NOTE 1 - ORGANIZATION

 

IceWEB, Inc. (the Company) began trading publicly in April 2002. Utilizing resources gained through acquisitions, we have developed our IceWEB data storage products. During fiscal 2013 and 2012 we had one wholly owned operating subsidiary, IceWEB Storage Corporation (formerly known as Inline Corporation).  

 

BUSINESS OF ICEWEB

 

Since 2005, the Company had been focused on serving the commercial and federal markets with network security products and proprietary on-line software solutions. In 2008, the Company narrowed its focus and expanded its capabilities by acquiring INLINE Corporation, a data storage manufacturing company.

 

In March, 2009, the Company sold its wholly owned subsidiary, IceWEB Virginia, Inc. to an unrelated third party, and in the process exited its low-margin IT re-seller business products business to further focus on the higher margin data storage manufacturing business.


With our acquisition of Computers & Telecom, Inc. and KCNAP, LLC, (collectively CTC) in October 2013, IceWEB provides 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).


NOTE 2 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Principles of Consolidation

The accompanying 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.

 

Reclassifications

Certain reclassifications have been made to previously reported amounts to conform to 2013 amounts. The reclassifications had no impact on previously reported results of operations or shareholders deficit.

 

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.  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.

 

35

IceWEB, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years ended September 30, 2013 and 2012


NOTE 2 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, (continued)

 

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.

 

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 in 2013 and 2012 include the valuation of stock-based compensation, the allowance for inventory obsolescence and the useful life of property and equipment and intangible assets, derivative liabilities, and litigation reserves.

 

Cash and Cash Equivalents

We consider all highly liquid debt instruments with original maturities of three months or less to be cash equivalents.

 

Accounts Receivable

Accounts receivable consists of normal trade receivables. We recorded a bad debt allowance of $0 and $409,000 as of September 30, 2013 and 2012, respectively. Management performs ongoing evaluations of its accounts receivable. Management believes that all remaining receivables are fully collectable.  Bad debt expense amounted to $114,918 and $0 for years ended September 30, 2013 and 2012, respectively.

 

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 $28 on our behalf that had not been remitted to us as of September 30, 2013.


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.

 

 

36

 





IceWEB, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years ended September 30, 2013 and 2012


NOTE 2 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, (continued)


Derivatives are required to be recorded on the balance sheet at fair value (see Note 11).  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. In addition, additional disclosures are required about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for and (c) how derivative instruments and related hedged items affect an entitys financial position, financial performance, and cash flows.


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 815-15-25 or FASB ASC 815 as of September 30, 2013 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 11).

 

Inventory

Inventory is valued at the lower of cost or market, on an average cost basis.

 

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.


37

 




IceWEB, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years ended September 30, 2013 and 2012


NOTE 2 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, (continued)


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.


 Intangible Assets

Intangible assets, net consists of the cost of acquired customer relationships. We capitalize and amortize the cost of acquired intangible assets over their estimated useful lives on a straight-line basis. The Company periodically reevaluates the carrying value of its intangible assets for events or changes in circumstances that indicate that the carrying value may not be recoverable. As part of this reevaluation, the Company estimates the future cash flows expected to result from the use of the asset. If the sum of the expected future cash flows is less than the carrying amount of the asset, an impairment loss is recognized to reduce the carrying value of the intangible asset to the estimated fair value of the asset.

 

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.

 

Advertising

Advertising costs are expensed as incurred and amounted to $20,813 in fiscal 2013 and $93,975 in fiscal 2012.

 

Revenue Recognition

We follow the guidance of ASC Topic 605, Revenue Recognition (formerly Staff Accounting Bulletin (SAB) No. 104, Revenue Recognition) for revenue recognition. In general, we record revenue when persuasive evidence of an arrangement exists, services have been rendered or product delivery has occurred, the sales price to the customer is fixed or determinable, and collectability is reasonably assured. The following policies reflect specific criteria for our various revenues streams:


Revenues from sales of products are generally recognized when products are shipped unless the Company has obligations remaining under sales or licensing agreements, in which case revenue is either deferred until all obligations are satisfied or recognized ratably over the term of the contract.

 

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 the related debt payable, net, in the accompanying consolidated balance sheets.


38

 


 




IceWEB, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years ended September 30, 2013 and 2012


NOTE 2 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, (continued)


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 September 30, 2013, there were options and warrants to purchase 106,238,245 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 13, 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).

 

Prior to October 1, 2005, we accounted for stock options issued under the Plan under the recognition and measurement provisions of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations, as permitted by ASC Topic 718, Compensation Stock Compensation, Share-Based Payments. No stock-based compensation cost related to employee stock options was recognized in the Consolidated Statement of Operations for the year ended September 30, 2005 as all options granted under the Plan had an exercise price equal to the market value of the underlying common stock on the date of grant.

 

Recently Issued Accounting Standards

 

In July 2013, the FASB issued ASU 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. This standard requires that an unrecognized tax benefits, or a portion of an unrecognized tax benefit be presented on a reduction to a deferred tax asset for an NOL carryforward, a similar tax loss, or a tax credit carryforward with certain exceptions to this rule. If certain exception conditions exists, an entity should present an unrecognized tax benefit in the financial statements as a liability and should not net the unrecognized tax benefit with a deferred tax asset. This standard is effective for fiscal years and interim periods within those years beginning after December 15, 2013. The Company does not expect the adoption of the new provisions to have a material impact on our financial condition or results of operations.


The Company believes that there were no other accounting standards recently issued that had or are expected to have a material impact on our financial position or results of operations.







39





IceWEB, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years ended September 30, 2013 and 2012

 

NOTE 3 - PROPERTY AND EQUIPMENT

 

At September 30, property and equipment consisted of the following:

 

 

 

Estimated Life

 

2013

 

 

2012

 

 

Office equipment

 

5 years

 

$

644,020

 

 

$

644,020

 

Computer software

 

3 years

 

 

52,841

 

 

 

29,523

 

 

Furniture and fixtures

 

5 years

 

 

-

 

 

 

-

 

 

Leasehold improvements

 

5 years

 

 

1,033,495

 

 

 

1,033,495

 

 

 

 

 

 

 

1,730,356

 

 

 

1,707,038

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less: accumulated depreciation

 

 

 

 

(1,422,488

)

 

 

(1,207,253

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

307,868

 

 

$

499,785

 

 

 

Depreciation expense for the years ended September 30, 2013 and 2012 was $215,237 and $202,130 respectively.

 


NOTE 4 OTHER CURRENT ASSETS


Other current assets totaled $175,551 at September 30, 2013, and 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.  See footnote 20.


NOTE 5 - 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 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.


40

 






IceWEB, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years ended September 30, 2013 and 2012


NOTE 5 - RELATED PARTY TRANSACTIONS (continued)


While six out of the seven board members 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 6 - NOTES PAYABLE

 

Sand Hill Finance, LLC

 

On December 19, 2005, the Company entered into a Financing Agreement with Sand Hill Finance, LLC pursuant to which, together with related amendments, the Company may borrow up to 80% on the Companys accounts receivable balances up to a maximum of $1,800,000. In conjunction with the acquisition of Inline Corporation in December, 2008, the lending limit on the credit facility was increased to $2,750,000. In addition, the Company and Sand Hill Finance, LLC entered into a 36 month term note agreement in the amount of $1,000,000. Amounts borrowed under the Financing Agreement are secured by a first security interest in substantially all of the Companys assets.

 

Interest on the accounts receivable-based borrowings was payable at a rate of 1.75% per month on the average loan balance outstanding during the year, equal to an annual interest rate of approximately 21% per year. The Company also agreed to pay an upfront commitment fee of 1% of the credit line upon signing the Financing Agreement, half of which was due and paid upon signing (amounting to $9,000) and half of which is due on the first anniversary of the Financing Agreement. In addition, the Company is obligated to pay a commitment fee of 1% of the credit limit annually, such amounts are payable on the anniversary of the agreement.


In connection with the term note, the Company issued Sand Hill Finance, LLC a seven-year common stock purchase warrant to purchase 120,000 shares of our common stock at an exercise price of $1.00 per share. The exercise price was subsequently reduced to $0.50 per share pursuant to Warrant Amendment Agreement which was executed in conjunction with the convertible debenture. The warrant contains a cashless exercise provision which means that at the option of the holder, the warrant is convertible into a number of shares of our common stock as determined by dividing the aggregate fair market value of the Companys common stock minus the aggregate exercise price of the warrant by the fair market value of one share of common stock.


The number of shares issuable upon the exercise of the warrant and the exercise price are subject to adjustment in the event of stock dividends, stock splits and reclassifications.  The fair value of the warrant of $13,589 has been recorded as an addition to paid-in capital and deferred finance costs during the year ended September 30, 2009.

 

The Financing Agreement had a term of one year, subject to mutual extension by both parties. As a result, the balance due to Sand Hill Finance, LLC was classified as a current liability on the accompanying consolidated balance sheet. 

The terms of the Financing Agreement also restrict the Company from undertaking certain transactions without the written consent of the creditor including (i) permit or suffer a change in control involving 20% of its securities, (ii) acquire assets, except in the ordinary course of business, involving payment of $100,000 or more, (iii) sell, lease, or transfer any of its property except for sales of inventory and equipment in the ordinary course of business, (iv) transfer, sell or license any intellectual property, (v) declare or pay a dividend on stock, except payable in the form of stock dividends (vi) incur any indebtedness other than trade credit in the ordinary course of business and (vii) permit any lien or security interest to attach to any collateral.


 

41





IceWEB, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years ended September 30, 2013 and 2012


NOTE 6 - NOTES PAYABLE (continued)


In November, 2011, in connection with the Companys private placement of convertible notes and Securities Purchase Agreement (see NOTE 6), Sand Hill Finance, LLC executed an amendment to the Financing Agreement in which Sand Hill Finance LLC agreed that they would not pursue any remedies of default under the Financing Agreement until at least the ninety-first day after the obligations under the convertible notes have been fully satisfied.


On September 7, 2012, Sand Hill Finance, LLC and IceWEB, Inc. entered into an agreement to amend the Financing Agreement in which Sand Hill Finance, LLC agreed to lower the interest rate on Icewebs existing debt from 21% per annum to 12% per annum.


On April 12, 2013 the Company entered into an agreement with Sand Hill Finance, LLC to amend the existing Financing Agreement by issuing a convertible debenture to replace IceWEBs existing note payable, in the amount of $2,139,235. The debenture was convertible into common stock at a fixed price of $0.075 per share, bore interest at 12% annually, and had a two year term. In addition, the terms of the note call for monthly payments of $15,000, which increases to $25,000 in the event that IceWEB raises $3,000,000 or more in an equity financing.  In April, 2013 Sand Hill Finance, LLC converted $506,250 of the debenture balance into 6,750,000  shares of IceWEB, Inc. $0.001 par value common stock.


On August 20, 2013 IceWEB, Inc. entered into an Agreement for the Cancellation of Secured Convertible Debenture with Sand Hill Finance, LLC pursuant to which SHF converted $1,642,739 of principal and accrued but unpaid interest due it under the Secured Convertible Debenture dated April 15, 2013 into 37,000,000 shares of our common stock.  The conversion price per share was $0.0444 when the market price per share was $0.0319 per share.  The Company recognized a loss on the extinguishment of debt of $481,588 as a result of this transaction.


As part of the agreement, within five days SHF was required to file UCC-3 financing statements to release its security interest in our assets which were pledged as collateral under the debenture.  The agreement also contains mutual general releases.  As a result of this transaction, at September 30, 2013, the principal amount due under the Financing Agreement amounted to $0.


NOTE 7 - INVENTORY

 

Inventory consisted of the following:

 

 

 

September 30, 2013

 

 

September 30, 2012

 

 

Raw materials

 

$

130,534

 

 

$

175,258

 

Work in progress

 

 

24,476                      

 

 

 

42,335

 

 

Finished goods

 

 

8,158

 

 

 

64,638

 

 

 

 

$

163,168

 

 

$

282,231

 

 


NOTE 8 - COMMITMENTS

 

We leased office space in Sterling, Virginia under a two-year operating lease that expired on March 31, 2011. We occupied the office space on a month-to-month basis until October 31, 2013, when we relocated our corporate offices to Kansas City, Missouri in conjunction with our acquisition of Computers & Telecom, Inc. and subsidiary.  

Rent expense was $73,894 and $75,177 for the years ended September 30, 2013 and 2012.

 

 42

 





IceWEB, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years ended September 30, 2013 and 2012

 

NOTE 9 - INCOME TAXES

 

We account for income taxes under the provisions of ASC 740-10-25. ASC 740-10-25 prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Benefits from tax positions should be recognized in the financial statements only when it is more likely than not that the tax position will be sustained upon examination by the appropriate taxing authority that would have full knowledge of all the relevant information. A tax position that meets the more-likely-than-not recognition threshold is measured at the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. Tax positions that previously failed to meet the more-likely-than not recognition threshold should be recognized in the first subsequent financial reporting period in which that threshold is met. Previously recognized tax positions that no longer meet the more-likely-than-not recognition threshold should be derecognized in the first subsequent financial reporting period in which that threshold is no longer met. ASC 740-10-25 also provides guidance on the accounting for and disclosure of unrecognized tax benefits, interest, and penalties. ASC 740-10-25 requires the recognition of deferred tax assets and liabilities for both the expected impact of differences between the financial statements and the tax basis of assets and liabilities, and for the expected future tax benefit to be derived from tax losses and tax credit carryforwards. ASC 740-10-25 additionally requires the establishment of a valuation allowance to reflect the likelihood of realization of deferred tax assets.  At September 30, 2013 and 2012 the Company has no unrecognized tax benefits, interest, or penalties.  At September 30, 2013 tax years ending September 30, 2012, 2011, and 2010 remain subject to examination.

 

A summary of our deferred tax is as follows:

 

 

 

2013

 

 

2012

 

 

Deferred Tax Assets:

 

 

 

 

 

 

 

 

 

Tax benefit of net operating loss carry forward

 

$

7,089,500

 

 

$

5,637,000

 

Unpaid accrued salaries

 

 

48,500

 

 

 

13,000

 

 

Allowance for doubtful accounts

 

 

-

 

 

 

154,000

 

 

Amortization of leasehold improvements

 

 

-

 

 

 

339,000

 

 

 

 

 

7,131,000

 

 

 

6,143,000

 

 

 

 

 

 

 

 

 

 

 

 

Less: valuation allowance

 

 

(7,131,000

)

 

 

(6,143,000

)

 

 

 

 

 

 

 

 

 

 

 

Net deferred tax assets

 

$

 

 

$

 

 

 

As of September 30, 2013 we had unused net operating loss carry forwards of approximately $18,855,000 available to reduce our future federal taxable income. Net operating loss carryforwards expire through fiscal years ending 2033. Internal Revenue Code Section 382 places a limitation on the amount of taxable income that can be offset by carryforwards after a change in control (generally a greater than 50% change in ownership).

 

The valuation allowance at September 30, 2013 was $7,131,000. The increase during fiscal 2013 was approximately $988,000.

 

The table below summarizes the differences between our effective tax rate and the statutory federal rate as follows for fiscal 2013 and 2012.  The effective tax rate is 34% Federal and 3.6% State after Federal tax benefit:

 

 

 

2013

 

 

2012

 

Computed expected tax benefit

 

 

(34.0

)%

 

 

(34.0

)%

State income taxes, net of federal tax benefit

 

 

(3.6

)%

 

 

(3.6

)%

Other permanent differences

 

 

15.0

%

 

 

13.6

%

Change in valuation allowance

 

 

22.6

%

 

 

24.0

%

 

 

 

 

 

 

 

 

 

Effective tax rate

 

 

0.0

%

 

 

0.0

%

 


43

IceWEB, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years ended September 30, 2013 and 2012

 

NOTE 10 CONVERTIBLE NOTES

 

On November 23, 2011, the Company entered into a Securities Purchase Agreement with three accredited investors pursuant to which the Company sold $2,012,500 in principal amount of senior convertible notes and issued the investors Series O, Series P and Series Q Warrants to purchase up to an aggregate of 81,588,029 shares, as adjusted, of the Companys common stock for an aggregate purchase price of $1,750,000 in a private transaction exempt from registration under the Securities Act of 1933, as amended (the Securities Act) in reliance on an exemption from registration pursuant to Section 4(2) and Regulation D of the Securities Act.     The Company issued the notes at an original issue discount of 13%.


The convertible notes were fully converted in March, 2013.  The remaining unamortized discount was written off as interest expense.   The balance of this note was as follows as of September 30, 2013 and 2012:


 

 

September 30,

 

 

September 30,

 

 

 

 

2013

 

 

2012

 

 

 

 

 

 

 

 

 

 

 

 

Principal balance of convertible notes

 

$

-

 

 

$

164,469

 

Original issue discount, net

 

 

-


 

 

(5,399

 )

 

Debt discount

 

 

-


 

 

(53,895

 )

 

Convertible notes, net of discount

 

$

-

 

 

$

105,175

 

 



 On April 10, 2013 when the closing price of the Companys stock was $0.034, the Company entered into a promissory note agreement with JMJ Financial for an amount of up to $500,000.  The note bears interest at 12% which is prepaid at the time of funding, and was issued with a 10% original issue discount.  Each note draw has a seven month term and is repayable in cash or stock with a minimum conversion price per share of the lesser of $0.075 per share or 60% of the lowest trade price in the 25 trading days previous to the conversion, but in no case shall the conversion price be less than $0.075.  As of September 30, 2013, the Company had borrowed $186,667 under this agreement.

 

 

 

September 30,

 

 

September 30,

 

 

 

 

2013

 

 

2012

 

 

 

 

 

 

 

 

 

 

 

 

Principal balance of convertible notes

 

$

186,667

 

 

$

-

 

Original issue discount, net

 

 

(4,789

)

 

 

-

 

 

Debt discount

 

 

-


 

 

-

 

 

Convertible notes, net of discount

 

$

181,878

 

 

$

-

 

 

 


The effective interest rate on notes issued with original issue discount for the years ending September 30, 2013 and 2012 was 36.8% and 31.9%, respectively.  Total interest cost, including contractual rate and original issue discount was $256,376 and $2,144,900 for the years ending September 30 2013 and 2012, respectively.



44

 


 





IceWEB, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years ended September 30, 2013 and 2012


NOTE 11 - DERIVATIVE LIABILITIES

 

Derivative warrant liability

 

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 September 30, 2013 using the Black-Scholes model, which approximates a binomial or lattice 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.

 

The derivative warrants outstanding at September 30, 2013 are all currently exercisable with a weighted-average remaining life of 3.04 years.

 

The revaluation of the warrants 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 $987,075 and $645,501 within the Companys consolidated statements of operations for the year ended September 30, 2013 and 2012, respectively, under the caption Gain on change in derivative liability.  The fair value of the warrants at September 30, 2013 is $117,424 which is reported on the consolidated balance sheet under the caption Derivative Liability.  The following summarizes the changes in the value of the derivative warrant liability from the date of the Companys issuance of derivative warrant instruments on November 23, 2011 until September 30, 2013

 

 

Value

 

 

No. of Warrants

 

 

Warrants Issued on November 23, 2011 Derivative warrant liability

 

$

1,750,000

 

 

 

115,446,100

 

Decrease in fair value of derivative warrant liability

 

 

(645,501

)

 

 

(2,669,628

)

 

 

 

 

 

 

 

 

 

 

 

Balance at September 30, 2012 Derivative warrant liability

 

$

1,104,499

 

 

 

112,776,472

 

 

 









 

Decrease in fair value of derivative warrant liability

 

 

(987,075

)

 

 

(23,957,751

)

 

 

 

 

 

 

 

 

 


 

Balance at September 30, 2013 Derivative warrant liability

 

$

117,424

 

 

 

88,818,721


 

 

 

45


IceWEB, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years ended September 30, 2013 and 2012 


NOTE 11 - DERIVATIVE LIABILITIES (continued)


Fair Value Assumptions Used in Accounting for Derivative Warrant Liability

 

The Company has determined its derivative warrant liability to be a Level 3 fair value measurement and has used the Black-Scholes pricing model to calculate the fair value as of September 30, 2013.  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.  The key inputs used in the September 30, 2013 fair value calculations were as follows:

 

 

 

September 30,

 

 

 

 

 

2013

 

 

Exercise price

 

$

0.028

 

Time to expiration

 

 

3.04 3.75 years

 

 

Risk-free interest rate

 

 

0.62% 0.77%

 

 

Estimated volatility

 

 

280

%

 

Dividend

 

 

-0-

 

 

Stock price on September 30, 2013

 

$

0.0229

 

 

Expected forfeiture rate

 

 

90%

 

 




NOTE 12 - 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 September 30, 2013 all of the Companys cash balances were fully insured. The Company has not experienced any losses in such accounts.

 

Major Customers

 

Sales to 2 customers represented approximately 39% and 60% of total sales for the years ended September 30, 2013 and 2012, respectively.






 

2013

 

2012

Customer A

26%

 

41%

Customer B

13%

 

19%

All others

61%

 

40%

 

100%

 

100%

 

 

 

 


As of September 30, 2013 and 2012, respectively, approximately 93% and 91% of our accounts receivable was due from three customers.

 





 

2013

 

2012

Customer A

47%

 

54%

Customer B

23%


26%

Customer C

22%

 

11%

All others

8%

 

9%

 

100%

 

100%

 

 

 

 


46



IceWEB, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years ended September 30, 2013 and 2012


NOTE 13 - STOCKHOLDERS EQUITY (DEFICIT)


Preferred Stock

 

Our authorized capital includes 10,000,000 shares of blank check preferred stock, par value $0.001 per share. Our Board of Directors, without further stockholder approval, may issue our preferred stock in one or more series from time to time and fix or alter the designations, relative rights, priorities, preferences, qualifications, limitations and restrictions of the shares of each series. In March 2005, our Board of Directors authorized a series of 1,666,667 shares of blank check preferred stock be designated as Series A Convertible Preferred Stock and on April 1, 2005 we filed a Certificate of Designations of Preferences, Rights and Limitations of Series A Convertible Preferred Stock with the Secretary of State of Delaware. In September 2005, our Board of Directors authorized a series of 833,334 shares of blank check preferred stock be designated as Series B Convertible Preferred Stock and on September 28, 2005, we filed a Certificate of Designations of Preferences, Rights and Limitations of Series B Preferred with the Secretary of State of Delaware. On December 29, 2005, we filed an Amended and Restated Certificate of Designations of Preferences, Rights and Limitations of Series B Convertible Preferred Stock increasing the number of shares authorized under this series to 1,833,334 shares.


A) Series B Convertible Preferred Stock

 

The designations, rights and preferences of the Series B Convertible Preferred Stock provide:

 

no dividends are payable on the Series B Convertible Preferred Stock. So long as these shares are outstanding, we cannot pay dividends on our common stock nor can it redeem any shares of its common stock, the shares of Series B Convertible Preferred Stock do not have any voting rights, except as may be provided under Delaware law,

 

so long as the shares are outstanding, we cannot change the designations of the Series B Convertible Preferred Stock, create a class of securities that in the instance of payment of dividends or distribution of assets upon our liquidation ranks senior to or pari passu with the Series B Convertible Preferred Stock or increase the number of authorized shares of Series B Convertible Preferred Stock.

 

each share of Series B Convertible Preferred Stock is convertible at the option of the holder into one share of our common stock based upon an initial conversion value of $0.2727 per share. The conversation ratio is subject to adjustment in the event of stock dividends, stock splits or reclassification of our common stock.  No conversion of the Series B Convertible Preferred Stock may occur if a conversion would result in the holder, and any of its affiliates beneficially owning more than 4.9% of our outstanding common shares following such conversion. This provision may be waived or amended only with the consent of the holders of all of the Series B Convertible Preferred Stock and the consent of the holders of a majority of our outstanding shares of common stock who are not affiliates, and

 

the shares of Series B Convertible Preferred Stock automatically convert into shares of our common stock in the event of change of control of the Company.


Common Stock

 

Fiscal 2013 Transactions

 

Issuances of Restricted Stock


In November, 2012 we issued 918,919 shares at a share price of $0.074/share to our executive officers and recognized stock based compensation expense of $68,000. The issuance was exempt from registration under the Securities Act of 1933 in reliance on an exemption provided by Section 4(2) of that act.

 


47




IceWEB, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years ended September 30, 2013 and 2012

 

NOTE 13 - STOCKHOLDERS EQUITY (DEFICIT) (continued)

  

In December, 2012, we issued 112,000 shares of common stock at a per share price of $0.074, valued at $8,228 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 December, 2012, we sold 500,000 shares of common stock at a per share price of $0.074, valued at $37,000 to an accredited investor.  The issuance was exempt from registration under the Securities Act of 1933 in reliance on an exemption provided by Section 4(2) of that act.


In January, 2013 we issued 216,216 shares at a share price of $0.074/share to our executive officers and recognized stock based compensation expense of $16,000. The issuance was exempt from registration under the Securities Act of 1933 in reliance on an exemption provided by Section 4(2) of that act.


In January, 2013 we sold 500,000 shares of common stock at a per share price of $0.074, valued at $37,000 to an accredited investor.  The issuance was exempt from registration under the Securities Act of 1933 in reliance on an exemption provided by Section 4(2) of that act.


In January, 2013, we issued 112,000 shares of common stock at a per share price of $0.074, valued at $8,228 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 February, 2013, we issued 175,000 shares of common stock at a per share price of $0.074, valued at $12,950 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 February, 2013 we issued 1,950,000 shares of common stock at a per share price of $0.0396, valued at $77,300 to two accredited investors 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 February, 2013, we issued 112,000 shares of common stock at a per share price of $0.039, valued at $4,368 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 March, 2013, we issued 5,000,000 shares of common stock at a per share price of $0.04, valued at $200,000 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 March, 2013 we sold 1,200,000 shares of common stock at a per share price of $0.021, valued at $25,000 to an accredited investor.  The issuance was exempt from registration under the Securities Act of 1933 in reliance on an exemption provided by Section 4(2) of that act.


In March, 2013 we issued 362,000 shares of common stock at a per share price of $0.0309, valued at $11,196 to two accredited investors 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 April, 2013 we issued 18,000,000 shares at a share price of $0.033/share to our executive officers and employees and recognized stock based compensation expense of $594,000. The issuance was exempt from registration under the Securities Act of 1933 in reliance on an exemption provided by Section 4(2) of that act.


In April, 2013, we issued 2,250,000 shares of common stock at a per share price of $0.0305, valued at $68,675 to two 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.


48




IceWEB, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years ended September 30, 2013 and 2012

 

NOTE 13 - STOCKHOLDERS EQUITY (DEFICIT) (continued)


In April, 2013, we sold 2,500,000 shares of common stock at a per share price of $0.02, valued at $50,000 to an accredited investor. The issuance was exempt from registration under the Securities Act of 1933 in reliance on an exemption provided by Section 4(2) of that act.


In May, 2013, we issued 224,000 shares of common stock at a per share price of $0.028, valued at $6,272 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 June, 2013, we issued 708,333 shares of common stock at a per share price of $0.0254, valued at $18,008 to two accredited investors 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 June, 2013, we sold 2,500,000 shares of common stock at a per share price of $0.02, valued at $50,000 to an accredited investor. The issuance was exempt from registration under the Securities Act of 1933 in reliance on an exemption provided by Section 4(2) of that act.


In July, 2013 we issued 6,000,000 shares at a share price of $0.0236/share to our executive officers and employees and recognized stock based compensation expense of $141,600. 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 July, 2013, we issued 2,000,000 shares of common stock at a per share price of $0.0236, valued at $47,200 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.


In July, 2013, we sold 3,500,000 shares of common stock at a per share price of $0.02, valued at $70,000 to an accredited investor. The issuance was exempt from registration under the Securities Act of 1933 in reliance on an exemption provided by Section 4(2) of that act.


In September, 2013, we issued 5,000,000 shares of common stock at a per share price of $0.03, valued at $150,000 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.


All stock based transactions listed above were valued at fair market value (quoted market prices) or the contractual rate which approximates fair market value, as applicable.


Unregistered shares issued in connection with the Conversion of Notes


The Company issued 43,750,000 shares upon the conversion of notes payable at exercise prices ranging from $0.0444 to $ 0.075 per share.


Registered shares issued related to the exercise of common stock options


The Company issued 91,224,000 shares upon the exercise of stock options at various contractual exercise prices ranging from $0.001 to $ 0.075 per share.


Registered shares issued in connection with the Conversion of Notes


The Company issued 3,431,300 shares upon the conversion of notes payable at various contractual exercise prices ranging from $0.03627 to $ 0.0527 per share.


49


IceWEB, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years ended September 30, 2013 and 2012


NOTE 13 - STOCKHOLDERS EQUITY (DEFICIT) (continued)


Registered shares issued in connection with the Exercise of Warrants


The Company issued 1,910,000 shares upon the exercise of common stock warrants at the contractual exercise prices of $ 0.028 per share.


Fiscal 2012 Transactions

 

In July and August, 2012 we issued 2,434,871 shares of restricted common stock at an average per share price of $0.094, valued at $228,250, in lieu of pay to five of our employees, including three of our executive officers.  The recipients were accredited investors and the issuances were exempt from registration under the Securities Act of 1933 in reliance on exemptions provided by Section 4(2) of that act.


In May, 2012 we executed a Finders Agreement pursuant to which the finder acted as the exclusive finder with respect to sales by us in a private placement transaction of up to $2.5 million in aggregate principal amount of equity or equity-related securities.   We sold 13,455,958 units in exchange for gross proceeds of $1,614,715.  These sales were made in a private transaction exempt from registration under the Securities Act of 1933 in reliance on an exemption provided by Section 4(2) of the Act and Regulation D thereunder.

 

On November 23, 2011, we entered into a Securities Purchase Agreement with three accredited investors pursuant to which we sold $2,012,500 in principal amount of senior convertible notes and issued the investors Series O, Series P and Series Q warrants to purchase up to an aggregate of 35,514,789 shares of our common stock for an aggregate purchase price of $1,750,000 in a private transaction exempt from registration under the Securities Act. We issued the senior convertible notes at an original issue discount of 13%. We also entered into a Registration Rights Agreement with investors in which we agreed to register the shares underlying the senior convertible notes and the warrants. We paid Rodman & Renshaw, LLC, a broker-dealer and member of FINRA who acted as the exclusive placement agent for us in the offering, a cash commission of $155,000, issued it warrants to purchase an aggregate of 911,765 shares of our common stock with an exercise price of $0.17 per share which are identical to the Series O warrants, and reimbursed it for legal expenses of $20,000. We reimbursed Iroquois Master Fund Ltd., an investor in the offering, $60,000 for its non-accountable expenses related to the investment.

 

Common Stock Warrants

 

A summary of the status of our outstanding common stock warrants as of September 30, 2013 and 2012 and changes during the period ending on that date is as follows: 

 

 

Year Ended September 30, 2013

 

 

Year Ended September 30, 2012

 

 

 

 

Number of Warrants

 

 

Weighted Average Exercise Price

 

 

Number of Warrants

 

 

Weighted Average Exercise Price

 

 

Common Stock Warrants

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at beginning of year

 

 

118,434,173

 

 

$

0.170

 

 

 

11,528,934

 

 

$

0.17

 

 

Granted

 

 

46,195,745

 

 

 

0.052

 

 

 

110,074,867

 

 

 

0.0816

 

 

Exercised

 

 

(1,910,000

)

 

 

0.028

 

 

 

(3,169,628

 

 

0.0737

 

 

Forfeited

 

 

(59,899,643

 

 

0.080

 

 

 


 

 

 

 

Balance at end of year

 

 

102,820,275

 

 

$

0.028

 

 

 

118,434,173

 

 

$

0.0853

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Warrants exercisable at end of year

 

 

102,820,275

 

 

$

0.046

 

 

 

118,434,173

 

 

 

0.0844

 

 

Weighted average fair value of warrants granted or re-priced during the year

 

 

 

 

 

$

0.028

 

 

 

 

 

 

 

 

 

 

50



IceWEB, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years ended September 30, 2013 and 2012

 

NOTE 13 - STOCKHOLDERS EQUITY (DEFICIT) (continued)

 

 

The following table summarizes information about common stock warrants outstanding at September 30, 2013:

 

 

 

 

Warrants Outstanding

 

 

Warrants Exercisable

 

 

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Number

 

 

Average

 

 

Weighted

 

 

Number

 

 

Weighted

 

 

Range of

 

 

Outstanding at

 

 

Remaining

 

 

Average

 

 

Exercisable at

 

 

Average

 

 

Exercise

 

 

September 30,

 

 

Contractual

 

 

Exercise

 

 

September 30,

 

 

Exercise

 

 

Price

 

 

2013

 

 

Life

 

 

Price

 

 

2013

 

 

Price

 

 

$

0.028

 

 

 

88,018,721

 

 

 

3.04 Years

 

 

$

0.028

 

 

 

88,018,721

 

 

$

0.028

 

 

$

0.150

 

 

 

14,801,554

 

 

 

3.75 Years

 

 

$

0.150

 

 

 

14,801,554

 

 

$

0.150

 

 

 

 

 

 

102,820,275

 

 

 

 

 

 

$

0.046

 

 

 

102,820,275

 

 

$

0.046

 

 


NOTE 14 - STOCK OPTION PLAN

 

In August 2000, the Board of Directors adopted the 2000 Management and Director Equity Incentive and Compensation Plan (the Plan) for directors, officers and employees that provides for non-qualified and incentive stock options to be issued enabling holders thereof to purchase common shares of our stock at exercise prices determined by our Board of Directors. The Plan was approved by our stockholders in August 2001, and the Plan terminated in August, 2010.


The purpose of this Plan was to advance our interests and those of its stockholders by providing a means of attracting and retaining key employees, directors and consultants. Participants in the Plan included our officers, directors, other key employees and consultants who had responsibilities affecting our management, development or financial success.


Awards may have been made under the Plan in the form of Plan options, shares of our 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 could have either been 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 had to 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 had to be at least 110% of such fair market value as determined on the date of the grant. Only persons who were 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 had to provide for an exercise price of not less than 50% of the fair market value of the underlying shares on the date of such grant.

 

As amended in fiscal 2012, the Plan permitted the grant of options and shares for up to 60,000,000 shares of our common stock.

 

The term of each Plan option and the manner in which it may have been exercised was determined by the Board of Directors, provided that no Plan option could 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 our common stock, no more than five years after the date of the grant. The exercise price of the stock options could 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 by surrender of shares of common stock subject to the stock option which had a fair market value equal to the total exercise price at the time of exercise, or a combination of the foregoing methods.



51

 



 

 IceWEB, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years ended September 30, 2013 and 2012

 

NOTE 14 - STOCK OPTION PLAN (continued)

 

In August 2012, the Board of Directors adopted the 2012 Equity Compensation Plan (the 2012 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 our stock at exercise prices determined by our Board of Directors.


The purpose of the 2012 Plan is to advance our 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, we believe the 2012 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 our officers, directors, other key employees and consultants who have responsibilities affecting our management, development or financial success.


Awards may be made under the 2012 Plan in the form of plan options, shares of our 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 2012 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 2012 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 2012 Plan, as amended permits the grant of options and shares for up to 80,000,000 shares of our common stock. The 2012 Plan terminates 10 years from the date of the 2012 Plans adoption by our stockholders.  The term of each 2012 Plan option and the manner in which it may be exercised is determined by the Board of Directors, provided that no 2012 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 our common stock, no more than five years after the date of the grant. The exercise price of the stock options may be paid in either cash, or delivery of unrestricted shares of common stock having a fair market value on the date of delivery equal to the exercise price, or surrender of shares of common stock subject to the stock option which has a fair market value equal to the total exercise price at the time of exercise, or a combination of the foregoing methods.

 

The fair value of stock options granted was estimated at the date of grant using the Black-Scholes options pricing model. We used the following assumptions for determining the fair value of options granted under the Black-Scholes option pricing model:

 

 

Year Ended September 30,

 

 

2013

 

 

2012

 

Expected volatility

 

13% - 278%


 


36% -278

%

Expected term


1-3 years


 

1 - 3 Years


Risk-free interest rate

 

0.01% - 0.34

%

 

 

0.67% - 0.77

%

Forfeiture Rate

 

0% -45

%

 

 

0% -45

%

Expected dividend yield

 

0

%

 

 

0

%

 


 

52

 

 




IceWEB, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years ended September 30, 2013 and 2012

 

NOTE 14 - STOCK OPTION PLAN (continued)

 The expected volatility was determined with reference to the historical volatility of our stock. We use historical data to estimate option exercise, employee termination, and forfeiture rate 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 year ended September 30, 2013, total stock-based compensation charged to operations for option-based arrangements amounted to $762,677. At September 30, 2013, there was approximately $95,785 of total unrecognized compensation expense related to non-vested option-based compensation arrangements under the Plan.

 

 A summary of the status of our outstanding stock options as of September 30, 2013 and changes during the period ending on that date is as follows:

 



Year Ended September 30,


Year Ended September 30,



2013


2012



 

 



Weighted


 



 

 

 

Weighted

 

 







Average


Aggregate





Average


Aggregate







Exercise


Intrinsic





Exercise


Intrinsic



 

 



Price


Value


 

 


Price

 

Value

Stock options

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at beginning of year

 

 

8,353,185

 

 

$

0.0773

 

$

 

 

4,104,487

 

$

 

0.375

$

 

Granted

 

 

90,963,785

 

 

 

0.042

 

 

-

 

8,079,185

 

 

 

0.079

 

-

Exercised

 

 

(91,224,000

)

 

$

0.042

 

 

-

 

(1,532,325

)

$

 

0.167

 

-

Forfeited

 

 

(4,675,000

)

 

$

0.079

 

 

 

 

(2,298,162

)

$

 

0.554

 

 

Balance at end of year

 

 

3,417,970

 

 

$

0.086

 

$

-

 

8,353,185

 

$

 

0.0773

$

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Options exercisable at end of year

 

 

3,045,852

 

 

$

0.087

 

$

-

 

1,307,333

 

$

 

0.0649

$

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average fair value of  options granted during the year

 

 

$

0.079

 

 

 

 

 

 

 

 

$

-

 

  


The following table summarizes information about employee stock options outstanding at September 30, 2013:

 



Options Outstanding


Options Exercisable



 


Weighted


 


 


 



Number


Average


Weighted


Number


Weighted

Range of


Outstanding at


Remaining


Average


Exercisable at


Average

Exercise


September 30,


Contractual


Exercise


September 30,


Exercise

Price


2013


Life


Price


2013


Price

$

0.077

 

 

275,000

 

3.96 Years

 

$

0.077

 

 

91,667

 

$

0.077

 

0.0814

 

 

188,785

 

4.10 Years

 

 

0.0814

 

 

-

 

 

0.0814

 

0.847

 

 

2,454,185

 

3.96 Years

 

 

0.847

 

 

2,454,185

 

 

0.847

 

0.100

 

 

500,000

 

0.44 Years

 

 

0.1

 

 

500,000

 

 

0.1

 

 

 

 

3,417,970

 

 

 

$

0.086

 

 

3,045,852

 

$

0.087

 


53

 



IceWEB, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years ended September 30, 2013 and 2012


NOTE 15 - INVESTMENTS

(a) Summary of Investments

 

Marketable Equity Securities:

 

In November, 2009 we acquired 800,000 shares of VOIS Inc. common stock for $48,000, and in March, 2012 we acquired an additional 3,300,000 shares of VOIS Inc. common stock for $33,000.  In both instances the Company was able to negotiate a purchase price less than the then trading price of VOIS common stock based upon the illiquid nature of the investment and the lack of any other willing purchasers for VOIS securities.  

 

As of September 30, 2013, the Companys investments in marketable equity securities are based on the September 30, 2013  stock price as reflected on the OTCBB. These marketable equity securities are summarized as follows:

 

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 losses are presented in comprehensive income in the consolidated statement of operations and comprehensive income.

 

(b) Gains and Losses on Investments

 

The following table summarizes the realized net gains (losses) associated with the Companys investments:

 

 

 

Fiscal Year Ended

 

 

 

 

September 30

 

 

 

 

2013

 

 

2012

 

 

 

 

 

 

 

 

 

 

Net gains/(loss) on investments in publicly traded equity securities

 

$

(308,780

 

$

192,360

 

 

 

 

 

 

 

 

 

 

 

Net gains on investments

 

$

(308,780

 

$

192,360

 

 

 

On January 1, 2008, the Company adopted ASC 820, which, among other things, defines fair value, establishes a consistent framework for measuring fair value and expands disclosure for each major asset and liability category measured at fair value on either a recurring or nonrecurring basis. The Company did not adopt the ASC 820 fair value framework for nonfinancial assets and liabilities, except for items that are recognized or disclosed at fair value in the financial statements at least annually. ASC 820 clarifies that fair value is an exit price, representing the amount that would either be received to sell an asset or be paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, ASC 820 establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:

 




 

54

 

 



IceWEB, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years ended September 30, 2013 and 2012

 

NOTE 15 - INVESTMENTS (continued)


Level 1.Observable inputs such as quoted prices in active markets for identical assets or liabilities;

 

Level 2.Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and

 

Level 3.Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.

 

Investments 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)

 

 

 September 30, 2013

 

 

 

 

 

 

 

 

 

 

Marketable Equity Securities

 

$

820 1

 

 

$

 

 

$

 

 


Liabilities: 














Derivative liabilities

 

$

 

 

$

 

 

$

117,424

 















 September 30, 2012

 

 

 

 

 

 

 

 

 

Marketable Equity Securities, net of discount for effect of restriction

 

$

 

 

$

 

 

$

309,600 1



Liabilities: 














 

Derivative liabilities

 

$

 

 

$

 

 

$

1,104,499

 

 


1 Previously Level 3 due to Rule 144 restrictions on trading and application of 20% discount; moved to Level 1 when restrictions expired.


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 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.



55

 

 




IceWEB, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years ended September 30, 2013 and 2012

 

NOTE 15 - INVESTMENTS (continued)

  

Under the guidance of ASC 320, Investments, we periodically evaluate other-than-temporary impairment (OTTI) of securities to determine whether a decline in their value is other than temporary. Management utilizes criteria such as the magnitude and duration of the decline, in addition to the reasons underlying the decline, to determine whether the loss in value is other than temporary. The term other-than-temporary is not intended to indicate that the decline is permanent. It indicates that the prospects for a near term recovery of value are not necessarily favorable, or that there is a lack of evidence to support fair values equal to, or greater than, the carrying value of the investment. Once a decline in value is determined to be other than temporary, the value of the security is reduced and a corresponding impairment charge to earnings is recognized. In the assessment of OTTI for various securities at September 30, 2013 the guidance in ASC 320, the Investment-Debt and Equity Securities, is carefully followed.

 

There were no impairment charges on investments in publicly traded equity securities for the year ended September 30, 2013 or for the year ended September 30, 2012.

 

The Company has evaluated its publicly traded equity securities as of September 30, 2013, 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 16EMPLOYEE BENEFIT PLANS

The Company maintained a retirement savings plan for its employees under Section 401(k) of the Internal Revenue Code (the 401(k) Plan) until December, 2012, at which time the 401(k) Plan was discontinued.  Under the 401(k) portion of the plan, participants could contribute eligible compensation up to the maximum allowed by the Internal Revenue Code.  The Company did not make any matching contributions to the 401(k) Plan during the years ending September 30, 2013 and 2012.



NOTE 17 - COMPREHENSIVE INCOME (LOSS)

 

Comprehensive income is comprised of net income and other comprehensive income or loss. Other comprehensive income or loss refers to revenue, expenses, gains and losses that under accounting principles generally accepted in the United States are included in comprehensive income but excluded from net income as these amounts are recorded directly as an adjustment to stockholders equity.

 

Our other comprehensive income at September 30, 2013 consists of unrealized losses on marketable securities available for sale of $80,180.

 

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, data storage manufacturing and cloud-based services.  For the periods ended September 30, 2013 and 2012 all material assets and revenues of the Company were in the United States.

 


56




IceWEB, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years ended September 30, 2013 and 2012


NOTE 19 - COMMITMENTS AND CONTINGENCIES

 

We are a party to litigation which arises primarily in the ordinary course of business. In the opinion of management, the ultimate disposition of such litigation should not have a material adverse effect on our financial position or results of operations.

 

NOTE 20 - SUBSEQUENT EVENTS

 

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.   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).  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 the Closing Date, pursuant to the Exchange Agreement, the shareholders of CTCI exchanged 250,000 shares of common stock of CTCI, representing 100% of the issued and outstanding stock of CTCI, for 9,568,400 newly issued shares of $0.001 par value common stock, which represents 2.2% of the Companys issued and outstanding common stock, immediately following the Share Exchange.  In addition, we issued 13,485,799 shares of IceWEB common stock to pay a debt owing by CTCI to Streamside Partners, LLC, and other liabilities of CTCI which together totaled $422,823, at an effective exchange rate of $0.0314/share.


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 Computers and Tele-Comm, Inc. and Subsidiary (CTCI) included the acquisition of assets of $3,110,192, and liabilities of $2,545,364. The aggregate purchase price consisted of the following:


Fair value of common stock issued to seller

 

   234,426

 

Fair value of common stock issued in exchange for debt

 

 

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

 

$

4,443

 

 

Accounts Receivable

 

68,529

 

 

Lease Deposits

 

188,874

 

 

Prepaid expenses

 

87,903

 

 

Other assets

 

917

 

 

Property and equipment, net

827,383

 

 

Intangible asset

 

1,932,143

 

 

Accounts payable and accrued expenses

(648,961

)

 

Deferred revenue

 

(59,396

)

 

Notes Payable

 

(1,837,007

)

 

 

 

$

564,828

 

 

 57


IceWEB, Inc. and Subsidiaries



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years ended September 30, 2013 and 2012

 

NOTE 20 - SUBSEQUENT EVENTS (continued)


We have not completed the determination as to the allocation of the intangible asset as of the date of this report.


On November 26, 2013, the Company issued an 8% convertible promissory note in the aggregate principal amount of $83,500 to an accredited investor. The note has a maturity date of August 29, 2014. The note is convertible into shares of its common stock at a conversion price of 60% of the lowest three (3) Trading Prices for our Common Stock during the ten trading day period ending on the latest complete trading day prior to the Conversion Date.



On December 18, 2013, the Company issued a 10% convertible promissory note to an accredited investor in the aggregate principal amount of $500,000, of which the Company has drawn down $132,000.  The holder of the note reserves the right to fund additional amounts under the loan agreement at its sole discretion, and the Company is not responsible to repay any unfunded portion of the note.  The note has a maturity date of December 18, 2014.  The note is convertible into shares of its common stock at a conversion price of 60% of the lowest trading price for any fifteen (15) consecutive trading days prior to the date on which the holder elects to convert all or part of the note.


The Company has evaluated subsequent events through the filing date of this Form 10-K, and determined that no subsequent events have occurred that would require recognition in the financial statements or disclosure in the notes thereto other than as discussed in the accompanying notes.

 


 

58

 

 




ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

 

None.

 

ITEM 9A. CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we have conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities and Exchange Act of 1934, as of the end of the period covered by this report. Based on this evaluation, our principal executive officer and principal financial officer concluded as of the evaluation date that our disclosure controls and procedures were not effective.

 

Management's Annual Report on Internal Control Over Financial Reporting

 

Our management, including our Chief Executive Officer and Chief Financial Officer, is responsible for establishing and maintaining adequate internal control over financial reporting to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets, (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors, and (iii) provide reasonable assurance regarding prevention or timely detection of the unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.

 

As of September 30, 2013, management assessed the effectiveness of our company's internal control over financial reporting based on the criteria for effective internal control over financial reporting established in Internal Control--Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO") and SEC guidance on conducting such assessments. Based on that evaluation, they concluded that, during the period covered by this report, such internal controls and procedures were not effective to detect the inappropriate application of US GAAP rules as more fully described below. This was due to deficiencies that existed in the design or operation of our internal control over the calculation of share-based expenses that adversely affected our internal controls and that may be considered to be material weaknesses.  The matters involving internal controls and procedures that our company's management considered to be material weaknesses under the standards of the Public Company Accounting Oversight Board were ineffective controls over the calculation of share-based expenses. The aforementioned material weaknesses were identified by our company's Chief Financial Officer in connection with the audit of our financial statements as of September 30, 2013 and communicated the matters to our management.

 

Management believes that the material weaknesses set forth above did not have an effect on our company's financial results.

 

We are committed to improving our financial organization. As part of this commitment, in January, 2014 Management implemented additional review procedures to included procedures in the review of the calculation of share based expenses.

 

As a result of the implementation of the above procedures, Management has concluded that the material weakness described above has been remediated as of January, 2014


We will continue to monitor and evaluate the effectiveness of our internal controls and procedures and our internal controls over financial reporting on an ongoing basis and are committed to taking further action and implementing additional enhancements or improvements, as necessary and as funds allow. This annual report does not include an attestation report of our company's registered accounting firm regarding internal control over financial reporting. 


59

 



Changes in Internal Controls Over Financial Reporting

 

Except as noted above, there have been no changes in our internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Rules 13a-15 or 15d-15 under the Exchange Act that occurred during the Registrants last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

ITEM 9B. OTHER INFORMATION

 

None.

 

60

 

 




PART III

 

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

 

The following individuals serve as our executive officers and members of our Board of directors:

 

Name

 

Age

 

Positions

Harold F. Compton (1)(2)

 

66

 

Chairman of the Board, Interim Chief Executive Officer

Mark B. Lucky

 

55

 

Chief Financial Officer

Nicholas Carosi, III

 

66

 

Director

Raymond H. Pirtle (2)

 

72

 

Director

Jack Bush(1)

 

78

 

Director

Harry E. Soyster

 

79

 

Director

Dr. Mark Stavish

 

58

 

Director

 

(1) Member of the Compensation Committee

(2) Member of the Audit Committee

 

Harold F. Compton.   Mr. Compton is serving as our interim Chief Executive officer, and has been a member of our board of directors since May 2005, and from May 2012 until July 2012 he served as interim Chief Executive Officer following the death of Mr. John Signorello, the former Chairman and Chief Executive Officer. Mr. Compton has been a retailer for more than 30 years. Mr. Compton joined CompUSA Inc. in 1994 as Executive Vice President-Operations, becoming Executive Vice President and Chief Operating Officer in 1995, President of CompUSA Stores in 1996 and Chief Executive Officer of CompUSA Inc. in 2000, a position he held until his retirement in 2004. Prior to joining CompUSA, Inc., from 1993 until 1994 he served as President and COO of Central Electric Inc., Executive Vice President Operations and Human Resources, and Director of Stores for HomeBase (1989 to 1993), Senior Vice President Operations and Director of Stores for Roses Discount Department Stores (1986 to 1989), and held various management positions including Store Manager, District Manager, Regional Vice President and Zone Vice President for Zayre Corporation from 1965 to 1986. Since 1998 Mr. Compton was a member of the board of directors of Linens N Things, Inc., is currently a member of the board of directors of Maidenform Brands, Inc. and is a member of its Compensation Committee and Corporate Governance and Nominating Committee of the board of directors of that company. Mr. Compton also serves as Chairman of the Board of HASCO Medical, Inc.

 

We believe that as a result of his years of managerial and operational experience, Mr. Compton brings to the board of directors demonstrated management ability at senior levels. In addition, his experience as a director of a variety of companies, and his more than 30 years of experience as a retailer brings valuable insight to our board of directors. These experiences, qualifications and attributes have led to our conclusion that Mr. Compton should be serving as a member of our board of directors in light of our business and structure.

 

 

Mark B. Lucky.   Mark B. Lucky has served as our Chief Financial Officer since March 2007 and as our Chief Operating Officer since May 2012. Since October 30, 2010 he has also served as a member of the board of directors of VOIS Inc. (OTC Markets: VOIS), an entity in which we purchased an interest as described elsewhere herein. He has over 20 years professional experience in high growth/start-up ventures and established companies with multi-industry experience including financial services, technology, software, real estate, biotech and entertainment and media. Prior to joining our company, he consulted at Bearing Point on their financial restatement project. From 2004 to 2005 he was Vice President of Finance and Administration at Galt Associates, Inc., a Sterling, Virginia informatics/ technology and medical research services company and from 2001 to 2004 he was Vice President of Finance and Administration of MindShare Design, Inc., a San Francisco, California based internet technology company. While at both Galt Associates, Inc. and MindShare Design, Inc. Mr. Lucky was the senior financial officer for the company, providing strategic and tactical analysis and managing day to day finance, accounting, cash management, reporting and human resource responsibilities. During his career Mr. Lucky has also been employed by Axys Pharmaceuticals, Inc., a NASDAQ-listed South San Francisco, California-based early stage drug discovery biotech company (acting CFO and Senior Director of Finance), PriceWaterhouseCoopers, LLC, COMPASS Management and Leasing, Inc. (Vice President - Finance 1997 to 1998), Mindscape, Inc. (Director of Financial Planning and Analysis 1995 to 1996), The Walt Disney Company (Manager, Operations Planning & Analysis, Manager of Corporate Planning 1991 to 1995), and KPMG. Mr. Lucky is a member of the board of directors of VOIS Inc. and HASCO Medical, Inc. Mr. Lucky is a CPA and received his B.A., Economics, from the University of California at Los Angeles.

 61

 

Raymond Pirtle. Jr.   Mr. Pirtle has been a member of our board of directors since June 2005. Mr. Pirtle is a veteran of the financial services industry, having spent the past three decades in a variety of senior roles in corporate finance, institutional sales, investment banking, and equity research. From 1966 until 1989 he was employed by J.C. Bradford & Co., a large regional investment banking and brokerage, departing as a general partner. From 1989 until 2001 he was a Director and co-head of institutional sales of Equitable Securities Corp., a banking and institutional brokerage firm later known as SunTrust Equitable. In 2001 he was one of the founding partners of Avondale Partners, LLC, an institutional equity research and investment banking firm focusing on small companies generally with a market cap in the range of $200 million to $2 billion. In March 2005 Mr. Pirtle founded Clairidge Company, LLC., a consulting firm that represents micro-cap to small-cap companies with a public equity valuation under $200 million or larger companies that are seeking to attract broad attention from institutional portfolio managers, research analysts or investment bankers. Since 1985 Mr. Pirtle has been serving on the board of both public and private companies. He currently serves on the board of Premier Global Services, Inc. (NYSE: PGI), a provider of business communications services and business process solutions that enable enterprise customers to automate and simplify components of their critical business processes and to communicate more effectively with their constituents.

 

Mr. Pirtle is a veteran of the financial services industry, having spent the past three decades in a variety of senior roles in corporate finance, institutional sales, investment banking, and equity research. These experiences, qualifications and attributes have led to our conclusion that Mr. Pirtle should be serving as a member of our board of directors in light of our business and structure.

 

Jack Bush.   Mr. Bush has been a member of our board of directors since August 2005. Mr. Bush has served as the President of Raintree Partners, Inc., a management consulting company, since September 1995. He is also currently Chairman and Director of IdeaForest.com (Joann.com), and Vice Chairman and Director of FPE Corporation (Framed Picture Enterprises). From 1995 to 1999 he served as Chairman of Aaron Brothers Holding Company and of Carolina Art & Frame Co. He was a founder, Chief Concept Officer and Director of Artistree Art, Frame & Design Company. During this time he was also a director of Cyberplay, New York Coffee & Bagels, Bradlees Stores, Stage Stores, Telequip and Jumbo Sports Company. He served on the board of Bradlees during a successful reorganization and served as special assistant to the board of Stage Stores during a successful reorganization. From 1997 to 1999 he served as Chairman, CEO and President of Jumbo Sports Co. From 1991 to August 1995, he was President and Director of Michaels Stores, Inc. and was Chairman of Michaels of Canada. The Company grew from 136 to 530 stores and became the largest arts and crafts retailer in the world. Upon leaving the NASDAQ-listed company, sales reached $1.5 billion and had 22,000 associates. From 1990 to 1991 he served as Executive Vice President, Director of Operations and Stores for Ames Department Stores. From 1985 to 1990 Mr. Bush was President and Director of Roses Stores, a NASDAQ-listed company. During his tenure the Company grew to 226 stores with $1.6 billion in sales and 25,000 associates. From 1980 to 1985 He served as Vice President of Zayre Corporation, an NYSE-listed company responsible for 105 stores and $750 million in sales. From 1958 to 1980 he served in a variety of positions with J.C. Penney Company, an NYSE-listed company. Mr. Bush was a U.S. Air Force Reserve officer and holds a Bachelor of Science from the University of Missouri.

 

We believe that Mr. Bushs extensive senior management, operational, and board experience bring valuable knowledge to our board of directors and that these experiences, qualifications and attributes have led to our conclusion that Mr. Bush should be serving as a member of our board of directors in light of our business and structure.

 

62






Harry E. Soyster.  General Soyster has been a member of our board of directors since March 2009. General Soyster served as Director, Defense Intelligence Agency during Desert Shield/Storm. He also served as Deputy Assistant Chief of Staff for Intelligence, Department of the Army; Commanding General, U.S. Army Intelligence and Security Command; and in the Joint Reconnaissance Center, Joint Chiefs of Staff. In Vietnam, he was a field artillery battalion operations officer, and was twice decorated for valor and wounded in action. Upon retirement, General Soyster was Vice President for International Operations with Military Professional Resources Incorporated where he helped pioneer the concept of providing retired military expertise to support emerging democracies in Eastern Europe and Africa. In 2006, he served as Special Assistant to the Secretary of the Army for World War II 60th Anniversary Commemorations. Currently, he serves as consultant to numerous corporations and participates in studies by the Center for Strategic and International Studies and the National Institute for Public Policy. In 1957, General Soyster graduated from the United States Military Academy with a Bachelor of Science degree in Engineering. He also holds a Masters of Science degree in Chemistry from Pennsylvania State University in Chemistry and a Masters of Science degree in Management from the University of Southern California. His military education includes completion of the Field Artillery School, Basic and Advanced Courses; the U.S. Army Command and General Staff College; and the National War College. General Soyster has an active TS/SCI (Top Secret/Sensitive Compartmented Information) clearance.

 

General Soyster provides our board with extensive knowledge, experience, and relationships with agencies in the federal government. He has significant organizational, operational, and managerial experience and we believe he brings valuable insight to growing our company and assist us in meeting our business objectives. We believe that these experiences, qualifications and attributes have led to our conclusion that General Soyster should be serving as a member of our board of directors in light of our business and structure.

 

Nick Carosi, III.  Mr. Carosi has been a member of our board of directors since May, 2012. He has served as President and CEO of Arban & Carosi Inc., one of the largest manufacturers of architectural precast concrete serving the Mid-Atlantic area, since 1990. He currently serves as a board member of INOVA Health Systems, with which he has been associated for over 20 years. He began his career with the Arban & Carosi Inc. in 1969, and was instrumental in overseeing its growth into the preeminent manufacturers of architectural precast concrete in North America. Mr. Carosi is a former board member, and President of the Prince William County Chamber of Commerce, has served on the advisory board of Sovran Bank, was a member of the board of Piedmont Federal Savings and Loan, and also served on the board of Potomac Hospital. During that time he has served as a board member, chairman of the finance committee, chairman of the governance committee, chairman of the investment committee, and is currently the vice chair of the board. He is also currently on the board of Marymount University of Arlington, Virginia, and Bellarmine University of Louisville, Kentucky, his alma mater. In addition, Mr. Carosi was instrumental in bringing what is now known as the Potomac Nationals to Prince William County, Virginia, having served as their Treasurer for four years. He is also a former partner of TSI Windows of Maryland.

 

We believe that Mr. Carosis extensive senior management, operational, and board experience brings valuable knowledge to our board of directors and that these experiences, qualifications and attributes have led to our conclusion that Mr. Carosi should be serving as a member of our board of directors.

 

63

 

 




Dr. Mark Stavish.  Dr. Stavish has been a member of our board of directors since September 2012. He currently serves as President and General Manager of Evergreen Partners, a consulting and venture capital entity. He is also an adjunct professor of clinical management and leadership at George Washington University. Prior to creating Evergreen Partners, Dr. Stavish served as an Executive Vice President of Human Resources of America Online (AOL) from February 1995 to December 2002. He was previously the director of Human Resources at Pepsi Beverages Company. Dr. Stavish also currently serves as a Director of DigitalSports Inc., Lowers & Associates Inc., Copyboy Publications Inc., HumanR Inc., INOVA Loudoun Healthcare Inc., Crossways International Inc., Every Orphans Hope, Loudoun Community Health Center and the Virginia High School League Foundation. He serves as Trustee of INOVA Health Systems Inc. He also previously served as the Chairman of the Loudoun County Chamber of Commerce. Dr. Stavish holds an Ed. D. in Human Resources Development and Organizational Learning from The George Washington University and a B.S. in Psychology from Iowa State University.

 

We believe that Dr. Stavishs extensive senior management, operational, and board experience brings valuable knowledge to our board of directors and that these experiences, qualifications and attributes have led to our conclusion that Dr. Stavish should be serving as a member of our board of directors.

 

There are no family relationships between any of the executive officers and directors. Directors are elected at our annual meeting of stockholders and hold office until the next annual meeting of stockholders or until his or her resignation, removal, or death.

 

Committees of the Board of Directors

 

Our Board of Directors has created both an Audit Committee and a Compensation Committee. We do not have a Nominating Committee or any committee performing a similar function. The functions that such a committee would undertake are being undertaken by the entire board as a whole. We do not have a policy regarding the consideration of any director candidates which may be recommended by our stockholders, including the minimum qualifications for director candidates, nor has our Board of Directors established a process for identifying and evaluating director nominees. We have not adopted a policy regarding the handling of any potential recommendation of director candidates by our stockholders, including the procedures to be followed. Our Board has not considered or adopted any of these policies as we have never received a recommendation from any stockholder for any candidate to serve on our Board of Directors or any inquiry as to what the procedures may be if a stockholder wished to make such a recommendation. While there have been no nominations of additional directors proposed, in the event such a proposal is made, all members of our Board will participate in the consideration of director nominees.

 

Audit Committee. The Audit Committee of our Board of Directors was formed to assist the Board of Directors in fulfilling its oversight responsibilities for the integrity of our consolidated financial statements, compliance with legal and regulatory requirements, the independent registered public accounting firms qualifications and independence, and the performance of our internal audit function and independent auditors. The Audit Committee will also prepare the report that SEC rules require be included in our annual proxy statement. The Audit Committee has adopted a charter which sets forth the parameters of its authority The Audit Committee Charter provides that the Audit Committee is empowered to:

 


Appoint, compensate, and oversee the work of the independent registered public accounting firm employed by our company to conduct the annual audit. This firm will report directly to the audit committee;



Resolve any disagreements between management and the auditor regarding financial reporting;



Pre-approve all auditing and permitted non-audit services performed by our external audit firm;



Retain independent counsel, accountants, or others to advise the committee or assist in the conduct of an investigation;



Seek any information it requires from employees - all of whom are directed to cooperate with the committees requests - or external parties;



Meet with our officers, external auditors, or outside counsel, as necessary; and



The committee may delegate authority to subcommittees, including the authority to pre-approve all auditing and permitted non-audit services, provided that such decisions are presented to the full committee at its next scheduled meeting.

 

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Each Audit Committee member is required to:

 


satisfy the independence requirements of Section 10A(m)(3) of the Securities Exchange Act of 1934, and all rules and regulations promulgated by the SEC as well as the rules imposed by the stock exchange or other marketplace on which our securities may be listed from time to time, and



meet the definitions of non-employee director for purposes of SEC Rule 16b-3 and outside director for purposes of Section 162(m) of the Internal Revenue Code.

 

Each committee member is required to be financially literate and at least one member is to be designated as the financial expert, as defined by applicable legislation and regulation. No committee member is permitted to simultaneously serve on the audit committees of more than two other public companies. Mr. Pirtle is considered an audit committee financial expert under the definition under Item 407 of Regulation S-K. As we expand our Board of Directors with additional independent directors the number of directors serving on the Audit Committee will also increase.

 

A copy of the Audit Committee Charter is available on our website at www.iceweb.com under the Investor Relations tab.

 

Compensation Committee. The Compensation Committee was appointed by the Board to discharge the Boards responsibilities relating to:

 

 

compensation of our executives,

 

equity-based compensation plans, including, without limitation, stock option and restricted stock plans, in which officers or employees may participate, and

 

arrangements with executive officers relating to their employment relationships with our company, including employment agreements, severance agreements, supplemental pension or savings arrangements, change in control agreements and restrictive covenants.

 

The Compensation Committee has adopted a charter. The Compensation Committee charter provides that the Compensation Committee has overall responsibility for approving and evaluating executive officer compensation plans, policies and programs of our company, as well as all equity-based compensation plans and policies. In addition, the Compensation Committee oversees, reviews and approves all of our ERISA and other employee benefit plans which we may establish from time to time. The Compensation Committee is also responsible for producing an annual report on executive compensation for inclusion in our proxy statement and assisting in the preparation of certain information to be included in other periodic reports filed with the SEC.

 

Each Compensation Committee member is required to:

 

 

satisfy the independence requirements of Section 10A(m)(3) of the Securities Exchange Act of 1934, and all rules and regulations promulgated by the SEC as well as the rules imposed by the stock exchange or other marketplace on which our securities may be listed from time to time, and

 

meet the definitions of non-employee director for purposes of SEC Rule 16b-3 and outside director for purposes of Section 162(m) of the Internal Revenue Code.

 

Pursuant to our Compensation Committee Charter, the Compensation Committee is charged with evaluating and recommending for approval by the Board of Directors the compensation of our executive officers. In addition, the Compensation Committee also evaluates and makes recommendations to the entire Board of Directors regarding grants of options which may be made as director compensation. The Compensation Committee does not delegate these authorities to any other persons nor does it use the services of any compensation consultants.

 

Messrs. Compton and Carosi are the members of our Compensation Committee. As we expand our Board of Directors with additional independent directors the number of directors serving on the Compensation Committee will also increase. A copy of the Compensation Committee Charter is available on our website at www.iceweb.com under the Investor Relations tab.

 

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Code of Ethics

 

In May 2005, we adopted a Code of Business Conduct and Ethics applicable to our Chief Executive Officer, principal financial and accounting officers and persons performing similar functions. A Code of Business Conduct and Ethics is a written standard designed to deter wrongdoing and to promote:

 

 

honest and ethical conduct,

 

full, fair, accurate, timely and understandable disclosure in regulatory filings and public statements,

 

compliance with applicable laws, rules and regulations,

  

the prompt reporting violation of the code, and

 

accountability for adherence to the Code.

 

A copy of our Code of Business Conduct and Ethics is filed as an exhibit to this annual report. We will provide a copy, without charge, to any person desiring a copy of the Code of Business Conduct and Ethics, by written request to us at our principal offices to the attention of Corporate Secretary.

  

Section 16(a) Beneficial Reporting Compliance

 

Based solely upon a review of Forms 3 and 4 and amendments thereto furnished to us under Rule 16a-3(d) of the Securities Exchange Act during the fiscal year ended September 30, 2013 and Forms 5 and amendments thereto furnished to us with respect to the fiscal year ended September 30, 2013, as well as any written representation from a reporting person that no Form 5 is required, we are aware that the following Board members and officers failed to file on a timely basis, as disclosed in the aforementioned Forms, reports required by Section 16(a) of the Securities Exchange Act during the fiscal year ended September 30, 2013, except as set forth below:

 

 

Mr. Compton failed to file 1 report covering 1 transaction,


 

Mr. Lucky failed to file 3 reports covering 4 transactions, and

 

Mr. Howe failed to file 3 reports covering 4 transactions,


All such Form 4s have subsequently been filed by the reporting person.

 

ITEM 11. EXECUTIVE COMPENSATION

 

Summary Compensation Table

 

The following table summarizes all compensation recorded by us in each of the last two completed fiscal years for our principal executive officer, each other executive officer serving as such whose annual compensation exceeded $100,000 and up to two additional individuals for whom disclosure would have been made in this table but for the fact that the individual was not serving as an executive officer of our company at September 30, 2013. The value attributable to any option awards is computed in accordance with accordance with ASC Topic 718, Compensation Stock Compensation (Formerly SFAS No. 123 (R), Share-Based Payments. The assumptions made in the valuations of the option awards are included in Note 12 of the Notes to our Financial Statements for fiscal 2013 appearing later in this report.

 

SUMMARY COMPENSATION TABLE

 

Name and principal position (a)       

 

Year (b)

 

 

Salary ($) (c)

 

 

Bonus ($) (d)

 

 

Stock Awards ($) (e)

 

 

Option Awards ($) (f)

 

 

Non-Equity Incentive Plan Compensation ($) (g)

 

 

Nonqualified Deferred Compensation Earnings ($) (h)

 

 

All Other Compensation ($) (i)

 

 

Total ($) (j)