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EX-31 - RULE 13A-14(A)/15D-14(A) CERTIFICATION OF CEO - UnifiedOnline, Inc.ex_31-1.htm
EX-32 - SECTION 906 CERTIFICATION OF CFO - UnifiedOnline, Inc.ex_32-2.htm
EX-32 - SECTION 906 CERTIFICATION OF CEO - UnifiedOnline, Inc.ex_32-1.htm
EX-31 - RULE 13A-14(A)/15D-14(A) CERTIFICATION OF CFO - UnifiedOnline, Inc.ex_31-2.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


Amendment No. 1
to the

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, 2010


OR


o           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.)


22900 Shaw Road, Suite 111, Sterling, VA

 

20166

(Address of principal executive offices)

 

(Zip Code


Registrant’s 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-know seasoned issuer, as defined in Rule 405 of the Securities Act.

 Yes o 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 o 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 o

 

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 o No o

 

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.   o

 

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 o

Accelerated filer o

 

 

Non-accelerated filer o

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 o 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 registrant’s 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, 2010, the last business day of the registrant’s most recently completed second fiscal quarter was $ 20,398,134. 


Indicate the number of shares outstanding of each of the registrant’s classes of common equity, as of the latest practicable date.  The number of common shares issued and outstanding as of December 17, 2010 was 137,975,867 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



Explanatory Paragraph


We are filing this Amendment No. 1 to our Annual Report on Form 10-K for the fiscal year ended September 30, 20101 as originally filed on December 29, 2010 (the “Original Filing”) to revise certain disclosure in response to comments from the Securities and Exchange Commission.  These revisions did not result in a restatement of our financial statements for any period presented herein.  These revisions include:


 

we have revised Part III, Item 11. Executive Compensation to delete two employees from the executive compensation table.  Neither of these employees are considered named executive officers and information regarding them should not have been included in the Original Filing,

 

 

 

 

the report of Sherb & Co., LLP, our independent registered public accounting firm, on our financial statements for fiscal 2010 has been revised to comply with AU Section 508,

 

 

 

 

certain expense items appearing in our Consolidated Statement of Operations for fiscal 2009 have been reclassified and Note 13 has been revised accordingly, and

 

 

 

 

Note 14 to our Consolidated Financial Statements has been revised.


This Form 10-K/A also includes new certifications pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act of 2002 as Exhibits 31.1, 31.2, 32.1 and 32.2.


Except as described above, no other information in the Original Filing has been updated and this Amendment continues to speak as of the date of the Original Filing. Other events occurring after the filing of the Original Filing or other disclosures necessary to reflect subsequent events have been or will be addressed in other reports filed with or furnished to the SEC subsequent to the date of the Original Filing.




TABLE OF CONTENTS


PART I

 

3

ITEM 1.      BUSINESS

 

3

ITEM 1A.   RISK FACTORS

 

8

ITEM 1B.   UNRESOLVED STAFF COMMENTS

 

14

ITEM 2:      PROPERTIES

 

14

ITEM 3:      LEGAL PROCEEDINGS

 

14

ITEM 4:      (REMOVED AND RESERVED)

 

15

PART II

  

16

ITEM 5:      MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
                    ISSUER PURCHASES OF EQUITY SECURITIES

 

16

ITEM 6.      SELECTED FINANCIAL DATA.

 

16

ITEM 7:      MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
                    OF OPERATIONS

 

17

ITEM 7A:   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

24

ITEM 8:      FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

24

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

 

52

ITEM 9A:   CONTROLS AND PROCEDURES

 

52

ITEM 9B:   OTHER INFORMATION

 

52

PART III

  

53

ITEM 10:    DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE

 

53

ITEM 11:    EXECUTIVE COMPENSATION

 

57

ITEM 12:    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
                    RELATED STOCKHOLDER MATTERS

 

61

ITEM 13:    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

 

63

ITEM 14:    PRINCIPAL ACCOUNTANT FEES AND SERVICES

 

64

PART IV

 

65

ITEM 15:    EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

 

65


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 annual 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 annual 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 2010” means the year ended September 30, 2010 and "fiscal year 2009" means the year ended September 30, 2009.  The information which appears on our Web sites is not part of this report.


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PART I


ITEM 1.  DESCRIPTION OF BUSINESS


Headquartered just outside of Washington, D.C., we manufacture and market purpose built appliances, network and cloud attached storage solutions and deliver on-line cloud computing application services.  Our customer base includes U.S. government agencies, enterprise companies, and small to medium sized businesses (SMB).  We have three key product offerings:


 

Iceweb 3000/5000 Unified Network Storage Solutions

 

Purpose Built Network/Data Appliances

 

• 

Cloud Computing Products/Services


Iceweb, the Iceweb logo and other trademarks or service marks of Iceweb are the property of Iceweb.


IceWEB 3000/5000 Unified Data Storage Solutions


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 consolidates file-based and block-based access in a single storage platform which supports Fibre Channel SAN, IP-based SAN (iSCSI), and NAS (network attached storage).


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 kinds.  Whether 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.  


We believe that 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.  Our innovative storage systems deliver 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 network attached storage (NAS), and storage area network (SAN) hardware products. This Unified Network Storage environment empowers companies to:


 

Quickly and easily deploy large complex data storage infrastructure environments

 

Reduce administrative costs for managing their storage by making complex technical tasks far more simple to accomplish

 

Reduce hardware and capital expenditure costs by more effectively using the storage within the system and repurposing older legacy hardware

 

Protect their business critical data by leveraging Iceweb’s built-in data replication features

 

Integrate with emerging server virtualization software (VMWare, Citrix Xen and Microsoft’s Hyper V) to better manage those solutions


IceWEB’s file management system replaces complex and performance-limited 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 time from overburdened technical staffers

Cost – our solutions typically can be deployed costing two to three times less than those of ours competitors, and are far more feature rich


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The Competitive Landscape


IceWEB competes with other storage vendors such as Compellent Technologies, Inc., Isilon Systems, Inc., and HP LeftHand Networks.  In addition, we find ourselves becoming an alternative in our customers’ eyes to purchasing additional equipment from large and expensive legacy storage providers such as EMC Corporation, IBM, Network Appliance and Hitachi Data Systems.  With data growing exponentially within all organizations, budgetary and common sense decision making is creating a second tier storage marketplace where our IceWEB 3000/5000 products are perceived as compelling data storage solutions.  Customers are recoiling from the high costs and fork-lift upgrades often required by the larger Tier 1 storage providers that are necessary to accommodate their rapid data growth.  Rather than purchasing additional expensive solutions from their existing vendors they opt to deploy our products with their versatile and feature rich capabilities in an overflow or project by project type environment.  Because our storage capacity can be purchased two to three times more cheaply than the legacy alternatives, these customers are actually able to purchase ahead of their perceived data growth rate.


Purpose Built Network and Data Appliances


IceWEB has been building Purpose Built Network and Data Appliances for several years.  Purpose Built Network and Data Appliances are devices which provide computing resources (processors and memory), data storage, and specific software for a specific application.  The primary appliance products that IceWEB has built have historically been centered on a single large business partner, ESRI Corporation.  IceWEB and ESRI have collaborated to create ultra-high performance IceWEB/ESRI GIS systems that allow customers to access massive amounts of data with unprecedented speed.  ESRI Corporation takes full responsibility for marketing to their customers and business partners, via their worldwide sales and consultancy organization.


IceWEB, in an effort to capitalize on what has been a successful model built within the Geographical Information System space, with ESRI has expanded our marketing of our appliance design, manufacturing and support capabilities to additional prospective partners.  In October 2010 IceWEB, Spot Image (a large satellite GIS data provider based in France), and Google Corporation agreed that IceWEB would build an appliance to deliver GIS imagery from Spot Image satellite data, powered by Google Earth Enterprise.  This Google Earth Engine appliance will be marketed worldwide through existing Spot Image and Google business partners.  IceWEB has also recently introduced a Cloud Storage Appliance, a device which allows organizations and/or service providers to rapidly and easily deploy cloud based storage services to their constituents and customers.  We are aggressively pursuing other Purpose Built Appliance opportunities and hope that this strategy will begin to contribute significantly to our business ramping over the next six months.  Our goal is that the Appliance business segment be grown to contribute approximately 35% of overall business revenue by the end of Fiscal Year 2010.  We expect to achieve this through our ongoing sales, marketing and research and development efforts, funded by operations.

 

Cloud Computing Products and Services


Cloud Computing Services


In December 2005, IceWEB launched IceMAIL TM a packaged software service that provides network –hosted groupware, email, calendaring and collaboration functionality.  Customers are typically organizations wishing to use Microsoft Exchange and Outlook without having to procure, maintain and manage their own equipment and software.   Online services were subsequently expanded to include IcePORTAL TM which provides customers with a complete Intranet portal and IceSECURE TM a hosted email encryption service.  Originally such hosted services were referred to with the acronym ‘SaaS’, which stands for Software-as-a-Service.  Such services, hosted across the internet are today commonly referred to as Cloud Computing.   The benefits of cloud computing are many.  First, adoption of an application, infrastructure, or storage environment which is available on-demand, with no capital expenditures for the user company represents an attractive proposition from the financial perspective.  Secondly, such models greatly reduce the need for highly paid internal technical staff, freeing critical resources to work on more core business related functions.  Thirdly, the application software, hardware, and infrastructure needs of organizations are constantly growing and evolving – Cloud Computing allows ad-hoc allocation of resources, cost free software upgrades, and freedom from hardware/infrastructure obsolescence.


Cloud Storage Appliances (CSA)


IceWEB has 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 IceWEB introduced a line of devices called “Cloud Storage Appliances” (CSA).  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


4



within the enterprise marketplace which revolve around hesitation to entrust corporate data to third party providers such as Amazon S3, Mozy, Nirvanix, and others, and to address additional concerns about data access latency and performance.  Companies, by implementing our CSA devices, can gain all of the benefits of cloud computing, while mitigating vendor lock-in issues, reducing the potential for security breaches, and maintaining high performance data transfer by back-hauling the data (and replicating it) from remote branch offices across existing wide area network links to the corporate IT infrastructure.  An additional obvious benefit derived from the deployment of private or hybrid storage clouds on the CSA products is that companies do not have to pay per-megabyte or per-gigabyte transfer and storage fees to third party service companies.


Sale of IceWEB Virginia, Inc. (doing business as IceWeb Solutions Group)


As described elsewhere herein, in March 2009 we sold our interest in IceWEB Virginia, Inc. (dba IceWEB Solutions Group) subsidiary to an unrelated third party in exchange for the assumption of approximately $3.2 million in liabilities and 1,000,000 shares of our common stock valued at $80,000.  IceWEB Virginia, Inc. was a provider of computer network security products and services such as access control, wide area network optimization, content filtering, email security, intrusion detection, to the Federal, State, and Local government entities.  This subsidiary accounted for 43% and 91% of our revenues for fiscal years 2009 and 2008, respectively.  We sold this business in order for us to be able to focus on our high margin storage business.


As a result of this transaction, absent a significant increase in our sales from other areas of our business our sales in fiscal year 2010 will be substantially lower than the prior two years.


Our 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, 2010 one customer accounted for 10% or more of our consolidated revenue.


Sales and Marketing Plans


We intend to sell of all of our products via full “channel-based” model.  In a Channel Based sales model, companies with products or services build partnerships with Systems Integrators, other manufacturers, vertical companies (such as ESRI and Spot Image), and distributors and leverage the sales resources of those groups to drive sales of products/services.  The value of a Channel Based sales model is twofold.  First it allows IceWEB to grow total sales volume significantly while keeping sales staff (and hence SG&A) 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 – this compresses the sales cycle, increases the close ratio on new business, and funnels more sales into IceWEB products and services.


As of September 30, 2010 we have 45 value added resellers, including ESRI, Google, Utilipath, LLC, Spot Image, James River Technical, Inc., and a distribution agreement with Promark Technology, Inc.


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


Manufacturing


Manufacturing is conducted at company headquarters in Sterling, VA.  Utilizing chassis from premium manufacturers such as AIC Corporation, Intel, SuperMicro, and others, all systems are built, burned, and tested at this facility by our in-house engineering and production staff. We manufacture data appliances, Modular Lightweight Portable enterprise servers (MLP), workgroup servers, data storage management platforms, as well as an array of database and customized appliances.  We use best-of-breed readily available, commercial off-the-shelf products sourced from various resellers and suppliers in our manufacturing process.


Competition


The market for IceWEB 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.


5



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

 

IceWEB competes effectively across all of these factors. In particular, our product architecture provides significant competitive advantages in terms of performance, scalability, ease of management and low total cost of ownership.  OEM partners provide us with a significant number of reference accounts which address credibility and helps marketing 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 IceWEB customers. 


Research and development 


Research and development expenses consist primarily of personnel-related expenses, costs of prototype equipment, costs of using contractors, allocated facility and IT overhead expenses and depreciation of equipment used in research and development activities. We expense research and development costs as incurred. We intend to continue to invest significantly in our research and development efforts, which we believe are essential to maintaining our competitive position. As a result, we expect research and development expenses to increase in absolute dollars, although we expect these expenses to decrease as a percentage of revenue.


Intellectual Property

 

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

 

IceWEB seeks to protect its proprietary positions by, among other methods, filing patent applications. Patent efforts are focused in the United States and, when justified by cost and strategic importance, we plan to file related foreign patent applications in jurisdictions such as the European Union and Japan. The company has retained an Intellectual Property Law firm and is in the process of preparing filings for two or more provisional patents (Cloud Storage Appliance and WISCSI technologies respectively).

 

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

 

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


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


Purchase of Interest in VOIS Inc.


As also described later in this section, in November 2009 we purchased 800,000 common shares of VOIS Inc. (OTCBB: VOISD), a development stage company that operates a social commerce website where people can find and do business with buyers and sellers of on-demand work or manufacturing around the world for $48,000.  The shares represent approximately a 6% interest in VOIS as of September 30, 2010.


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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.


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 stockholders. 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 company in February 2007.


In October 2003, we acquired 19% of the capital stock of Iplicity, 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 stockholders 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, 2010. We issued to the stockholders 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.


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On October 18, 2004, we entered into a non-binding letter of intent to acquire 100% of the issued and outstanding stock of Plan Graphics, Inc. The transaction was subject to approval by the Plan Graphics, Inc. stockholders, and certain terms and conditions, including terms and conditions which are customary to this type of transaction. On April 29, 2005 the letter of intent expired without a definitive agreement having been executed or all conditions precedent to the closing having been completed.


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 sales from PatriotNet were approximately $316,000 and represented approximately 6% of our consolidated sales. 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.


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, sales 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 seller’s subcontractor until the novation of the GSA Schedule was complete. The novation of the GSA schedule was completed in March, 2009.  The assets acquired in this transaction became the basis for our IceWEB Virginia, Inc. subsidiary.


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 sales 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, (now known as IceWEB Storage Corporation) for $1,925,128 in cash, plus 503,356 shares of our common stock valued at $276,846, the fair market value on the date of acquisition. The purchase of Inline Corporation included the acquisition of assets of $2,688,795, and liabilities of $614,668.


In March, 2009, we sold 100% of the capital stock of our wholly-owned subsidiary, IceWEB Virginia, Inc. to an unrelated party.  We exchanged our GSA schedule and 1,000,000 shares of our common stock valued at $80,000 for the assumption of approximately $3.2 million in liabilities.  In fiscal 2008, sales for IceWEB Virginia, Inc. accounted for approximately $14,887,587 or 91% of our total sales


On November 3, 2009 we purchased 800,000 shares of common stock from VOIS Inc. for $48,000 in a private transaction.  Immediately prior to the transaction, on October 30, 2010 Mr. Mark B. Lucky, our Chief Financial Officer, joined the Board of VOIS, and on November 2, 2009 Mr. John R. Signorello, our Chief Executive Officer, purchased 1,125,000 shares of VOIS’ common stock, which then represented approximately 27% of its outstanding common stock, from a former executive officer and director of our company for nominal consideration.  Mr. Lucky resigned his positions with VOIS on October 25, 2010.


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 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 WE ANTICIPATE CONTINUING LOSSES THAT WILL RESULT IN SIGNIFICANT LIQUIDITY AND CASH FLOW PROBLEMS ABSENT A MATERIAL INCREASE IN OUR REVENUES.


8



We have an accumulated deficit of approximately $29.6 million at September 30, 2010.  For the Years ended September 30, 2010 and 2009, we had a net loss of approximately $6.96 million and approximately $2.53 million, respectively.  In fiscal year 2010, cash used in operations was approximately $4.13 million and we had approximately $540,000 of cash on hand at September 30, 2010. The report of our independent registered public accounting firm on our consolidated financial statements for the fiscal year ended September 30, 2010 contains a qualification expressing substantial doubt as to our ability to continue as a going concern as a result of our net losses and cash used in operations. We reported an increase in our sales from continuing operations for fiscal 2010 as compared to fiscal 2009 of approximately 49.7% which is primarily related to the Company’s focus on its storage business beginning in late fiscal 2009.  We cannot assure you that our sales will increase in future periods, nor can we assure you that they will not further decrease. As long as our cash flow from operations remains insufficient to fund our operations, we will continue depleting our cash and other financial resources, as well as issue additional equity to raise capital. Our failure to achieve profitable operations in future periods will adversely affect our ability to continue as a going concern. In this event, you could lose all of your investment in our company.


WE WILL NEED ADDITIONAL FINANCING WHICH WE MAY NOT BE ABLE TO OBTAIN ON ACCEPTABLE TERMS. IF WE CANNOT RAISE ADDITIONAL CAPITAL AS NEEDED, OUR ABILITY TO EXECUTE OUR GROWTH STRATEGY AND FUND OUR ONGOING OPERATIONS WILL 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 our ongoing operations and to pay our existing obligations, but is also necessary if we wish to acquire additional assets or companies and for the effective integration, operation and expansion of these businesses. Our future capital requirements, however, depend on a number of factors, including our ability to internally grow our sales, manage our business and control our expenses. At September 30, 2010, we had a working capital deficit of approximately $1,250,000.


OUR TARGET MARKETS ARE HIGHLY COMPETITIVE AND DOMINATED BY LARGER COMPANIES AND WE MAY NOT BE ABLE TO COMPETE EFFECTIVELY.


The market for our products is highly competitive and we expect competition to intensify in the future. This competition could result in increased pricing pressure, reduced gross margins, increased sales and marketing expenses or our failure to increase, or our loss of, market share, any of which could seriously harm our business, operating results and financial condition.


Currently, we face competition from a number of established companies, including EMC Corporation, or EMC, Hewlett-Packard Company, or HP, Hitachi Limited, International Business Machines Corporation, or IBM, and Network Appliance, Inc., or NetApp.  We also face competition from a large number of private companies and recent public company market entrants, such as Isilon Systems, Inc.  Many of our current competitors have, and some of our potential competitors could have, longer operating histories, greater name recognition, larger customer bases and significantly greater financial, technical, sales, marketing and other resources than we have. Potential customers may prefer to purchase from their existing suppliers rather than a new supplier regardless of product performance or features.


NetApp is our primary competition in the high performance unified network storage system market. They have a significantly greater share of this market than we do. In addition, they are a substantially larger company with more resources than we have.


Our ability to compete effectively in our target markets depends on a number of factors, including:

 

 

our products’ scalability, performance, ease of use and cost effectiveness relative to that of our competitors’ products;

 

aggressive business tactics by our competitors, including selling at a discount or asserting intellectual property rights irrespective of the validity of the claims;

 

our success in utilizing new and proprietary technologies to offer products and features previously not available in the marketplace;

 

our success in identifying new markets, applications and technologies;

 

our ability to attract and retain value-added resellers and OEMs;

 

our name recognition and reputation;

 

our ability to recruit development engineers and sales and marketing personnel; and

 

our ability to protect our intellectual property.


9



We expect increased competition from other established and emerging companies, including companies such as networking infrastructure and storage management companies that provide complementary technology and functionality. Some of our competitors, including EMC, HP and NetApp, have made acquisitions of businesses that allow them to offer more directly competitive and comprehensive solutions than they had previously offered. Our current and potential competitors may also establish cooperative relationships among themselves or with third parties. If so, new competitors or alliances that include our competitors may emerge that could acquire significant market share.


WE ARE SUBSTANTIALLY DEPENDENT ON CUSTOMERS IN A LIMITED NUMBER OF INDUSTRIES.  DOWNTURNS IMPACTING CERTAIN INDUSTRIES MAY RESULT IN REDUCED SALES FOR US.


In fiscal year 2010, a substantial amount of our net revenue was generated from Geographic Information Systems (“GIS”), state, local, and federal government, oil and gas companies, and our primary distributor, Promark Technology, Inc.  . If, however, economic conditions change for these industries, or if we are unable to continue to attract significant numbers of customers in other industries, our prospects for growth could be reduced.

 

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


Our 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, our 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, our 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 Corporation’s, or Microsoft, protocols. Accordingly, improvements to Microsoft application protocols to accelerate storage performance or reduce storage costs may reduce the need for our products, adversely affecting our business, operating results and financial condition. Improvement in other application protocols or in the Transmission Control Protocol could have a similar effect.


IF WE ARE UNABLE TO CONTINUE TO CREATE VALUABLE INNOVATIONS IN SOFTWARE AND HARDWARE, WE MAY NOT BE ABLE TO GENERATE ADDITIONAL HIGH-MARGIN REVENUE THAT WILL ENABLE US TO MAINTAIN OR INCREASE OUR GROSS MARGINS, WHICH COULD REDUCE OUR REVENUE.


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 our gross margins, we will need to continue to create valuable software that is included with our network storage systems and/or sold separately as a licensed software application. 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 our overall gross margin. If we are unable to successfully develop or acquire and then market and sell additional software and hardware functionality, our revenue could be reduced.


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 OUR PRODUCT SALES AND REVENUE.


After our products are deployed within our customers’ networks, our customers depend on our support services organization to resolve issues relating to our products and how they perform within our customer’s environment. High-quality support services are therefore 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 our customers in deploying our products, it would adversely affect our ability to sell our products to existing customers and could harm our prospects with potential customers. In addition, as we expand our operations internationally, our support services organization will face additional challenges, which we expect to include those issues that are associated with delivering support, training and documentation in languages other than English. As a result, our failure to maintain high-quality support services could reduce our product sales and revenue.


10



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 OUR CUSTOMERS, HARM TO OUR REPUTATION AND 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 our 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 our 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 a customer’s data unavailability, loss or corruption 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 our 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 management’s attention and adversely affect the market’s perception of us 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, our product sales and revenue could be reduced.


OUR FACTORING AGREEMENT WITH SAND HILL FINANCE, LLC CONTAINS CERTAIN TERMS WHICH MAY ADVERSELY AFFECT OUR ABILITY TO RAISE CAPITAL IN FUTURE PERIODS.


In December 2005 and as amended during fiscal 2006 and fiscal 2009, we entered into a Finance Agreement with Sand Hill Finance, LLC for a $2.75 million accounts receivable factoring line. Under the terms of this agreement we agreed not to take certain actions including undertaking a transaction which would result in a change of control of our company or the transfer of more than 20% of our securities and incurring any indebtedness other than trade credit in the ordinary course of business. These restrictions may limit our ability to raise working capital as needed.


WE DO NOT HAVE A DISASTER RECOVERY PLAN AND WE DO NOT CARRY BUSINESS INTERRUPTION INSURANCE.


Our systems and operations are vulnerable to damage or interruption from fire, flood, power loss, telecommunications failure, break-ins and similar events. Our headquarters are physically located in Fairfax County, Virginia, a Washington, DC suburb, in close proximity to the US Capitol, White House, Pentagon, CIA, and numerous other agencies within the intelligence community. All these government installations are considered potential targets of any future terrorist attacks. We do not currently have a disaster recovery plan, nor do we carry business interruption insurance to compensate our company for losses that may occur. We are also vulnerable to computer viruses and/or physical disruptions, which could lead to interruptions, delays, loss of data or the inability to accept orders. The occurrence of any of the foregoing events could have a material adverse effect on our business, prospects, financial condition and results of operations.


OUR MANAGEMENT MAY BE UNABLE TO EFFECTIVELY INTEGRATE OUR ACQUISITIONS AND TO MANAGE OUR GROWTH AND WE 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 our businesses and the business of the acquired companies or assets, and to effectively manage our continued growth. There can be no assurance that our efforts to integrate the operations of any acquired assets or companies acquired in the future will be successful, that we can manage our 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 our 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 our integration efforts, either of which could have a material adverse effect on our operating results.


WE HAVE NOT VOLUNTARILY IMPLEMENTED VARIOUS CORPORATE GOVERNANCE MEASURES, IN THE ABSENCE OF WHICH, STOCKHOLDERS MAY HAVE MORE LIMITED PROTECTIONS AGAINST INTERESTED DIRECTOR TRANSACTIONS, CONFLICTS OF INTEREST AND SIMILAR MATTERS.


11



Recent Federal legislation, including the Sarbanes-Oxley Act of 2002, has resulted in the adoption of various corporate governance measures designed to promote the integrity of the corporate management and the securities markets. Some of these measures have been adopted in response to legal requirements. Others have been adopted by companies in response to the requirements of national securities exchanges, such as the NYSE or The Nasdaq Stock Market, on which their securities are listed. Among the corporate governance measures that are required under the rules of national securities exchanges are those that address board of directors’ independence, audit committee oversight, and the adoption of a code of ethics. Because our stock is not listed on an exchange we are not required to adopt these corporate governance standards. While our board of directors has adopted a Code of Ethics and Business Conduct and our Board has established Audit and Compensation Committees, we have not adopted all of the corporate governance measures which we might otherwise have been required to adopt if our securities were listed on a national securities exchange. It is possible that if we were to adopt all of these corporate governance measures, stockholders would benefit from somewhat greater assurances that internal corporate decisions were being made by disinterested directors and that policies had been implemented to define responsible conduct. Prospective investors should bear in mind our current lack of corporate governance measures in formulating their investment decisions.


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 September 30, 2010 we had outstanding:

 

 

134,443,725 shares of our common stock,

 

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

 

common stock purchase warrants to purchase a total of 8,287,100 shares of our common stock with exercise prices ranging from $0.20 to $2.00 per share, and

 

Stock options granted under our 2000 Management and Director Equity Incentive and Compensation Plan which are exercisable into 11,604,404 shares of our common stock with a weighted average exercise price of $0.296 per share.


CERTAIN OF OUR OUTSTANDING WARRANTS CONTAIN CASHLESS EXERCISE PROVISIONS WHICH MEANS WE WILL NOT RECEIVE ANY CASH PROCEEDS UPON THEIR EXERCISE.


In December 2005, we issued a seven year common stock purchase warrant to purchase 25,000 shares of our common stock with an exercise price of $1.00 per share in connection with our accounts receivable financing agreement with Sand Hill Finance, LLC.


These warrants were exercisable on a cashless basis which means that the holders, rather than paying the exercise price in cash, may surrender a number of warrants equal to the exercise price of the warrants being exercised. The utilization of this cashless exercise feature deprived us of additional capital which might otherwise be obtained if the warrants did not contain a cashless feature.


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 STOCKHOLDERS.


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 our stockholders 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 which include 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 corporation’s disinterested stockholders.


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.  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.


OUR COMMON STOCK COULD BE REMOVED FROM QUOTATION ON THE OTCBB IF WE FAIL TO TIMELY FILE OUR ANNUAL OR QUARTERLY REPORTS. IF OUR COMMON STOCK WAS NO LONGER ELIGIBLE FOR QUOTATION ON THE OTCBB, THE LIQUIDITY OF OUR STOCK MAY BE FURTHER ADVERSELY IMPACTED.


12



Under the rules of the Securities and Exchange Commission we are required to file our quarterly reports within 45 days from the end of the fiscal quarter and our annual report within 90 days from the end of our fiscal year. Under rules adopted by the Financial Industry Regulatory Authority (FINRA) in 2005 which is informally known as the “Three Strikes Rule”, a FINRA member is prohibited from quoting securities of an OTCBB issuer such as our company if the issuer either fails to timely file these reports or is otherwise delinquent in the filing requirements three times in the prior two year period or if the issuer’s common stock has been removed from quotation on the OTCBB twice in that two year period. If we were to fail to file three reports on a timely basis our stock would be removed from quotation on the OTCBB and would in all likelihood then be quoted on the Pink Sheets Electronic Quotation Service. Pink Sheets offers a quotation service to companies that are unable to list their securities on the OTCBB or an exchange. The requirements for listing on the Pink Sheets are considerably lower and less regulated than those of the OTCBB an exchange. If our common stock were to be quoted on the Pink Sheets, it is possible that even fewer brokers or dealers would be interested in making a market in our common stock which would further adversely impact its liquidity.


THE APPLICATION OF THE “PENNY STOCK” RULES TO OUR COMMON STOCK COULD LIMIT THE TRADING AND LIQUIDITY OF OUR COMMON STOCK, ADVERSELY AFFECT THE MARKET PRICE OF OUR COMMON STOCK AND INCREASE STOCKHOLDER TRANSACTION COSTS TO SELL THOSE SHARES.

 

As long as the trading price of our common stock is below $5.00 per share, the open-market trading of our common stock will be subject to the “penny stock” rules, unless we otherwise qualify for an exemption from the “penny stock” definition. The “penny stock” rules impose additional sales practice requirements on certain broker-dealers who sell securities to persons other than established customers and accredited investors (generally those with assets in excess of $1,000,000 or annual income exceeding $200,000 or $300,000 together with their spouse). These regulations, if they apply, require the delivery, prior to any transaction involving a penny stock, of a disclosure schedule explaining the penny stock market and the associated risks. Under these regulations, certain brokers who recommend such securities to persons other than established customers or certain accredited investors must make a special written suitability determination regarding such a purchaser and receive such purchaser’s written agreement to a transaction prior to sale. These regulations may have the effect of limiting the trading activity of our common stock, reducing the liquidity of an investment in our common stock and increasing the transaction costs for sales and purchases of our common stock as compared to other securities.

 

THE MARKET PRICE FOR OUR COMMON STOCK MAY BE PARTICULARLY VOLATILE GIVEN OUR STATUS AS A RELATIVELY UNKNOWN COMPANY WITH A LACK OF PROFITS, WHICH COULD LEAD TO WIDE FLUCTUATIONS IN OUR SHARE PRICE. THE PRICE AT WHICH STOCKHOLDERS PURCHASE SHARES OF OUR COMMON STOCK MAY NOT BE INDICATIVE OF THE PRICE OF OUR COMMON STOCK THAT WILL PREVAIL IN THE TRADING MARKET.

 

The market for our common stock has been characterized by significant price volatility when compared to seasoned issuers, and we expect that our stock price could continue to be more volatile than a seasoned issuer for the indefinite future. The potential volatility in our share price is attributable to a number of factors. First, there has been limited trading in our common stock. As a consequence of this lack of liquidity, any future trading of shares by our stockholders may disproportionately influence the price of those shares in either direction. Second, we are a speculative or “risky” investment due to our limited operating history and lack of profits to date, and uncertainty of future market acceptance for our potential products. As a consequence of this enhanced risk, more risk averse investors may, under the fear of losing all or most of their investment in the event of negative news or lack of progress, be more inclined to sell their shares on the market more quickly and at greater discounts than would be the case with the stock of a seasoned issuer. Many of these factors will be beyond our control and may decrease the market price of our common stock, regardless of our operating performance. We cannot make any predictions or projections as to what the prevailing market price for our common stock will be at any time or as to what effect that the sale of shares or the availability of shares for sale at any time will have on the prevailing market price.


In addition, the market price of our common stock could be subject to wide fluctuations in response to:

 

 

·

quarterly variations in our sales and operating expenses;

 

·

announcements of new products or services by us;

 

·

fluctuations in interest rates;

 

·

significant sales of our common stock;

 

·

the operating and stock price performance of other companies that investors may deem comparable to us; and

 

·

news reports relating to trends in our markets or general economic conditions.


13



SHARES ELIGIBLE FOR FUTURE SALE MAY ADVERSELY AFFECT THE MARKET.

 

From time to time, certain of our stockholders may be eligible to sell all or some of their shares of common stock by means of ordinary brokerage transactions in the open market pursuant to Rule 144 promulgated under the Securities Act of 1933, as amended, subject to certain limitations. In general, pursuant to Rule 144, a stockholder (or stockholders whose shares are aggregated) who is not an affiliate of our company and who has satisfied a six month holding period may, as long as we are current in our required filings with the SEC, sell securities without further limitation. Rule 144 also permits, under certain circumstances, the sale of securities, without any limitations, by a non-affiliate of our company who has satisfied a one-year holding period. Affiliates of our company who have satisfied a six month holding period may sell securities subject to volume limitations. Any substantial sale of our common stock pursuant to Rule 144 or pursuant to any resale prospectus may have an adverse effect on the market price of our securities. Currently, almost all of our securities are either free trading or subject to the release of trading restrictions under the six month or one year holding periods of Rule 144.

 

COMPLIANCE WITH THE RULES ESTABLISHED BY THE SEC PURSUANT TO SECTION 404 OF THE SARBANES-OXLEY ACT OF 2002 WILL BE COMPLEX. FAILURE TO COMPLY IN A TIMELY MANNER COULD ADVERSELY AFFECT INVESTOR CONFIDENCE AND OUR STOCK PRICE.

 

Rules adopted by the SEC pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 require us to perform an annual assessment of our internal controls over financial reporting and certify the effectiveness of those controls. The standards that must be met for management to assess the internal controls over financial reporting as now in effect are complex, and require significant documentation, testing and possible remediation to meet the detailed standards. We may encounter problems or delays in completing activities necessary to make an assessment of our internal controls over financial reporting.

 

ITEM 1B.  UNRESOLVED STAFF COMMENTS.

 

Not applicable to a smaller reporting company.


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 are also responsible for our pro rata share of certain pass through costs. We have the option to renew this lease for one additional five year term.


ITEM 3.  LEGAL PROCEEDINGS.


At September 30, 2010 we are the subject of, or party to, eight known, pending or threatened, legal actions. As of the date of this report on Form 10-K, one of the legal proceedings have been resolved.  Following is a discussion of each:


1.    We were named as the defendant in a legal proceeding brought by Immixtechnology, Inc. (the plaintiff) in the Fairfax County Circuit Court, Fairfax, Virginia. The plaintiff asserts that Iceweb failed to pay for certain computer components purchased from plaintiff.


2.    We were named as the defendant in a legal proceeding brought by International Business Machines Corporation-IBM Internet Security Systems Division (the plaintiff) in the Supreme Court f the State of New York, County of Westchester. The plaintiff asserts that the Company failed to pay certain invoices for goods or services sold to IceWeb Virginia, Inc. by plaintiff for resale to its customers.


3.    We were named as the defendant in a legal proceeding brought by Charles Rothermel (the plaintiff) in the Equal Opportunity Commission. The plaintiff asserts that Iceweb breached its employment agreement with him.


4.    We were named as the defendant in a legal proceeding brought by Charles Rothermel (the plaintiff) in the Equal Opportunity Commission. The plaintiff asserts that Iceweb discriminated against him on the basis of age.


5.    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. The plaintiff asserts that Iceweb failed to pay for delivery of services provided by plaintiff.


14



6.    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. The plaintiff asserts that Iceweb failed to pay for delivery of services provided by plaintiff.


7.    We were named as the defendant in a legal proceeding brought by Computerlinks of North America, Inc. (the plaintiff) in the Circuit Court of Travis County, Texas. The plaintiff asserts that Iceweb failed to pay for delivery of services provided by plaintiff. The plaintiff received a Summary Judgment for $141,144.22 as of November 5, 2010.


8.    We were named as the defendant in a legal proceeding brought by FCN, Inc. (the plaintiff) in the Maryland Court of Special Appeals. The plaintiff asserts that Iceweb failed to pay for delivery of services provided by plaintiff. This suit was settled on October 22, 2010 in the amount of $65,000.


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.  (REMOVED AND RESERVED)


15



PART II


ITEM 5.  MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.


Our common stock is quoted on the OTCBB under the symbol IWEB. The reported high and low bid 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 2009

 

 

 

 

 

 

First quarter ended December 31, 2008

$

0.18

 

$

0.041

 

Second quarter ended March 31, 2009

$

0.15

 

$

0.052

 

Third quarter ended June 30, 2009

$

0.11

 

$

0.05

 

Fourth quarter ended September 30, 2009

$

0.14

 

$

0.05

 

 

 

 

 

 

 

 

Fiscal 2010

 

 

 

 

 

 

First quarter ended December 31, 2009

$

0.235

 

$

0.07

 

Second quarter ended March 31, 2010

$

0.23

 

$

0.075

 

Third quarter ended June 30, 2010

$

0.47

 

$

0.135

 

Fourth quarter ended September 30, 2010

$

0.30

 

$

0.105

 


As of December 20, 2010 the last sale price of our common shares as reported on the OTC Bulletin Board was $0.17 per share.  As of December 20, 2010, there were approximately 3,875 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


In July 2010, we issued 2,678,571 shares of common stock valued at $401,786 to Optimus Capital Partners, LLC as consideration in the settlement of certain litigation.  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 2010, we issued 3,000,000 shares of our common stock in full satisfaction of $1,090,136 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.


Purchases of Equity Securities by the Issuer and Affiliated Purchasers


None.


ITEM 6.  SELECTED FINANCIAL DATA


Not applicable for a smaller reporting company.


16



ITEM 7.  MANAGEMENT’S 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 (network attached storage).


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 kinds.  Whether 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.


We believe our business model is highly differentiated and provides us with several competitive advantages. We sell our products through a two-tier channel sales model designed to enable us to quickly scale and cost effectively increase sales. We have built a strong internal sales team, which is spread geographically by region throughout the United States to assist our channel partners with sales calls, service and support offerings, product matter expertise, configuration and pricing, and product demonstration.


On December 22, 2007, we acquired 100% of the outstanding stock of Inline Corporation, (now known as IceWEB Storage Corporation) for $1,925,128 in cash, plus 503,356 shares of our common stock valued at $276,846, the fair market value on the date of acquisition. The purchase of Inline Corporation included the acquisition of assets of $2,688,795, and liabilities of $614,668.


In March, 2009, we sold 100% of the capital stock of our wholly-owned subsidiary, IceWEB Virginia, Inc. to an unrelated party.  We exchanged our GSA schedule and 1,000,000 shares of our common stock valued at $80,000 for the assumption of approximately $3.2 million in liabilities.  In fiscal 2008, sales for IceWEB Virginia, Inc. accounted for approximately $14,887,587 or 91% of our total sales


On November 3, 2009 we purchased 800,000 shares of common stock from VOIS Inc. for $48,000 in a private transaction.  Immediately prior to the transaction, on October 30, 2010 Mr. Mark B. Lucky, our Chief Financial Officer, joined the Board of VOIS, and on November 2, 2009 Mr. John R. Signorello, our Chief Executive Officer, purchased 1,125,000 shares of VOIS’ common stock, which then represented approximately 27% of its outstanding common stock, from a former executive officer and director of our company for nominal consideration.  Mr. Lucky resigned his positions with VOIS on October 25, 2010.


CHANGE IN PRESENTATION


We have changed the presentation of our results for the fiscal year ended September 30, 2009 to reflect as discontinued operations the results of operations of our IceWEB Virginia, Inc. subsidiary in response to comments from the staff of the SEC.  This change did not result in a restatement of our 2009 financial statements.  As noted above, we sold 100% of the capital stock of our wholly-owned subsidiary, IceWEB Virginia, Inc. to an unrelated party in March, 2009.  Discontinued operations reflect the results from IceWEB Virginia, Inc. through the date of sale.


17



Results of Operations


FISCAL YEAR 2010 AS COMPARED TO FISCAL YEAR 2009


The following table provides an overview of certain key factors of our results of operations for fiscal year 2010 as compared to fiscal year 2009:


 

Fiscal Year Ended
September 30,

 

$

 

%

 

2010

 

2009

 

Change

 

Change

Sales

$

3,353,286

 

$

2,240,363

 

$

1,112,923

 

 

49.7

 %

Cost of sales

 

1,742,110

 

 

1,326,385

 

 

415,725

 

 

31.3

 %

Operating Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Sales and marketing

 

1,690,684

 

 

1,004,970

 

 

685,714

 

 

68.2

 %

Depreciation and amortization

 

662,003

 

 

696,723

 

 

(34,720

)

 

(5.0

)%

Research and development

 

533,713

 

 

336,616

 

 

197,097

 

 

58.6

 %

General and administrative

 

5,325,898

 

 

3,538,086

 

 

1,787,812

 

 

50.5

 %

Total operating expenses

 

8,212,298

 

 

5,576,395

 

 

2,635,903

 

 

47.3

 %

Loss from continuing operations

 

(6,601,122

)

 

(4,662,417

)

 

(1,938,705

)

 

41.6

 %

Income from discontinued operations

 

 

 

136,408

 

 

(136,408

)

 

(100.0

)%

Interest expense related to discontinued operations

 

 

 

(205,940

)

 

205,940

 

 

100.0

  %

Gain from sale of subsidiary

 

 

 

2,666,236

 

 

(2,666,236

)

 

(100.0

)%

O ther expense

 

(363,111

)

 

( 460,889

)

 

97,778

 

 

21.2

 %

Net loss

$

 (6,964,233

)

$

 (2,526,602

)

 

(4,437,631

)

 

175.6

 %


Other Key Indicators:


 

Fiscal

 

Fiscal

 

 

2010

2009

Change

Cost of sales as a percentage of sales

 

51.95%

 

 

59.20%

 

 

(7.3)%

Gross profit margin

 

48.05%

 

 

40.80%

 

 

7.3 %

General and administrative expenses as a percentage of sales

 

158.83%

 

 

157.92%

 

 

0.9 %

Total operating expenses as a percentage of sales

 

244.90%

 

 

248.91%

 

 

(4.0)%


Sales


Our sales increased approximately 49.7% in fiscal year 2010 from fiscal year 2009.  Of our total net sales for fiscal 2010, approximately $3,152,346 is attributable to our sale of storage products, and approximately $200,940 is attributable to sales from our online products and services. Of our total net sales for fiscal 2009, approximately $1,957,856 is attributable to our sale of storage products, and approximately $282,507 is attributable to sales from our online products and services.


The increase in fiscal 2010 net sales from fiscal 2009 is primarily due to the increase in our IceWEB storage products, as we have refocused our efforts on our leading edge storage products.  We anticipate revenues for fiscal 2011 will increase due to sales of our Unified Network Storage Solutions and other data storage products.

.

Cost of Sales and Gross Profit


Our cost of sales consists primarily of products purchased to manufacture our storage products.  For fiscal 2010, cost of sales was approximately 52.0% of sales, as compared to approximately 59.0% of sales, for fiscal 2009. The decrease in costs of sales as a percentage of revenue and the corresponding increase in our gross profit margin for fiscal 2010 as compared to fiscal 2009 was the result of an increase in higher margin storage sales in fiscal 2010. We anticipate that our cost of sales as a percentage of revenue will remain in the 50% to 55% range in fiscal 2011, as 95% of our fiscal 2010 revenues are expected to come primarily from our higher margin storage business.


Total Operating Expenses


Our total operating expenses increased approximately 47% for fiscal 2010 as compared to fiscal 2009.  The increase is primarily due to increased headcount in sales and marketing, increased investment in research and development, and our investment in launching our channel sales distribution model.  This increase includes:


18



•            Sales and Marketing. Sales and marketing expense includes salaries, commission, occupancy, telephone, travel, and entertainment expenses for direct sales personnel.  For the fiscal year ended September 30, 2010, sales and marketing costs were $1,690,684 as compared to $1,004,970 for the fiscal year ended September 30, 2009, an increase of $685,714 or approximately 68.2%. The increase was due primarily to hiring additional sales and marketing personnel to support our channel distribution sales and marketing approach during the fiscal year ended September 30, 2010


•            Depreciation and amortization expense. For fiscal 2010, depreciation and amortization expense decreased approximately 5% from fiscal 2009.


 Amortization expense is related to the customer relationships and manufacturing GSA schedule which are intangible assets that we generated through our acquisition of Inline Corporation.  The GSA schedule is being amortized on a straight-line basis over three years. Amortization expense was $243,090 for both fiscal 2010 and fiscal 2009.


•           Research and development expense.  For fiscal 2010, research and development expenses increased approximately 59% from fiscal 2009.  This increase is related to increased research and development efforts related to our storage products.  We anticipate the spending on research and development in fiscal 2011 will be approximately $175,000 per quarter related to developing and enhancing our storage solutions and pursuing intellectual property patents when we believe it is warranted.


•            General and administrative expense. For fiscal 2010, general and administrative expenses increased approximately 51% from fiscal 2009. This increase is primarily attributable to higher stock-based compensation, higher investor relations expense, higher bad debt expense, and higher legal and professional fees.  For fiscal 2010 and 2009, general and administrative expenses consisted of the following:


 

2010

 

2009

Salaries/benefits 

3,483,798

 

2,897,647

Occupancy 

24,139

 

50,258

Professional fees 

659,547

 

82,929

Other 

518,303

 

125,922

Consulting 

193,783

 

85,738

Investor Relations

358,780

 

173,686

Travel/Entertainment

32,361

 

26,867

Internet/Phone 

8,883

 

35,967

Insurance 

46,304

 

59,072

 

5,325,898

 

3,538,086


The principal changes in fiscal 2010 as compared to fiscal 2009 include:


For fiscal 2010, salaries and related taxes and benefits increased approximately 20.2% from fiscal 2009. The increase was primarily attributable to the increase in headcount, the 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 2010 of $329,604, an increase of 15%.

 

 

For fiscal 2010, occupancy expense decreased approximately 52% from fiscal 2009.  The decrease was due to consolidation and relocation of office locations.

 

 

For fiscal 2010, professional fees increased $576,619, or approximately 695% from fiscal 2009. The increase was primarily attributable to an increase in legal fees incurred and the settlement of lawsuits against us in fiscal 2010.

 

 

For fiscal 2010, other expense increased approximately 312% from fiscal 2009. The increase is primarily due to an increase in bad debt expense of $300,000, and hosting fees of $48,735.

 

 

For fiscal 2010, consulting expense increased by approximately 126% from fiscal 2009. The increase was primarily due to non-recurring consulting fees related to our capital raising activities, and human resources recruiting fees.

 

 

For fiscal 2010, investor relations expense increased approximately 107% from fiscal 2009. The increase was attributable to an increase in general investor relations activity versus fiscal 2009.  We expect that in fiscal 2011 our investor relations activity and related expense will be substantially flat.


19



For fiscal 2010, internet and telephone expense decreased approximately 75%. The decrease was attributable to cost cutting measures adopted by us.

 

 

For fiscal 2010, travel and entertainment expense increased approximately 20%. The increase was attributable to an increase in general business, and travel-related investor relations activity.

 

 

For fiscal 2010, insurance expense decreased approximately 22% from fiscal 2009. The decrease was attributable to lower premiums paid for general business and directors and officer’s insurance.


LOSS FROM CONTINUING OPERATIONS


Our loss from operations increased approximately 42% in fiscal year 2010 as compared to fiscal year 2009.  This increase is primarily the result of increased headcount, increased research and development efforts, and our investment in our channel marketing sales programs.


GAIN ON DISCONTINUED OPERATIONS


Results from discontinued operations were as follows:


 

 

Fiscal Year Ended
September 30,

 

 

 

2010

 

2009

 

Sales

 

$

 

$

1,694,322

 

Cost of sales

 

 

 

 

1,348,307

 

Operating Expenses:

 

 

 

 

 

 

 

Sales and marketing

 

 

 

 

163,694

 

Depreciation and amortization

 

 

 

 

45,913

 

Subtotal

 

 

 

 

209,607

 

Income from discontinued operations

 

 

 

 

136,408

 

Interest expense related to discontinued operations

 

 

 

 

(205,940

)

Gain from sale of discontinued operations

 

 

 

 

2,666,236

 

Total Gain from discontinued operations

 

$

 

$

2,596,704

 


During the fiscal second quarter of 2009 we sold our wholly owned subsidiary, Iceweb Virginia, Inc. to an unrelated third party.


For 2009 we earned revenues in discontinued operations of $1,694,322.  We had no comparable discontinued operations in fiscal 2010.


Total operating expenses of discontinued operations in fiscal 2009 amounted to $209,607, and consisted of primarily sales and marketing expenses associated with IceWEB Virginia, Inc. and the amortization of the GSA schedule through the date of sale of the subsidiary.


Gain (loss) from sale of assets. During the fiscal year 2009 we recorded a gain of $2,666,236 on the sale of our IceWEB Virginia, Inc. subsidiary. We did not have a comparable transaction in fiscal 2010.


TOTAL OTHER INCOME (EXPENSES)


Interest Expense. For fiscal 2010, interest expense decreased approximately 17%. The decrease in interest expense is primarily attributable to lower average outstanding note balances during fiscal 2010, and lower deferred loan fee amortization in fiscal 2010 of $27,015 as compared to deferred loan fee amortization of $127,015 in fiscal 2009.


NET LOSS


Our net loss was $6,964,233 for fiscal 2010 compared to $2,526,602 for fiscal 2009, an increase of $4,437,631 or approximately 176%.


20



LIQUIDITY AND CAPITAL RESOURCES


Liquidity is the ability of a company to generate adequate amounts of cash to meet its needs for cash.


 

September 30,

2010

 

September 30,

2009

 

$

Change

 

%

Change

Working Capital

$

(1,250,033

)

$

(3,158,232

)

$

1,908,199

 

(60.4

)%

 

 

 

 

 

 

 

 

 

 

 

 

Cash

 

540,156

 

 

63,310

 

 

476,846

 

753.2

%

Accounts receivable, net

 

1,529,852

 

 

424,919

 

 

1,104,933

 

260.0

%

Inventory

 

62,197

 

 

151,361

 

 

(89,164

)

(58.9

)%

Total current assets

 

2,170,310

 

 

671,160

 

 

1,499,150

 

223.4

%

Property and equipment, net

 

418,873

 

 

752,162

 

 

(333,289

)

(44.3

)%

 

 

 

 

 

 

 

 

 

 

 

 

Intangibles, net

 

546,952

 

 

790,042

 

 

(243,090

)

(30.8

)%

Marketable securities

 

524,800

 

 

 

 

524,800

 

N/A

 

Total assets

$

3,674,255

 

$

2,226,684

 

$

1,447,571

 

70.9

%

 

 

 

 

 

 

 

 

 

 

 

 

Accounts payable and accrued liabilities

 

1,711,619

 

 

1,971,376

 

 

(259,757

)

(13.2

)%

Notes payable-current

 

1,649,140

 

 

1,847,755

 

 

(198,615

)

(10.7

)%

Deferred revenue

 

59,582

 

 

10,261

 

 

49,321

 

480.7

%

Total current liabilities

 

3,420,342

 

 

3,829,392

 

 

(409,050

)

(10.7

)%

Notes payable-long term

 

0

 

 

934,756

 

 

(934,756

)

(100.0

)%

Total liabilities

 

3,420,343

 

 

4,764,148

 

 

(1,343,805

)

(28.2

)%

Accumulated deficit

 

(29,622,792

)

 

(22,658,560

)

 

(6,964,232

)

30.7

%

Stockholders’ equity (deficit)

 

253,912

 

 

(2,537,464

)

 

2,791,376

 

(115.2

)%


At September 30, 2010, we had a working capital deficit of $1,250,033 compared to a working capital deficit of $3,158,232 at September 30, 2009, a decrease of $1,908,199.  The decrease in the deficit is primarily attributable to the cash raised in our private placement in June, 2010, in the amount of approximately $2.3 million.  In addition, the changes are primarily attributable to the decreases in accounts payable and accrued expenses of $259,757, and the decrease in our current notes payable of $198,615, offset by the increase in accounts receivable of $1,104,934, and an increase in marketable securities of $524,800.  Also contributing was the decrease in inventory of $89,164 and the increase in deferred revenue of $49,321.


Net cash used in operating activities was $4,128,415 for fiscal 2010 as compared to net cash used in operating activities of $2,145,514 for fiscal 2009, an increase of $1,982,901.  For fiscal 2010, our cash used in operations of $4,128,415 consisted of a net loss of $6,964,233, offset by non-cash items totaling $2,835,818 including items such as depreciation and amortization of $662,003, stock based compensation of $867,365, the amortization of deferred compensation of $1,627,919, and other non-cash items of $938,282.  Additionally, during fiscal 2010 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 an increase in accounts receivable of $1,104,934 attributable to an increase in annual sales, and an increase in prepaid expenses of $33,545,offset by a decrease in net inventory of $89,164, a decrease in accounts payable and accrued liabilities of $259,757 and an increase in deferred revenue of $49,321.


For fiscal 2009, our cash used in operations of $2,145,514 consisted of a net loss of $2,526,602, offset by non-cash items totaling $381,088 including items such as depreciation and amortization of $742,636, stock based compensation of $1,167,721, the amortization of deferred compensation of $1,016,134, and other non-cash items of $162,748.  Additionally, during fiscal 2010 we had a decrease in operating liabilities and a decrease in operating assets which offset our net loss. This change in operating assets and liabilities primarily consisted of a decrease in accounts receivable of $2,669,191 attributable to a decrease in annual sales, and a decrease in prepaid expenses of $29,975, a decrease in deposits of $33,035, and a decrease in net inventory of $248,951, offset by a decrease in accounts payable and accrued liabilities of $3,020,165 and an increase in deferred revenue of $2,902.


Net cash used in investing activities for fiscal 2010 was $133,624 as compared to net cash used in investing activities of $99,762 for fiscal 2009.  During fiscal 2010 we used cash of $85,624 for property and equipment purchases, and $48,000 to invest in marketable securities. During fiscal 2009, net cash used in investing activities was $99,762 which was cash used for property and equipment purchases.


21



Net cash provided by financing activities for fiscal 2010 was $4,738,885 as compared to $2,303,806 for fiscal 2009, an increase of $2,435,079. The primary reason for the increase was due to the proceeds from the sale of common stock of $2,380,630, and the exercise of common stock options of $2,591,626. In addition we made payments on notes payable of $1,835,395, and borrowed $1,602,024 under our financing line.


At September 30, 2010 we had an accumulated deficit of $29,622,792 and the report from our independent registered public accounting firm on our audited financial statements at September 30, 2010 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 2010 or that we will report net income in any future periods.

 

We do not have any working capital commitments nor do we not presently have any external sources of working capital. 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, 2010 we had cash on hand of $540,156.  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.  In fiscal 2006, we entered into a receivable factoring agreement with Sand Hill Finance, LLC under which we can sell certain accounts receivable to the lender on a full recourse basis at 80% of the face amount of the receivable up to an aggregate of $1.8 million. This financing agreement was amended in fiscal 2009 to increase the line amount to $2,750,000, and to add an 18 month term loan of $1,000,000 with an interest rate of 24% per annum.  As of September 30, 2010, we had $1,100,860 available under the line of credit facility.


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.  Under the terms of the financing agreement with Sand Hill Finance, LLC we agreed not to incur any additional indebtedness other than trade credit in the ordinary course of business. These covenants may also limit our ability to raise capital in future periods. There can be no assurance that acceptable financing can be obtained on suitable terms, if at all.  Our ability to continue our existing operations and to 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.


Accounting Pronouncements Recently Adopted


In January 2010, the FASB issued ASU No. 2010-06, “Fair Value Measurements and Disclosures” (“ASU 2010-06”) which provides amendments to Subtopic 820-10 that require new disclosures regarding (1) transfers in and out of Levels 1 and 2 fair value measurements and (2) activity in Level 3 fair value measurements. Additionally, ASU 2010-06 clarifies existing fair value disclosures about the level of disaggregation and about inputs and valuation techniques used to measure fair value. The guidance in ASU 2010-06 became effective for the Company’s second quarter of fiscal year 2010 and the disclosures required by this adoption are included in Note 2 “Fair Value Measurements”, except for disclosures about purchases, sales, issuances, and settlements in the roll forward activity in Level 3 fair value measurements which are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. The adoption of this guidance did not have an impact on the Company’s consolidated financial statements.


In December 2008, the FASB issued new accounting guidance that requires enhanced annual disclosures about the plan assets of a Company’s defined benefit pension and other postretirement plans intended to provide users of financial statements with a greater understanding of: (1) how investment allocation decisions are made, including the factors that are pertinent to an understanding of investment policies and strategies; (2) the major categories of plan assets; (3) the inputs and valuation techniques used to measure the fair value of plan assets; (4) the effect of fair value measurements, using significant unobservable inputs (Level 3) on changes in plan assets for the period; and (5) significant concentrations of risk within plan assets. The new guidance resulted in enhanced disclosures beginning with the Company’s Form 10-K for the year ended September 30, 2010 included herein.


22



In December 2007, the FASB issued new accounting and disclosure guidance related to non-controlling interests in subsidiaries (previously referred to as minority interests), which was effective for the Company on October 1, 2009. Among other things, the new guidance requires that a non-controlling interest in a subsidiary be presented as a component of equity separate from the parent’s equity. It also requires that consolidated net income be reported at amounts that include the amounts attributable to both the parent and the non-controlling interests. The new guidance has been applied prospectively, except for the presentation and disclosure requirements, which have been applied retrospectively to all periods presented herein.


In June 2008, ASC Topic 260, “Earnings Per Share”, was amended to require that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) be treated as participating securities and shall be included in the computation of earnings per share pursuant to the two-class method. This amendment became effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those years, and requires that all prior period earnings per share data presented (including interim financial statements, summaries of earnings and selected financial data) be adjusted retrospectively to conform to its provisions. This Topic became effective October 1, 2009, and did not have an impact on the Company’s consolidated financial statements.


In April 2008, ASC Topic 350, “Intangibles – Goodwill and Other”, was amended to include a list of factors an entity should consider in developing renewal or extension assumptions used in determining the useful life of recognized intangible assets. The new guidance applies to (1) intangible assets that are acquired individually or with a group of other assets and (2) intangible assets acquired in both business combinations and asset acquisitions. Under this amendment, entities estimating the useful life of a recognized intangible asset must consider their historical experience in renewing or extending similar arrangements or, in the absence of historical experience, must consider assumptions that market participants would use about renewal or extension. This amendment required certain additional disclosures beginning October 1, 2009, and prospective application to useful life estimates prospectively for intangible assets acquired after September 30, 2009. This Topic became effective October 1, 2009, and did not have an impact on the Company’s consolidated financial statements.


In December 2007, the FASB amended its guidance on accounting for business combinations. The new accounting guidance was effective for the company on October 1, 2009, and is being applied prospectively to all business combinations subsequent to the effective date. Among other things, the new guidance amends the principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed and any non-controlling interest in the acquiree and the goodwill acquired. It also establishes new disclosure requirements to enable the evaluation of the nature and financial effects of the business combination. The adoption of this accounting guidance did not have a significant impact on the Company’s consolidated financial statements, and the impact it will have on the Company’s consolidated financial statements in future periods will depend on the nature and size of business combinations completed subsequent to the date of adoption.


In February 2010, the FASB issued ASU No. 2010-09, “Subsequent Events (Topic 855)” (“ASU 2010-09”) which provides an update to Topic 855, “Subsequent Events”. This update clarifies that an SEC filer is required to evaluate subsequent events through the date that the financial statements are issued and removes the requirement for SEC filers to disclose the date through which subsequent events have been evaluated. This guidance became effective upon issuance and has been adopted by the Company.


Recent Accounting Pronouncements Not Yet Adopted as of September 30, 2010


In April 2010, the FASB issued ASU No. 2010-17, “Revenue Recognition - Milestone Method (Topic 605)” (“ASU 2010-17”) which provides guidance on defining a milestone and determining when it may be appropriate to apply the milestone method of revenue recognition for certain revenue transactions. This guidance is effective on a prospective basis for milestones achieved in fiscal years, and interim periods within those years, beginning on or after June 15, 2010 (fiscal year 2011 for the Company). This accounting guidance is not expected to have a material impact on the Company’s consolidated financial statements.


In June 2009, ASC Topic 810 was amended to improve financial reporting by enterprises involved with variable interest entities. This Topic addresses (1) the effects on certain provisions regarding the consolidation of variable interest entities, as a result of the elimination of the qualifying special-purpose entity concept in ASC Topic 860 regarding the accounting for transfers of financial assets, and (2) concern about the application of certain key provisions of FASB Interpretation No. 46(R), including those in which the accounting and disclosures under the Interpretation do not always provide timely and useful information about an enterprise’s involvement in a variable interest entity. This guidance is effective as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009 (fiscal year 2011 for the Company), for interim periods within that first annual reporting period, and for interim and annual reporting periods thereafter. Earlier application is prohibited. The adoption of this statement is not expected to have a material effect on the Company’s consolidated financial statements.


23



In October 2009, the FASB issued new accounting guidance for revenue recognition with multiple deliverables. This guidance impacts the determination of when the individual deliverables included in a multiple-element arrangement may be treated as separate units of accounting. Additionally, this new accounting guidance modifies the manner in which the transaction consideration is allocated across the separately identified deliverables by no longer permitting the residual method of allocating arrangement consideration. The new guidance is effective for the Company prospectively for revenue arrangements entered into or materially modified beginning in the first quarter of fiscal 2011. Early adoption is permitted. This accounting guidance is not expected to have a significant impact on the Company’s consolidated financial statements.


In July 2010, the FASB issued ASU No. 2010-20, “Receivables (Topic 310) - Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses” (“ASU 2010-20”) which requires additional disclosures about an entity’s allowance for credit losses and the credit quality of its financing receivables. These amendments affect all entities with financing receivables, excluding short-term accounts receivable or receivables measured at fair value or lower of cost or fair value. The guidance on disclosures as of the end of a reporting period will be effective for the Company on December 31, 2010. The disclosures about activity that occurs during a reporting period are effective for the Company’s second quarter of fiscal year 2011. The Company does not expect the adoption of this guidance to have a material impact on its financial statements.


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


Not applicable to a smaller reporting company.


ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA


IceWEB, Inc. and Subsidiaries

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


CONTENTS

 

Report of Independent Registered Public Accounting Firm

25

 

 

Consolidated Financial Statements:

 

 

 

Consolidated Balance Sheets

26

 

 

Consolidated Statements of Operations

27

 

 

Consolidated Statement of Changes in Stockholders’ Deficit

28

 

 

Consolidated Statements of Cash Flows

29

 

 

Notes to Consolidated Financial Statements

30 - 51


24



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, 2010 and 2009 and the related consolidated statements of operations, changes in stockholders’ equity (deficit) and cash flows for the years then ended.  These consolidated financial statements are the responsibility of the Company’s 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 audit 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, an audit of its internal control over financial reporting.  Our audit 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, 2010 and September 30, 2009 and the consolidated results of their operations and their cash flows for the years then ended, 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 of $6,964,233 and $2,526,602 respectively, for the years ended September 30, 2010 and 2009. These matters raise substantial doubt about the Company’s ability to continue as a going concern.  Management’s 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/ Sherb & Co., LLP

Certified Public Accountants

 

Boca Raton, Florida

December 20, 2010


25



IceWEB, Inc. and Subsidiaries

Consolidated Balance Sheets


ASSETS

 

September 30,
2010

 

September 30,
2009

 

 

 

 

 

 

 

CURRENT ASSETS:

 

 

 

 

 

Cash

 

$

540,156

 

$

6,310

 

Accounts receivable, net of allowance for doubtful accounts of $309,000 and $9,000 respectively

 

 

1,529,852

 

 

424,919

 

Inventory, net

 

 

62,197

 

 

151,361

 

Other current assets

 

 

6,875

 

 

6,390

 

Prepaid expenses

 

 

31,230

 

 

25,180

 

 

 

 

2,170,310

 

 

671,160

 

 

 

 

 

 

 

 

 

OTHER ASSETS:

 

 

 

 

 

 

 

Property and equipment, net of accumulated depreciation of $2,180,643 and $1,761,730 respectively

 

 

418,873

 

 

752,162

 

Deposits

 

 

13,320

 

 

13,320

 

Marketable securities, net

 

 

524,800

 

 

 

Intangible assets, net of accumulated amortization of $668,498 and $425,408, respectively

 

 

546,952

 

 

790,042

 

Total Assets

 

$

3,674,255

 

$

2,226,684

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CURRENT LIABILITIES:

 

 

 

 

 

 

 

Accounts payable and accrued liabilities

 

$

1,711,621

 

$

1,971,376

 

Notes payable

 

 

1,649,140

 

 

1,847,755

 

Deferred revenue

 

 

59,582

 

 

10,261

 

 

 

 

3,420,343

 

 

3,829,392

 

 

 

 

 

 

 

 

 

Long-Term Liabilities

 

 

 

 

 

 

 

Notes payable

 

 

 

 

934,756

 

Total Liabilities

 

 

3,420,343

 

 

4,764,148

 

 

 

 

 

 

 

 

 

Stockholders' Equity (Deficit)

 

 

 

 

 

 

 

Preferred stock ($.001 par value; 10,000,000 shares authorized) Series A convertible preferred stock ($.001 par value; 0 shares issued and outstanding)

 

 

 

 

 

Series B convertible preferred stock ($.001 par value; 626,667 shares issued and outstanding)

 

 

626

 

 

626

 

Common stock ($0.001 par value; 1,000,000,000 shares authorized; 134,443,725 and 68,469,617 shares issued and outstanding, respectively)

 

 

134,445

 

 

68,471

 

Additional paid in capital

 

 

29,360,833

 

 

20,064,998

 

Accumulated deficit

 

 

(29,622,792

)

 

(22,658,560

)

Accumulated other comprehensive income

 

 

476,800

 

 

 

Subscription receivable

 

 

(83,000

)

 

 

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

 

 

(13,000

)

 

(13,000

)

 

 

 

 

 

 

 

 

Total stockholders’ equity (deficit)

 

 

253,912

 

 

(2,537,464

)

 

 

 

 

 

 

 

 

Total Liabilities and Stockholders’ Equity (Deficit)

 

$

3,674,255

 

$

2,226,684

 


See accompanying notes to consolidated financial statements


26



IceWEB, Inc. and Subsidiaries

Consolidated Statements of Operations


 

 

For the Year Ended

September 30,

 

 

 

2010

 

2009

 

 

 

 

 

 

 

 

 

Sales

 

$

3,353,286

 

$

2,240,363

 

 

 

 

 

 

 

 

 

Cost of sales

 

 

1,742,110

 

 

1,326,385

 

 

 

 

 

 

 

 

 

Gross profit

 

 

1,611,176

 

 

913,978

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

Sales and marketing expense

 

 

1,690,684

 

 

1,004,970

 

Depreciation and amortization expense

 

 

662,003

 

 

696,723

 

Research and development

 

 

533,713

 

 

336,616

 

General and administrative

 

 

5,325,898

 

 

3,538,086

 

 

 

 

 

 

 

 

 

Total operating expenses

 

 

8,212,298

 

 

5,576,395

 

 

 

 

 

 

 

 

 

Loss From continuing Operations

 

 

(6,601,122

)

 

(4,662,417

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from discontinued operations

 

 

 

 

136,408

 

Interest expense related to discontinued operations

 

 

 

 

(205,940

)

Gain from sale of subsidiary

 

 

 

 

2,666,236

 

Total gain from discontinued operations

 

 

 

 

2,596,704

 

 

 

 

 

 

 

 

 

Other income (expenses):

 

 

 

 

 

 

 

Gain on conversion of debt

 

 

190,136

 

 

 

Interest income

 

 

 

 

1,142

 

Interest expense

 

 

(553,247

)

 

(462,031

)

 

 

 

 

 

 

 

 

Total other income (expenses):

 

 

(363,111

)

 

(460,889

)

 

 

 

 

 

 

 

 

Net loss

 

$

 (6,964,233

)

$

 (2,526,602

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss per common share - basic and diluted:

 

 

 

 

 

 

 

Loss from operations

 

$

 (0.07

)

$

 (0.11

)

Gain (loss) from discontinued operations

 

$

 

$

0.06

 

 

 

$

 (0.07

)

$

 (0.06

)

 

 

 

 

 

 

 

 

Weighted average common shares outstanding basic and diluted

 

 

101,379,729

 

 

40,911,411

 


See accompanying notes to consolidated financial statements


27



IceWEB, Inc. and Subsidiaries

Consolidated Statement of Changes in Stockholders' Equity (Deficit)

For the years ended September 30, 2010 and 2009


 

 

Series B

 

 

 

Additional

 

 

 

Compre-

 

 

 

 

 

 

 

 

Preferred Stock

 

Common Stock

 

Paid-In

 

Accumulated

 

hensive

 

Subscription

 

Treasury Stock

 

 

 

 

Shares

 

Amount

 

Shares

 

Amount

 

Capital

 

Deficit

 

Income

 

Receivable

 

Share

 

Amount

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at September 30, 2008

 

1,253,334

 

$       1,253

 

24,688,088

 

$     24,690

 

$   15,953,221

 

$   (20,131,957)

 

$            —

 

$                 —

 

(162,500)

 

$   (13,000)

 

$ (4,165,793)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of deferred compensation

 

 

 

 

 

1,016,137

 

 

 

 

 

 

1,016,137

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of common stock for cash

 

 

 

3,900,000

 

3,900

 

203,100

 

 

 

 

 

 

207,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cancellation of common stock 

 

 

 

(100,000)

 

(100)

 

100

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock issued for exercise of options

 

 

 

18,715,000

 

18,715

 

960,585

 

 

 

 

 

 

979,300

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock issued in connection with notes payable

 

 

 

1,959,601

 

1,960

 

150,313

 

 

 

 

 

 

152,273

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Conversion of series B preferred to common stock

 

(626,667)

 

(627)

 

626,667

 

627

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock issued for services

 

 

 

1,725,000

 

1,725

 

130,775

 

 

 

 

 

 

132,500

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock issued to employees

 

 

 

13,155,261

 

13,154

 

1,154,567

 

 

 

 

 

 

1,167,721

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock issued in connection with disposition of subsidiary

 

 

 

1,000,000

 

1,000

 

79,000

 

 

 

 

 

 

80,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock issued in connection with conversion of convertible debenture

 

 

 

2,800,000

 

2,800

 

417,200

 

 

 

 

 

 

420,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss for the year

 

 

 

 

 

 

(2,526,602)

 

 

 

 

 

(2,526,602)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at September 30, 2009

 

626,667

 

626

 

68,469,617

 

68,471

 

20,064,998

 

(22,658,560)

 

 

 

(162,500)

 

(13,000)

 

(2,537,464)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of deferred compensation

 

 

 

 

 

1,627,919

 

 

 

 

 

 

1,627,919

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of common stock for cash

 

 

 

15,580,000

 

15,580

 

2,365,050

 

 

 

 

 

 

2,380,630

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of common stock to settle litigation

 

 

 

2,678,571

 

2,679

 

399,104

 

 

 

 

 

 

401,783

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock issued for exercise of options

 

 

 

30,570,600

 

30,571

 

2,561,055

 

 

 

 

 

 

2,591,626

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock issued in connection with subscription receivable

 

 

 

2,000,000

 

2,000

 

81,000

 

 

 

(83,000)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock issued for services

 

 

 

2,800,000

 

2,800

 

506,684

 

 

 

 

 

 

509,484

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock issued to employees

 

 

 

9,344,937

 

9,345

 

858,020

 

 

 

 

 

 

867,365

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock issued in connection with conversion of convertible debenture

 

 

 

3,000,000

 

3,000

 

897,000

 

 

 

 

 

 

900,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other Comprehensive income

 

 

 

 

 

 

 

476,800

 

 

 

 

476,800

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss for the year

 

 

 

 

 

 

(6,964,233)

 

 

 

 

 

(6,964,233)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Comprehensive loss

 

 

 

 

 

 

(6,964,233)

 

476,800

 

 

 

 

(6,487,433)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at September 30, 2010

 

626,667

 

$         626

 

134,443,725

 

$   134,445

 

$   29,360,833

 

$   (29,622,792)

 

$   476,800

 

$       (83,000)

 

(162,500)

 

$   (13,000)

 

$      253,912


See accompanying notes to consolidated financial statements


28



IceWEB, Inc. and Subsidiaries

Consolidated Statements of Cash Flows


 

 

For the Year Ended

September 30,

 

 

 

2010

 

2009

 

 

 

 

 

 

 

Net loss

 

$

(6,964,233

)

$

(2,526,602

)

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

 

 

 

 

 

 

 

Depreciation and amortization

 

 

662,003

 

 

742,636

 

Share-based compensation

 

 

867,365

 

 

1,167,721

 

Amortization of deferred compensation

 

 

1,627,919

 

 

1,016,134

 

Gain on sale of discontinued operations

 

 

 

 

(2,666,236

)

Common stock issued for services rendered

 

 

509,484

 

 

132,500

 

Common stock issued for settlement

 

 

401,783

 

 

 

Amortization of deferred finance costs

 

 

27,015

 

 

30,248

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

(Increase) decrease in:

 

 

 

 

 

 

 

Accounts receivable

 

 

(1,104,934

)

 

2,669,191

 

Prepaid expense

 

 

(33,545

)

 

29,975

 

Inventory

 

 

89,164

 

 

248,951

 

Deposits

 

 

 

 

33,035

 

Increase (decrease) in:

 

 

 

 

 

 

 

Accounts payable and accrued liabilities

 

 

(259,757)

 

 

(3,020,165

)

Deferred revenue

 

 

49,321

 

 

(2,902

)

 

 

 

 

 

 

 

 

NET CASH USED IN OPERATING ACTIVITIES

 

 

(4,128,415

)

 

(2,145,514

)

 

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

Purchase of property and equipment

 

 

(85,624

)

 

(99,762

)

Investment in marketable securities

 

 

(48,000

)

 

 

 

 

 

 

 

 

 

 

 

NET CASH USED IN INVESTING ACTIVITIES

 

 

(133,624

)

 

(99,762

)

  

 

 

 

 

 

 

 

 CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

Proceeds from notes payable

 

 

1,602,024

 

 

7,594,455

 

Payments on notes payable

 

 

(1,835,395

)

 

(6,476,949

)

Proceeds from sale of common stock

 

 

2,380,630

 

 

207,000

 

Proceeds from exercise of common stock options

 

 

2,591,626

 

 

979,300

 

 

 

 

 

 

 

 

 

NET CASH PROVIDED BY FINANCING ACTIVITIES

 

 

4,738,885

 

 

2,303,806

 

 

 

 

 

 

 

 

 

NET INCREASE IN CASH

 

 

476,846

 

 

58,530

 

 

 

 

 

 

 

 

 

CASH - beginning of period

 

 

63,310

 

 

4,780

 

 

 

 

 

 

 

 

 

CASH - end of period

 

$

540,156

 

$

63,310

 

 

 

 

 

 

 

 

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

Cash paid for:

 

 

 

 

 

 

 

Interest

 

$

526,232

 

$

552,886

 

Income taxes

 

$

 

$

 

 

 

 

 

 

 

 

 

NON-CASH INVESTING AND FINANCING ACTIVITIES:

 

 

 

 

 

 

 

Common stock issued for debt and interest

 

$

 

$

152,273

 

Common stock issued in connection with convertible debenture

 

$

1,090,136

 

$

420,000

 

Common stock issued in connection with acquisition/disposition

 

$

 

 

$

80,000

 


See accompanying notes to consolidated financial statements


29



IceWEB, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years ended September 30, 2010 and 2009


NOTE 1 - ORGANIZATION


IceWEB, Inc. (the “Company”) began trading publicly in April 2002. Utilizing resources gained through acquisitions, we have developed two lines of business, IceWEB Storage products, and IceMAIL which is a hosted Microsoft Exchange application service.  We currently have two wholly owned operating subsidiaries: IceWEB Storage Corporation (formerly known as Inline Corporation), and IceWEB Online, Inc.

 

BUSINESS OF ICEWEB

 

Since 2005, the Company has been focused on serving the commercial and federal markets with network security products and proprietary on-line software solutions.  In 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.

 

At the close of fiscal year 2010, the Company has three key product offerings:


•     Unified Network Storage Solutions

•     Purpose Built Network/Data Appliances

•     Cloud Computing Products/Services


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 2010 amounts. The reclassifications had no impact on previously reported results of operations or shareholders’ deficit.


Going Concern


Our auditors stated in their report on the consolidated financial statements of the Company for the Years ended September 30, 2010 and 2009 that we have had losses since inception that raise doubt about our ability to continue as a going concern. In addition and as discussed further in Note 6, we are not in compliance with debt covenants under our Financing Agreements with Sand Hill Finance LLC. For the year ended September 30, 2010 we incurred a net loss of $6,964,233.  The consolidated financial statements do not include any adjustments related to the recovery and classification of recorded assets, or the amounts and classification of liabilities that might be necessary in the event we cannot continue in existence.


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.


Fair value of financial instruments


The carrying amounts of financial instruments, including cash, accounts receivable, prepaid expenses, and other current assets, accounts payable and accrued liabilities, and deposits approximated fair value as of September 30, 2010 and 2009, because of the relatively short-term maturity of these instruments and their market interest rates.


30



IceWEB, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years ended September 30, 2010 and 2009

 

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


Marketable Securities


IceWEB accounts for the purchase of marketable equity securities in accordance with 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 2010 and 2009 include the allowance for doubtful accounts, the valuation of stock-based compensation, the allowance for inventory obsolescence and the useful life of property and equipment and intangible assets, 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 $309,000 as of September 30, 2010. Management performs ongoing evaluations of its accounts receivable. Management believes that all remaining receivables are fully collectable. Bad debt expense amounted to $336,568 and $29,324 for the Years ended September 30, 2010 and 2009, respectively.


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 is provided by using the straight-line method over the estimated useful lives of the related assets.

 

Intangible Assets


Intangible assets, net consists of the cost of acquired customer relationships. We capitalize and amortize the cost of acquired intangible assets over their estimated useful lives on a straight-line basis. The estimated useful life of our acquired customer relationships is five years.


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.


31



IceWEB, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years ended September 30, 2010 and 2009


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


Advertising


Advertising costs are expensed as incurred and amounted to $162,862 in fiscal 2010 and $77,549 million in fiscal 2009.


Revenue Recognition


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


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


Revenue from services is recorded as it is earned. Commissions earned on third party sales are recorded in the month in which contracts are awarded. Customers are generally billed every two weeks based on the units of production for the project. Each project has an estimated total which is based on the estimated units of production and agreed upon billing rates. Amounts billed in advance of services being provided are recorded as deferred revenues and recognized in the consolidated statement of operations as services are provided.


Earnings per Share


We compute earnings per share in accordance with ASC Topic 260, “Earnings Per Share” (formerly SFAS No. 128, “Earnings per Share”) Under the provisions of ASC Topic 260, basic earnings per share is computed by dividing the net income (loss) for the period by the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed by dividing the net income (loss) for the period by the weighted average number of common and potentially dilutive common shares outstanding during the period. Potentially dilutive common shares consist of the common shares issuable upon the exercise of stock options and warrants (using the treasury stock method) and upon the conversion of convertible preferred stock (using the if-converted method). Potentially dilutive common shares are excluded from the calculation if their effect is antidilutive.  At September 30, 2010, there were options and warrants to purchase 19,891,504 shares of common stock, 626,667 shares issuable upon conversion of Series B preferred stock, and no shares of Series C preferred stock outstanding which could potentially dilute future earnings per share.


Stock-Based Compensation


As more fully described in Note 12, we have a stock option plan that provides for non-qualified and incentive stock options to be issued to directors, officers, employees and consultants (the 2000 Management and Director Equity Incentive and Compensation Plan (the “Plan”).


Prior to October 1, 2005, we accounted for stock options issued under the Plan under the recognition and measurement provisions of APB Opinion No. 25, Accounting for Stock Issued to Employees , and related interpretations, as permitted by ASC Topic 718, “Compensation – Stock Compensation (Formerly SFAS No. 123 (R), “Share-Based Payments. No stock-based compensation cost related to employee stock options was recognized in the Consolidated Statement of Operations for the year ended September 30, 2005 as all options granted under the Plan had an exercise price equal to the market value of the underlying common stock on the date of grant.


Effective October 1, 2005, we adopted the fair value recognition provisions of ASC Topic 718, “Compensation – Stock Compensation (Formerly SFAS No. 123 (R), “Share-Based Payments using the modified-prospective-transition method. Under that transition method, compensation cost recognized in the year ended September 30, 2006 includes: (a) compensation cost for all share-based payments granted prior to, but not yet vested as of September 30, 2005, based on the grant date fair value estimated in accordance with the original provisions of Statement 123, and (b) compensation cost for all share-based payments granted subsequent to October 1, 2005, based on the grant-date fair value estimated in accordance with the provisions of Statement 123(R). Financial results for the year ended September 30, 2005 have not been restated.


32



IceWEB, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years ended September 30, 2010 and 2009


Accounting Pronouncements Recently Adopted


In January 2010, the FASB issued ASU No. 2010-06, “Fair Value Measurements and Disclosures” (“ASU 2010-06”) which provides amendments to Subtopic 820-10 that require new disclosures regarding (1) transfers in and out of Levels 1 and 2 fair value measurements and (2) activity in Level 3 fair value measurements. Additionally, ASU 2010-06 clarifies existing fair value disclosures about the level of disaggregation and about inputs and valuation techniques used to measure fair value. The guidance in ASU 2010-06 became effective for the Company’s second quarter of fiscal year 2010 and the disclosures required by this adoption are included in Note 2 “Fair Value Measurements”, except for disclosures about purchases, sales, issuances, and settlements in the roll forward activity in Level 3 fair value measurements which are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. The adoption of this guidance did not have an impact on the Company’s consolidated financial statements.


In December 2008, the FASB issued new accounting guidance that requires enhanced annual disclosures about the plan assets of a Company’s defined benefit pension and other postretirement plans intended to provide users of financial statements with a greater understanding of: (1) how investment allocation decisions are made, including the factors that are pertinent to an understanding of investment policies and strategies; (2) the major categories of plan assets; (3) the inputs and valuation techniques used to measure the fair value of plan assets; (4) the effect of fair value measurements, using significant unobservable inputs (Level 3) on changes in plan assets for the period; and (5) significant concentrations of risk within plan assets. The new guidance resulted in enhanced disclosures beginning with the Company’s Form 10-K for the year ended September 30, 2010 included herein.


In December 2007, the FASB issued new accounting and disclosure guidance related to non-controlling interests in subsidiaries (previously referred to as minority interests), which was effective for the Company on October 1, 2009. Among other things, the new guidance requires that a non-controlling interest in a subsidiary be presented as a component of equity separate from the parent’s equity. It also requires that consolidated net income be reported at amounts that include the amounts attributable to both the parent and the non-controlling interests. The new guidance has been applied prospectively, except for the presentation and disclosure requirements, which have been applied retrospectively to all periods presented herein.


In June 2008, ASC Topic 260, “Earnings Per Share”, was amended to require that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) be treated as participating securities and shall be included in the computation of earnings per share pursuant to the two-class method. This amendment became effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those years, and requires that all prior period earnings per share data presented (including interim financial statements, summaries of earnings and selected financial data) be adjusted retrospectively to conform to its provisions. This Topic became effective October 1, 2009, and did not have an impact on the Company’s consolidated financial statements.


In April 2008, ASC Topic 350, “Intangibles – Goodwill and Other”, was amended to include a list of factors an entity should consider in developing renewal or extension assumptions used in determining the useful life of recognized intangible assets. The new guidance applies to (1) intangible assets that are acquired individually or with a group of other assets and (2) intangible assets acquired in both business combinations and asset acquisitions. Under this amendment, entities estimating the useful life of a recognized intangible asset must consider their historical experience in renewing or extending similar arrangements or, in the absence of historical experience, must consider assumptions that market participants would use about renewal or extension. This amendment required certain additional disclosures beginning October 1, 2009, and prospective application to useful life estimates prospectively for intangible assets acquired after September 30, 2009. This Topic became effective October 1, 2009, and did not have an impact on the Company’s consolidated financial statements.


In December 2007, the FASB amended its guidance on accounting for business combinations. The new accounting guidance was effective for the company on October 1, 2009, and is being applied prospectively to all business combinations subsequent to the effective date. Among other things, the new guidance amends the principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed and any non-controlling interest in the acquiree and the goodwill acquired. It also establishes new disclosure requirements to enable the evaluation of the nature and financial effects of the business combination. The adoption of this accounting guidance did not have a significant impact on the Company’s consolidated financial statements, and the impact it will have on the Company’s consolidated financial statements in future periods will depend on the nature and size of business combinations completed subsequent to the date of adoption.


33



IceWEB, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years ended September 30, 2010 and 2009


Accounting Pronouncements Recently Adopted (continued)


In February 2010, the FASB issued ASU No. 2010-09, “Subsequent Events (Topic 855)” (“ASU 2010-09”) which provides an update to Topic 855, “Subsequent Events”. This update clarifies that an SEC filer is required to evaluate subsequent events through the date that the financial statements are issued and removes the requirement for SEC filers to disclose the date through which subsequent events have been evaluated. This guidance became effective upon issuance and has been adopted by the Company.


Recent Accounting Pronouncements Not Yet Adopted as of September 30, 2010


In April 2010, the FASB issued ASU No. 2010-17, “Revenue Recognition - Milestone Method (Topic 605)” (“ASU 2010-17”) which provides guidance on defining a milestone and determining when it may be appropriate to apply the milestone method of revenue recognition for certain revenue transactions. This guidance is effective on a prospective basis for milestones achieved in fiscal years, and interim periods within those years, beginning on or after June 15, 2010 (fiscal year 2011 for the Company). This accounting guidance is not expected to have a material impact on the Company’s consolidated financial statements.


In June 2009, ASC Topic 810 was amended to improve financial reporting by enterprises involved with variable interest entities. This Topic addresses (1) the effects on certain provisions regarding the consolidation of variable interest entities, as a result of the elimination of the qualifying special-purpose entity concept in ASC Topic 860 regarding the accounting for transfers of financial assets, and (2) concern about the application of certain key provisions of FASB Interpretation No. 46(R), including those in which the accounting and disclosures under the Interpretation do not always provide timely and useful information about an enterprise’s involvement in a variable interest entity. This guidance is effective as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009 (fiscal year 2011 for the Company), for interim periods within that first annual reporting period, and for interim and annual reporting periods thereafter. Earlier application is prohibited. The adoption of this statement is not expected to have a material effect on the Company’s consolidated financial statements.


In October 2009, the FASB issued new accounting guidance for revenue recognition with multiple deliverables. This guidance impacts the determination of when the individual deliverables included in a multiple-element arrangement may be treated as separate units of accounting. Additionally, this new accounting guidance modifies the manner in which the transaction consideration is allocated across the separately identified deliverables by no longer permitting the residual method of allocating arrangement consideration. The new guidance is effective for the Company prospectively for revenue arrangements entered into or materially modified beginning in the first quarter of fiscal 2011. Early adoption is permitted. This accounting guidance is not expected to have a significant impact on the Company’s consolidated financial statements.


In July 2010, the FASB issued ASU No. 2010-20, “Receivables (Topic 310) - Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses” (“ASU 2010-20”) which requires additional disclosures about an entity’s allowance for credit losses and the credit quality of its financing receivables. These amendments affect all entities with financing receivables, excluding short-term accounts receivable or receivables measured at fair value or lower of cost or fair value. The guidance on disclosures as of the end of a reporting period will be effective for the Company on December 31, 2010. The disclosures about activity that occurs during a reporting period are effective for the Company’s second quarter of fiscal year 2011. The Company does not expect the adoption of this guidance to have a material impact on its financial statements.


34



IceWEB, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years ended September 30, 2010 and 2009


NOTE 3 - PROPERTY AND EQUIPMENT


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


 

Estimated

Life

 

2010

 

2009

 

Office equipment

5 years

 

$

699,282

 

$

637,920

 

Computer software

3 years

 

 

612,379

 

 

607,278

 

Furniture and fixtures

5 years

 

 

261,385

 

 

261,385

 

Leasehold improvements

5 years

 

 

1,026,470

 

 

1,007,250

 

 

 

 

 

2,599,516

 

 

2,513,833

 

 

 

 

 

 

 

 

 

 

Less: accumulated depreciation

 

 

 

(2,180,643

)

 

(1,761,671

)

 

 

 

 

 

 

 

 

 

 

 

 

$

418,873

 

$

752,162

 


Depreciation expense for the years ended September 30, 2010 and 2009 was $418,913 and $453,633 respectively.


NOTE 4 - INTANGIBLE ASSETS


At September 30, 2010, intangible assets consist of the following:


 

 

2010

 

2009

 

Manufacturing GSA Schedule

 

$

750,000

 

$

750,000

 

Customer relationships  intangible

 

 

465,451

 

 

465,451

 

 

 

 

1,215,451

 

 

1,215,451

 

Less: accumulated amortization

 

 

(668,499

)

 

(425,409

)

 

 

 

 

 

 

 

 

 

 

$

546,952

 

$

790,042

 


Amortization expense amounted to $243,090 for both of the Years ended September 30, 2010 and 2009.


Amortization expense subsequent to the year ended September 30, 2010 is as follows:

 

Years ending September 30:

 

 

 

2011

 

$

243,090

 

2012

 

 

243,090

 

2013

 

 

60,772

 

 

 

$

546,952

 


NOTE 5 - RELATED PARTY TRANSACTIONS


From time to time we have borrowed operating funds from Mr. John Signorello, our Chief Executive Officer, for working capital.  The advances were payable upon demand and were interest free.  During fiscal 2009 Mr. Signorello advanced $66,300 to us, and we repaid $66,300. The highest amount that we owed Mr. Signorello during fiscal 2009 was $25,000. At each of the last three fiscal year ends, 2008, 2009, and 2010, the amount owed to Mr. Signorello was $0.  As of December 13, 2010, the amount owed to Mr. Signorello was $0.


On June 8, 2009 we sold 1,000,000 shares of common stock at a per share price of $0.04, valued at $40,000 to Jack Bush, a member of our Board of Directors. The fair market value of our common stock on the date of the transaction was $0.07 per share.  The shares were issued at a discount to the fair market value of our common stock of approximately 43% due to their restricted status, because we needed the cash, our access to capital was limited, and it was the price negotiated and agreed to by the buyer.


35



IceWEB, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years ended September 30, 2010 and 2009


NOTE 5 - RELATED PARTY TRANSACTIONS (continued)


On August 10, 2009 we sold 1,000,000 shares of common stock at a per share price of $0.04, valued at $40,000 to Joseph Druzak, a member of our Board of Directors. The fair market value of our common stock on the date of the transaction was $0.10 per share.  The shares were issued at a discount to the fair market value of our common stock of approximately 60% due to their restricted status, because we needed the cash, our access to capital was limited, and it was the price negotiated and agreed to by the buyer.

 

During October, 2009, we sold 2,000,000 shares of common stock at a per share price of $0.042, valued at $83,000 to Florence Signorello, an accredited investor who is the mother of John Signorello, our chief executive officer. The fair market value of our common stock on the date of the transaction was $0.145 per share. As of June 30, 2010 we had not received the proceeds from the investor and as a result we recorded the subscription receivable as a contra equity account on our balance sheet.

 

During November, 2009, we sold 1,000,000 shares of common stock, valued at $130,000 to Hal Compton, a member of our Board of Director for $40,000, and recognized stock based compensation expense of $90,000.  The shares were issued at a discount to the fair market value of our common stock of approximately 69% due to their restricted status, because we needed the cash, our access to capital was limited, and it was the price negotiated and agreed to by the buyer.


We and certain of our affiliates have entered into a series of transactions involving VOIS Inc. (OTCBB: VOIS), a public company which had developed and launched a social commerce website.  On November 3, 2009 we purchased 160,000,000 shares of the common stock of VOIS Inc., which represented approximately 16% of that company, for $48,000 in a private transaction exempt from registration under the Securities Act of 1933 in reliance on an exemption provided by Section 4(2) of that act resulting in gross proceeds to us of $48,000. At the time of our investment, Mr. Mark Lucky, our Chief Financial Officer, was a member of VOIS’ board of directors, having been elected in October 2009.  In exchange for this strategic interest, VOIS received non-exclusive access to distribute IceMAIL, IcePORTAL and IceSECURE to their existing and prospective new user base, and our cloud storage network.  Mr. Lucky resigned his positions with VOIS in September 2010.  As of the date hereof, VOIS has not integrated this access within its business and we have had no subsequent business relationship with it, other than as set forth herein.


Prior to our investment in VOIS, both Messrs. John R. Signorello and Robert Druzak had personal relationships with the founders of VOIS.  In an unrelated transaction in November 2009 Mr. Signorello, a member of our board of directors and our CEO, purchased 225,000,000 shares of VOIS’ common stock from a former officer and director of VOIS for nominal consideration in a private transaction.  The shares of common stock purchased by Mr. Signorello represented approximately 27% of VOIS’ outstanding common stock purchase of the shares by us.  Thereafter, in an unrelated transaction in January 2010 Mr. Druzak purchased 225,000,000 shares of VOIS’ common stock from a former officer and director of VOIS for nominal consideration in a private transaction.  The shares of common stock purchased by Mr. Druzak represented approximately 22% of VOIS’ outstanding common stock.  Immediately following the closing of this transaction Mr. Druzak was appointed to VOIS’ board of directors and named President and Chief Executive Officer of VOIS.  Mr. Druzak, the brother of Joseph Druzak, a member of our board, was formerly a vice president of our company from March 2005 to January, 2010, but was not considered an executive officer of our company.  Mr. Robert Druzak resigned his positions with VOIS in March 2010.


While five out of the 6 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 Director’s 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 truncations by our board has occurred.


NOTE 6 - NOTES PAYABLE


Sand Hill Finance, LLC


On December 19, 2005, we entered into a Financing Agreement with Sand Hill Finance, LLC pursuant to which, together with related amendments, we may borrow up to 80% on our accounts receivable balances up to a maximum of $1,800,000.  In conjunction with the acquisition of Inline Corporation in December, 2007, the lending limit on the credit facility was increased to $2,750,000.  


36



IceWEB, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years ended September 30, 2010 and 2009


NOTE 6 - NOTES PAYABLE (continued)


In addition, in November, 2008 we and Sand Hill Finance, LLC entered into a 36 month term convertible debenture agreement in the amount of $1,000,000. On September 7, 2010, Sand Hill Finance, LLC converted the remaining balance of $1,090,136 of this convertible debenture in exchange for three million shares of our common stock.  The debenture was converted at a price of $0.36338 per share.  The conversion price was subject to a floor of $0.30 per share resulting in a gain on conversion of $190,136.


Amounts borrowed under the Financing Agreement are secured by a first security interest in substantially all of our assets.  At September 30, 2010, the principal amount due under the Financing Agreement amounted to $1,649,140.  This amount is included in the note payable balance of $1,649,140 on the balance sheet at September 30, 2010.

 

Interest is payable under the Financing Agreement at a rate of 1.75% per month on the average loan balance outstanding during the year, equal to an annual interest of approximately 21% per year. We 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, we are obligated to pay a commitment fee of 1% of the credit limit annually, such amounts are payable on the anniversary of the agreement.


In connection with the Financing Agreement, we issued Sand Hill Finance, LLC, a seven-year common stock purchase warrant to purchase 25,000 shares of our common stock at an exercise price of $1.00 per share. The 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 our common stock minus the aggregate exercise price of the warrant by the fair market value of one share of common stock. The number of shares issuable upon the exercise of the warrant and the exercise price are subject to adjustment in the event of stock dividends, stock splits and reclassifications. The fair value of the warrant of $16,250 has been recorded as an addition to paid-in capital and interest expense during the year ended September 30, 2007.


In connection with the term loan, we issued Sand Hill Finance, LLC a seven-year common stock purchase warrant to purchase 120,000 shares of our common stock at an exercise prices $1.00 per share.  The 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 our common stock minus the aggregate exercise price of the warrant by the fair market value of one share of common stock. The number of shares issuable upon the exercise of the warrant and the exercise price are subject to adjustment in the event of stock dividends, stock splits and reclassifications. The fair value of the warrant of $13,587 has been recorded as an addition to paid-in capital and deferred finance costs during the year ended September 30, 2009.


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


The terms of the Financing Agreement also restricts us 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.  Sand Hill Finance provided a waiver with respect to our disposition of IceWEB, Virginia, Inc. in March, 2010, as discussed herein.


37



IceWEB, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years ended September 30, 2010 and 2009


NOTE 7 - INVENTORY


Inventory consisted of the following:

 

 

 

September 30,

2010

 

September 30,

2009

 

Raw materials

 

$

49,757

 

$

78,966

 

Work in progress

 

 

9,330

 

 

14,862

 

Finished goods

 

 

3,110

 

 

57,533

 

 

 

 

62,197

 

 

151,361

 

 

 

 

 

 

 

 

 

Less: reserve for obsolescence

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

62,197

 

$

151,361

 


NOTE 8 - COMMITMENTS


We lease office space in Sterling, Virginia under a two-year operating lease that expires on March 31, 2011.  The office lease agreement has certain escalation clauses and renewal options. Additionally, we have lease agreements for computer equipment and an office copier/fax machine. Future minimum rental payments required under these operating leases are as follows:

 

Years ending September 30:

 

 

 

2011

 

$

37,611

 

2012

 

 

 

2013

 

 

 

2014

 

 

 

2015 and thereafter

 

 

 

 

 

$

37,611

 

 

Rent expense was $78,076 and $71,399 for the years ended September 30, 2010 and 2009.


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, 2010 and 2009 the Company has no unrecognized tax benefits, interest, or penalties.


38



IceWEB, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years ended September 30, 2010 and 2009


NOTE 9 - INCOME TAXES (continued)


A summary of our deferred tax is as follows:


 

 

2010

 

2009

 

Deferred Tax Assets:

 

 

 

 

 

 

 

Tax benefit of net operating loss carry forward

 

$

5,360,000

 

$

4,146,000

 

Grant of stock options/restricted stock to employees

 

 

 

 

1,768,000

 

Unpaid accrued salaries

 

 

17,000

 

 

31,000

 

Allowance for doubtful accounts

 

 

113,000

 

 

 

Reserve for legal settlement

 

 

353,000

 

 

451,000

 

Amortization of leasehold improvements

 

 

182,000

 

 

115,000

 

Amortization of intangibles

 

 

302,000

 

 

175,000

 

 

 

 

6,327,000

 

 

6,686,000

 

 

 

 

 

 

 

 

 

Less: valuation allowance

 

 

(6,327,000

)

 

(6,686,000

)

 

 

 

 

 

 

 

 

Net deferred tax assets

 

$

 

$

 


As of September 30, 2010 we had unused net operating loss carry forwards of approximately $14,200,000 available to reduce our future federal taxable income. Net operating loss carryforwards expire through fiscal years ending 2030. 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, 2010 was $6,327,000. The decrease during fiscal 2010 was approximately $359,000.


Net operating loss carryforwards and the associated deferred tax asset were reduced during fiscal September 30, 2009 to reflect the impact of the disposition of IceWEB Virginia, Inc. in a stock sale transaction in the second quarter.


The table below summarizes the differences between our effective tax rate and the statutory federal rate as follows for fiscal 2010 and 2009. The effective tax rate is 34% Federal and 3.6% State after Federal tax benefit:

 

 

 

2010

 

 

2009

 

Computed “expected” tax benefit

 

 

(34.0

)%

 

 

(34.0

)%

State income taxes

 

 

(3.6

)%

 

 

(3.6

)%

Other permanent differences

 

 

1.0

 %

 

 

42.0

 %

Change in valuation allowance

 

 

36.6

 %

 

 

(4.4

)%

 

 

 

 

 

 

 

 

 

Effective tax rate

 

 

0.0

 %

 

 

0.0

 %


NOTE 10 - CONCENTRATION OF CREDIT RISK


Bank Balances


We maintain our cash bank deposits at various financial institutions which, at times, may exceed federally insured limits. Accounts are guaranteed by the Federal Deposit Insurance Corporation (FDIC).  During October 2009, the FDIC increased the insured amounts at participating financial institutions from $100,000 to $250,000 and provided unlimited coverage for non-interest bearing transaction accounts.  At September 30, 2010 we had no amounts in excess of FDIC insured limits. We have not experienced any losses in such accounts.


Major Customers


Sales to eight customers represented approximately 89% of total sales for the year ended September 30, 2010. As of September 30, 2010 approximately 83% of our accounts receivable was due from one customer. Sales to ten customers represented approximately 63% in 2009.


39



IceWEB, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years ended September 30, 2010 and 2009


NOTE 11 - STOCKHOLDERS’ EQUITY (DEFICIT)


Preferred Stock


Our authorized capital includes 10,000,000 shares of blank check preferred stock, par value $0.001 per share, of which 1,666,667 shares have previously been designated as Series A Convertible Preferred Stock. 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 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 A Convertible Preferred Stock


On March 30, 2005, we entered into a Preferred Stock Purchase Agreement and related agreements with Barron Partners LP. Under the terms of this agreement, we sold Barron Partners LP, an accredited investor, 1,666,667 shares of our Series A Convertible Preferred Stock and issued the purchaser the Common Stock Purchase Warrants “A”, “B” and “C” to purchase an aggregate of 4,500,000 shares of our common stock at exercise prices ranging from $2.00 to $9.60 per share for an aggregate purchase price of $1,000,000. We received net proceeds of $900,000 after payment of expenses of $35,000 and a finder’s fee to Liberty Company LLC of $65,000. We also issued Liberty Company LLC, a broker-dealer, a Common Stock Purchase Warrant “A” exercisable into 175,000 shares of our common stock with an exercise price of $0.70 per share as additional compensation for its services. We used these proceeds for general working capital and acquisitions. The transaction was exempt from registration under the Securities Act in reliance on an exemption provided by Section 4(2) of that act.


All shares of Series A Convertible Preferred Stock were converted into shares of our common stock in fiscal 2008.  As of September 30, 2010 there are no Series A Convertible Preferred shares outstanding. The warrants issued in conjunction with the Series A Convertible Preferred Stock transaction were fully converted into shares of our common stock in fiscal 2008.  There are no outstanding warrants related to the Series A Convertible Preferred Stock transaction at September 30, 2010.


B) 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, the shares carry a liquidation preference of $0.2727 per share,

 

 

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. The conversion ratio is also subject to adjustment in the event we should sell any shares of its common stock or securities convertible into common stock at an effective price less than the conversion ratio then in effect, in which case the conversion ratio would be reduced to the lesser price. 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,


40



IceWEB, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years ended September 30, 2010 and 2009

 

NOTE 11 - STOCKHOLDERS’ EQUITY (DEFICIT) (continued)


so long as the Series B Convertible Preferred Stock is outstanding, we have agreed not to issue any rights, options or warrants to holders of its common stock entitling the holders to purchase shares of its common stock at less than the conversion ratio without the consent of the holders of a majority of the outstanding shares of Series B Convertible Preferred Stock. If we should elect to undertake such an issuance and the Series B holders consent, the conversion ratio would be reduced. Further, if we should make a distribution of any evidence of indebtedness or assets or rights or warrants to subscribe for any security to our common stockholders, the conversion value would be readjusted,

 

 

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, and

 

 

so long as the shares of Series B Convertible Preferred Stock are outstanding, we cannot sell or issue any common stock, rights to subscribe for shares of common stock or securities which are convertible or exercisable into shares of common stock at an effective purchase price of less than the then conversion value of the Series B Convertible Preferred Stock.


During fiscal 2008, Series B Preferred stockholders’ converted 580,000 shares of Series B Preferred Stock into 580,000 shares of common stock.


During fiscal 2009, Series B Preferred stockholders’ converted 626,667 shares of Series B Preferred Stock into 580,000 shares of common stock.


During fiscal 2009, the remaining 626,667 shares of Series B Preferred Stock were acquired from the original holders by John Signorello, the Company’s CEO, for total consideration of $75,000.


On December 28, 2005, the Company consummated a Preferred Stock Purchase Agreement and related agreements with Barron Partners LP. Under the terms of these agreements, the Company issued Barron Partners LP, an accredited investor, 1,833,334 shares of its Series B Convertible Preferred Stock and Common Stock Purchase Warrants “D”, “E” and “F” to purchase an aggregate of 2,250,000 shares of its common stock at exercise prices ranging from $2.00 to $9.60 per share, for an aggregate purchase price of $500,000. The Company received net proceeds of $475,000 after payment of commissions of $25,000 (before placement expenses). The Company used these proceeds for general working capital. The transaction was exempt from registration under the Securities Act of 1933 in reliance on an exemption provided by Section 4(2) of that act.


On the date of issuance of the Series B Preferred Stock, the effective conversion price was at a discount to the price of the common stock into which it was convertible. In fiscal 2006, the Company recorded a $500,000 preferred stock dividend related to the beneficial conversion feature and the fair value of the warrants granted in connection with the preferred stock.

Under the terms of the Preferred Stock Purchase Agreement, the Company agreed:


to maintain a majority of independent directors on its Board of Directors, and that these independent directors will make up a majority of the audit and compensation committees of its Board. If at any time the Company should fail to maintain these independent majority requirements, the Company is required to pay Barron Partners LP liquidated damages of 24% of the purchase price of the securities ($120,000) per annum, payable monthly in kind,

 

 

that if within 24 months from the closing date the Company consummates the sale of debt or equity securities with a conversion price less than the then effective conversion price of the Series B Convertible Preferred Stock, the Company will make a post-closing adjustment in the conversion price of the Series B Convertible Preferred Stock to such lower conversion price,

 

 

that for a period of three years all employment and consulting agreements must have the unanimous consent of the compensation committee of its Board, and any awards other than salary are usual and appropriate for other officers, directors, employees or consultants holding similar positions in similar publicly held-companies,

 

 

that for a period of two years from the closing the Company will not enter into any new borrowings of more than twice as much as the sum of EBITDA from recurring operations over the past four quarters, subject to certain exceptions,


41



IceWEB, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years ended September 30, 2010 and 2009

 

NOTE 11 - STOCKHOLDERS’ EQUITY (DEFICIT) (continued)

 

that for long as Barron Partners LP holds any of the securities, the Company will not enter into any subsequent financing in which we issue or sell any debt or equity securities with a floating conversion price or containing a reset feature, and

 

 

that the Company will submit a proposal at its next annual meeting of stockholders to amend our Certificate of Incorporation to require the consent of the holders of a designated percentage of a designated class of its securities to waive or amend the terms of any rights, options and warrants approved by its Board.


Mr. John R. Signorello, the Company’s CEO, agreed not to sell any shares of the Company’s common stock that he may own in excess of 1% per quarter or at a price of less than $1.50 per share for a period ending August 30, 2007, and that the earliest any other insiders could sell their shares would be beginning two years from the closing date.


The Company granted Barron Partners LP a right of first refusal to participate in any subsequent funding the Company may undertake on a pro rata basis at 94% of the offering price.


Warrants Issued In the Series B Convertible Preferred Stock Transaction


In connection with the sale of shares of our Series B Convertible Preferred Stock, we issued the purchaser the following common stock purchase warrants:


Common Stock Purchase Warrants “D” to purchase an aggregate of 1,000,000 shares of our common stock at an exercise price of $2.00 per share,

 

 

Common Stock Purchase Warrants “E” to purchase an aggregate of 625,000 shares of our common stock at an exercise price of $4.80 per share, and

 

 

Common Stock Purchase Warrants “F” to purchase an aggregate of 625,000 shares of our common stock at an exercise price of $9.60 per share.


We also issued Liberty Company LLC, a broker dealer which served as finder for us in the transaction, a Common Stock Purchase Warrant “G” to purchase 25,000 shares of its common stock at an exercise price of $1.00 per share. Other than the exercise price, all other terms of the warrant issued to Liberty Company LLC are identical to the Common Stock Purchase Warrants “E” and “F” issued to the purchaser.


The expiration date of the warrants is five years, or 18 months after effectiveness of a registration statement subsequent to the issuance hereof with such 18 months to be extended by one month for each month or portion of a month during which such registration statement’s effectiveness has lapsed or been suspended, whichever is longer. The warrants contain a cashless exercise provision which permits the holder, rather than paying the exercise price in cash, to surrender a number of warrants equal to the exercise price of the warrants being exercised. The holder cannot utilize the cashless exercise feature during the first six months of the term or so long as there is an effective registration statement covering the shares of common stock underlying the warrants. The exercise price of the warrants and the number of shares issuable upon the exercise of the warrants is subject to adjustment in the event of stock splits, stock dividends and reorganizations, as well as if we issue common stock or securities convertible into common stock at an effective price less than the then current exercise price of the warrant.


The warrants issued in conjunction with the Series B Convertible Preferred Stock transaction were fully converted into shares of our common stock in fiscal 2009.  There are no outstanding warrants related to the Series B Convertible Preferred Stock transaction.


Common Stock


Fiscal 2009 Transactions


On October 28, 2008 we issued 3,431,680 shares of restricted common stock at a per share price of $0.07, valued at $240,218, in lieu of pay to our employees.  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.


42



IceWEB, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years ended September 30, 2010 and 2009


NOTE 11 - STOCKHOLDERS’ EQUITY (DEFICIT) (continued)


On February 18, 2009 we issued 480,000 shares of restricted common stock at a per share price of $0.14, valued at $67,200, in lieu of pay to our employees.  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.

 

On March 26, 2009 we issued 6,243,581shares of restricted common stock at a per share price of $0.09, valued at $560,305, in lieu of pay to our employees.  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.

 

On August 19, 2009 we issued 3,000,000 shares of restricted common stock at a per share price of $0.10 valued at $300,000, in lieu of pay to our employees.  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.

 

On June 3, 2009 we sold 1,400,000 shares of common stock at a per share price of $0.03, valued at $42,000 to an accredited investor and the issuance was exempt from registration under the Securities Act of 1933 in reliance on an exemption provided by Section 4(2) of that act.


On June 8, 2009 we sold 1,000,000 shares of common stock at a per share price of $0.04, valued at $40,000 to an accredited investor and the issuance was exempt from registration under the Securities Act of 1933 in reliance on an exemption provided by Section 4(2) of that act.


On June 11, 2009 we sold 500,000 shares of common stock at a per share price of $0.03, valued at $15,000 to an accredited investor and the issuance was exempt from registration under the Securities Act of 1933 in reliance on an exemption provided by Section 4(2) of that act.


On August 10, 2009 we sold 1,000,000 shares of common stock at a per share price of $0.08, valued at $80,000 to an accredited investor and the issuance was exempt from registration under the Securities Act of 1933 in reliance on an exemption provided by Section 4(2) of that act.


On March 10, 2009, we issued 25,000 shares of our common stock valued at $2,500 in satisfaction of debt in the amount of $2,500, which related to services rendered to the Company. The recipient was an accredited investor and the issuance was exempt from registration under the Securities Act of 1933 in reliance on an exemption provided by Section 4(2) of that act.


On March 11, 2009, we issued 100,000 shares of our common stock valued at $4,000 in satisfaction of debt in the amount of $4,000, which related to services rendered to the Company.  The recipient was an accredited investor and the issuance was exempt from registration under the Securities Act of 1933 in reliance on an exemption provided by Section 4(2) of that act.


On June 25, 2009, we issued 100,000 shares of our common stock valued at $6,000 in satisfaction of debt in the amount of $6,000, which related to services rendered to the Company.  The recipient was an accredited investor and the issuance was exempt from registration under the Securities Act of 1933 in reliance on an exemption provided by Section 4(2) of that act.

 

On September 2, 2009, we issued 1,500,000 shares of our common stock valued at $120,000 in satisfaction of debt in the amount of $120,000, which related to services rendered to the Company.  The recipient was an accredited investor and the issuance was exempt from registration under the Securities Act of 1933 in reliance on an exemption provided by Section 4(2) of that act.


In March, 2009, in conjunction with the sale of its subsidiary IceWEB Virginia, Inc., the Company issued 1,000,000 shares of our common stock to the purchaser, valued at $80,000.  The recipient was an accredited investor and the issuance was exempt from registration under the Securities Act of 1933 in reliance on an exemption provided by Section 4(2) of that act.


During fiscal 2009, we issued 18,715,000 of our common stock in connection with the exercise of options under our stock option plan.


In the fiscal first quarter of 2009, we issued 1,959,601 shares of common stock in connection with payments on a short term note payable, valued at $152,273.


43



IceWEB, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years ended September 30, 2010 and 2009


NOTE 11 - STOCKHOLDERS’ EQUITY (DEFICIT) (continued)


Fiscal 2010 Transactions


During November, 2009, we sold 1,000,000 shares of common stock, valued at $130,000 to a Director for $40,000, and recognized stock based compensation expense of $90,000. The purchaser was an accredited investor and the issuance was exempt from registration under the Securities Act of 1933 in reliance on an exemption provided by Section 4(2) of that act.

 

During November, 2009, we sold 1,500,000 shares of common stock at a per share price of $0.10, valued at $150,000 to an accredited investor, and the issuance was exempt from registration under the Securities Act of 1933 in reliance on an exemption provided by Section 4(2) of that act.


During March, 2010, we sold 3,000,000 shares of common stock at a per share price of $0.10, valued at $300,000 to four accredited investors.  The issuances were exempt from registration under the Securities Act of 1933 in reliance on exemptions provided by Section 4(2) of that act.

 

During March, 2010, we issued 1,000,000 shares of common stock at a per share price of $0.17, valued at $170,000 to an accredited investor 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.


During February, 2010 we issued 8,800,000 shares of restricted common stock at a per share price of $0.086, valued at $756,800, in lieu of pay to five of our employees, including two 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.


During April and May, 2010 we sold 10,080,000 units of our securities to 35 accredited investors in a private placement exempt from registration under the Securities Act of 1933 in reliance on an exemption provided by Section 4(2) of that act and Regulation D, with each unit consisting of one share of our common stock and one 12 month common stock purchase warrants.  We received gross proceeds of $2,316,000 in this offering.  Jesup & Lamont Securities Incorporated, a broker-dealer and member of FINRA, acted as finder for us in the offering and we paid Jesup & Lamont Securities Incorporated a fee of $162,120 and issued them one-year common stock purchase warrants to purchase an aggregate of 877,100 shares of our common stock at an exercise price of $0.40 per share. In addition, we paid Jesup & Lamont  Securities Incorporated legal expenses totaling $25,000 incurred in the preparation of the various transactional documents.  We are using the net proceeds of this offering for general working capital.

 

In July 2010, we issued 2,678,571 shares of common stock valued at $401,786 to Optimus Capital Partners, LLC as consideration in the settlement of certain litigation.  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 2010, we issued 3,000,000 shares of our common stock in full satisfaction of $1,090,136 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.


During fiscal 2010, in conjunction with certain employment agreements, we issued 494,937 shares of restricted common stock valued at $97,065, in lieu of pay to non-executive employees.  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.


During May, 2010, we issued 200,000 shares of common stock at a per share price of $0.30, valued at $60,000 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.


During fiscal 2010, in conjunction with a consulting agreement, we issued 250,000 shares of restricted common stock valued at $56,234, in lieu of pay to non-executive employees.  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.


44



IceWEB, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years ended September 30, 2010 and 2009


NOTE 11 - STOCKHOLDERS’ EQUITY (DEFICIT) (continued)


In June 2010, we issued 1,300,000 shares of common stock valued at $210,000 as partial consideration in the settlement of certain litigation.  The recipients were 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.


Common Stock Warrants


A summary of the status of our outstanding common stock warrants as of September 30, 2010 and 2009 and changes during the period ending on that date is as follows:

 

 

 

Year Ended September 30,

2010

 

 

Year Ended September 30,

2009

 

 

 

Number of

Warrants

 

 

Weighted

Average

Exercise

Price

 

 

Number of

Warrants

 

 

Weighted

Average

Exercise

Price

 

Common Stock Warrants

 

 

 

 

 

 

 

 

 

 

 

 

Balance at beginning of year

 

 

225,000

 

 

$

1.78

 

 

 

300,000

 

 

$

1.25

 

Granted

 

 

8,137,100

 

 

 

0.40

 

 

 

 

 

 

 

Exercised

 

 

 

 

 

 

 

 

 

 

 

 

Forfeited

 

 

(75,000

)

 

 

6.00

 

 

 

(75,000

)

 

 

0.65

 

Balance at end of year

 

 

8,287,100

 

 

$

0.40

 

 

 

225,000

 

 

$

1.78

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Warrants exercisable at end of year

 

 

8,287,100

 

 

$

0.40

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

$

 

 

 

 

 

 

 

 

 


The following table summarizes information about common stock warrants outstanding at September 30, 2010:

 

 

 

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

 

2010

 

Life

 

Price

 

2010

 

Price

$       0.20

 

200,000

 

0.57 Years

 

$       0.20

 

200,000

 

$       0.20

$       0.40

 

7,792,100

 

0.65 Years

 

$       0.40

 

7,792,100

 

$       0.40

$       0.50

 

290,000

 

3.03 Years

 

$       0.50

 

290,000

 

$       0.50

$       2.00

 

5,000

 

0.81 Years

 

$       2.00

 

5,000

 

$       2.00

 

 

8,287,100

 

 

 

$       0.40

 

8,287,100

 

$       0.40


NOTE 12 - 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.


45



IceWEB, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years ended September 30, 2010 and 2009


NOTE 12 - STOCK OPTION PLAN (continued)


The purpose of the 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 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 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 recipient’s continued employment (“restricted shares”). Plan options may either be options qualifying as incentive stock options under Section 422 of the Internal Revenue Code of 1986, as amended or options that do not so qualify. Any incentive stock option granted under the Plan must provide for an exercise price of not less than 100% of the fair market value of the underlying shares on the date of such grant, but the exercise price of any incentive option granted to an eligible employee owning more than 10% of our common stock must be at least 110% of such fair market value as determined on the date of the grant. Only persons who are officers or other key employees are eligible to receive incentive stock options and performance share grants. Any non-qualified stock option granted under the Plan must provide for an exercise price of not less than 50% of the fair market value of the underlying shares on the date of such grant.



As amended in fiscal 2010, the Plan permits the grant of options and shares for up to 60,000,000 shares of our common stock. The Plan terminates 10 years from the date of the Plan’s adoption by our stockholders.


The term of each Plan option and the manner in which it may be exercised is determined by the Board of Directors, provided that no Plan option may be exercisable more than three years after the date of its grant and, in the case of an incentive option granted to an eligible employee owning more than 10% of 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,

 

 

 

2010

 

 

2009

 

Expected volatility

 

129% - 325%

 

 

149% - 183%

 

Expected term

 

1 - 5 Years

 

 

1 - 5 Years

 

Risk-free interest rate

 

0.03% - 0.48%

 

 

2.53% - 4.76%

 

Forfeiture Rate

 

0% - 45%

 

 

0% - 45%

 

Expected dividend yield

 

0%

 

 

0%

 


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, 2010, total stock-based compensation charged to operations for option-based arrangements amounted to $1,627,920. At September 30, 2010, there was approximately $447,076 of total unrecognized compensation expense related to non-vested option-based compensation arrangements under the Plan.



46



IceWEB, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years ended September 30, 2010 and 2009


NOTE 12 - STOCK OPTION PLAN (continued)


A summary of the status of our outstanding stock options as of September 30, 2010 and changes during the period ending on that date is as follows:

 

 

 

Year Ended September 30,

2010

 

 

Year Ended September 30,

2009

 

 

 

Number of

Options

 

 

Weighted

Average

Exercise

Price

 

 

Aggregate

Intrinsic

Value

 

 

Number of

Options

 

 

Weighted

Average

Exercise

Price

 

 

Aggregate

Intrinsic

Value

 

Stock options

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at beginning of year

 

 

10,944,483

 

 

$

0.27

 

 

 

 

 

 

6,583,827

 

 

$

0.61

 

 

$

 

 

Granted

 

 

32,410,000

 

 

 

0.09

 

 

 

 

 

 

24,395,000

 

 

 

0.06

 

 

 

 

 

Exercised

 

 

(30,570,600

)

 

 

0.09

 

 

 

 

 

 

(18,715,000

)

 

 

0.05

 

 

 

 

 

Forfeited

 

 

(1,179,479

)

 

 

0.16

 

 

 

 

 

 

(1,319,344

)

 

 

0.28

 

 

 

 

 

Balance at end of year

 

 

11,604,404

 

 

$

0.27

 

 

$

1,351,502

 

 

 

10,944,483

 

 

$

0.27

 

 

$

147,150

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Options exercisable at end of year

 

 

9,691,237

 

 

$

0.30

 

 

$

1,037,335

 

 

 

4,123,134

 

 

$

0.47

 

 

$

109,006

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average fair value of options granted during the year

 

 

 

 

 

$

0.078

 

 

 

 

 

 

 

 

 

 

$

0.04

 

 

 

 

 


The following table summarizes information about employee stock options outstanding at September 30, 2010:

 

 

 

Options Outstanding

 

Options Exercisable

 

Range of

Exercise

Price

 

Number

Outstanding at

September 30,

2010

 

Weighted

Average

Remaining

Contractual

Life

 

Weighted

Average

Exercise

Price

 

Number

Exercisable at

September 30,

2010

 

 

Weighted

Average

Exercise

Price

 

$ 0.001-0.25

 

 

7,649,400

 

2.13 Years

 

$

0.11

 

 

5,880,033

 

 

$

0.11

 

0.30-0.48

 

 

695,000

 

2.25 Years

 

 

0.41

 

 

556,750

 

 

 

0.45

 

0.54-0.60

 

 

2,475,004

 

1.87 Years

 

 

0.58

 

 

2,469,454

 

 

 

0.59

 

0.61-0.80

 

 

785,000

 

1.13 Years

 

 

0.70

 

 

785,000

 

 

 

0.69

 

 

 

 

11,604,404

 

 

 

$

0.27

 

 

9,691,237

 

 

$

0.30

 


NOTE 13 - DISCONTINUED OPERATIONS


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

 

The aggregate sales price consisted of the following:

 

Common stock issued to purchaser

 

$

80,000

 

Net book value of disposed subsidiary

 

 

(2,746,236

)

 

 

$

(2,666,236

)


47



IceWEB, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years ended September 30, 2010 and 2009


NOTE 13 - DISCONTINUED OPERATIONS (continued)


The following table summarizes the estimated fair values of IceWeb Virginia’s assets and liabilities disposed of at the date of the sale:

 

Intangible assets, net

 

$

(53,565

)

IceWEB, Inc. common stock

 

 

(80,000

)

Accounts payable and accrued liabilities

 

 

2,799,801

 

Estimated gain on the sale

 

$

2,666,236

 


IceWEB Virginia, Inc. operated as a value-added reseller of primarily IT security products to the Federal government.  The results of operations of discontinued operations were as follows:


Results from discontinued operations were as follows:


 

 

Fiscal Year Ended
September 30,

 

 

 

2010

 

2009

 

Sales

 

$

 

$

1,694,322

 

Cost of sales

 

 

 

 

1,348,307

 

Operating Expenses:

 

 

 

 

 

 

 

Sales and marketing

 

 

 

 

163,694

 

Depreciation and amortization

 

 

 

 

45,913

 

Subtotal

 

 

 

 

209,607

 

Income from discontinued operations

 

 

 

 

136,408

 

Interest expense related to discontinued operations

 

 

 

 

(205,940

)

Gain from sale of discontinued operations

 

 

 

 

2,666,236

 

Total Gain from discontinued operations

 

$

 

$

2,596,704

 


During the fiscal second quarter of 2009 we sold our wholly owned subsidiary, Iceweb Virginia, Inc. to an unrelated third party.


For 2009 we earned revenues in discontinued operations of $1,694,322.  We had no comparable discontinued operations in fiscal 2010.


Total operating expenses of discontinued operations in fiscal 2009 amounted to $209,607, and consisted of primarily sales and marketing expenses associated with IceWEB Virginia, Inc. and the amortization of the GSA schedule through the date of sale of the subsidiary.


Gain from sale of assets. During the fiscal year 2009 we recorded a gain of $2,666,236 on the sale of our IceWEB Virginia, Inc. subsidiary. We did not have a comparable transaction in fiscal 2010.


NOTE 14 - INVESTMENTS


(a) Summary of Investments


Marketable Equity Securities:


In November, 2009 we acquired 800,000 shares of VOIS Inc. common stock for $48,000. 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. Due to the illiquid nature of the VOIS Inc. common stock we applied a discount factor of 20% to the fair value of the marketable security.


As of September 30, 2010,  the Company’s investments in marketable equity securities are based on the September 30, 2010  stock price as reflected on the OTCBB stock exchange , reduced by a discount factor if those shares have selling restrictions.  These marketable equity securities are summarized as follows:


48



IceWEB, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years ended September 30, 2010 and 2009


NOTE 14 - INVESTMENTS (continued)


SEPTEMBER 30, 2010

 

Cost

 

Gross

Unrealized

Gains

 

Gross

Unrealized

Losses

 

Fair

Value

 

 

 

 

 

 

 

 

 

 

 

Publicly traded equity securities

 

$

48,000

 

$

476,800

 

$

 

$

524,800

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

48,000

 

$

476,800

 

$

 

$

524,800

 


The unrealized gains 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 Company’s investments:


 

 

Fiscal Year Ended

 

 

 

September30

 

 

 

2010

 

 

2009

 

 

 

 

 

 

 

 

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

 

$

476,800

 

 

$

 

 

 

 

 

 

 

 

 

 

Net gains on investments

 

$

476,800

 

 

$

 


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:


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.


Investment Measured at Fair Value on a Recurring Basis:


 

 

Fair Value Measurements Using:

 

  

 

Quoted Prices

in Active

Markets

(Level 1)

 

Significant

Other

Observable

Inputs

(Level 2)

 

Significant

Unobservable

Inputs

(Level 3)

 

  

 

 

 

 

 

 

 

Marketable Equity Securities , net of discount for effect of restriction

 

$

 

$

 

$

524,800

 


49



IceWEB, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years ended September 30, 2010 and 2009


NOTE 14 - INVESTMENTS (continued)


We categorize the securities as investments in marketable securities available for sale.  These securities are quoted either on an exchange or inter-dealer quotation (pink sheet) system. The securities are restricted and cannot be readily resold by us absent a registration of those securities under the Securities Act of 1933 (the “Securities Act”) or the availabilities of an exemption from the registration requirements under the Securities Act.  As these securities are often restricted, we are unable to liquidate them until the restriction is removed.  Unrealized gains or losses on marketable securities available for sale are recognized as an element of comprehensive income based on changes in the fair value of the security.  Once liquidated, realized gains or losses on the sale of marketable securities available for sale are reflected in our net income for the period in which the security was liquidated.


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, 2010 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, 2010 or for the year ended September 30, 2009.


The Company has evaluated its publicly traded equity securities as of September 30, 2010, and has determined that there were no unrealized losses that indicate an other-than-temporary impairment. This determination was based on several factors, which include the length of time and extent to which fair value has been less than the cost basis and the financial condition and near-term prospects of the issuer, and the Company’s intent and ability to hold the publicly traded equity securities for a period of time sufficient to allow for any anticipated recovery in market value.

 

NOTE 15 - COMPREHENSIVE INCOME (LOSS)


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


Our other comprehensive income consists of unrealized gains on marketable securities available for sale of $476,800.


NOTE 16 - SEGMENT REPORTING


Although the Company has a number of operating divisions, separate segment data has not been presented as they meet the criteria for aggregation as permitted by ASC Topic 280, “Segment Reporting” (formerly Statement of Financial Accounting Standards (SFAS) No. 131, “Disclosures About Segments of an Enterprise and Related Information”).


Our chief operating decision-maker is considered to be our Chief Executive Officer (CEO). The CEO reviews financial information presented on a consolidated basis for purposes of making operating decisions and assessing financial performance. The financial information reviewed by the CEO is identical to the information presented in the accompanying consolidated statements of operations. Therefore, the Company has determined that it operates in a single operating segment, specifically, web communications services. For the periods ended September 30, 2010 and 2009 all material assets and revenues of the Company were in the United States.


50



IceWEB, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years ended September 30, 2010 and 2009


NOTE 17 - SUBSEQUENT EVENTS


Subsequent to September 30, 2010 we have issued 265,475 shares of our common stock valued at $60,000 to our employees in conjunction with their compensation.  In addition, subsequent to September 30, 2010 we issued 100,000 shares of our common stock to a consultant for services rendered, valued at $21,692.


We have evaluated events and transactions that occurred subsequent to September 30, 2010 through the date the financial instruments were issued, for potential recognition or disclosure in the accompanying financial statements.  Other than the disclosures shown, we did not identify any events or transactions that should be recognized or disclosed in the accompanying financial statements.


NOTE 18 - 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.


51



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 Chief Executive Officer and Chief 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 Chief Executive Officer and Chief Financial Officer concluded as of the evaluation date that our disclosure controls and procedures were effective such that the information relating to our company, required to be disclosed in our Securities and Exchange Commission reports (i) is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and (ii) is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.

 

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.


Management assessed our internal control over financial reporting as of September 30, 2010, the end of our fiscal year. Management based its assessment on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Management’s assessment included an evaluation of such elements as the design and operating effectiveness of key financial reporting controls, process documentation, accounting policies, and our overall control environment.


Based on its assessment, our management has concluded that our internal control over financial reporting was effective as of September 30, 2010 to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with generally accepted accounting principles. As described elsewhere herein, we have changed the presentation of discontinued operations in our 2009 financial statements in response to comments from the staff of the SEC.  As this change did not result in a restatement of our 2009 financial statements, our management concluded that the change in presentation was not a weakness in internal control over financial reporting based upon their assessment of our internal control over financial reporting for the year ended September 30, 2010.  


Changes in Internal Controls Over Financial Reporting

 

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 Registrant’s 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.


52



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

John R. Signorello

 

44

 

Chairman and Chief Executive Officer

Mark B. Lucky

 

52

 

Chief Financial Officer

Harold F. Compton (1)(2)

 

63

 

Director

Raymond H. Pirtle (2)

 

67

 

Director

Joseph L. Druzak (1)

 

56

 

Director

Jack Bush(1)

 

73

 

Director

Harry E. Soyster

  

73

  

Director


(1) Member of the Compensation Committee

(2) Member of the Audit Committee


John R. Signorello . Mr. Signorello has served as Chairman of the Board and CEO since March 2000. From 1991 until September 1997, Mr. Signorello served as the Chief Executive Officer of STMS -”Solutions That Make Sense” - a private technology company he founded that specialized in computer networks, systems integration and information technology. In 1996, STMS was ranked the 17th fastest growing technology company in America by The National Technology Council’s “The Fast Five Hundred”. In September 1997, they were acquired by Steelcloud (Nasdaq: SCLD), and Mr. Signorello remained as Vice President of Sales and Marketing until November 1998.  Mr. Signorello is an accomplished musician, and serves as a principal in New York City Lights Entertainment. Mr. Signorello received a B.B.A. in Marketing from Radford University in 1989.


We believe that as a result of his years of managerial and operational experience, Mr. Signorello brings to the board of directors a demonstrated management ability at senior levels. In addition, his experience with a variety of technology companies brings valuable insight to his role as CEO and to our board of directors. These experiences, qualifications and attributes have led to our conclusion that Mr. Signorello 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. Since October 30, 2010 he has also served as a member of the Board of Directors of VOIS Inc. (OTCBB: 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 IceWEB, 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.


Harold F. Compton. Mr. Compton has been a member of our Board of Directors since May 2005. 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.


53



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.

 

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.


Joseph L. Druzak. Mr. Druzak has been a member of our Board of Directors since June 2005.  Since 1985 Mr. Druzak has served President and CEO of Kreher Steel Company, LLC., a large, privately-held specialty steel distribution company serving such diverse markets as automotive, rail, construction, oil and gas, aerospace and defense.


With his years of managerial and operational experience, Mr. Druzak brings to the board of directors demonstrated management ability at senior levels and his insight and direction will assist the company in achieving its objectives. We believe that these experiences, qualifications and attributes have led to our conclusion that Mr. Druzak 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. Bush’s 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.


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


54



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 SEC 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.


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.  Since 2009 the Board has been developing a nominating and approval process and policy to guide the handling of potential recommendations of board candidates. 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 firm’s 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 committee’s 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.


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.


55



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 Board’s 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, Druzak and Bush 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.

 

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.


56



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, 2010 and Forms 5 and amendments thereto furnished to us with respect to the fiscal year ended September 30, 2010, 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, 2010, except as set forth below:

 

 

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

 

Mr. Druzak failed to file 1 reports covering 1 transaction, and

 

Mr. Lucky failed to file 1 reports covering 1 transaction.


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, 2010. 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 2010 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)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

John  Signorello (1)

 

2010

 

 

239,559

 

 

 

430,000

 

 

 

 

 

8,914

 

 

678,476

 

 

 

2009

 

 

145,230

 

 

 

392,789

 

 

 

 

 

 

8,174

 

 

556,342

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mark B. Lucky (2)

 

2010

 

 

201,424

 

 

 

197,800

 

 

 

 

 

 

8,923

 

 

408,147

 

 

 

2009

 

 

147,500

 

 

 

176,148

 

 

 

 

 

 

7,403

 

 

331,051

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


(1)        Mr. Signorello is our Chief Executive Officer. All other compensation in fiscal 2010 includes $8,914 which represents the value of health insurance premiums we pay for Mr. Signorello.  In fiscal 2010, we granted him 5,000,000 shares of our restricted common stock, valued at $430,000.  All other compensation in fiscal 2009 includes $8,174 which represents the value of health insurance premiums we pay for Mr. Signorello.  In fiscal 2009, we granted him 8,147,222 shares of our restricted common stock, valued at $392,789.  The compensation for Mr. Signorello in fiscal 2009 included $26,500 in salary that had been accrued and not yet paid.  The compensation table above excludes the compensation provided to Mr. Signorello as a member of the Board of Directors.


(2)        Mr. Lucky is our Chief Financial Officer. All other compensation in fiscal 2010 and 2009 represents the value of health insurance premiums we pay for Mr. Lucky. In fiscal 2010, we granted him 2,300,000 shares of our restricted common stock, valued at $197,800.  In fiscal 2009, we granted him 3,100,606 shares of our restricted common stock, valued at $176,148.  The compensation for Mr. Lucky in fiscal 2009 included $40,000 in salary that had been accrued and not yet paid.


57



  

How Mr. Signorello’s compensation is determined


Mr. Signorello, who has served as our CEO since March 2000, is not a party to an employment agreement with our company. His compensation is determined by the Compensation Committee of our Board of Directors. The Compensation Committee considered a number of factors in determining Mr. Signorello’s compensation including the scope of his duties and responsibilities to our company and the time he devotes to our business. The Compensation Committee did not consult with any experts or other third parties in fixing the amount of Mr. Signorello’s compensation. During fiscal 2010 Mr. Signorello’s compensation package included a base salary of $250,000 and company provided health care benefits.  Mr. Signorello’s compensation excludes option grants he received as a member of the Board of Directors.


How Mr. Lucky’s compensation is determined


Mr. Lucky, who has served as our CFO since March 2007, is not a party to an employment agreement with our company. His compensation is determined by the Compensation Committee of our Board of Directors. The Compensation Committee considered a number of factors in determining Mr. Lucky’s compensation including the scope of his duties and responsibilities to our company and the time he devotes to our business. The Compensation Committee did not consult with any experts or other third parties in fixing the amount of Mr. Lucky’s compensation. During fiscal 2010 Mr. Lucky’s compensation package included a base salary of $200,000 and company provided health care benefits. Mr. Lucky did not receive any stock option grants during this fiscal year.  The amount of compensation payable to Mr. Lucky can be increased at any time upon the determination of the Compensation Committee of our Board of Directors.


Director Compensation


We have not established standard compensation arrangements for our directors and the compensation payable to each individual for their service on our Board is determined from time to time by our Board of Directors based upon the amount of time expended by each of the directors on our behalf. The following table provides information concerning the compensation of our directors for their services as members of our Board of Directors for the fiscal year ended September 30, 2010.

 

Name

 

Fees

Earned

or Paid

in Cash

($)

 

 

Stock

Awards

($)

 

 

Option

Awards

($)

 

 

Non-Equity

Incentive

Plan

Compensation

($)

 

 

Non-Qualified

Deferred

Compensation

Earnings

($)

 

 

All Other

Compensation

($)

 

 

Total

($)

 

Harold Compton

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Jack Bush

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

John R. Signorello

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Raymond Pirtle

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Harry E. Soyster

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Joseph Druzak

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


Outstanding Equity Awards at Fiscal Year-End


The following table provides information concerning unexercised options, stock that has not vested and equity incentive plan awards for each named executive officer outstanding as of September 30, 2010:


58



OUTSTANDING EQUITY AWARDS AT FISCAL YEAR END

 

 

 

OPTION AWARDS

 

STOCK AWARDS

Name

(a)

 

Number of

Securities

Underlying

Unexercised

Options

(#)

Exercisable

(b)

 

Number of

Securities

Underlying

Unexercised

Options

(#)

Unexercisable

(c)

 

Equity

Incentive

Plan

Awards:

Number of

Securities

Underlying

Unexercised

Unearned

Options

(#)

(d)

 

Option

Exercise

Price

($)

(e)

 

Option

Expiration

Date

(f)

 

Number

of

Shares

or

Units

of

Stock

That

Have

Not

Vested

(#)

(g)

 

Market

Value

of

Shares

or

Units

of

Stock

That

Have

Not

Vested

($)

(h)

 

Equity

Incentive

Plan

Awards:

Number

of

Unearned

Shares,

Units or

Other

Rights

That

Have Not

Vested

(#)

(i)

 

Equity

Incentive

Plan

Awards:

Market

or Payout

Value of

Unearned

Shares,

Units or

Other

Rights

That

Have Not

Vested

(#)

(j)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

John R. Signorello

 

100,000

 

 

 

 

$

0.70

 

04/29/2012

 

 

 

 

 

 

 

 

 

 

500,000

 

 

 

 

$

0.58

 

05/06/2015

 

 

 

 

 

 

 

 

 

 

250,000

 

 

 

 

$

0.60

 

09/06/2012

 

 

 

 

 

 

 

 

 

 

250,000

 

 

 

 

$

0.10

 

03/09/2014

 

 

 

 

 

 

 

 

 

 

50,000

 

 

 

 

$

0.47

 

09/06/2011

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mark Lucky

 

100,000

 

 

 

 

$

0.58

 

05/06/2012

 

 

 

 

 

 

 

 

 

 

150,000

 

 

 

 

$

0.55

 

06/14/2012

 

 

 

 

 

 

 

 

 

 

150,000

 

 

 

 

$

0.60

 

09/06/2012

 

 

 

 

 

 

 

 

 

 

29,167

 

20,833

 

 

 

$

0.001

 

03/18/2013

 

 

 

 

 

 

 

 


STOCK OPTION PLAN


In August 2000, our Board of Directors adopted our 2000 Management and Director Equity Incentive and Compensation Plan (the “Plan”). The Plan was approved by our stockholders in August 2001. As amended in May 2006, June, 2007, February, 2010, and October, 2010, we have reserved an aggregate of 60,000,000 shares of common stock for issuance under the Plan. At November 30, 2010 we have granted options to purchase 10,944,108 shares of our common stock under the Plan. Our Board of Directors (or at their discretion a committee of our Board members) administers the Plan including, without limitation, the selection of recipients of awards under the Plan, the granting of stock options, restricted shares or performance shares, the determination of the terms and conditions of any such awards, the interpretation of the Plan and any other action they deem appropriate in connection with the administration of the Plan.


The purpose of the Plan is to advance our interests and those of our stockholders by providing a means of attracting and retaining key employees, directors and consultants. In order to serve this purpose, we believe the Plan encourages and enables key employees, directors and consultants to participate in our future prosperity and growth by providing them with incentives and compensation based on our 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 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 recipient’s continued employment (“restricted shares”). Plan options may either be options qualifying as incentive stock options under Section 422 of the Internal Revenue Code of 1986, as amended or options that do not so qualify. Any incentive stock option granted under our 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 our officers or other key employees are eligible to receive incentive stock options and performance share grants. Any non-qualified stock option granted under our 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.


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The term of each Plan option and the manner in which it may be exercised is determined by the Board of Directors, provided that no Plan option may be exercisable more than three years after the date of its grant and, in the case of an incentive option granted to an eligible employee owning more than 10% of 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 our common stock having a fair market value on the date of delivery equal to the exercise price, or

 

surrender of shares of our 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.  


All Plan options are nonassignable and nontransferable, except by will or by the laws of descent and distribution and, during the lifetime of the optionee, may be exercised only by such optionee. At the discretion of the Board of Directors, it may approve the irrevocable transfer, without payment, of non-qualified options to the option holder’s spouse, children, grandchildren, nieces or nephews, or to the trustee of a trust for the principal benefit of one or more such persons, or to a partnership whose partners are one or more of such persons. If an optionee’s employment is terminated for any reason, other than due to his or her death, disability or termination for cause, or if an optionee is not our employee but is a member of our Board of Directors and his or her service as a director is terminated for any reason, other than due to his or her death or disability, the Plan option granted may be exercised on the earlier of the expiration date or 90 days following the date of termination. If the optionee dies during the term of his or her employment, the Plan option granted to him or her shall lapse to the extent unexercised on the earlier of the expiration date of the Plan option or the date one year following the date of the optionee’s death. If the optionee’s employment, membership on the Board of Directors or engagement as a consultant terminates by reason of the optionee’s retirement, then the Plan option granted may be exercised until the earlier of 90 days following the date of termination or the expiration date. If the optionee is permanently and totally disabled within the meaning of Section 22(c)(3) of the Internal Revenue Code, the Plan option granted to him or her lapses to the extent unexercised on the earlier of the expiration date of the option or one year following the date of such disability.


At the time of the restricted share grant, the Board of Directors may determine the vesting schedule of such shares and that after vesting, such shares may be further restricted as to transferability or be subject to repurchase by us or forfeiture upon the occurrence of certain events. Awards of restricted shares must be accepted by the participant within 30 days of the grant.


At the time of the award of performance shares, the Board of Directors shall establish a range of performance goals to be achieved during the performance period, including, without limitation, earnings, return on capital, or any performance goal approved by our stockholders in accordance with Section 162(m) of the Internal Revenue Code. Attainment of the highest performance goal for the performance period will earn 100% of the performance shares awarded for the performance period; failure to attain the lowest performance goal will result in the participant earning no performance shares. Attainment of the performance goals will be calculated from our financial statements, excluding changes in federal income tax rates and the effect of non-recurring and extraordinary items. The performance goals may vary for different performance periods and need not be the same for each participant receiving an award during a performance period.


If the participant’s employment by us, membership on our Board of Directors, or engagement by us as a consultant is terminated before the end of any performance period, or upon the participant’s death, retirement or disability, the Board of Directors, taking into consideration the performance of such participant and our performance over the performance period, may authorize the issuance to the participant or his or her legal representative or designated beneficiary all or a portion of the performance shares which would have been issued to him or her had the participant’s employment, Board membership or consulting engagement continued to the end of the performance period. If the participant’s employment, Board membership or consulting engagement terminates before the end of the performance period for any other reason, all performance shares are forfeited.


Notwithstanding the foregoing, but subject to any stockholder approval or other requirements of Section 162(m) of the Internal Revenue Code, the Board of Directors in its discretion and as determined at the time of award of the performance shares, may provide the participant with the option of receiving cash in lieu of the performance shares in an amount determined at the time of award including, without limitation, by one or more of the following methods:


 

the fair market value of the number of shares subject to the performance shares agreement on the date of award, or

 

part or all of any increase in the fair market value since such date, or

 

part or all of any dividends paid or payable on the number of shares subject to the performance share agreement, or

 

any other amounts which in the Board’s sole discretion are reasonably related to the achievement of the applicable performance goals, or

 

any combination of the foregoing.


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The purchase price for restricted shares or performance shares granted under the Plan shall be set by the Board of Directors but may not be less than par value. Payment of the purchase price for the restricted shares or performance share may be made in either,


 

cash, or

 

by delivery of unrestricted shares of our common stock having a fair

 

market value on the date of such delivery equal to the total

 

purchase price, or

 

a combination of either of these methods.


The restricted stock awards, performance stock awards and stock options are subject to accelerated vesting in the event of our change of control. We may, at our option, terminate all unexercised stock options 30 days after a change in control and pay to the participant holding these unexercised options cash in an amount equal to the difference between fair market value and the exercise price of the stock option. If the fair market value is less than the exercise price, we may terminate the options without payment to the holder. The per share purchase price of shares subject to Plan options granted under the Plan or related to performance share awards or restricted share awards may be adjusted in the event of certain changes in our capitalization, but any such adjustment shall not change the total purchase price payable upon the exercise in full of such option or award. No participant in our Plan has any rights as a stockholder until the shares subject to the Plan options or stock awards have been duly issued and delivered to him or her.


We have an option to purchase any shares of our common stock which have been issued to Plan participants pursuant to restricted stock awards, performance stock awards or stock options if the participant ceases to be our employee, a member of our Board of Directors or a consultant to us for any reason. We must exercise our repurchase right at the time of termination. The purchase price for any shares we repurchase will be equal to the fair market value of the our total stockholders’ equity divided by the total outstanding shares of our common stock on the last day of that calendar month, calculated on a fully-diluted basis. If we exercise our repurchase right, we much close the transaction within 20 days from the termination date. At closing, we are entitled to delivery of a one-year promissory note as payment for the purchase price or, at our option, we may pay same in cash at closing.


We also have a right of first refusal to meet the offer if the holder of any shares of our common stock awarded or issued pursuant to our Plan desires to sell such shares to a third party.


The Board of Directors may amend, suspend or terminate our Plan at any time, except that no amendment shall be made which:

 

 

affects outstanding Plan options or any exercise right thereunder, or

 

extends the term of any Plan option beyond 10 years, or

 

extends the termination date of the Plan.


Unless the Plan shall be earlier suspended or terminated, the Plan shall terminate 10 years from the date of the Plan’s adoption by our stockholders. Any such termination of our Plan shall not affect the validity of any Plan options previously granted there under.


ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS


At December 22, 2010, there were 136,725,867 shares of our common stock issued and outstanding. Our common stock is the only outstanding class of our voting securities. The following table sets forth, as of December 22, 2010, information known to us relating to the beneficial ownership of these shares by:

 

 

each person who is the beneficial owner of more than 5% of the outstanding shares of common stock;

 

each director;

 

each executive officer; and

 

all executive officers and directors as a group.


Unless otherwise indicated, the address of each beneficial owner in the table set forth below is care of 22900 Shaw Road, Suite 111, Sterling, Virginia 20166.


We believe that all persons named in the table have sole voting and investment power with respect to all shares of beneficially owned by them. Under securities laws, a person is considered to be the beneficial owner of securities he owns and that can be acquired by him within 60 days from December 22, 2010 upon the exercise of options, warrants, convertible securities or other understandings. We determine a beneficial owner’s percentage ownership by assuming that options, warrants or convertible securities that are held by him, but not those held by any other person and which are exercisable within 60 days of December 15, 2010, have been exercised or converted. Unless otherwise noted, the address of each of these principal stockholders is our principal executive offices.


61



Name of Beneficial Owner

 

Amount and

Nature of

Beneficial

Ownership

 

Percentage

of Class

 

 

 

 

 

 

 

John R. Signorello (1)

 

 

16,384,785

 

 

11.88

%

Hal Compton (2)

 

 

2,231,833

 

 

1.62

%

Raymond H. Pirtle (3)

 

 

428,167

 

 

0.31

%

Joseph L. Druzak (4)

 

 

1,645,293

 

 

1.20

%

Mark B. Lucky (5)

 

 

5,729,167

 

 

4.18

%

Ed Soyster (6)

 

 

57,750

 

 

0.04

%

Jack Bush (7)

 

 

1,678,167

 

 

1.22

%

 

 

 

 

 

 

 

 

All executive officers and as a group (seven persons)

 

 

24,816,918

 

 

20.46

%


(1) The number of shares beneficially owned by Mr. Signorello includes options to purchase 50,000 shares of our common stock at an exercise price of $0.47 per share, options to purchase 100,000 shares of our common stock at an exercise price of $0.70 per share, options to purchase 500,000 shares of our common stock at an exercise price of $0.58 per share, options to purchase 250,000 shares of our common stock at an exercise price of $0.60 per share, and options to purchase 250,000 shares of our common stock at an exercise price of $0.10 per share.  The number of shares beneficially owned by Mr. Signorello excludes 626,667 shares of our common stock issuable upon the conversion of 626,667 shares of Series B Convertible Preferred Stock.  Under the designations, rights and preferences of such security, the Series B Convertible Preferred Stock is not convertible by the holder if such conversion would result in the holder becoming the beneficial owner of in excess of 4.99% of our common stock.  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 w ho are not our affiliates.


(2) The number of shares beneficially owned by Mr. Compton includes options to purchase 50,000 shares of our common stock at an exercise price of $0.47 per share, options to purchase 100,000 shares of our common stock at an exercise price of $0.70, options to purchase 150,000 shares of our common stock at an exercise price of $0.60 per share, options to purchase 206,833 shares of our common stock at an exercise price of $0.001 per share, and options to purchase 250,000 shares of our common stock at an exercise price of $0.10 per share.


(3) The number of shares beneficially owned by Mr. Pirtle includes options to purchase 50,000 shares of our common stock at an exercise price of $0.47 per share, options to purchase 100,000 shares of our common stock at an exercise price of $0.70 per share, options to purchase 150,000 shares of our common stock at an exercise price of $0.60 per share, and options to purchase 128,167 shares of our common stock at an exercise price of $0.001 per share.  


(4) The number of shares beneficially owned by Mr. Druzak includes options to purchase 50,000 shares of our common stock at an exercise price of $0.47 per share, options to purchase 100,000 shares of our common stock at an exercise price of $0.70 per share, options to purchase 150,000 shares of our common stock at an exercise price of $0.60 per share, and options to purchase 42,167 shares of our common stock at an exercise price of $0.001 per share.


(5) The number of shares beneficially owned by Mr. Lucky includes options to purchase 100,000 shares of our common stock at an exercise price of $0.58 per share, options to purchase 150,000 shares of our common stock at an exercise price of $0.55 per share, options to purchase 150,000 shares of our common stock at an exercise price of $0.60 per share, and options to purchase 29,167 shares of our common stock at an exercise price of $0.001 per share.

 

(6) The number of shares beneficially owned by Mr. Soyster includes options to purchase 24,750 shares of our common stock at an exercise price of $0.37 per share, and options to purchase 33,000 shares of our common stock at an exercise price of $0.001 per share.

 

(7) The number of shares beneficially owned by Mr. Bush includes options to purchase 50,000 shares of our common stock at an exercise price of $0.47 per share, options to purchase 100,000 shares of our common stock at an exercise price of $0.70 per share, options to purchase 150,000 shares of our common stock at an exercise price of $0.60 per share, options to purchase 128,167 shares of our common stock at an exercise price of $0.001 per share, and options to purchase 250,000 shares of our common stock at an exercise price of $0.10 per share.


62



Securities Authorized For Issuance Under Equity Compensation Plans


The following table sets forth securities authorized for issuance under equity compensation plans, including individual compensation arrangements, by us under our 2000 Management and Director Equity Incentive and Compensation Plan and any compensation plans not previously approved by our stockholders as of September 30, 2010.


 

 

Number of

securities to be

issued upon

exercise of

outstanding

options,

warrants and

rights (a)

 

Weighted

average

exercise

price of

outstanding

options,

warrants and

rights (b

 

Number of

securities

remaining

available for

future issuance

under equity

compensation

plans (excluding

securities

reflected in

column (a)) (c)

 

Plan category

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Plans approved by our stockholders:

 

 

 

 

 

 

 

2000 Management and Director Equity Incentive and Compensation Plan

 

 

11,604,404

 

$

0.296

 

 

74,752

 

 

 

 

 

 

 

 

 

 

 

 

Plans not approved by stockholders:

 

 

 

 

 

 

 

 

 

 

None

 

 

0

 

 

n/a

 

 

n/a

 


A description of each of these plans is contained earlier in this report under Part III Item 10. Executive Compensation – Stock Option Plan.


ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE


From time to time we have borrowed operating funds from our Mr. John Signorello, our Chief Executive Officer, for working capital.  The advances were payable upon demand and were interest free.    During fiscal 2009 Mr. Signorello advanced $66,300 to us, and we repaid $66,300. The highest amount that we owed Mr. Signorello during fiscal 2009 was $25,000.  At each of the last three fiscal year ends, 2008, 2009, and 20010, the amount owed to Mr. Signorello was $0.  As of December 21, 2010, the amount owed to Mr. Signorello was $0.


On June 8, 2009 we sold 1,000,000 shares of common stock at a per share price of $0.04, valued at $40,000 to Jack Bush, a member of our Board of Directors. The fair market value of our common stock on the date of the transaction was $0.07 per share.  The shares were issued at a discount to the fair market value of our common stock of approximately 43% due to their restricted status, because we needed the cash, our access to capital was limited, and it was the price negotiated and agreed to by the buyer.


On August 10, 2009 we sold 1,000,000 shares of common stock at a per share price of $0.04, valued at $40,000 to Joseph Druzak, a member of our Board of Directors. The fair market value of our common stock on the date of the transaction was $0.10 per share.  The shares were issued at a discount to the fair market value of our common stock of approximately 60% due to their restricted status, because we needed the cash, our access to capital was limited, and it was the price negotiated and agreed to by the buyer.


During March, 2009, we sold 2,000,000 shares of common stock at a per share price of $0.042, valued at $83,000 to Florence Signorello, an accredited investor who is the mother of John Signorello, our chief executive officer. The fair market value of our common stock on the date of the transaction was $0.145 per share. As of June 30, 2010 we had not received the proceeds from the investor and as a result we recorded the subscription receivable as a contra equity account on our balance sheet.

 

During November, 2009, we sold 1,000,000 shares of common stock, valued at $130,000 to Hal Compton, a member of our Board of Director for $40,000, and recognized stock based compensation expense of $90,000.  The shares were issued at a discount to the fair market value of our common stock of approximately 69% due to their restricted status, because we needed the cash, our access to capital was limited, and it was the price negotiated and agreed to by the buyer.


63



We and certain of our affiliates have entered into a series of transactions involving VOIS Inc. (OTCBB: VOIS), a public company which had developed and launched a social commerce website.  On November 3, 2009 we purchased 160,000,000 shares of the common stock of VOIS Inc., which represented approximately 16% of that company, for $48,000 in a private transaction exempt from registration under the Securities Act of 1933 in reliance on an exemption provided by Section 4(2) of that act resulting in gross proceeds to us of $48,000. At the time of our investment, Mr. Mark Lucky, our Chief Financial Officer, was a member of VOIS’ board of directors, having been elected in October 2009.  In exchange for this strategic interest, VOIS received non-exclusive access to distribute IceMAIL, IcePORTAL and IceSECURE to their existing and prospective new user base, and our cloud storage network.  Mr. Lucky resigned his positions with VOIS in September 2010.  As of the date hereof, VOIS has not integrated this access within its business and we have had no subsequent business relationship with it, other than as set forth herein.


Prior to our investment in VOIS, both Messrs. John R. Signorello and Robert Druzak had personal relationships with the founders of VOIS.  In an unrelated transaction in November 2009 Mr. Signorello, a member of our board of directors and our CEO, purchased 225,000,000 shares of VOIS’ common stock from a former officer and director of VOIS for nominal consideration in a private transaction.  The shares of common stock purchased by Mr. Signorello represented approximately 27% of VOIS’ outstanding common stock purchase of the shares by us.  Thereafter, in an unrelated transaction in January 2010 Mr. Druzak purchased 225,000,000 shares of VOIS’ common stock from a former officer and director of VOIS for nominal consideration in a private transaction.  The shares of common stock purchased by Mr. Druzak represented approximately 22% of VOIS’ outstanding common stock.  Immediately following the closing of this transaction Mr. Druzak was appointed to VOIS’ board of directors and named President and Chief Executive Officer of VOIS.  Mr. Druzak, the brother of Joseph Druzak, a member of our board, was formerly a vice president of our company from March 2005 to January, 2010, but was not considered an executive officer of our company.  Mr. Robert Druzak resigned his positions with VOIS in March 2010.


Director Independence


Messrs. Compton, Pirtle, Druzak, Soyster, and Bush, members of our Board of Directors, are “independent” within the meaning of Rule 5605 of the NASDAQ Marketplace Rules.


ITEM 14.  PRINCIPAL ACCOUNTANT FEES AND SERVICES


AUDIT FEES


The aggregate fees billed for professional services rendered by our principal accountant for the audit of our annual financial statements, review of our financial statements included in our quarterly reports and other fees that are normally provided by our accountant in connection with our audits and reviews for the fiscal Years ended September 30, 2010 and 2009 is $66,000 and $61,500, respectively.


AUDIT-RELATED FEES


This category consists of assurance and related services by the independent auditors that are reasonably related to the performance of the audit or review of our financial statements and are not reported above under “Audit Fees.” The services for the fees disclosed under this category include consultation regarding our correspondence with the SEC and other accounting consulting. Our audit-related and review fees for the fiscal Years ended September 30, 2010 and 2009 were $0 and $0.


TAX FEES


The aggregate fees billed for professional services rendered by our principal accountant for tax compliance, tax advices and tax planning for the fiscal Years ended September 30, 2010 and 2009 is $0 and $0, respectively.


ALL OTHER FEES


There were no other fees billed by our principal accountant for the fiscal Years ended September 30, 2010 and 2009, except as provided above.


Our Board of Directors has adopted a procedure for pre-approval of all fees charged by our independent auditors. Under the procedure, the Board approves the engagement letter with respect to audit, tax and review services. Other fees are subject to pre-approval by the Board, or, in the period between meetings, by a designated member of Board. Any such approval by the designated member is disclosed to the entire Board at the next meeting. The audit and tax fees paid to the auditors with respect to fiscal year 2010 were pre-approved by the entire Board of Directors.


64



PART IV


ITEM 15.  EXHIBITS


2.1

Agreement and Plan of Reorganization and Stock Purchase Agreement with Disease S.I. Inc.(4)

2.2

Agreement and Plan of Merger with IceWEB Communications, Inc. (8)

2.3

Agreement and Plan of Merger with Seven Corporation (9)

3.1

Certificate of Incorporation (1)

3.2

Certificate of Amendment to Certificate of Incorporation (1)

3.3

Certificate of Amendment to Certificate of Incorporation (1)

3.4

Certificate of Amendment to Certificate of Incorporation (1)

3.5

Certificate of Amendment to Certificate of Incorporation (2)

3.6

Certificate of Amendment to Certificate of Incorporation (3)

3.7

Certificate of Amendment to Certificate of Incorporation (11)

3.8

Certificate of Designations of Series A Convertible Preferred Stock (12)

3.9

Certificate of Amendment to Certificate of Incorporation (13)

3.10

Bylaws (1)

3.11

Certificate of Designations of Series B Convertible Preferred Stock (17)

4.1

Form of Common Stock Purchase Warrant “A” (12)

4.2

Form of Common Stock Purchase Warrant “B” (12)

4.3

Form of Common Stock Purchase Warrant “C” (12)

4.4

Form of Series H Common Stock Purchase Warrant (16)

4.5

Form of Series I Common Stock Purchase Warrant (16)

4.6

Form of $0.70 Common Stock Purchase Warrant “A” (16)

4.7

Form of Comerica Bank warrant (16)

4.8

Form of Common Stock Purchase Warrant “D” (17)

4.9

Form of Common Stock Purchase Warrant “E” (17)

4.10

Form of Common Stock Purchase Warrant “F” (17)

4.11

Form of Common Stock Purchase Warrant “G” (18)

4.12

Form of Common Stock Purchase Warrant for Sand Hill Finance LLC (18)

4.13

Secured Convertible Debenture for Sand Hill Finance LLC (25)

4.14

Warrant Amendment Agreement with Sand Hill Finance LLC (25)

10.1

Acquisition Agreement with North Orlando Sports Promotions, Inc. (1)

10.2

Asset Purchase Agreement with Raymond J. Hotaling (5)

10.3

2000 Management and Director Equity Incentive and Compensation Plan (6)

10.4

Stock Purchase Agreement with Health Span Sciences, Inc. (7)

10.4

Stock Purchase Agreement with Health Span Sciences, Inc. (7)

10.5

Stock Purchase and Exchange Agreement with Interlan Communications (9)

10.6

Preferred Stock Purchase Agreement dated March 30, 2005 (12)

10.7

Registration Rights Agreement with Barron Partners LP (12)

10.8

Asset and Stock Purchase Agreement for iPlicity, Inc.(16)

10.9

Asset and Stock Purchase Agreement for DevElements, Inc. of Virginia (15)

10.10

Form of Loan and Security Agreement with Comerica Bank (16)

10.11

Forbearance Agreement (16)

10.12

Sublease Agreement for principal executive offices (16)

10.13

Preferred Stock Purchase Agreement dated September 8, 2005 (18)

10.14

Registration Rights Agreement with Barron Partners LP (18)

10.15

Financing Agreement with Sand Hill Finance LLC (18)

10.16

Lease Agreement for principal executive offices (19)

10.17

Retailer Marketing Agreement with CompUSA (20)

10.18

Stock Purchase Agreement with Inline Corporation (21)

10.19

First Amendment to Stock Purchase Agreement with Inline Corporation (21)

10.20

Convertible Debenture with Sand Hill Finance LLC (22)

10.21

Stock Purchase Agreement for Sale of IceWEB Virginia, Inc. (23)

10.22

Series C Preferred Stock Purchase Agreement (24)

14.1

Code of Business Conduct and Ethics (16)

21.1

Subsidiaries of the registrant (16)

23.1

Consent of Sherb & Co., LLP * *


65



31.1

Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer *

31.2

Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer *

32.1

Section 906 Certification of Chief Executive Officer *

32.2

Section 906 Certification of Chief Financial Officer *


* filed herewith

** previously filed


(1)

Incorporated by reference to the Form 10-SB, file number 000-27865, filed with on October 28, 1999, as amended.

(2)

Incorporated by reference to the definitive Information Statement on   Schedule 14C as filed on June 18, 2001.

(3)

Incorporated by reference to the definitive Information Statement on   Schedule 14C as filed on June 26, 2001.

(4)

Incorporated by reference to the Report on Form 8-K as filed on June 6, 2001.

(5)

Incorporated by reference to the Report on Form 8-K as filed on July 26, 2001.

(6)

Incorporated by reference to the definitive Information Statement on Schedule 14C as filed on July 23, 2001.

(7)

Incorporated by reference to the Report on Form 8-K as filed on December 4, 2001.

(8)

Incorporated by reference to the Report on Form 8-K as filed on April 4, 2002.

(9)

Incorporated by reference to the Report on Form 8-K as filed on August 1, 2003.

(10)

Incorporated by reference to the Report on Form 8-K/A as filed on February 20, 2004.

(11)

Incorporated by reference to the definitive Information Statement on Schedule 14C as filed on August 20, 2004.

(12)

Incorporated by reference to the Report on Form 8-K as filed on April 5, 2005.

(13)

Incorporated by reference to the definitive Information Statement on Schedule14C as filed on April 4, 2005.

(14)

Incorporated by reference to Amendment No. 1 to the Report on Form 8-K/A as filed on February 20, 2004.

(15)

Incorporated by reference to the Report on Form 8-K as filed on July 23, 2004.

(16)

Incorporated by reference to the registration statement on Form SB-2, SEC file number 333-126898, as amended.

(17)

Incorporated by reference to our Annual Report on Form 10-KSB as filed on January 18, 2006.

(18)

Incorporated by reference to the Report on Form 8-K as filed on January 30, 2006.

(19)

Incorporated by reference to the registration statement on Form SB-2/A, SEC file number 333-126898 filed on January 30. 2006.

(20)

Incorporated by reference to the Report on Form 8-K as filed on June 22, 2006.

(21)

Incorporated by reference to the Report on Form 8-K as filed on January 3, 2009.

(22)

Incorporated by reference to the Report on Form 8-K as filed on December 1, 2009.

(23)

Incorporated by reference to the Report on Form 8-K as filed on April 15, 2010.

(24)

Incorporated by reference to the Report on Form 8-K as filed on July 31, 2010.

(25)

Incorporated by reference to the registration statement on Form S-1, SEC file number 333-167501, as amended.


66



SIGNATURES


Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant had duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


 

ICEWEB, INC.

 

 

 

January 26, 2011

By:

/s/ John R. Signorello

  

John R. Signorello, Chairman and Chief Executive Officer,
principal executive officer


Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

 

Signature

 

Title

 

Date

 

 

 

 

 

/s/ John R. Signorello

 

Chairman of the Board and CEO, principal

 

January 26, 2011

John R. Signorello

 

executive officer

 

 

 

 

 

 

 

/s/ Mark B. Lucky

 

Chief Financial Officer, principal financial

 

January 26, 2011

Mark B. Lucky

 

and accounting officer

 

 

 

 

 

 

 

/s/ Hal Compton

 

Director

 

January 26, 2011

Hal Compton

 

 

 

 

 

 

 

 

 

/s/ Raymond H. Pirtle, Jr.

 

Director

 

January 26, 2011

Raymond H. Pirtle, Jr.

 

 

 

 

 

 

 

 

 

/s/ Joseph Druzak

 

Director

 

January 26, 2011

Joseph Druzak

 

 

 

 

 

 

 

 

 

/s/ Jack Bush

 

Director

 

January 26, 2011

Jack Bush

 

 

 

 

 

 

 

 

 

/s/ Harry E. Soyster

 

Director

 

January 26, 2011

Harry E. Soyster

  

 

  

 


67