U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
(X} QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended JUNE 30, 2002
{ } TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________________________________
Commission File Number: 000-27865
DISEASE SCIENCES, INC.
(Exact name of small business issuer as specified in its charter)
Delaware 65-1095431
(State or other jurisdiction of (IRS Employer
Incorporation or organization) Identification No.)
620 Herndon Parkway, Suite 360, Herndon, VA 20170
(Address of Principal executive offices)
Issuer's telephone number, including area code: (703) 563-6565
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15 (d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.) YES X NO_____
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 29,437,878 issued and
outstanding at June 30, 2002.
DISEASE SCIENCES, INC.
TO BE RENAMED ICEWEB COMMUNICATIONS, INC.
QUARTERLY REPORT ON FORM 10-QSB FOR THE PERIOD ENDED
JUNE 30, 2002
TABLE OF CONTENTS
Page No.
PART I FINANCIAL INFORMATION
Item 1 Financial Statements
Unaudited Condensed Balance Sheet at JUNE 30, 2002............. 3
Unaudited Condensed Statements of Operations for the
three months and six months ended June 30, 2002 and 2001....... 4
Unaudited Condensed Statements of Cash Flows for the
six months ended June 30, 2002 and 2001........................ 5
Notes to Unaudited Condensed Financial Statements.............. 6-14
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations ........................... 14-22
PART II OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K .............................. 23
Exhibit Index ................................................. 23
Signatures .................................................... 23
2
Item 1. Financial Statements
DISEASE SCIENCES, INC.
TO BE RENAMED ICEWEB COMMUNICATIONS, INC.
June 30, 2002
CONDENSED BALANCE SHEET
(UNAUDITED)
ASSETS
Current assets:
Cash .......................................................... $ 8,373
Accounts receivable ........................................... 8,888
-----------
Total current assets ........................................ 17,261
-----------
Property and equipment, net ..................................... 175,608
Deposits ........................................................ 9,532
Due from related parties ........................................ 73,435
-----------
Total assets .................................................... 275,836
===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities
Accounts payable .............................................. $ 219,141
Accrued expenses .............................................. 53,546
Line of credit ................................................ 403,015
Notes payable ................................................. 257,000
-----------
Total current liabilities ................................... 932,702
-----------
Stockholders' deficit:
Common stock, $.001 par value; 100,000,000
shares authorized, 29,437,878 issued ........................ 29,438
Additional paid in capital .................................... 1,545,113
Accumulated deficit ........................................... (2,231,417)
-----------
Total stockholders' deficit ................................. (656,866)
-----------
Total liabilities and stockholders' deficit ..................... 275,836
===========
See notes to condensed financial statements
3
DISEASE SCIENCES, INC.
TO BE RENAMED ICEWEB COMMUNICATIONS, INC.
CONDENSED STATEMENT OF OPERATIONS
THREE AND NINE MONTHS ENDED JUNE 30, 2002 AND 2001
(UNAUDITED)
Three Months Ended Nine Months Ended
June 30 June 30
2002 2001 2002 2001
------------ ------------ ------------ ------------
Revenues ........... $ 30,494 $ 54,810 $ 171,665 $ 55,299
Cost of Sales ...... 14,313 47,612 63,611 55,715
------------ ------------ ------------ ------------
Gross Profit ....... 16,180 7,198 108,054 (416)
------------ ------------ ------------ ------------
Operating expenses:
Marketing & sales 72,283 26,273 188,134 63,118
Research &
development ...... 26,392 10,987 69,433 10,987
General &
Administrative ... 111,109 147,577 298,171 316,149
------------ ------------ ------------ ------------
Operating loss ..... (193,603) (177,638) (447,685) (390,669)
------------ ------------ ------------ ------------
Interest (income)
expense, net ....... 88 2,662 3,527 10,184
Loss on disposal of
assets ............. 0 0 2,117 0
Depreciation and
amortization ....... 24,640 31,635 74,052 73,491
------------ ------------ ------------ ------------
Net loss ........... $ (218,330) $ (211,935) $ (527,382) $ (474,344)
============ ============ ============ ============
Basic loss per
common share ....... $ (.01) $ (.01) $ (.02) $ (.02)
============ ============ ============ ============
Weighted average
common shares
outstanding ........ 29,437,878 25,000,000 25,307,864 26,588,024
============ ============ ============ ============
See notes to condensed financial statements
4
DISEASE SCIENCES, INC.
TO BE RENAMED ICEWEB COMMUNICATIONS, INC.
CONDENSED STATEMENT OF CASH FLOWS
NINE MONTHS ENDED JUNE 30, 2002 AND 2001
(UNAUDITED)
2002 2001
--------- ---------
NET LOSS ......................................... $(527,382) $(474,344)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation & amortization ...................... 74,052 69,850
Loss on disposal of assets ....................... 4,910 -
Non-cash adjustments ............................. (2,020) -
Changes in assets and liabilities:
Increase in assets ............................. 80,091 114,255
Increase in liabilities ........................ 73,059 36,868
--------- ---------
NET CASH PROVIDED (USED) IN OPERATIONS ........... (297,290) (327,107)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of fixed assets ....................... (9,695) (228,524)
Proceeds from sale of fixed assets ............. 10,000 -
--------- ---------
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES . 305 (228,524)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Notes payable .................................. 257,000 11,639
Proceeds from related party .................... 34,014 (25,697)
Contributed capital ............................ (1,139) -
Proceeds from private offering ................. - 539,500
--------- ---------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES . 289,875 525,442
--------- ---------
NET INCREASE (DECREASE) IN CASH .................. (7,110) (30,189)
CASH, beginning of period ........................ 15,484 40,192
--------- ---------
CASH, end of period .............................. 8,373 10,002
========= =========
See notes to condensed financial statements
5
Disease Science, Inc.
To be renamed Iceweb Communications, Inc.
Notes to Condensed Financials Statements unaudited
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Financial Statements
The unaudited condensed consolidated financial statements have been prepared in
conformity with generally accepted accounting principles and include all
adjustments which are, in the opinion of management, necessary for a fair
presentation of the results for the interim periods presented. All such
adjustments are, in the opinion of management, of a normal recurring nature. The
accounting entries to record the merger with DSSC are included in the financial
statements for the second quarter of fiscal year 2002 (January 2002 through
March 2002). Additional information on the finances of Disease Sciences, Inc.
and the merger can be found in the Form 10-KSB filed May 16, 2002; the Form 8-K
filed April 4, 2002 and the Form 8-K/A filed June 16, 2002.
The results of operations for the three months and nine months ended are not
necessarily indicative of those for the full year. In the opinion of management,
the accompanying unaudited financial statements contain all adjustments
necessary to fairly present the financial position and the results of operations
for the periods indicated.
Certain information and footnote disclosures normally included in condensed
consolidated financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. It is suggested that these
condensed consolidated financial statements be read in conjunction with the
financial statements and notes thereto included in the Company's quarterly
report on Form 10-QSB for the quarter ended March 31, 2002. As stated above, the
Form 8-K and Form 8-K/A that contained information on the merger between Disease
Sciences, Inc. and Iceweb, Inc. should also be read.
On June 18, 2002, the Company filed a Form 8-K to change its fiscal year to
October 1 through September 30. The change took effect immediately so that the
current fiscal year is October 1, 2001 through September 30, 2002.
Organization
Disease Sciences, Inc., is a Delaware corporation which anticipates
changing its name to Iceweb Communications, Inc. in the near future.
On March 21, 2002, Disease Sciences, Inc. executed an Agreement and Plan of
Merger (DSSC Agreement) with Iceweb Communications, Inc., a Delaware Corporation
and its shareholders. Under the terms of the DSSC Agreement Iceweb was acquired
by and became a wholly owned subsidiary of DSSC. Pursuant to the DSSC Agreement,
each of the 22,720,500 share of common stock of ICEWEB issued and outstanding
immediately prior to the Merger were converted into the right to receive 1.07
shares of restricted common stock of DSSC, for an aggregate of 24,311,000 DSSC
6
Common Shares. The source of the approximately 24,311,000 DSSC Common Shares
being exchanged for approximately 22,720,500 Iceweb Common Shares is as follows:
5,600,000 DSSC Common Shares were returned to the DSSC Treasury following the
redemption of DSSC Common Shares; and approximately 18,711,000 additional DSSC
Common Shares were issued from the DSSC Treasury. DSSC redeemed 5,600,000 Common
Shares from Dr. Goldstein and Brian Johns in consideration for (a) forgiveness
of $10,000 promissory notes owing by each to DSSC; and (b) payment of $55,000 by
DSSC to each of Goldstein and John.
Each of the 5,441,000 warrants to purchase ICEWEB Common Shares issued and
outstanding immediately prior to the Merger but not exercised were converted
into the right to receive one warrant to purchase 1.07 Common Shares upon
exercise of said warrant.
The 6,980,000 warrants to purchase DSSC Common Shares remain issued and
outstanding. None of said warrants has been exercised.
Options to purchase ICEWEB Common Shares issued and outstanding immediately
prior to the Merger but not exercised shall be converted into the right to
receive one option to purchase 1.07 Common Shares upon exercise of said options.
Giving effect to the recapitalization, the exchanging Iceweb Shareholders will
be the DSSC Controlling Shareholder after the Merger. DSSC will have a total of
29,460,935 shares of Common Stock issued and outstanding. The significant
shareholders with 5% or more or the shares are John R. Signorello with 61.7% or
the shares and Michael VanPatten with 5.12% of the shares. The closing of the
agreement has resulted in a change in control of Disease Sciences, Inc.
Concurrent with the closing of the DSSC Agreement, the pre-merger Directors and
Officers of DSSC were replaced by the Directors and Officers of Iceweb.
Cash Equivalents
The Company considers all highly-liquid debt instruments with original
maturities of three months or less to be cash equivalents.
Property and Equipment
Property and equipment is recorded at cost and is depreciated using the
straight-line method over their estimated useful lives.
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect certain reported amounts and disclosures.
Accordingly, actual results could differ from those estimates.
Revenue Recognition
Generally, revenues from sales of products are recognized when products are
shipped unless the Company has obligations remaining under sales or
7
licensing agreements, in which case revenue is either deferred until all
obligations are satisfied or recognized ratably over the term of the contract.
The company uses the Percentage of Completion method to recognize revenue and
expense from contracts extending through fiscal quarters.
Intangible Assets
Trademarks were acquired in September 2000. They were recorded at cost and are
amortized using the straight-line method over 5 years. The Company continually
reviews its intangible assets to evaluate whether events or changes have
occurred that would suggest an impairment of carrying value. An impairment would
be recognized when expected future operating cash flows are lower than the
carrying value.
Advertising Costs
Advertising costs are included in selling expenses, and are expensed as
incurred.
Amortization of Goodwill
Goodwill represents the amount by which the purchase price of a business
acquired exceeds the fair market value of the net assets acquired under the
purchase method of accounting. The Company assesses whether its goodwill and
other intangible assets are impaired as required by SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets to be Disposed of," based on an
evaluation of undiscounted projected cash flows through the remaining
amortization period. If an impairment exists, the amount of such impairment is
calculated based on the estimated fair value of the asset. The Company
determined the goodwill associated with the acquisition of American Computer
Systems was impaired and the entire amount of goodwill, $257,081 and accumulated
amortization, $102,832 was written off in September 2001.
Recent Accounting Pronouncements
On June 29, 2001, the Financial Accounting Standards Board unanimously approved
the issuance of Statements of Financial Accounting Standards No. 141, Business
Combinations (Statement 141), and No. 142, Goodwill and Other Intangible Assets
(Statements 142). Statement 141 eliminates the pooling-of interests method of
accounting for business combinations except for qualifying business combinations
that were initiated prior to July 1, 2001. Statement 141 changes the criteria to
recognize intangible assets apart form goodwill. The requirements of Statement
141 are effective for any business combination accounted for by the purchase
method that is completed after June 30, 2001.
Under Statement 142, goodwill and indefinite lived intangible assets are no
longer amortized but are reviewed annually, or more frequently if impairment
indicators arise, for impairment. Identifiable intangible assets will continue
to be amortized over their estimated useful lives. Early adoption is permitted
for companies with fiscal years beginning after March 15, 2001, provided that
their first quarter financial statements have not been issued. The Company plans
to adopt Statement 142 beginning January 1, 2002. The adoption of Statement 142
is not expected to have a material impact on the Company's earnings or financial
position, since Goodwill was written down to $0 as of September 30, 2001.
8
NOTE 3 - PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
2002 2001
--------- ---------
Furniture and fixtures ..................... $ 21,593 $ 21,593
Computers and equipment .................... 177,962 166,740
Software ................................... 96,615 0
Automobiles ................................ 3,600 17,737
Intangibles ................................ 9,676 110,587
Leasehold improvements ..................... 3,000 13,925
Accumulated depreciation ................. (136,838) (45,741)
-------- -------
Property and equipment, net ................ 175,608 284,841
======== =======
NOTE 4 - OPERATING LEASES
The Company leased facilities in Chantilly, VA for office space and
developmental work through May 2001 at a cost of $2,250 per month. From June to
September 2001 the Company occupied the Learning Stream office space at Silver
Spring, MD; the rental expense was paid by Learning Stream, Inc. From September
15, 2001 through April 30, 2002 the Company had a sublease on space in Herndon,
VA at a cost of $5,000 per month. The Company has extended its lease at its
current location for 24 months starting May 1, 2002 at an average cost of $6,933
per month.
NOTE 5 - ACCOUNTS RECEIVABLE
Accounts receivable consist of normal trade receivables. The Company assesses
the collectibility of its accounts receivable regularly. Based on this
assessment, the Company wrote off approximately $8,711 in delinquent accounts
receivable and adjusted the allowance against accounts receivable to $500.
NOTE 6 - RELATED PARTIES
For the period ended June 30, 2002, the company held Notes Receivable from a
corporation related through common ownership and separately from a shareholder
of the Company. At June 30, 2002 and 2001, the Company had a note receivable
from a shareholder of $70,230 and $137,127. This advance is non-interest bearing
and due on demand. The company advanced a corporation related through common
ownership $3,204 and $4,242 at June 30, 2002 and 2001 respectively. The advance
is non-interest bearing and due on demand.
During the years ended September 30, 2001 and 2000 a shareholder of the
corporation contributed capital of $2,280 and $886,191, respectively to help
fund operations.
The Company has a note payable for $403,015 due to a shareholder of the Company.
The note is described more fully below under NOTES PAYABLE.
9
NOTE 7 - STOCK OFFERING
In July 2000, the Company commenced a stock offering under Regulation D. The
offering consisted of 10,000 units at $100 per unit, each unit contained 500
shares of common stock at a price of $0.20 per share. As of September 30, 2000,
no common stock had been issued, nor had any funds been received. As of
September 2001, approximately $539,500 was received and approximately 2,720,500
shares of common stock had been issued. Each share of common stock that was sold
was subsequently issued two warrants for each common share for a total of
5,441,000 warrants.
NOTE 8 - ACQUISITION
In June 2001, the Company executed an asset purchase agreement to purchase all
the assets of Learning Stream, Inc. which is in the same line of business as the
Company. The purchase price was $173,000, which approximates the fair value of
$72,000 of computer software and $101,000 of computer equipment acquired. The
acquisition was accounted for using the purchase method of accounting. The
results of operations are included in the financial statements from the date of
acquisition.
NOTE 9 - SHORT-TERM DEBT
The Company had a line of credit with Merrill Lynch Business Financial Services,
Inc. of up to $500,000. The interest rate charged was based on 30-day commercial
paper plus 2.4%. The interest rate was 5.07% and 8.96% as of September 30, 2001
and 2000 respectively. The line of credit was secured by the assets of the
Company, and is personally guaranteed by the majority shareholder. The line of
credit expired in January 2002 and was converted to a note payable to the
majority shareholder.
On May 23, 2001 Disease Sciences borrowed a total of $140,000 from two
unaffiliated third parties. The notes are unsecured, payable upon demand and
bear interest at 9% per year. In March 2002, payments totaling $50,000 reduced
the balance due to $90,000. The Company is no longer accruing interest on these
notes and will convert them to equity.
In March 2002, a shareholder made a double payment of $7,000 to the Company for
the ongoing private placement. The amount due the shareholder has been recorded
as a note payable.
In April 2002, the Company borrowed a total of $150,000 from an unaffiliated
third party. The note is unsecured and bears interest at 12.5% per year for the
first seven months and 18% thereafter.
In April 2002, the Company borrowed a total of $10,000 from an unaffiliated
third party. The note is unsecured and payable upon demand. The Company will
convert this note to equity.
NOTE 10 - PRIVATE PLACEMENT
Disease Sciences, Inc. completed a private placement of 4,700,000 Units (the
"Units)" in August of 2001. Each Unit consisted of one share of
10
common stock and four common stock purchase warrants designated Series A, Series
B, Series C and Series D common stock purchase warrants (collectively the
"Warrants"). The Series A Warrant included in each Unit entitles the holder to
purchase one share of common stock of the Company at a purchase price of $.30
per share. The Series B Warrant included in each Unit entitles the holder to
purchase one share of common stock of the Company at a purchase price of $.60
per share. The Series C Warrant included in each Unit entitles the holder to
purchase one share of common stock of the Company at a purchase price of $1.00
per share. The Series D Warrant included in each Unit entitles the holder to
purchase one share of common stock of the Company at the purchase price of $2.00
per share. The Warrants will expire on May 1, 2006. The Company may call any
Warrant series or all of the Warrants at a call price of $.001 per underlying
share should the Company's common stock trade at or above $5.00 per share, based
on the reported closing bid price of the common stock, for 10 consecutive
trading days following 15 days prior written notice of the Company's intention
to call the Warrants. In the event the Warrants or Warrant series subject to
call have not been exercised by written notice within such 15-day notice period,
the Warrants will cease to exist.
Disease Sciences, Inc. completed a second private placement of 1,822,500 units
as of March 31, 2002. Each Unit consists of one share of common stock and three
common stock purchase warrants designated Series E, Series F and Series G Common
Stock Purchase Warrants (collectively, the "Warrants"). Each Series E Warrant
entitles the holder to purchase one share of common stock at a purchase price of
$.75 per share. Each Series F Warrant entitles the holder to purchase one share
of common stock at a purchase price of $1.50 per share. Each Series G Warrant
entitles the holder to purchase one share of common stock at a purchase price of
$3.00 per share. The Warrants are immediately exercisable and will expire on
October 1, 2005. Upon 15 days written notice, the Company may call any Warrant
series or all of the Warrants at a call price of $.001 per underlying share
should the common stock trade at or above $5.00 per share for 10 consecutive
trading days prior to the date of such notice. The Company had sold 1,822,500
units as of March 21, 2002. The Company received a double payment from one
investor for $7,000 in March 2002; the amount has been recorded as a Note
Payable to the investor for $7,000.
NOTE 11 - Stock Options
During March 2002, the Company adopted the "Management and Director Equity
Incentive and Compensation Plan." The maximum number of shares authorized and
available under the plan is 10,000,000 shares. As of June 30, 2002, 3,175,000 of
the shares authorized under the plan have been issued. Under the terms of the
plan, the options expire after 5 years, as long as the employees remain employed
with the Company. The following is a summary of option activity for the nine
months ended June 30, 2002.
11
Options Options Outstanding
Available Weighted Average
For Grant Options Exercise Price
---------- ---------- --------------
Beginning balance ............. 10,000,000 - -
Granted DSSC .................. - 2,000,000
Granted ICEW .................. - 3,175,000 .20
Exercised DSSC ................ - (2,000,000) -
Cancelled ..................... - - -
Balance, June 30, 2002 ........ 4,825,000 3,175,000 .20
The employee option grants provide that the option will be canceled ninety days
after an employee leaves employment with the Company.
SFAS No. 123 "Accounting for Stock Based Compensation" ("SFAS 123"), requires
the Company to disclose pro forma information regarding option grants made to
its employees. SFAS 123 specifies certain valuation techniques that produce
estimated compensation charges that are included in the pro forma results below.
These amounts have not been reflected in the Company's Statement of Operations,
because Accounting Principles Board Opinion 25, "Accounting for Stock Issued to
Employees," specifies that no compensation charge arises when the price of the
employees' stock options equal the market value of the underlying stock at the
grant date, as in the case of options granted to the Company's employees
SFAS No. 123 pro forma numbers are as follows for the nine-month periods
ended June 30, 2002 and 2001:
2002 2001
-------- --------
Actual net (loss) .................... (527,382) (474,344)
SFAS 123 Compensation Cost ........... 66,636 0
-------- --------
Pro forma net income (loss) .......... (594,018) (474,344)
======== ========
Pro forma basic and diluted
net income (loss) per share ......... (.02) (.02)
======== ========
Under SFAS 123, the fair value of each option grant is estimated on the date of
grant using the Black-Scholes option-pricing model. The following weighted
average assumptions were used:
Risk free interest rate .................................... 6%
Expected dividends ......................................... 0
Volatility factor .......................................... 255%
Weighted average expected
life of options ........................................... 5
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options that have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion the existing models do not necessarily provide a reliable single measure
of the fair value of the Company's options.
12
NOTE 12 - EARNINGS PER COMMON SHARE
Earnings per common share are calculated under the provisions of SFAS No. 128,
"Earnings per Share," which established new standards for computing and
presenting earnings per share. SFAS No. 128 requires the Company to report both
basic earnings per share, which is based on the weighted-average number of
common shares outstanding, and diluted earnings per share, which is based on the
weighted-average number of common shares outstanding plus all potential dilutive
common shares outstanding.
The weighted average common shares used in the computations of basic earnings
per common share and earnings per common share assuming dilution are as follows:
Three months Nine months
Ended June 30 Ended June 30
2002 2001 2002 2001
---------- ---------- ---------- ----------
Average common shares
outstanding .................... 29,437,878 25,000,000 25,307,864 26,588,024
Common shares issuable (1) ..... 321,333 0 322,295 0
---------- ---------- ---------- ----------
Average common shares
outstanding assuming
dilution (2) ................... 29,759,211 25,000,000 25,630,159 25,871,762
========== ========== ========== ==========
----------
(1) issuable under stock option plans
(2) excluded from the computation of diluted net loss per share for the
periods ended June 30, 2002 because their effect would have been
antidilutive
NOTE 13 - SIGNIFICANT CUSTOMER INFORMATION AND SEGMENT REPORTING
SFAS No. 131, Disclosure about Segments of an Enterprise and Related
Information, establishes standards for the reporting by business enterprises of
information about operating segments, products and services, geographic areas,
and major customers. The method for determining what information to report is
based on the way that management organizes the operating segments with Iceweb
for making operational decisions and assessments of financial performance.
Iceweb's chief operating decision-maker is considered to be the 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 condensed statements of operations.
Therefore, Iceweb has determined that it operates in a single operating segment,
specifically, web communications services. For the periods ended June 30, 2002
and 2001, all material assets and revenues of Iceweb were in the United States.
NOTE 14 - GOING CONCERN
The Company's auditors stated in their reports on the financial statements of
the Company for the years ended September 30, 2001 and 2000 that the Company is
dependent on outside financing and has had losses since inception that raise
substantial doubt about our ability to continue as a going concern.
13
For the years ended September 30, 2001and 2000, the Company incurred net annual
losses of $996,474 and $707,689, respectively. Management believes that
resources will be available from private and operating sources in 2002 to
continue the marketing of the Company's products and services. The financial
statements do not include any adjustments relating to the recoverability and
classification of recorded assets, or the amounts and classification of
liabilities that might be necessary in the event the Company cannot continue in
existence.
Management has established plans intended to increase the sales of the Company's
products. 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 assurance can be given that the Company
will be able to raise any additional capital.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
The following discussion should be read together with the information contained
in the financial statements and related notes included elsewhere in this report.
We Have Been The Subject Of A Going Concern Opinion From Our Independent
Auditors
Our independent auditors have added explanatory paragraphs to their audit
opinions issued in connection with the 2001 and 2000 financial statements which
states that our Company is dependent on outside financing and has had losses
since inception that raise substantial doubt about our ability to continue as a
going concern. Our financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
Critical Accounting Policies
Financial Reporting Release No. 60, which was recently released by the U.S.
Securities and Exchange Commission, encourages all companies to include a
discussion of critical accounting policies or methods used in the preparation of
financial statements. Our consolidated financial statements include a summary of
the significant accounting policies and methods used in the preparation of our
consolidated financial statements.
Management believes the following critical accounting policies affect the
significant judgments and estimates used in the preparation of the financial
statements.
Revenue Recognition - revenues are recognized at the time of shipment of the
respective products and/or services. Our Company includes shipping and handling
fees billed to customers as revenues. Costs of sales include outbound freight.
Use of Estimates
Management's discussion and analysis of financial condition and results of
operations is based upon our consolidated financial statements,
14
which have been prepared in accordance with accounting principles generally
accepted in the United States of America. The preparation of these financial
statements requires management to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenues, and expenses, and related
disclosure of contingent assets and liabilities. On an ongoing basis, management
evaluates these estimates, including those related to allowances for doubtful
accounts receivable and the carrying value of inventories and long-lived assets.
Management bases these estimates on historical experience and on various other
assumptions that are believed to be reasonable under the circumstances, the
results of which form the basis of making judgments about the carrying value of
assets and liabilities that are not readily apparent from other sources. Actual
results may differ from these estimates under different assumptions or
conditions.
Plan of operation
From 1999 until June 2001, Iceweb operated as a technology hardware and software
distributor business. In June 2001, we acquired the assets of Learning Stream,
Inc. (LSI) in bankruptcy and changed the business model to enable interactive
communication and education on the internet. Our goal is to expand our product
and services offering to take advantage of what we believe to be a rapidly
growing market.
Iceweb's proprietary software, IceSHOW(TM) under development since 1999 and
completed in the 1st quarter 2002, allows us to create Web-ready multimedia
productions very quickly, giving us a tangible competitive advantage in both
time and cost. Our technology integrates audio, video and PowerPoint slides into
a highly interactive, customizable interface.
Additional features can easily be added including closed captioning, indexing,
animation, quizzes and surveys and pay-per-view capabilities. The software ties
to a database backend that provides authentication and reporting.
Our custom services business is another service we offer our customers.
Combining our technology with our experience in producing, packaging and
delivering online presentations allows us to create solutions that meet specific
market demands from e-learning, HR and executive communications and sales and
marketing professionals.
Markets for Products and Services
Iceweb currently has customers in the training, corporate communications and
advertising/marketing segments. We will focus on e-learning solutions while
continuing to support the other segments as opportunities are presented.
Training - A model customer has a widely dispersed audience with regular
training needs; these needs could include compliance with government
regulations, skills updating or educational enhancement. For maximum benefit,
the end user must have a compelling need for the training, such as license
renewal, job progression or degree advancement.
15
A typical online course would include video or audio with synchronized slides,
plus interactive elements such as registration, quizzes and materials downloads
as well as a database to track progress, compliance and effectiveness. In
addition, training companies, universities or trade associations could charge
students for the course work, creating a new source of ongoing revenue. Iceweb
is providing e-learning solutions for the hotel brands within the Cendant
Corporation training reservations clerks worldwide.
Corporate Communications - A model customer is a corporation with offices
throughout the US or the world. Iceweb's solutions could provide on-demand or
live streaming of executive addresses or earnings calls. They could also be used
by the Human Resources department to provide orientation, introduce new benefits
programs or deliver presentations to employees on compliance matters, such as
sexual harassment training. This can help companies make better use of already
strained budgets, as employees no longer have to take time to attend small or
large group meetings and HR professionals can avoid week-long blocks of travel.
Iceweb has contracts with Cendant companies to provide these services for their
real estate brands.
Advertising & Marketing - Online presentations can be used to sell or market
nearly any industrial or consumer product. As with any direct marketing
technique, the content is of prime importance. However, studies have shown that
by making the message entertaining, combining audio, video and synchronized
slides, retention dramatically increases.
Iceweb has the ability to profitably sell its products and services while
innovating to comply with the leading technology standards. In addition,
Iceweb's education focus will allow it to market is products and services to the
most rapidly growing viewing audience.
Technology
The majority of Iceweb's applications are based on client-server technology. The
authoring and content management application software has been developed using a
combination of ColdFusion, Javascript, ASP, VBscript, Java, and Flash. Since a
majority of the processing is done on our server network, the author only needs
a browser to produce and manage presentations. This keeps the need for desktop
processing power to a minimum and allows for future development of enterprise
solutions that can be hosted within a customer's network.
Iceweb is in the process of ensuring its course software code is compliant with
AICC and SCORM computer-based training standards, so that we may integrate its
solutions with those of leading Learning Management System (LMS) providers.
Iceweb's software is designed for Microsoft's Windows operating systems and
applications that use Microsoft's SQL 7 database software.
All Iceweb's software utilizes its original technology in one form or another.
By leveraging the code of existing products, Iceweb decreases new product
development costs, shortens time to market and is therefore able to realize new
revenues from new products quickly.
IceSHOW(TM)is the company's core technology, a multimedia creation and delivery
platform. IceSHOW's powerful feature set and intuitive viewer
16
interface are designed for ease of use. It offers great flexibility and
convenience to non-technical users. Anyone with encoded media and PowerPoint
slides can publish a multimedia presentation over the Internet very quickly.
IceSHOW(TM) further reduces costs through an online production center. A
"wizard" steps users through the process of uploading and converting existing
media components, then stitching them together seamlessly. There are options for
adding a branded interface and other interactive elements as well. Taking only
minutes to complete (depending on the presentation length), the resulting show
is ready for distribution via the Internet or an intranet.
IceSLIDE(TM) is our PowerPoint-to-Flash format conversion tool. It makes
PowerPoint shows small enough to distribute via the Web or through e-mail.
IceSLIDE(TM) was developed from the slide conversion technology built into
IceSHOW(TM). However, IceSLIDE(TM) is a standalone application that runs on the
viewer's PC. The files it creates can be uploaded into a IceSHOW(TM)
presentation. We currently sell IceSLIDE(TM) directly to graphics professional
via our Web site.
Services
Consulting - Iceweb's consulting staff has years of experience in providing
custom multimedia solutions to all size organizations. Iceweb consulting
services include personalized project management, multimedia development,
synchronization of all media assets, application design and development,
software integration, instructional design, graphic design, foreign language
translations and delivery methods. In addition to our in-house staff, we have a
roster of professionals who can be contracted to provide specific expertise as
needed.
IceSTUDIO(TM) Productions - Iceweb can provide audio/video studio services that
a customer would need to create new audio or video assets or to transform
existing media assets for Web use. Services include audio/video production, live
Webcasting, audio/video editing, audio/video encoding, audio/video
transcription, and voiceovers.
o Encoding - We accept source material in virtually any format to digitize and
encode into a file format that is compatible with the streaming media
architecture being used. In order to produce the best results, an Iceweb
encoding engineer is assigned to each project to analyze critical data and apply
tailored processing to ensure optimum results for that particular clip and data
rates. The end result is video and audio configured properly for transmission
online at the best possible resolution, motion, clarity and system
compatibility, for both dial-up and broadband users.
o Webcasting - For live productions, we can produce Webcasts from a studio or
from on-location. Webcasts can include audio, video, synchronized slides and
graphics; shows can appear in an interface branded with your company's look and
feel. Interface options include buttons for downloading additional material,
sending a message to the presenter and requesting technical help. Other
available features include advance user registration, user system detection,
password protection, interactive surveys, quizzes and more.
17
Sales & Marketing Strategy
The potential buyers of Iceweb's products and services are organizations in both
the public and private sectors with large, dispersed audiences of customers,
employees, or partners. Iceweb reaches these buyers directly with its own sales
organization, through telesales and direct marketing. We are also building a
highly focused sales channel to refer or resell Iceweb solutions.
Marketing
Services, by their nature, are unbounded in scope. In order to create demand and
reach our market quickly, we have created several service "products"; in effect,
we have put boundaries around a group of services, which makes them easier to
understand and therefore easier to purchase. No new technology needs to be
created for these "products." Iceweb is simply using the skills and technology
we already have in-house. No additional development is needed to deliver these
"products."
The first set of products is being released under the brand name "IceSHOW(TM)."
These are intended to be pilot programs that whet the appetite and prove the
value proposition. Recognizing that a customer may want to see a deliverable
before making a long-term investment, IceSHOW(TM) programs provide quick
turnaround of a finished online presentation. Custom options are also available.
Each package provides for on-demand viewing and includes a customized interface,
login and registration forms, some level of interactivity, and hosting services
for a specified period of time. They require only minimal amount of labor by
Iceweb, as most of the processes used to create the presentations are automated
by our technology. The products include:
o IceSHOW(TM) e-Learning: Aimed at the educational market, this allows customers
with existing content (video, slides, etc.) to quickly produce an online
training session. It includes an online quiz with real-time results.
o IceSHOW(TM) HR: For corporate HR managers who wish to contact employees with
new information, for example, details on a new benefits program. It includes a
survey form to poll the viewers.
o IceSHOW(TM) Exec: This package, designed for local organizations, puts new
video of an executive address online; the video can be shot in our studio or at
the executive's location. It is designed for both internal announcements (to
employees) and external announcements (to shareholders, business partners,
customers, or the media and analyst communities).
o IceSHOW(TM) WebVideo: Many companies have invested in corporate video
productions. This package allows them to quickly put them online. The customer
submits a video tape or electronic file of the original production. We provide
the encoding and hosting services as well as the customized interface.
We also are launching a Web portal to deliver our customers e-learning
courses. Learningstream.com provides an outlet for customers to sell
18
their online classes. Iceweb will manage the e-commerce aspects and provide
payments to the course owners, in exchange for a percentage of the revenues. We
will include content that we have produced for our customers as well as existing
online content, or video content that we can convert for Web use. The technology
to support and manage this portal is already in use, as we are currently
providing these services for Fred Pryor Seminars. From an operational
standpoint, Learningstream.com is merely an expansion of this existing service.
Direct mail, email and outbound telemarketing will be used to uncover new
prospects and invite them to view the Iceweb Web site and learn about our
targeted solutions. The site itself is regularly refreshed to include
information relevant to our target audiences.
Iceweb's marketing plan also depends on the strategic application of media
relations. The goal is to not only raise the company's profile, but also
establish Iceweb as an expert source in the streaming media arena. PR and
analyst relations can provide invaluable credibility and can often lead to sales
leads.
In addition, a judicious use of trade shows will be implemented to reach highly
focused audiences in specific market niches.
Sales
Our solutions are sold directly by Iceweb consultative sales personnel. Sales
personnel are assigned target accounts within target markets. Some specific
target markets are:
o Repeat LearningStream, Inc. customers
o Training and Marketing Departments of mid- to large-size companies and trade
associations in the DC metropolitan area and select companies in nearby states o
Audio & Video Production (A/V), Advertising, Promotional and Trade Show services
companies who already create and produce content and wish to deliver it via the
Web o Educational institutions (schools, colleges, universities) that wish to
deliver internal courseware or generate additional revenue through "e-campus"
solutions.
Iceweb products and services are priced competitively based on complexity and
the degree of customization. We have created a number of "pilot" programs with a
strict set of features in order to give prospects a quick deliverable and easy
entry into online multimedia productions. These can be to whet the appetite of
potentially large clients or to close prospects that wish to test the solution's
capabilities in a limited fashion.
Competitive Advantages
Two major Iceweb competitive advantages are its lean business model with low
fixed costs and its favorable margin on products and services. Iceweb's core
competency of digital media production is manifested in its IceSHOW(TM)
technology. It was designed to make our products and services easy and
affordable, the two factors that are key for the Company to fulfill its growth
expectations.
19
Our technology makes the creation of online multimedia shows easy and affordable
whether Iceweb is doing the work or the customers are using one of Iceweb's
products to do the work themselves. In either case, the cost and complexity of
the development is reduced substantially. And, because Iceweb's products are
easy to understand and use, there is the potential for future distribution by a
sales channel or network of affiliates.
Financial
Since June 2001, working capital to fund our operations was generated from the
proceeds of $539,500 received by us from the private placement of our securities
and also from sales of our product and services to both legacy LSI customers and
new customers.
Net revenues - for the nine months and three months ended June 30, 2002, we
generated revenues of $171,665 and $30,494 respectively compared to $55,299 and
$54,810 in each of the comparative periods in 2001. Sales for the three months
ending June 30, 2002 were lower than the previous quarter and lower than the
same quarter for the previous fiscal year. The primary reason for this was a
change in our marketing and sales strategy to build our business around the
IceShow products. Sales from both custom services and webcasts were lower this
quarter than in the previous quarter due in part to hiring and training new
salespersons. We also changed our E-commerce business to sell third-party
classes and on-line training over the internet.
Cost of revenues - our cost of revenues consists of costs related to production
of custom services, internet and telephony communication access costs,
personnel, and technical support. Our cost of revenues as a percentage of total
revenues decreased for both the nine months and three months ending June 30,
2002 over the respective periods in 2001 by 37% and 40%. This was primarily due
to conversion of our production costs to a variable from a fixed expense, better
bidding on new projects and more aggressive control of costs.
Marketing and Sales - our sales and marketing expense consists of
personnelcosts, including commissions, public relations, advertising, marketing
programs, lead generation, travel and trade shows. Marketing and sales costs
increased for the nine and three months ending June 30, 2002 over the same
periods in 2001 by $125,016 and $46,010 respectively. This increase was the
result of continued upgrading of our sales and marketing personnel, commission
expenses and marketing programs.
Research and development - our research and development expense consists mostly
of salaries, personnel related expenses, supplies, equipment and engineering
services. Expenses increased by $58,446 and $15,405 for the nine and three month
period ending June 30, 2002 from the respective periods in 2001. This increase
is our investment in the development of the IceSHOW software. We plan on using
this software as the foundation for our product offerings in the future.
General and administrative expense - our general and administrative expense
consists primarily of personnel costs, rent, legal, accounting, human resources,
telecommunications, office supplies and corporate governance and compliance.
General and administrative expense
20
decreased for the nine and three months ending June 30, 2002 over the same
periods in 2001 by $17,978 and $36,468 respectively. The primary reasons for
this were a reduction in rent expense and the fact that the LSI acquisition
costs occurred in June 2001. This also represents our success in operational
efficiency initiatives to streamline work processes to permanently reduce the
Company's overall cost structure.
Income taxes - because we incurred net operating losses in the three and nine
months ended June 30, 2002, we paid no federal, state or foreign income taxes in
those periods. We have also not recognized any tax benefits for the related tax
operating loss carryforwards and may not until we conclude that such benefits
will be utilized.
Overall, our loss per share was $(.02) for the nine months ended June 30, 2002
and 2001 and $(.01) for the three months ending June 30, 2002 and 2001. The
lower loss per share in the third quarter of 2002 is due primarily to the
increase in the number of shares of stock associated with the Disease Sciences
merger. For the third quarter 2001, the reason was the stock issued included the
Evolve One shares that were returned in September 2001. For the balance of this
fiscal year we anticipate that our loss per share may increase.
We expect to generate losses resulting principally from costs incurred in
conjunction with our marketing and sales and research and development
initiatives, and we expect that the costs of these activities will increase as
the implementation of our business plan continues. However, as we continue to
implement our plan of operation, we expect general and administrative expenses
to remain nearly flat and actually decrease as a percentage of sales due to the
process efficiencies we have already put in place.
In order to provide sufficient working capital to fund our ongoing operations we
will be required to raise additional capital to fund these anticipated costs.
There are no assurances that we will be able to obtain the additional capital in
which event our future operations would be materially and adversely affected.
Liquidity and Capital Resources
Since inception, our operating and investing activities have used more cash than
they have generated. Because of the continued need for substantial amounts of
working capital to fund the growth of the business, to meet our commitment for
research funding and to pay our operating expenses, we expect to continue to
experience significant negative operating and investing cash flows for the
foreseeable future. Our existing working capital will not be sufficient to fund
the continued implementation of our plan of operation during the next 12 months
and to meet our capital commitments and general operating expenses. We are
unable to predict at this time the exact amount of additional working capital we
will require, however, in order to provide any additional working capital which
we may require, we will in all likelihood be required to raise additional
capital through the sale of equity or debt securities. We currently have no
commitments to provide us with any additional working capital. If we do not have
sufficient working capital to implement our plan of operation described above,
it is likely that we will cease operations.
21
Cautionary Factors That May Affect Future Results
This report and other written reports and oral statements made from time to time
by the Company may contain so-called "forward-looking statements," all of which
are subject to risks and uncertainties. One can identify these forward-looking
statements by their use of words such as "expects," "plans," "will,"
"estimates," "forecasts," "projects" and other works of similar meaning. One can
identify them by the fact that they do not relate strictly to historical or
current facts. These statements are likely to address the Company's growth
strategy, financial results, and product and development programs. One must
carefully consider any such statement and should understand that many factors
could cause actual results to differ from the Company's forward-looking
statements. These factors include inaccurate assumptions and a broad variety of
other risks and uncertainties, including some that are known and some that are
not. No forward-looking statement can be guaranteed and actual future results
may vary materially.
The Company does not assume the obligation to update any forward-looking
statement. One should carefully evaluate such statements in light of factors
described in the Company's filings with the Securities and Exchange Commission,
especially on Forms 10-K, 10-Q and 8-K. In various filing the Company has
identified important factors that could cause actual results to differ from
expected or historic results. The Company notes these factors for investors as
permitted by the Private Securities Litigation Reform Act of 1995. One should
understand that it is not possible to predict or identify all such factors.
Consequently, the reader should not consider any such list to be a complete list
of all potential risks or uncertainties.
Part II - OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities
None.
Item 3. Defaults upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
22
Item 6. Exhibits and Reports on Form 8-K
Exhibit 99.1 - Certification of Quarterly Reports for the period ending
June 30, 2002 by the Principal Executive Officer and the Principal Financial
Officer.
During the three month period from March 31, 2002 to June 30, 2002, the
Company filed or furnished:
(a) A current report on Form 8-K filed on April 4, 2002 pertaining to
the Merger between Disease Sciences and Iceweb.
(b) A current report on Form 8-K filed on May 16, 2002 pertaining to
the change in registrants certifying accountant.
(c) A current report on Form 8-K filed on June 11, 2002 amending the
Form 8-K filed on May 16, 2002.
(d) A current report on Form 8-K filed on June 18, 2002 changing the
fiscal year.
(e) A current report on For 8-K filed on June 18, amending the Form 8-K
filed on May 16, 2002.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Disease Sciences, Inc.
By: /s/ John R. Signorello
------------------
Dated: August 16, 2002 John R. Signorello,
Chairman and CEO
23