JAWZ INC (JAWZ)
Quarterly Report (SEC form 10-Q)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The purpose of this section is to discuss and analyze JAWZ' results of operations. In addition, some analysis and information regarding JAWZ' financial condition and
liquidity and capital resources is provided. This analysis should be read jointly with the financial statements, related notes, and the cautionary statement regarding
forward-looking statements, which appear elsewhere in this filing.
OVERVIEW
GENERAL
JAWZ Inc. and its subsidiaries (collectively "JAWZ" or the "Company") provide information security and secure e-business solutions (collectively "e-security
solutions"). The Company assists in removing the burden of information risk management for its customers by providing products and services that cover the entire
e-security market (from assessment to implementation to monitoring). JAWZ develops, sells, installs and supports its own and third party information security
products. JAWZ products are based on proprietary encryption technology.
INDUSTRY BACKGROUND
E-security solutions historically have been deployed primarily to protect corporate networks from erroneous and possibly malicious intrusion, and to preserve the
integrity of data as it passed over insecure networks. It was typically the focus of businesses in security conscious or dependent industries such as banking,
telecommunications, aerospace and defense. However, today e-security has become a fundamental requirement for conducting all forms of business, including but not
limited to commerce and communications conducted through corporate intranets, extranets and other Internet based applications. Many organizations, in a wide range
of industries, are conducting e-business as a means of reducing costs, competing more aggressively and more efficiently meeting increased business demands for
speed, accuracy and delivery of information.
With the rise in computer connectivity and the push to electronic commerce, organizations are becoming increasingly more exposed to the outside world via electronic
means. Often these organizations lack the skills and time requirements needed to protect and secure their information assets. Periodicals and reference material such as
Maximum Security, 2nd ed., have indicated that servers are often set up by non-technical individuals who inadvertently create numerous viable targets for hackers. As
the number of servers supporting websites increases on a daily basis the security risks increase as well.
E-business requires e-security to create and ensure the same trust relationships that currently exist on paper in the brick-and-mortar world, so organizations can
conduct e-business with the same confidence with which they currently conduct traditional commerce. There are several essential requirements for e-security: (a) user
identification and authentication; (b) access control and privilege management; (c) data privacy, integrity and authentication; and (d) security administration and audit.
JAWZ delivers products and services that fulfill these essential requirements.
COMPANY STRUCTURE
JAWZ was incorporated on January 27, 1997 under the laws of the State of Nevada as "E-Biz" Solutions, Inc. On March 27, 1998, "E-Biz" Solutions, Inc. changed its
name to JAWS Technologies, Inc. and on September 29, 2000 JAWS Technologies, Inc. changed its name to JAWZ Inc. Effective July 7, 2000, JAWZ Inc. migrated
its incorporation to the State of Delaware. The Company's international headquarters are located in Toronto, Ontario, Canada. The Company also has offices in
Calgary, Alberta and Ottawa, Ontario in Canada. In the United States the Company has offices in Fairfield, New Jersey, Chicago, Illinois. Until February 2001 JAWZ
had additional North American offices in Pasadena, California, Edmonton, Alberta and Vancouver, British Columbia.
The Company's wholly owned subsidiaries are:
o JAWZ Canada Inc., formerly JAWS Technologies, Inc., an Alberta corporation ("JAWZ Canada"). Effective July 1, 2000, JAWS Technologies (Ontario) Inc., Pace
Systems Group Inc. ("Pace") and Offsite Data Services Ltd. ("Offsite") were amalgamated with JAWZ Canada. JAWZ Canada provides high-end information
security, providing consulting services and software solutions to minimize the threats to clients' information and communications. At its offices in Calgary, Alberta,
JAWZ developed proprietary encryption software using the L5 encryption algorithm to secure binary data in various forms, including streamlining or blocking data.
o JAWZ USA Inc. ("JAWZ USA"), formerly JAWS Technologies (Delaware), Inc., provides the same products and services as JAWZ Canada.
o JAWZ Illinois Inc., formerly Nucleus Consulting, Inc. ("Nucleus"). The Company intends to amalgamate JAWZ USA Inc. and JAWZ Illinois Inc.
o JAWZ Acquisition Corp. ("JAC") was established primarily for tax purposes and has been used solely for the acquisition of Offsite; and
o JAWZ Acquisition Canada Corp. ("JACC") was established for the purpose of completing certain acquisitions and tax purposes. JACC has four wholly owned
subsidiaries, General Network Services (GNS) Inc. ("GNS"), Betach Advanced Solutions Inc., Betach Systems, Inc. (collectively the "Betach companies") and
4COMM.com Inc. ("4COMM"). The Company intends to dissolve the Betach companies and 4COMM as the assets and operations of these companies have been
incorporated into JAWZ Canada.
BUSINESS STRATEGY
JAWZ' objective is to continue to be a leading provider of e-security solutions with a focus on the financial services, health care, telecommunications and government
sectors. JAWZ has sought to achieve this objective by consolidating the highly fragmented information security industry and by achieving increasing economies of
scale through the acquisition of growing organizations and through the integration of such operating entities through centralized administration and planning.
The Company completed seven material acquisitions since November 1999. The integration of these acquired businesses into the Company's information security
business has expanded the products and services that the Company offers to its customers. Pace has been amalgamated into JAWZ Canada and forms part of the
Professional Security Services group. Secure Data has been incorporated into the Professional Security Services group. Offsite has been amalgamated into JAWZ
Canada and forms part of the Managed Services group. Nucleus has been amalgamated into JAWZ USA. Doctorvillage forms part of the Professional Security
Services group, in particular the HIPAA project. 4COMM has been integrated as part of the Security Products group. GNS forms part of the Professional Security
Services and Managed Security Services groups. Betach forms part of the Professional Security Services and Security Products groups. Through industry and
management expertise, JAWZ attempts to ensure that acquired companies' receive the capital and corporate planning necessary to successfully compete in their
respective markets.
Telecommunications includes key telecommunication company partners Verizon Communications Inc. ("Verizon"), also a partner in financial services and health care,
Intermedia Communications Inc. ("Intermedia"), Telus Corporation ("Telus") and GT Group Telecom Inc. ("Group Telecom"). The Company continues to win
business with its telecommunication partners from e-security to e-business engagements.
In health care, JAWZ has developed a comprehensive Health Insurance Portability and Accountability Act ("HIPAA") compliance program and website. HIPAA
legislation requires health care provides to implement security and privacy safeguards by 2003. The Company's HIPAA compliance program is generating significant
interest in the health care community. The U.S. and American College of Physician Executives (ACPE) has selected JAWZ as their security partner of choice.
In the government sector, Industry Canada has chose the Company as their only third party security manager of secure information technology. The Company
managed the security and Public Key Infrastructure ("PKI") for the spectrum auctions of 2000 and 2001. The Company has also provided technical expertise to
facilitate the electronic signing of a joint statement on Global Electronic Commerce and E-Government between Canada and the United Kingdom to establish an
agenda for bilateral and multilateral cooperation on e-Commerce. The signatures of the Canadian ministers are routed through Industry Canada's Certificate Authority,
managed by the Company. The Company ensured that the PKI keys and proper software were
functional on both ends of the international event. The Company is also working with various state governments in the United States on various PKI and security
projects.
In an attempt to create and maintain a competitive advantage in the information security industry, JAWZ strives to continually differentiate itself from other industry
players and works towards establishing strong brand loyalty for its products and services through multiple channels of distribution. The distribution strategy used by
JAWZ addresses the requirements of small organizations to large enterprises and matches the appropriate sales and distribution channels to the software and services
offered.
The key elements of the Company's strategy to be a leading provider of e-security include:
o Deliver e-Security Solutions. The Company believes e-security is driven by the proliferation of Internet based applications, whether for internal network security, for
e-business applications deployed to customers, suppliers or employees, or for e-commerce Internet sites. Further, the Company believes that traditional, fear based
security is being augmented and in many cases replaced by e-security as an enabling technology that opens up new markets and channels for communications and
commerce. The Company intends to defend and grow its position in providing information security and secure e-business solutions.
o Expand Market Opportunities. The Company intends to expand its market opportunities through strategic alliances and partnerships and has expanded through a
series of acquisitions. Strategic alliances such as Verizon and Telus, its government partners such as the Government of Canada and the U.S. and American College of
Physician Executives in health care are examples of this. The Company plans to continue to foster and leverage these partnerships and enter into additional
relationships with companies that can provide a strategic advantage. The Company has discontinued certain alliances and partnerships previously announced that were
found not to be effective. The Company has also expanded market opportunities through a series of acquisitions which the Company believes will contribute to market
expansion.
o Expand Indirect Sales and Support Channel. The Company currently sells its products and services through a direct sales force and through relationships with a
significant number of OEM's and value-added resellers. The Company believes that an expanded indirect sales and support channel enables it to enter new markets and
gain access to a larger installed base of potential customers in a cost effective manner.
o Maintain Technological Leadership. The Company plans to continue to add new capabilities and features to its e-security products and services to meet its customers
evolving needs.
EMPLOYEES
As of June 30, 2001, JAWZ employed approximately 116 full time staff. During 2000, the number of employees grew from 58 at the beginning of the year to 275 by
year end. However, in an effort to reduce costs, the Company implemented a work force reduction in January 2001, eliminated 31 full time positions from across the
Company. A second work force reduction was implemented in February 2001, eliminating an additional 64 full time positions from all areas of the Company, including
the closure of the California, British Columbia and Edmonton, Alberta offices. In July of 2001, JAWZ implemented another workforce reduction and eliminated an
additional 29 employees and hired 10. None of JAWZ employees are represented by any type of labor organization and JAWZ is not aware of any activity by
employees seeking organization. JAWZ considers its relationships with it employees to be satisfactory. JAWZ has, in its early stages, developed strong human
resources practices with the belief that the growth of JAWZ is heavily reliant on its human resources.
RESULTS OF OPERATIONS
Three Months Ended June 30, 2001 compared with the Three Months ended June 30,
The consolidated financial statements include the accounts of the Company, its wholly owned subsidiaries, after elimination of intercompany accounts and transactions.
All amounts are expressed in United States dollars.
REVENUE. Revenues include the sale of proprietary and third party security products, professional security consulting services, integration and installation of secure
information systems, remote data storage and recovery systems. These different segments have been segregated into consulting revenue, product revenue and other
income.
Total revenues for the three month period ended June 30, 2001 decreased 51% to $1,096,759 from $2,221,410 for the same period in 2000. The decrease in 2001
revenues is primarily attributable to the overall reduction in the purchase of technology products and services and subsequently information security spending by all
corporations across all industries in response to an overall weakening economic climate and the technology stock market collapse. As a determined and focused step to
reach profitabilty, JAWZ has worked to eliminate low margin and unprofitable business which has hurt top line revenue. This revenue base was spread evenly among
many customers with no single customer accounting for more than 10% of JAWZ revenue for the quarter.
Consulting revenue for the three month period ended June 30, 2001 decreased 65% to $740,552 from $2,125,613 for the same period in 2000. Product revenue for the
three month period ended June 30, 2001 increased 269% to $353,208 from $95,797 for the same period in 2000. Other income (excluding interest income) for the
three month period ended June 30, 2001 increased to $2,999 from $0 for the same period in 2000.
COST OF SALES. Cost of sales were 81% of total revenues in for the three month period ended June 30, 2001 versus 32% for the same period in 2000. The increase
in cost of sales is the result of charges to cost of sales for unrecoverable work in process and due to the absence of high margin fixed fee business as more customers
choose a time and materials billing. The Company continues to implement new recording mechanisms to better track cost of sales and gross profits.
Advertising and Promotion. Advertising and promotion expenses were historically primarily related to a branding initiative, company name change, marketing and print
media and collateral sales materials. Advertising and promotion expenses for the three month period ended June 30, 2001 decreased 98% to $9,509 from $616,546 for
the same period in 2000. The Company has recently significantly reduced advertising and promotion expenses as part of a general effort to reduce costs and as part of
a new sales strategy which focuses on leverages existing customers and relationships.
Bad Debts. The Company recorded a bad debt provision of $117,277 for the three month period ended June 30, 2001 versus a $0 provision for the same period in
2000.
Selling, General and Administration. Selling, general and administration expenses consist primarily of compensation of sales, marketing and administrative personnel,
preparation of sales and marketing documents, corporate overhead, directors fees, consulting services, management fees and facilities expenses. Selling, general and
administrative expenses increased 1% to $6,045,723 for the three month period ended June 30, 2001 from $5,971,605 for the same period ended in 2000.
Loss on Sale of Assets. During the quarter ended June 30, 2001, JAWZ disposed of various assets related to its secure network storage operations and the former
e-business solutions group. The excess of the carrying value of these assets over the proceeds received has been included in loss on sale of assets. At June 30, 2001
the carrying value of the employee and consultants base relating to the acquisitions of Pace, Betach and GNS was written off as there was no value remaining, due to
the sale of the former Betach operations and the resignation or termination of other employees. At June 30, 2001 the carrying value of the employee and consultants
base relating to the acquisition of 4-Comm was written off in full as the operations related to this acquisition have ceased.
The writedowns in 2001 for Betach and 4-Comm totalling $1,638,209 were included in loss on sale of assets. All other writedowns were included in amortization.
Additionally, the Software licenses acquired from Offsite Data were disposed of during the quarter ended June 30, 2001 as part of the sale of the Secure Network
Storage operations.
Depreciation. Depreciation expense increased by 8% to $159,429 for the three month period ended June 30, 2001 from $147,003 for the same period ended in 2000.
This increase was primarily due to the continued depreciation of fixed assets purchased in 2000 consistent with the expansion of operations (more offices and
equipment).
Amortization. Amortization expense decreased by 11% to $1,567,587 for the three month period ended June 30, 2001 from $1,567,587 for the same period ended in
2000. The decreased amortization expense relates to the reduced carrying value and subseqeunt amortization as a result of the one time write off of goodwill associated
with the acquisitions undertaken by the Company in 2000 and employee and consultants base associated with these acquisitions, that was done in 2000 due to an
assessment of permanent impairment.
Interest Income. Interest income accounted for $6,300 for the three month period ended June 30, 2001 versus $70,951 for the same period in 2000. For the period
ended June 30, 2000 the company had cash balances from financing activities that it invested to zero risk interest securities. For the same period in 2001, the company
was not in the same cash situation to allow it generate interest income.
Interest Expense. Interest expense, which includes financing fees and amortization of deferred financing fees/debt discount, increased for the three month period ended
June 30, 2001 to $207,100 versus $1,424 for the same period in 2000. The increase was due to the fees associated late payments and with the funds raised in the three
months ended June 30, under what was originally a promissary note agreement that was subsequently converted into a secured loan agreement for additional
consideration.
Foreign Exchange. The Company incurred a foreign exchange gain for the three month period ended June 30, 2001 of $1,123,039 as compared to foreign exchange
loss of $105,947 for the same period in 2000. Transactions denominated in foreign currencies are translated at the exchange rate on the transaction date. Foreign
currency denominated monetary assets and liabilities are converted at exchange rates in effect at the balance sheet date.
Loss on Impairment of Investment. The Company recorded a $578,997 for the three month period ended June 30, 2001 relating to an investment in eFinancial
Depot.com and Iconix. On December 12, 2000, the Company received 2,384,000 shares of common stock of eFinancial in settlement of work performed by the
Company in the amount of $2,112,946. eFinancial is a publicly traded company. An advisor to eFinancial is also a director and officer of JAWZ. At December 31,
2000, on March 31, 2001, and again on June 30, 2001, the investment was assessed as permanently impaired given the eFinancial stock price and a write down was
taken to value the investment at estimated fair market value. In 2000, JAWZ exercised an option to purchase a 20% interest in Iconix for 2,000,000 shares of JAWZ
common stock. The sole director of Iconix is also an officer and director of JAWZ. Iconix has subsequently closed down operations and laid off all employees. An
advisor to eFinancial is also a director and officer of JAWZ. At June 30, 2001 the investment was assessed as permanently impaired given the events described above
and a write down was taken to value the investment at estimated fair market value of zero.
Six Months Ended June 30, 2001 compared with the Six Months ended June 30, 2000
The consolidated financial statements include the accounts of the Company, its wholly owned subsidiaries, after elimination of intercompany accounts and transactions.
All amounts are expressed in United States dollars.
REVENUE. Revenues include the sale of proprietary and third party security products, professional security consulting services, integration and installation of secure
information systems, remote data storage and recovery systems. These different segments have been segregated into consulting revenue, product revenue and other
income.
Total revenues for the six month period ended June 30, 2001 increased 19% to $3,295,761 from $2,768,095 for the same period in 2000. This increase is primarily
due to the performance of the company during Q1 2001 versus Q1 2000, which reflected the impact of the acquisitions prior to JAWZ reorganizing itself. This revenue
base was spread evenly among many customers with no single customer accounting for more than 10% of JAWZ revenue for the quarter.
Consulting revenue for the six month period ended June 30, 2001 decreased 21% to $2,121,609 from $2,670,815 for the same period in 2000. Product revenue for the
six month period ended June 30, 2001 increased 1,057% to $1,131,836 from $97,280 for the same period in 2000. Other income (excluding interest income) for the
six month period ended June 30, 2001 increased to $42,315 from $0 for the same period in 2000.
The Company's geographical sales are divided between Canada and the United States. For the six month period ended June 30, 2001, 86% of revenues or $2,845,024
were generated in Canada and 14% or $450,736 in the United States. For the same period in 2000, 76% of revenues or $2,231,090 were generated in Canada and 24%
or $713,253 in the United States. All of the Company's revenues to date have been generated in either Canada or the United States.
COST OF SALES. Cost of sales were 89% of total revenues for the six month period ended June 30, 2001 versus 32% for the same period in 2000. The increase in
cost of sales is the result of charges to cost of sales for unrecoverable work in process and due to the absence of high margin fixed fee business as more customers
choose a time and materials billing. The increase in the cost of sales line also reflects increased revenues and the direct and identifiable costs associated with generating
these revenues. The Company continues to implement new recording mechanisms to better track cost of sales and gross profits. |
