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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
/ X / QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2002
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934.
For the transition period from ________ to ________.
Commission file number 000-27941
Imergent, Inc.
-------------
(Exact name of registrant as specified in its charter)
Delaware 87-0591719
-------- ----------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
754 E. Technology Avenue
Orem, Utah 84097
---------- -----
(Address of Principal Executive Offices) (Zip Code)
(801) 227-0004
--------------
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark 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 proceeding 12 months and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
The number of shares outstanding of the registrant's common stock as of
November 4, 2002: 10,999,520
When we refer in this Form 10-Q to "Imergent," the "Company," "we,"
"our," and "us," we mean Imergent, Inc., a Delaware corporation, together with
our subsidiaries and their respective predecessors.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
Condensed Consolidated Balance Sheets at September 30, 2002 (unaudited) and at
June 30, 2002..................................................................3
Unaudited Condensed Consolidated Statements of Operations for the three months
ended September 30, 2002 and 2001..............................................4
Unaudited Condensed Consolidated Statement of Stockholders' Equity for the three
months ended September 30, 2002................................................5
Unaudited Condensed Consolidated Statements of Cash Flows for the three months
ended September 30, 2002 and 2001..............................................6
Notes to Unaudited Condensed Consolidated Financial Statements ................7
IMERGENT, INC. AND SUBSIDIARIES
(formerly Netgateway, Inc.)
Condensed Consolidated Balance Sheets
September 30,
2002
(Unaudited) June 30, 2002
-----------------------------
Assets
Current assets
- --------------
Cash $ 116,653 $ 519,748
Trade receivables, net of allowance for doubtful accounts of $3,186,747
at September 30, 2002 and $1,918,673 at June 30, 2002. 3,914,628 2,247,129
Inventories 23,416 23,416
Prepaid expenses 464,627 607,857
Credit card reserves, net of allowance for doubtful accounts of $101,587
at September 30, 2002 and $137,370 at June 30, 2002. 919,679 1,022,701
-----------------------------
Total current assets 5,439,003 4,420,851
Property and equipment, net 286,901 409,460
Goodwill, net 455,177 455,177
Trade receivables, net of allowance for doubtful accounts of $978,378
at September 30, 2002 and $1,357,938 at June 30, 2002. 1,258,781 1,673,740
Other assets, net of allowance for doubtful accounts of $7,200 at
September 30, 2002 and $0 at June 30, 2002. 407,292 417,384
-----------------------------
Total Assets $ 7,847,154 $ 7,376,612
=============================
Liabilities and Stockholders' Equity
Current liabilities
- -------------------
Accounts payable $ 1,087,557 $ 1,215,400
Accounts payable - related party 90,917 111,702
Bank overdraft 28,238 150,336
Accrued wages and benefits 653,123 681,472
Past due payroll taxes - 26,797
Accrued liabilities 486,135 548,016
Current portion of capital lease obligations 50,396 80,938
Current portion of notes payable 160,671 160,671
Other current liabilities 441,828 450,523
Current portion of deferred revenue 565,967 705,558
-----------------------------
Total current liabilities 3,564,832 4,131,413
Capital lease obligations, net of current portion 16,736 27,906
Note payable, net of current portion 340,575 393,560
-----------------------------
Total liabilities 3,922,143 4,552,879
-----------------------------
Commitments and contingencies
Minority interest 355,159 355,159
-----------------------------
Stockholders' Equity
- --------------------
Capital stock, par value $.001 per share
Preferred stock - authorized 5,000,000 shares; none issued - -
Common stock - authorized 100,000,000 shares; issued and outstanding
10,999,520 and 10,995,774 shares, at September 30, 2002 and
June 30, 2002, respectively 11,000 10,996
Additional paid-in capital 72,032,924 72,017,928
Deferred compensation (31,859) (34,987)
Accumulated other comprehensive loss (4,902) (4,902)
Accumulated deficit (68,437,311) (69,520,461)
-----------------------------
Total stockholders' equity 3,569,852 2,468,574
-----------------------------
Total Liabilities and Stockholders' Equity $ 7,847,154 $ 7,376,612
=============================
See Notes to Unaudited Condensed Consolidated Financial Statements
IMERGENT, INC. AND SUBSIDIARIES
(formerly Netgateway, Inc.)
Unaudited Condensed Consolidated Statements of Operations for the
Three Months Ended September 30, 2002 and 2001
2002 2001
------------------------------------------------------
Revenue $ 11,283,849 $ 11,634,043
Cost of revenue 2,234,716 1,227,686
Cost of revenue - related party 223,716 361,883
------------------------------------------------------
Total cost of revenue 2,458,432 1,589,569
------------------------------------------------------
Gross profit 8,825,417 10,044,474
Product development - 53,400
Selling and marketing 4,243,288 3,503,937
Selling and marketing - related party 278,060 107,859
General and administrative 934,418 1,555,987
Depreciation and amortization 148,417 151,628
Bad debt expense 2,287,733 845,000
------------------------------------------------------
Total operating expenses 7,891,916 6,217,811
Income from operations 933,501 3,826,663
Other income 158,637 101,773
Interest expense (8,988) (1,593,128)
------------------------------------------------------
Total other income (expenses) 149,649 (1,491,355)
------------------------------------------------------
Net income $ 1,083,150 $ 2,335,308
======================================================
Earnings per share:
Basic $ 0.10 $ 0.68
Diluted $ 0.10 $ 0.66
Weighted average shares outstanding:
Basic 10,999,478 3,450,711
Diluted 11,035,459 3,539,724
See Notes to Unaudited Condensed Consolidated Financial Statements
IMERGENT, INC. AND SUBSIDIARIES
(formerly Netgateway, Inc.)
Unaudited Condensed Consolidated Statement of Stockholders' Equity
For the Three Months Ended September 30, 2002
Accumulated
Common Stock Additional Other Total
----------------------- Paid-in Deferred Accumulated Comprehensive Stockholders'
Shares Amount Capital Compensation Deficit loss Equity
------------------------------------------------------------------------------------------
Balance July 1, 2002 10,995,774 $ 10,996 $ 72,017,928 $ (34,987) $ (69,520,461) $(4,902) $ 2,468,574
Amortization of deferred compensation - - - 3,128 - - 3,128
Private placement of common stock 5,000 5 14,995 - - - 15,000
Reconciliaton of common stock following
reverse stock split (1,254) (1) 1 - - - -
Comprehensive income
- --------------------
Net income - - - - 1,083,150 - 1,083,150
Foreign currency translation
adjustment - - - - - - -
-------------
Comprehensive income 1,083,150
- ------------------------------------------------------------------------------------------------------------------------------------
Balance September 30, 2002 10,999,520 $ 11,000 $ 72,032,924 $ (31,859) $ (68,437,311) $ (4,902) $ 3,569,852
===========================================================================================
See Notes to Unaudited Condensed Consolidated Financial Statements
IMERGENT, INC AND SUBSIDIARIES
(formerly Netgateway, Inc.)
Unaudited Condensed Consolidated Statements of Cash Flows
For the Three Months Ended September 30, 2002 and 2001
2002 2001
-------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 1,083,150 $ 2,335,308
Adjustments to reconcile net income (loss) to net
cash used in operating activities:
Depreciation and amortization 148,417 151,628
Amortization of deferred compensation 3,128 6,610
Provision for bad debts 2,287,733 845,000
Common stock issued for services - 199,657
Amortization of debt issue costs - 642,019
Amortization of beneficial conversion feature & debt discount - 1,482,422
Changes in assets and liabilities:
Trade receivables and unbilled receivables (3,452,066) (2,486,089)
Inventories - 15,318
Prepaid expenses and other current assets - (107,082)
Credit card reserves 14,815 168,718
Other assets 153,323 (2,069)
Deferred revenue (139,591) (3,750,227)
Accounts payable, accrued expenses and other liabilities -
related party (20,785) (2,780)
Accounts payable, accrued expenses and other liabilities (229,471) (834,753)
-------------------------------------------
Net cash used in operating activities (151,347) (1,336,320)
-------------------------------------------
NET CASH FLOWS USED IN INVESTING ACTIVITIES
Acquisition of equipment (26,318) (6,862)
-------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from common stock subscribed - 91,000
Proceeds from issuance of common stock - 1,421,776
Proceeds from exercise of options and warrants - 1,727
Bank overdraft borrowings (122,098) 5,701
Repayment of convertible debenture - (100,000)
Repayment of note payable-bank - (97,779)
Repayment of capital lease obligations (41,712) (18,680)
Repayment of notes (61,620) -
-------------------------------------------
Net cash provided (used) by financing activities (225,430) 1,303,745
-------------------------------------------
NET DECREASE IN CASH (403,095) (39,437)
CASH AT THE BEGINNING OF THE QUARTER 519,748 149,165
-------------------------------------------
CASH AT THE END OF THE QUARTER $ 116,653 $ 109,728
===========================================
Supplemental disclosures of non-cash transactions:
Conversion of debenture to common stock - 2,115,885
Conversion of notes payable - officers to common stock - 490,000
Conversion of loan payable to common stock - 100,000
Conversion of convertible notes to common stock - 1,800,180
Common stock issued for outstanding liabilities 15,000 449,234
Accrued interest added to note payable balance 8,635 -
Supplemental disclosure of cash flow information:
Cash paid for Interest - 1,732
See Notes to Unaudited Condensed Consolidated Financial Statements
IMERGENT, INC. AND SUBSIDIARIES
(formerly Netgateway, Inc.)
Notes to Unaudited Condensed Consolidated Financial Statements
(1) Description of Business
Imergent, Inc. (formerly known as "Netgateway, Inc.", referred to
hereinafter as Imergent or the "Company"), was incorporated as a Nevada
corporation on April 13, 1995. In November 1999, it was reincorporated under the
laws of Delaware. Effective July 3, 2002, a Certificate of Amendment was filed
to its Certificate of Incorporation to change its name to Imergent, Inc.
Imergent is an e-Services company that provides eCommerce technology, training
and a variety of web-based technology and resources to over 100,000 small
businesses and entrepreneurs annually. The Company's affordably priced
e-Services offerings leverage industry and client practices, and help increase
the predictability of success for Internet merchants. The Company's services
also help decrease the risks associated with e-commerce implementation by
providing low-cost, scalable solutions with minimal lead-time, ongoing industry
updates and support. The Company's strategic vision is to remain an eCommerce
provider tightly focused on its target market.
(2) Summary of Significant Accounting Policies
(a) Principles of Consolidation
The unaudited condensed consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiaries which include
Netgateway, Galaxy Enterprises, Inc., Galaxy Mall, Inc., StoresOnline Inc.,
StoresOnline, LTD., and StoresOnline.com, Inc. All significant intercompany
balances and transactions have been eliminated in consolidation.
(b) Reverse Stock Split
On June 28, 2002 the shareholders of the Company approved a one-for-ten
reverse split of the Company's outstanding common stock shares, which became
effective July 3, 2002. All data for common stock shares, options and warrants
have been adjusted to reflect the one-for-ten reverse split for all periods
presented. In addition, all common stock share prices and per share data for all
periods presented have been adjusted to reflect the one-for-ten reverse stock
split.
(c) Inventories
Inventories are stated at the lower of cost (first-in, first-out) or
market. Inventory consists mainly of products provided in conjunction with the
Internet training workshops.
(d) Property and Equipment
Property and equipment are stated at cost. Depreciation expense is
computed principally on the straight-line method in amounts sufficient to
allocate the cost of depreciable assets, including assets held under capital
leases, over their estimated useful lives ranging from 3 to 5 years. The cost of
leasehold improvements is being amortized using the straight-line method over
the shorter of the estimated useful life of the asset or the terms of the
related leases. Depreciable lives by asset group are as follows:
Computer and office equipment .................3 to 5 years
Furniture and fixtures.........................4 years
Computer software..............................3 years
Leasehold improvements.........................term of lease
Normal maintenance and repair items are charged to costs and expenses
as incurred. The cost and accumulated depreciation of property and equipment
sold or otherwise retired are removed from the accounts and any related gain or
loss on disposition is reflected in net income for the period.
(e) Goodwill
As required by Statement of Financial Accounting Standards ("SFAS")
142, beginning on July 1, 2002 goodwill is no longer amortized but is tested on
an annual basis for impairment by comparing its fair value to its carrying
value. If the carrying amount of goodwill exceeds its fair value, an impairment
loss will be recognized in an amount equal to that excess. Prior to July 1, 2002
goodwill was being amortized over a ten-year period. The Company anticipates
that the required testing for impairment will be completed during the quarter
ending December 31, 2002.
(f) Product and Development Expenditures
Product and development costs are expensed as incurred. Costs related
to internally developed software are expensed until technological feasibility
has been achieved, after which the costs are capitalized.
(g) Impairment of Long-Lived Assets
The Company reviews long-lived assets and intangible assets for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an asset
to future undiscounted operating cash flows projected to be generated by the
asset. 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 assets
exceeds the fair value of the assets. Assets to be disposed of are reported at
the lower of the carrying amount or fair value less costs to sell.
(h) Financial Instruments
The carrying values of cash, accounts receivable, notes receivable,
accounts payable, accrued liabilities, capital lease obligations, current
portion of notes payable and convertible debenture approximated fair value due
to either the short maturity of the instruments or the recent date of the
initial transaction or the restructuring.
(i) Income Taxes
Income taxes are accounted for under the asset and liability method.
The asset and liability method recognizes deferred income taxes for the tax
consequences of "temporary differences" by applying enacted statutory tax rates
applicable to future years to differences between the financial statement
carrying amounts and the tax bases of existing assets and liabilities.
Deferred tax assets are to be recognized for temporary differences that
will result in tax deductible amounts in future years and for tax carryforwards
if, in the opinion of management, it is more likely than not that the deferred
tax assets will be realized. Our deferred tax assets consist primarily of net
operating losses carried forward. We have provided a valuation allowance against
all of our net deferred tax assets at September 30, 2002 and June 30, 2002.
Fiscal year 2002 was the first profitable year for the Company since its
inception. We have net operating loss carry forwards sufficient to reduce our
pretax profits generated in the quarter ended September 20, 2002 to zero,
therefore, we have not paid or accrued any federal income taxes in this quarter
or prior fiscal years.
(j) Accounting for Stock Options
The Company applies the intrinsic value-based method of accounting
prescribed by Accounting Principles Board (APB) Opinion No. 25, "Accounting for
Stock Issued to Employees," and related interpretations, in accounting for its
fixed plan employee stock options. As such, compensation expense would be
recorded on the date of grant only if the current market price of the underlying
stock exceeded the exercise price. Compensation expense related to stock options
granted to non-employees is accounted for under SFAS No. 123, "Accounting for
Stock-Based Compensation," whereby compensation expense is recognized over the
vesting period based on the fair value of the options on the date of grant.
(k) Revenue Recognition
During the year ended June 30, 2001, the Company changed its product
offering at its Internet training workshops. The date of the change was October
1, 2000, the beginning of the Company's second fiscal quarter of fiscal year
2001. Prior to that time, customers were sold a service consisting of the
construction of Internet websites for their business, which service was to be
provided at any time during the 12 months following the sale. Included in the
price paid for this service was one year's hosting beginning when the website
was published. Revenue from these transactions was deferred at the time of sale
and recognized as the services were rendered or when the right to receive the
services terminated.
Beginning October 1, 2000, the Company discontinued selling the service
and in its place sold a new product called the StoresOnline Software ("SOS").
The SOS is a software product that enables the customer to develop their
Internet website without additional assistance from the Company. When a customer
purchases the SOS he or she receives a CD-ROM containing programs to be used
with their computer and a password and instructions that allow access to the
Company's website where all the necessary tools are present to complete the
construction of the customer's website. When completed, the website can be
hosted with the Company or any other provider of such services. If they choose
the Company, an additional setup and hosting fee (currently $150) is required
for publishing and 12 months of hosting. This fee is deferred at the time of
sale and recognized over the subsequent 12 months.
The revenue from the sale of the SOS is recognized when the product is
delivered to the customer. The Company accepts cash and credit cards as methods
of payment and offers 24-month installment contracts to customers who prefer an
extended payment term arrangement. The Company offers these contracts to all
workshop attendees not wishing to use a check or credit card provided they
complete a credit application, give the Company permission to independently
check their credit and are willing to make an appropriate down payment.
Installment contracts are carried on the Company's books as a receivable and the
revenue generated by these installment contracts is recognized when the product
is delivered to the customer and the contract is signed. This procedure was in
effect for the last three quarters of fiscal year 2001 and for all of fiscal
year 2002.
Extended payment term arrangements for software sales that are longer
than 12 months are governed by the AICPA Statement of Position 97-2, Software
Revenue Recognition. This Statement of Position permits the recognition of
revenue at the time of sale, rather than as the monthly payments become due, if
the vendor's fee is fixed or determinable and collectibility is probable.
Paragraph 28 states, "...Further, if payment of a significant portion of the
software licensing fee is not due until after expiration of the license or more
than twelve months after delivery, the licensing fee should be presumed not to
be fixed or determinable. However, this presumption may be overcome by evidence
that the vendor has a standard business practice of using long-term or
installment contacts and a history of successfully collecting under the original
payment terms without making concessions." The Company has been offering these
24-month installment contracts for more than four years and collecting them
without making concessions, as defined in the AICPA Technical Practice Aids
5100.56. Therefore it is appropriate that the Company recognize the revenue at
the time of delivery of the product
SOP 97-2 states that revenue from the sale of software should be
recognized when the following four specific criteria are met: 1) persuasive
evidence of an arrangement exists, 2) delivery has occurred, 3) the fee is fixed
and determinable and 4) collectibility is probable. All of these criteria are
met when a customer purchases the SOS product. The customer signs a Company
order form and a receipt acknowledging a sale and receipt and acceptance of the
product. As noted on the order and acceptance forms, all sales are final. All
fees are fixed and final. Some states require a three-day right to rescind the
transaction. Sales in these states are not recognized until the rescission
period has expired. The Company offers customers the option to pay for the SOS
with Extended Payment Term Arrangements (EPTAs). The EPTAs generally have a
twenty-four month term. The Company has a standard of using long-term or
installment contracts and has a four-year history of successfully collecting
under the original payment terms without making concessions. Over the past four
years the Company has collected or is collecting approximately 70% to 80% of all
EPTAs issued to customers. Not all customers live up to their obligations under
the contracts. The Company makes every effort to collect on the EPTAs, including
the engagement of professional collection services. Despite the Company's
efforts, approximately 20 percent of all EPTAs are determined to be
uncollectible. All uncollectible EPTAs are written off against an allowance for
doubtful accounts, which allowance is established at the time of sale based on
the Company's four-year history of extending EPTAs. As a result, revenue from
the sale of the SOS is recognized upon the delivery of the product.
Revenue related to the sale of certificates for web site hosting and
banner licenses is recognized over the period representing the life of the
certificate and the length of the prepaid service. Revenue related to banner
advertising services is recognized over the period such advertising is usable
and revenue related to the delivery of mentoring services is recognized over the
estimated service period. Revenue recorded relating to the sale of merchant
account software is reflected net of the cost of the product paid since the
Company does not take title to the product prior to its sale.
Revenues relating to the design and development of Internet Web sites
and related consulting projects is recognized using the percentage-of-completion
method. Unbilled receivables represent time and costs incurred on projects in
progress in excess of amounts billed, and are recorded as assets. Deferred
revenue represents amounts billed in excess of costs incurred, and is recorded
as a liability. To the extent costs incurred and anticipated costs to complete
projects in progress exceed anticipated billings, a loss is recognized in the
period such determination is made for the excess.
(l) Business Segments and Related Information
The Company has historically operated under two principal business
segments (Internet services and multimedia products). The primary business
segment (Internet services) is engaged in the business of providing its
customers the ability to (i) acquire a presence on the Internet and (ii) to
advertise and sell their products or services on the Internet. A secondary
business segment (multimedia services) was engaged in providing assistance in
the design, manufacture and marketing of multimedia brochure kits, shaped
compact discs and similar products and services intended to facilitate
conducting business over the Internet. This second segment was sold on January
11, 2001 and the gain on the sale is reported as an extraordinary item in the
accompanying consolidated financial statements. As a result, the Company
currently operates in one business segment.
(m) Foreign Currency Translation
The financial statements of the Company's Canadian subsidiary,
StoresOnline.com, Ltd. have been translated into U.S. dollars from its
functional currency in the accompanying consolidated financial statements in
accordance with Statement of Financial Accounting Standards No. 52, "Foreign
Currency Translation." Balance sheet accounts of StoresOnline.com, Ltd. are
translated at period-end exchange rates while income and expenses are translated
at the average of the exchange rates in effect during the period. Translation
gains or losses that related to the net assets of StoresOnline.com Ltd. are
shown as a separate component of stockholders' equity (capital deficit) and
comprehensive income (loss). There were no gains or losses resulting from
realized foreign currency transactions (transactions denominated in a currency
other than the entities' functional currency) during the three months ended
September 30, 2002 and 2001.
(n) Per Share Data
Basic net income (loss) per share is computed by dividing net income
(loss) available to common shareholders by the weighted average number of common
shares outstanding during the period. Diluted net income (loss) per share
reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common stock or
resulted in the issuance of common stock that then shared in the earnings of the
entity.
(o) Use of Estimates
Management of the Company has made a number of estimates and
assumptions relating to the reporting of assets and liabilities and the
disclosure of contingent assets and liabilities at the balance sheet date, and
the reporting of revenues and expenses during the reporting periods to prepare
these financial statements in conformity with accounting principles generally
accepted in the United States of America. Actual results could differ from those
estimates. The Company has estimated that allowances for bad debt for Trade
Receivables should be $4,165,125 and $3,276,611 as of September 30, 2002 and
June 30, 2002, respectively. In addition, the Company has recorded an allowance
for doubtful accounts of $101,587 at September 30, 2002 and $137,370 at June 30,
2002 for estimated credit card chargebacks relating to the most recent 180 days
of credit card sales.
(p) Reclassifications
Certain amounts reported in 2001 have been reclassified to conform to
the 2002 presentation.
(q) Commission Expense
Commission expense relating to third-party telemarketing activity is
recognized as incurred.
(r) Recently Issued Accounting Pronouncements
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations" (SFAS 143). Under this standard, asset retirement
obligations will be recognized when incurred at their estimated fair value. In
addition, the cost of the asset retirement obligations will be capitalized as a
part of the asset's carrying value and depreciated over the asset's remaining
useful life. SFAS No. 143 is effective for fiscal years beginning after June 15,
2002. The Company does not expect that adoption of SFAS No. 143 will have a
material impact on its financial condition or results of operations.
In October, 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" (SFAS 144). This standard requires
that all long-lived assets (including discontinued operations) that are to be
disposed of by sale be measured at the lower of book value or fair value less
cost to sell. Additionally, SFAS 144 expands the scope of discontinued
operations to include all components of an entity with operations that can be
distinguished from the rest of the entity and will be eliminated from the
ongoing operations of the entity in a disposal transaction. SFAS 144 is
effective for fiscal years beginning after December 15, 2001. The Company does
not expect the implementation of SFAS 144 to have a material effect on its
financial condition or results of operations.
In April 2002, the FASB issued SFAS No. 145, "Rescission of SFAS Nos.
4, 44, and 64, Amendment of SFAS 13, and Technical Corrections as of April 2002"
(SFAS 145). This standard rescinds SFAS No. 4, Reporting Gains and Losses from
Extinguishment of Debt, and an amendment of that Statement, SFAS No. 64,
Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements and excludes
extraordinary item treatment for gains and losses associated with the
extinguishment of debt that do not meet the APB Opinion No. 30, Reporting the
Results of Operations -- Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions (APB 30) criteria. Any gain or loss on extinguishment of debt that
was classified as an extraordinary item in prior periods presented that does not
meet the criteria in APB 30 for classification as an extraordinary item shall be
reclassified. SFAS 145 also amends SFAS 13, Accounting for Leases as well as
other existing authoritative pronouncements to make various technical
corrections, clarify meanings, or describe their applicability under changed
conditions. Certain provisions of SFAS are effective for transactions occurring
after May 15, 2002 while others are effective for fiscal years beginning after
May 15, 2002. The Company has not assessed the potential impact of SFAS 145 on
its financial condition or results of operations.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" (SFAS 146). This standard addresses
financial accounting and reporting for costs associated with exit or disposal
activities and replaces Emerging Issues Task Force Issue No. 94-3, Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring) (EITF 94-3). SFAS
146 requires that a liability for costs associated with an exit or disposal
activity be recognized when the liability is incurred. Under EITF 94-3, a
liability for exit costs, as defined in EITF No. 94-3 were recognized at the
date of an entity's commitment to an exit plan. The provisions of SFAS 146 are
effective for exit or disposal activities that are initiated by the Company
after December 31, 2002.
(3) Going Concern
The accompanying financial statements have been prepared on the basis
that the Company will continue as a going concern, which contemplates the
realization of assets and satisfaction of liabilities in the normal course of
business. The Company has primarily incurred losses since its inception, and has
a cumulative net loss of a $68,437,311 through September 30, 2002. At September
30, 2002 the Company had working capital of $1,874,171 and an equity balance of
$3,569,852. For the three months ended September 30, 2002 and 2001, the Company
recorded negative cash flows from continuing operations of $151,347 and
$1,336,320, respectively. The Company has historically relied upon private
placements of its stock, issuance of debt and sale of accounts receivable to
generate funds to meet its operating needs. Management's plans include the
raising of additional debt or equity capital. However, there can be no assurance
that additional financing will be available on acceptable terms, if at all. The
Company continues to work to improve the strength of its balance sheet and has
restructured its ongoing operations in an effort to improve profitability and
operating cash flow. If adequate funds are not generated the Company may not be
able to execute its strategic plan and may be required to obtain funds through
arrangements that require it to relinquish rights to all or part of the
intellectual property of its Stores Online software or control of its business.
The unaudited condensed consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
(4) Selling of Accounts Receivable With Recourse
The Company offers to customers the option to finance, through Extended
Payment Term Arrangements (EPTAs), purchases made at the Internet training
workshops. A significant portion of these EPTAs, are then sold, on a discounted
basis, to third party financial institutions for cash. EPTAs sold to third party
financial institutions are generally subject to recourse by the purchasing
finance company after an EPTA is determined to be uncollectible. For the three
months ended September 30, 2002 and September 30, 2001, the Company sold
contracts totaling $754,751 and $819,564, respectively. The Company maintains a
two percent bad debt allowance for doubtful accounts on all EPTAs that are
purchased by finance companies. The Company works with various finance companies
and continues to seek relationships with other potential purchasers of these
EPTAs.
(5) Notes Payable
A note payable of $97,779 to a financial institution, bearing interest at the
prime rate plus 3% per annum (10% at June 30, 2001) was due on November 1, 2001.
The note was secured by certain equipment of the Company and was guaranteed by
the Company's current Chief Executive Officer. The note was paid in full on
September 24, 2001. Notes payable at September 30, 2002 consist of $438,723 of
principal and interest payable to King William (see Note 7) and $62,523 due to
Imperial Premium Finance Company. Maturities of notes payable are as follows:
Year ending June 30,
2003 $ 62,523
2004 0
2005 0
2006 0
2007 438,723
Thereafter -
------------
$ 501,246
============
(6) Convertible Debenture
In July 2000, the Company entered into a securities purchase agreement
with King William, LLC ("King William"). Under the terms of the agreement, the
Company issued to King William an 8% convertible debenture due July 31, 2003 in
the principal amount of $4.5 million. The debenture was convertible at King
William's option into the number of shares of our common stock at the lower of
$17.90 or a conversion rate of 80% of the average market price of the common
stock during any three non-consecutive trading days during the 20 trading days
prior to conversion. The purchase price for the debenture was payable in two
tranches. The first tranche of $2.5 million was paid at the closing in July
2000. The value of the beneficial conversion feature on the $2.5 million that
has been drawn down was recorded as additional paid in capital and interest
expense of $884,000 for the year ended June 30, 2001, as the convertible
debentures were immediately exercisable.
In connection with the securities purchase agreement, the Company
issued to King William a warrant to purchase 23,100 shares of the Company's
common stock. In connection with the issuance of the debenture, the Company also
issued to Roth Capital Partners, Inc., a warrant to purchase 9,000 shares of
common stock and to Carbon Mesa Partners, LLC, a warrant to purchase 1,000
shares of common stock. Each of the warrants is exercisable for five years from
the date of issue, at an exercise price of $16.25 per share and with cashless
exercise and piggyback registration rights. The fair value of the warrants has
been determined to equal $371,000 using the Black-Scholes pricing model with the
following assumptions: dividend yield of zero, expected volatility of 80%,
risk-free interest rate of 6.5% and expected life of 5 years. The $371,000 was
accounted for as additional paid in capital and debt discount and was amortized
over the life of the debt. The unamortized balance at September 30, 2002 and
June 30, 2002 was $0 and $0, respectively.
Effective January 25, 2001, the Company reached an agreement with King
William to restructure the debenture (the "Restructuring Agreement"). As of the
date of the Restructuring Agreement the Company was in breach and/or violation
of the Purchase Agreement, the Debenture, the King William Warrant Agreement,
the Registration Rights Agreements and the Equity Agreement. However, pursuant
to the terms of the Restructuring Agreement the holder of the convertible
debenture has waived all of these defaults as of the date of the Restructuring
Agreement. Under the terms of the Restructuring Agreement the agreements were
terminated effective as of the date of the Restructuring Agreement and no
termination payment or additional warrants were issued in connection therewith.
Under the terms of the Restructuring and Amendment Agreement the second
tranche of the debenture will not be available to the Company. The Company
agreed to repay the full amount of the Debenture plus a 15% premium ($375,000)
with respect to the original principal amount in ten payments. As of the date of
the Restructuring and Amendment Agreement the principal amount including accrued
and unpaid interest was $2,972,781. Additionally, the Company has allowed King
William to retain the right to convert any or all portions of the outstanding
debt to equity, but only after the stock has traded at or above $30.00 for
twenty consecutive trading days, or if the Company does not make a required
payment of principal. Warrants already earned by King William were re-priced at
$2.50 per share and King William was issued a warrant for an additional 26,900
shares of common stock at $2.50 per share. The incremental fair value of the
re-pricing of the warrants and the issuance of the new warrants, valued using
the Black-Scholes pricing model with the following assumptions: dividend yield
of zero, expected volatility of 170%, risk-free interest rate of 5% and expected
life of 5 years, was $9,008 and $129,927, respectively. These costs were
classified on the balance sheet as debt financing costs and were being amortized
over the life of the debt. The unamortized balance as of September 30, 2002 and
2001 is $0 and $0, respectively. The initial payment of $250,000, as called for
by the Restructuring and Amendment Agreement, was made during the first week of
February 2001. A second payment to be paid on February 28, 2001 was not made.
In May 2001 King William elected to convert $200,000 of the principal
and accrued and unpaid interest of the debenture (Conversion Amount) into 80,000
shares of Common Stock of the Company, at a conversion price of $2.50 per share.
The Conversion Amount was credited toward the payment of $250,000 due on
February 28, 2001, with the balance plus interest accrued to be paid on March
10, 2002. In addition, in May 2001, the Company entered into a Waiver Agreement
with King William, LLC to amend certain of the terms of the Restructuring
Agreement and to waive certain existing defaults under the Restructuring
Agreement. The Waiver Agreement amended the Restructuring Agreement payment
schedule to postpone the remaining April 2001 payment of $247,278 to February
2002 and the May 2001 payment of $247,278 to March 2002. As of the date of the
Waiver Agreement King William has withdrawn and waived all defaults and
violations.
Effective July 11, 2001 the Company and King William entered into a
Second Restructuring Agreement. The Company agreed to pay, and King William
agreed to accept, in full and final satisfaction of the Debenture at a closing
effective September 10, 2001, (i) a cash payment of $100,000, (ii) a $400,000
promissory note of the Company due August 2004 bearing interest at 8% per annum
and (iii) 280,000 shares of the Company's common stock. No accrued interest was
payable in connection with these payments. King William has agreed to certain
volume limitations relating to the subsequent sale of its shares of the
Company's common stock and has also agreed to forgive the promissory note if the
Company meets certain specific requirements including a minimal amount
($2,250,000) of proceeds King William receives from its sale of Company common
stock. The Final Conversion Shares insure that King William will receive
sufficient shares so that on the day of the closing King William will
beneficially own common shares equal to 9.99% of the then outstanding shares of
the Company. In September 2001 the Company issued the final conversion shares
equal to 280,000. No gain or loss on the exchange of shares for debt was
recorded in the accompanying financial statements. The Company was in default
under the Second Restructuring Agreement for failure to make interest payments
on November 10, 2001 and February 10, 2002, as called for by the agreement. King
William may have accelerated payment of the unpaid balance of the note plus
accrued interest upon written notice to the Company. No written notice of
default had been received.
Effective February 13, 2002 the Company and King William agreed to
amend certain terms of the Second Restructuring Agreement. The New Note is
amended to provide for a final maturity on July 10, 2006 and to provide that
interest shall accrue at the rate stated in the New Note and be added to the
principal balance until August 13, 2002. In addition, interest payable may be
paid in either cash or common stock of the Company, which common stock is to be
valued at an amount equal to the average closing bid price of the Company's
common stock during the five trading days prior to the date the interest payment
is made. Upon the signing of this agreement the Company issued 10,000 shares of
restricted common stock valued at $13,000. The Company is no longer required to
file a registration statement with respect to the common stock of the Company
currently held by King William or acquirable by it upon exercise of the warrants
held by it. King William has waived any default by the Company under the Second
Agreement and the New Note. Finally, the selling limitations in Section 4 of the
Second Agreement are no longer in effect and King William is only bound by the
limitations under Rule 144 relating to the resale of any securities.
(7) Convertible Long Term Notes
In January and April 2001, the Company issued long term Convertible
Promissory Notes ("Notes") in a private placement offering totaling $2,076,500.
The terms of Notes required them to be repaid on July 1, 2004 plus accrual of
interest at the rate of eight percent (8%) per annum. The Notes were convertible
prior to the Maturity Date at the option of the Holder any time after July 1,
2001, or by the Company at any time after July 1, 2001 upon certain conditions
as detailed in the Notes. The Notes were convertible into shares of common stock
of the Company by dividing the Note balance on the date of conversion by $2.50,
subject to Conversion Price Adjustments as defined in the agreement. The
relative fair value of this Beneficial Conversion Feature of the notes was
calculated to be $1,347,480 and was recorded as debt discount on the balance
sheet, and was amortized over the life of the Notes in accordance with Emerging
Issues Task Force issue 00-27 effective November 16, 2000.
In connection with the sale of the Notes, the Company issued a warrant
to purchase a share of the Company's common stock at an exercise price of $5.00
per share for every two shares of Common Stock into which the Note is originally
convertible. The Company issued a total of 366,100 warrants in connection with
the sale of the Notes, with a date of expiration not to exceed sixty calendar
days following the commencement date of the warrants. The relative fair value of
the warrants has been determined to be $512,540 and has been recorded as debt
discount on the balance sheet and is amortized over the life of the Notes in
accordance with Emerging Issues Task Force issue 00-27 effective November 16,
2000. None of the warrants were exercised.
The beneficial conversion feature and debt discounts of $1,347,480 and
$512,540, respectively, have been netted against the $2,076,500 balance of the
Notes on the Balance Sheet and are being amortized over the life of the Notes in
accordance with Emerging Issues Task Force issue 00-27 effective November 16,
2000. The unamortized balance of the beneficial conversion feature and debt
discount at September 30, 2002 and June 30, 2002 was $0 and $269,634,
respectively.
On July 15, 2001 the Company sent a letter to all holders of the Notes
explaining their right to convert their investment into common stock. The letter
included a calculation of the interest the note holder had earned and offered to
convert both the principal balance of the Note and the accrued interest into
common stock at a conversion price of $2.50 per share.
As of December 31, 2001, all Note holders, holding $2,147,295 of
aggregate principal and accrued interest, had exercised their right to convert
both principal and accrued interest into 859,279 shares of common stock.
(8) Stockholders' Equity
Quarter ended September 30, 2001
On August 1, 2001, the Company entered into an agreement with
Electronic Commerce International ("ECI"), a company formerly owned by Jay
Poelman who was at that time a director of and the president of the Company,
pursuant to which, among other matters, the Company agreed to issue ECI a total
of 83,192 shares of common stock of the Company at a price of $3.00 per share in
exchange for the release by ECI of trade claims against the Company totaling
$249,575. In connection with the exchange, the Company recorded a charge of
$199,657, representing the difference between the market value and the exchange
rate, which is included in cost of revenue.
During September 2001 the Company issued 280,000 common shares upon
conversion of a long-term convertible debenture (see Note 6).
Quarter ended September 30, 2002
In July 2002, the Company issued 5,000 shares of common stock at a
price of $3.00 a share relating to the private placement of common stock which
closed during November 2001 for which all necessary paperwork had not previously
been received. The Company had held these funds as a current liability pending
the receipt of all proper paperwork.
(9) Related Entity Transactions
The Company utilizes the services of Electronic Commerce International,
Inc. ("ECI"), a Utah corporation, to provide a credit card merchant account
solution to our customers and, formerly, to provide a leasing opportunity to
customers who purchased our products at the Internet training workshops. The
Company buys a product from ECI that provides on-line, real-time processing of
credit card transactions and resells it to its customers. John J. Poelman, Chief
Executive Officer, a director and a stockholder of the Company, was the sole
owner of ECI during the three months ended September 30, 2002 and September 30,
2001. Mr. Poelman sold his interest in ECI effective October 1, 2002. Total
revenue generated by the Company from the sale of ECI merchant account solutions
was $1,453,612 and $1,194,706 for the three months ended September 30, 2002 and
2001, respectively. The cost to the Company for these products and services
totaled $223,716 and $361,883 for the three months ended September 30, 2002 and
2001, respectively. During the three months ended September 30, 2002 and 2001
the Company processed leasing transactions for its customers through ECI in the
amounts of $0 and $898,173, respectively. In addition, the Company had $30,498
and $26,702 as of September 30, 2002 and June 30, 2002, respectively, recorded
in accounts payable relating to the amounts owed to ECI for the purchase of the
merchant account software.
The Company offers its customers at its Internet training workshops,
and through backend telemarketing sales, certain products intended to assist the
customer in being successful with their business. These products include live
chat and web traffic building services. The Company utilizes Electronic
Marketing Services, LLC. ("EMS") to fulfill these services to the Company's
customers. In addition, EMS provides telemarketing services, selling some of the
Company's products and services. Ryan Poelman, who owns EMS, is the son of John
J. Poelman, Chief Executive Officer, a director and a stockholder of the
Company. The Company's revenues generated from the above products and services
were $1,429,824 and $1,020,351 for the three months ended September 30, 2002 and
2001, respectively. The Company paid EMS $278,060 and $107,859 to fulfill these
services during the three months ended September 30, 2002 and 2001,
respectively. In addition, the Company had $60,419 and $53,023 as of September
30, 2002 and June 30, 2002, respectively, recorded in accounts payable relating
to the amounts owed to EMS for product and services.
(10) Subsequent Events
Effective October 1, 2002 John J. Poelman, Chief Executive Officer and
a director and stockholder of the Company, sold his interest in Electronic
Commerce International, Inc. ("ECI") to an unrelated third party. The Company
presently obtains from ECI a product which allows the Company's customers to
accept credit card payments for goods and services sold by them through their
websites.
(11) Earnings Per Share
Unexercised stock options to purchase 312,015 shares of the Company's
common stock and unexercised warrants to purchase 502,212 shares of the
Company's common stock were outstanding as of September 30, 2002, of which no
stock options and 269,643 warrants were included in the diluted per share
computation. Unexercised stock options to purchase 372,782 shares of the
Company's common stock and unexercised warrants to purchase 210,735 shares of
the Company's common stock, in addition to shares of common stock from the
conversion of subsidiary common stock and convertible debentures of 1,437,889
were outstanding as of September 30, 2001, of which 262,623 options and 88,235
warrants were not included in the per share computations because their effect
would have been antidilutive.
The following data was used in computing earnings per share:
----------------------------------
Three Months Ending September 30,
----------------------------------
2002 2001
----------------------------------
Net Income available to common shareholders $ 1,083,150 $ 2,335,308
Basic EPS
- --------------------------------------------------------------------------------
Shares
Common shares outstanding entire period 10,995,774 2,446,019
Weighted average common shares:
Issued during period 3,704 1,004,692
Canceled during period - -
---------------------------------
Weighted average common shares outstanding
during period 10,999,478 3,450,711
---------------------------------
Earnings per common share - basic $ .10 $ .68
=================================
Diluted EPS
- --------------------------------------------------------------------------------
Weighted average common shares outstanding
during period - basic 10,999,478 3,450,711
Dilutive effect of stock equivalents 35,981 89,013
---------------------------------
Weighted average common shares outstanding
during period - diluted 11,035,459 3,539,724
---------------------------------
Earnings per common share - diluted $ .10 $ .66
=================================
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This management's discussion and analysis of financial condition and
results of operations and other portions of this Quarterly Report on Form 10-Q
contain forward-looking information that involves risks and uncertainties. Our
actual results could differ materially from those anticipated by this
forward-looking information. Factors that could cause or contribute to such
differences include, but are not limited to, those discussed or referred to in
the Annual Report on Form 10-K for the year ended June 30, 2002, filed on
October 15, 2002, under the heading Information Regarding Forward-Looking
statements and elsewhere. Investors should review this quarterly report in
combination with our Annual Report on Form 10-K in order to have a more complete
understanding of the principal risks associated with an investment in our common
stock. This management's discussion and analysis of financial condition and
results of operations should be read in conjunction with our financial
statements and related notes included elsewhere in this quarterly report on Form
10-Q.
General
During the fiscal year ended June 30, 2000 and the first six months of
fiscal year 2001 we incurred large losses and our liquidity was severely
strained. It was not possible to continue operations without significant
changes. In January 2001, we implemented a restructuring process intended to
allow us to begin to operate on a cash flow positive basis. The Internet
Commerce Center (ICC) division and the CableCommerce division were reduced to a
maintenance staff supporting existing customers, and all other employees were
laid off. Our wholly-owned subsidiary, IMI, Inc., also sometimes referred to as
Impact Media, was sold. We entered into an agreement with a third party to
negotiate compromise payment schedules with non-essential vendors for less than
the full amount owed. In addition, key management employees agreed for a period
of time to voluntarily reduce their salaries.
This restructuring allowed us to focus our attention and resources on
our core Galaxy Mall business which was subsequently rebranded as StoresOnline.
During the subsequent 18 months, approximately $7.2 million was raised through
private placements of convertible notes and common stock, the proceeds of which
were used to provide working capital for the business, to partially repay our
long term debt and pay our past due accounts payable. The following discussion
of the results of operations further expands on the effects of these changes.
Reverse Stock Split
On June 28, 2002, our stockholders approved amendments to our
Certificate of Incorporation to change our corporate name to "Imergent, Inc."
and to effect a one-for-ten reverse split of the issued and outstanding shares
of our common stock and reduce the authorized number of shares of common stock
from 250,000,000 to 100,000,000. These changes were effected July 2, 2002. As a
result of the reverse stock split, every ten shares of our existing common stock
was converted into one share of our new common stock under our new name,
Imergent, Inc. Fractional shares resulting from the reverse stock split were
settled by cash payment. Throughout this discussion references to numbers of
shares and prices of shares have been adjusted to reflect the reverse stock
split.
Review by the Securities and Exchange Commission
On March 6, 2002, the Securities and Exchange Commission ("SEC")
notified us that they reviewed our annual report filed on Form 10-K for the
fiscal year ended June 30, 2001 and our quarterly report on Form 10-Q for the
quarter ended September 30, 2001. They sent us their letter of comment pointing
out areas of concern and requesting that we answer their questions and provide
additional information. Since receipt of this letter, we have exchanged
correspondence with members of the SEC staff and provided them with additional
information. On September 24, 2002 in a telephone conference call with the SEC
staff, we resolved certain of the more material issues. On October 31, 2002 we
responded to other comments from the staff in their letter dated August 5, 2002.
We believe that these remaining comments will be satisfactorily resolved.
Fluctuations in Quarterly Results and Seasonality
In view of the rapidly evolving nature of our business and our limited
operating history, we believe that period-to-period comparisons of our operating
results, including our gross profit and operating expenses as a percentage of
net sales, are not necessarily meaningful and should not be relied upon as an
indication of future performance.
While we cannot say with certainty the degree to which we experience
seasonality in our business because of our limited operating history, our
experience to date indicates that we experience lower sales from our core
business during our first and second fiscal quarters. We believe this to be
attributable to summer vacations and the Thanksgiving and December holiday
seasons.
Critical Accounting Policies and Estimates
Our consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of America
and form the basis for the following discussion and analysis on critical
accounting policies and estimates. The preparation of these financial statements
requires us to make estimates and assumptions that affect the reported amounts
of assets, liabilities, revenues and expenses, and related disclosure of
contingent assets and liabilities. On a regular basis we evaluate our estimates
and assumptions. We base our 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 for making judgments about the carrying
values of assets and liabilities that are not readily apparent from other
sources. Actual results may differ from these estimates under different
assumptions or conditions.
A summary of our significant accounting policies is set out in Note 2
to our Financial Statements in our Form 10-K for the fiscal year ended June 30,
2002. We believe the critical accounting policies described below reflect our
more significant estimates and assumptions used in the preparation of our
unaudited condensed consolidated financial statements. The impact and any
associated risks on our business that are related to these policies are also
discussed throughout this Management's Discussion and Analysis of Financial
Condition and Results of Operations where such policies affect reported and
expected financial results.
Revenue Recognition
During the fiscal year ended June 30, 2001 the Company changed its
product offering at its Internet training workshops. The date of the change was
October 1, 2000, the beginning of our second fiscal quarter of fiscal year 2001.
Prior to that time, customers were sold a service consisting of the construction
of Internet websites for their business, which service was to be provided at any
time during the 12 months following the sale. Included in the price paid for
this service was one year's hosting beginning when the website was published.
Revenue from these transactions was deferred at the time of sale and recognized
as the services were rendered or when the right to receive the services
terminated.
Beginning October 1, 2000, we discontinued selling the service and in
its place sold a new product called the StoresOnline Software ("SOS"). The SOS
is a software product that enables the customer to develop their Internet
website without additional assistance from us. When a customer purchases a SOS
at one of our Internet workshops, he or she receives a CD-ROM containing
programs to be used with their computer and a password and instructions that
allow access to our website where all the necessary tools are present to
complete the construction of the customer's website. When completed, the website
can be hosted with us or any other provider of such services. If they choose to
host with us there is an additional setup and hosting fee (currently $150) for
publishing and 12 months of hosting. This fee is deferred at the time it is paid
and recognized during the subsequent 12 months.
The revenue from the sale of the SOS is recognized when the product is
delivered to the customer. We accept cash and credit cards as methods of payment
and we offer 24-month installment contracts to customers who prefer an extended
payment term arrangement. We offer these contracts to all workshop attendees not
wishing to use a check or credit card provided they complete a credit
application, give us permission to independently check their credit and are
willing to make an appropriate down payment. Installment contracts are carried
on our books as a receivable and the revenue generated by these installment
contracts is recognized when the product is delivered to the customer and the
contract is signed and an allowance for doubtful accounts is established. This
procedure was in effect for the last three quarters of fiscal year 2001, all of
fiscal year 2002 and is still in effect for the quarter ended September 30,
2002.
The American Institute of Certified Public Accounts statement of
position 97-2 ("SOP 97-2") states that revenue from the sale of software should
be recognized when the following four specific criteria are met: 1) persuasive
evidence of an arrangement exists, 2) delivery has occurred, 3) the fee is fixed
and determinable and 4) collectibility is probable. All of these criteria are
met when a customer purchases the SOS product. The customer signs one of our
order forms and a receipt acknowledging receipt and acceptance of the product.
As is noted on the order and acceptance forms, all sales are final. All fees are
fixed and final. Some states require a three-day right to rescind the
transaction. Sales in these states are not recognized until the rescission
period has expired. We offer customers the option to pay for the SOS with
Extended Payment Term Arrangements ("EPTAs"). The EPTAs generally have a
twenty-four month term. We have a standard of using long-term or installment
contracts and have a four-year history of successfully collecting under the
original payment terms without making concessions. Over the past four years, we
have collected or are collecting approximately 70% to 80% of all EPTAs issued to
customers. Not all customers live up to their obligations under the contracts.
We make every effort to collect on the EPTAs, including the engagement of
professional collection services. Despite our efforts, approximately 20 percent
of all EPTAs are determined to be uncollectible. All uncollectible EPTAs are
written off against an allowance for doubtful accounts, which allowance is
established at the time of sale based on our four-year history of extending
EPTAs. As a result, revenue from the sale of the SOS is recognized upon the
delivery of the product.
Allowance for Doubtful Accounts
We record an allowance for doubtful accounts and disclose the
associated expense as a separate line item in operating expenses. The allowance,
which is netted against our current and long term accounts receivable balances
on our condensed consolidated balance sheets, totaled approximately $4.2 million
as of September 30, 2002 compared to $3.3 million as of June 30, 2002. The
amounts represent estimated losses resulting from the inability of our customers
to make required payments. The estimates are based on historical bad debt
write-offs, specific identification of probable bad debts based on collection
efforts, aging of accounts receivable and other known factors. If the financial
condition of our customers were to deteriorate, resulting in an impairment of
their ability to make payments, additional allowances may be required.
Income Taxes
In preparing our consolidated financial statements, we are required to
estimate our income taxes in each of the jurisdictions in which we operate. This
process involves estimating actual current tax liabilities together with
assessing temporary differences resulting from differing treatment of items for
tax and accounting purposes. These differences result in deferred tax assets and
liabilities that are included within the consolidated balance sheet, as
applicable. Our deferred tax assets consist primarily of net operating losses
carried forward. We then assess the likelihood that deferred tax assets will be
recovered from future taxable income, and, to the extent that we believe that
recovery is not more likely than not, we establish a valuation allowance. We
have provided a valuation allowance against all of our net deferred tax assets
at September 30, 2002 and June 30, 2002. To the extent we establish a valuation
allowance against our deferred tax assets or change this valuation allowance in
a period, we reflect the impact in the tax provision for (benefit from) income
taxes in the condensed consolidated statements of operations.
Related Party Transactions
During the quarter ended September 30, 2002 we derived approximately
$1.5 million, or 13% of our total revenues, from the sale to our customers of a
product which allows the customer to accept credit card payments for goods and
services sold by them through their website and/or through their "bricks and
mortar" business. In the past, we have experienced difficulty in maintaining the
arrangements that allow us to offer this product to our customers and have
experienced difficulty in establishing such a product for resale at our
workshops held outside the United States. In addition, from time to time, credit
card issuing organizations make changes that affect this product which could
negatively impact, or preclude, our offering this product for sale in the United
States in its present form. We presently obtain this product for resale from
Electronic Commerce International, Inc. ("ECI"), the sole shareholder of which
was John J. Poelman, our chief executive officer and one of our directors and
stockholders, who, effective October 1, 2002, sold his interest in ECI to an
unrelated third party. Were we to lose our access to this product or if its cost
increases our business would be severely and negatively impacted and were we not
to be able to obtain a comparable product for resale outside the United States
our ability to successfully execute our international expansion would be
compromised.
Total revenue generated by us from the sale of ECI merchant account
solutions was $1,453,612 and $1,194,706 for the quarters ended September 30,
2002 and 2001, respectively. The cost to us for these products and services
totaled $221,726 and $195,604 for the quarters ended September 30, 2002 and
2001, respectively. In addition, we have $30,498 and $26,702 recorded in
accounts payable as of September 30, 2002 and June 30, 2002, respectively,
relating to the amounts owed to ECI for the purchase of its merchant account
product.
We offer our customers at our Internet training workshops, and through
backend telemarketing sales, certain products intended to assist the customer in
being successful with their business. These products include live chat and web
traffic building services. We utilize Electronic Marketing Services, LLC.
("EMS") to fulfill these services to our customers. In addition, EMS provides
telemarketing services, selling some of our products and services to those who
do not purchase at our workshops and to other leads. Ryan Poelman, who owns EMS,
is the son of John J. Poelman, Chief Executive Officer, a director and a
stockholder of the Company. Our revenues realized from the above products and
services were $1,429,824 and $1,020,351 for the quarters ended September 30,
2002 and 2001, respectively. We paid EMS $278,060 and $107,859 to fulfill these
services during the quarters ended September 30, 2002 and 2001, respectively.
In each of the above-described transactions and business relationships,
we believe that the terms under which business is transacted with all related
parties are at least as favorable to us as would be available from an
independent third party providing the same goods or services.
Results of Operations
Three-month period ended September 30, 2002 compared to the three-month
period ended September 30, 2001
Revenue
Revenues for the three-month period ended September 30, 2002, our first
fiscal quarter of fiscal year 2003, decreased to $11,283,849 from $11,634,043 in
the three month period ended September 30, 2001, a decrease of 3%. Revenues
generated at our Internet training workshops for the fiscal quarters ended
September 30 2002 and 2001 were from the sale of the SOS product as described
above. Other revenues include fees charged to attend the workshop, web traffic
building products, mentoring, consulting services, access to credit card
transaction processing interfaces and sales of banner advertising. We expect
future operating revenues to be generated principally following a business model
similar to the one used in fiscal year 2002. The Internet environment continues
to evolve, and we intend to offer future customers new products as they are
developed. We anticipate that our offering of products and services will evolve
as some products are dropped and are replaced by new and sometimes innovative
products intended to assist our customers achieve success with their
Internet-related businesses.
The decrease in revenues from the three month period ended September
30, 2002 compared to the three month period ended September 30, 2001 can be
attributed to various factors some of which increased revenues while others
caused the decline. There was an increase in the number of Internet training
workshops conducted during the current quarter. The number increased to 78,
including 11 that were held outside the United States of America, for the
current fiscal quarter from 73 in the fiscal quarter ended September 30, 2001,
all of which were held within the United States. Also the average number of
persons attending each workshop increased which further increased revenues
during the current period. Approximately 35% percent of primary workshop
attendees (not including their guests) made purchases at our workshops. This
percentage remained approximately the same as has been our experience
historically. We will seek to continue to hold workshops with a larger number of
attendees in future quarters. We will seek to increase the number of these
larger workshops during the balance of fiscal year 2003.
The principal cause of the reduction in revenue during the fiscal
quarter ended September 30, 2002 compared to the prior year's period was the
loss of a benefit relating to the recognition of revenue deferred from
historical workshop sales at rates greater than the level at which revenue is
required to be deferred from the current period. During the quarter ended
September 30, 2002, we recognized only $139,810 in net revenue from sales made
in prior periods compared to $3,753,007 recognized from sales make in prior
periods during the quarter ended September 30, 2001.
This benefit experienced during fiscal 2001 resulted from a change in
the business model and product offering at the workshops as noted above. This
benefit has now been fully realized and we do not expect it to reoccur. We
anticipate that in future quarters the amount of revenue recognized from earlier
periods will be approximately equal to that deferred into future periods.
Effective January 1, 2002, we began making our product offerings
through our StoresOnline subsidiary rather than our Galaxy Mall subsidiary. This
culminated an eighteen month long plan to fully incorporate the SOS throughout
the engineering and programming departments, servers and infrastructure and to
move away from a mall-based hosting environment. Our services have been used for
several years by non-mall based merchants, and we believe that principles taught
by us work equally well for standalone websites, as they do with sites hosted on
the mall. Although Galaxy Mall remains an active website, all new customers are
sold the SOS through our StoresOnline previews and workshops.
In summary, based on new sales (without regard to revenue from deferred
sales), revenue for the quarter ended September 30, 2002 was $11,144,039,
compared to $7,881,036 for the quarter ended September 30, 2001.
Gross Profit
Gross profit is calculated as revenue less the cost of revenue, which
consists of the cost to conduct Internet training workshops, to program customer
storefronts, to provide customer technical support and the cost of tangible
products sold. Gross profit for the fiscal quarter ended September 30, 2002
decreased to $8,825,417 from $10,044,474 in the prior year. The decrease in
gross profit primarily reflects the decreased revenue related to the reduced
level of benefit from the recognition of deferred revenue as described above.
The cost of revenue in the current fiscal quarter also included the costs
associated with the international workshops which are greater than those for
domestic workshops.
Gross profit as a percent of revenue for the fiscal quarter ended June
30, 2002 was 78% compared to 86% for the fiscal year ended September 30, 2001.
However, the $3,753,007 in deferred revenue that was recognized during the
quarter ended September 30, 2001 from prior periods had no costs associated with
it since those costs were recognized at the time the products were delivered in
the relevant prior periods. Therefore, the cost of revenue in 2001 of $1,589,569
without the benefit of the deferred revenue would have been equal to 20% and
thus the gross profit percentage comparison would be 78% in 2002 verses 80% in
2001. We anticipate that gross profit as a percentage of revenue will remain in
the range of from 73% to 78% in future quarters.
Cost of revenues includes related party transactions of $223,716 in the
first fiscal quarter of 2002 and $361,883 in the comparable period of the prior
fiscal year. These are more fully described in the notes to the financial
statements as Note 9. We believe that the terms under which business is
transacted with all related parties are at least as favorable to us as would be
available from an independent third party providing the same goods or services.
Product Development
Product development expenses consist primarily of payroll and related
expenses. We had no product development expenses for the quarter ended September
30, 2002. Product development expenses in the quarter ended September 30, 2001
were $53,400. They consisted of work on the Stores On Line, version 4 product
which is used in the "Complete Store Building Packet" sold at our Internet
training workshops.
We intend to make enhancements to our technology as new methods and
business opportunities present themselves, but our business model currently
contemplates that in most cases we will pass these costs on to our customers. We
will undertake additional development projects as the needs are identified and
as the funds to undertake the work are available.
Selling and Marketing
Selling and marketing expenses consist of payroll and related expenses
for sales and marketing, the cost of advertising, promotional and public
relations expenditures and related expenses for personnel engaged in sales and
marketing activities, and commissions paid to telemarketing companies. Selling
and marketing expenses for the quarter ended September 30, 2002 increased to
$4,521,348 from $3,611,796 in the quarter ended September 30, 2001. The increase
in selling and marketing expenses is primarily attributable to the increase in
the number of workshops held during the current year and the associated expenses
including advertising and promotional expenses necessary to attract attendees.
Advertising expenses for the quarter ended September 30, 2002 were approximately
$2.0 million compared to $1.3 million in the quarter ended September 30, 2001.
Selling and marketing expenses as a percentage of sales were 40% of revenues for
the current fiscal quarter and with the deferred revenue mentioned above,
selling and marketing expenses were 31% for the quarter ended September 30,
2001. Without the benefit of the deferred revenue, selling and marketing
expenses in the quarter ended September 30, 2001 as a percentage of revenues
would have been 46%.
Selling and marketing expense includes related party transactions of
$287,060 and $107,859 in the quarters ended September 30, 2002 and 2001,
respectively. These are more fully described in the notes to the financial
statements as Note 9. We have determined, based on competitive bidding and
experience with independent vendors offering similar products and services, that
the terms under which business is transacted with this related party are at
least as favorable to us as would be available from an independent third party.
General and Administrative
General and administrative expenses consist of payroll and related
expenses for executive, accounting and administrative personnel, professional
fees and other general corporate expenses. General and administrative expenses
for quarter ended September 30, 2002 decreased to $934,418 from $1,555,987 in
the comparable quarter of the previous fiscal year. This decrease is primarily
attributable to the fact that in the quarter ended September 30, 2001 we
incurred $555,201 in debt issuance costs associated with our convertible
debenture with King William, LLC. Since King William converted the debenture
into common stock, the debt issuance costs were written off rather than being
amortized over the life of the debenture. Other items contributing to the
reduction were a decrease in payroll and related expenses that resulted from
reducing the size of our workforce, elimination of certain consulting fees
associated with financial public relations firms, and a reduction in legal
expenses. Further cost reductions at current revenue levels are unlikely. We
anticipate that general and administrative expenses will increase in future
years as our business grows.
On October 28, 2002, our board of directors authorized adjustments in
the salaries of our executive officers. As of January 1, 2001, the combined base
salaries of our five executive officers was $603,475 per annum. Beginning March
1, 2001 these officers voluntarily reduced their base salaries to $482,780 per
annum, a 20% reduction, to lower expenses and reduce negative cash flow from
operations. Due to improved balance sheet ratios and profitability for the
fiscal year ended June 30, 2002 and the quarter ended September 30, 2002, our
board of directors increased the base salaries of our executive officers to
$568,000 per annum effective November 1, 2002.
Bad Debt Expense
Bad debt expense consists mostly of actual and anticipated losses
resulting from the extension of credit terms to our customers when they purchase
products from us. We encourage customers to pay for their purchases by check or
credit card since these are the least expensive methods of payment, but we also
offer installment contracts with payment terms up to 24 months. We offer these
contracts to all workshop attendees not wishing to use a check or credit card
provided they complete a credit application, give us permission to independently
check their credit and are willing to make an appropriate down payment. These
installment contracts are sold to various finance companies, with partial or
full recourse, if our customer has a credit history that meets the finance
company's criteria. If not sold, we carry the contract and out-source the
collection activity. Our collection experience with these 24-month contracts is
satisfactory given the cost structure under which we operate.
Bad debt expense was $2,287,733 in the quarter ended September 30, 2002
compared to $845,000 in the prior fiscal year, an increase of $1,442,733. The
increase is due to an increase in the number of workshops held, an increase in
the number of installment contracts carried by us and to our recent collection
experience. During the first six months of fiscal year 2002 there were no
finance companies willing to purchase our contracts so we carried them
ourselves. In January 2002, we were once again able to sell contracts to a
finance company, but on terms that were less favorable than we had experienced
in the past. The new finance company agreed to purchase contracts only if they
had full recourse on any uncollectable contracts. We accepted these terms and as
a result have incurred increased bad debts. During the quarter ended September
30, 2002 the contracts carried by us increased by $1,184,503 compared to the
quarter ended September 30, 2001. This required an increase in our allowance for
doubtful accounts of approximately $410,000 based on the reserve ratio in effect
during the quarter ended September 30, 2001. Based on our history over the past
12 months and the possible consequences of the full recourse contract sales it
was necessary to increase the allowance for doubtful accounts to provide for
possible future losses. This increased bad debt expense during the quarter ended
September 30. 2002 was approximately $1 million.
We do not expect this increase in bad debt expense during the current
quarter to continue. In August 2002 we entered into an agreement with a second
finance company to purchase contracts with limited recourse and purchases were
made by them during September 2002. We have also been able during October 2002
to sell contracts having a principal balance of approximately $405,000 that were
carried on our books, thus reducing our exposure to bad debts. This sale
resulted in net proceeds to us of $316,998. We anticipate selling additional
contracts in the future. Bad debt expense is expected to decrease as a
percentage of revenues in future quarters.
Interest Expense
Interest expense during the quarter ended September 30, 2002 decreased
to $8,988 from $1,593,128 in the quarter ended September 30, 2001. Included in
interest expense in the quarter ended September 30, 2001 was a one-time charge
of $437,474 relating to the conversion of an 8% convertible debenture issued to
King William, LLC into common stock and a charge of $594,217 relating to the
conversion into common stock of convertible long term notes held by investors
who participated in a private placement of the notes in January and April 2001.
Upon conversion of these items the debt discount previously recorded was written
off in the quarter ended September 30, 2001 instead of being amortized over the
life of the notes. We have repaid the various debt instruments, which created
the balance of the interest expense for the three-month period ended September
30, 2001.
Income Taxes
Fiscal year 2002 was the first profitable year for the Company since
its inception. We have net operating loss carry forwards sufficient to reduce
our pretax profits generated in the quarter ended September 20, 2002 to zero,
therefore, we have not paid or accrued any federal income taxes in this quarter
or prior fiscal years.
Liquidity and Capital Resources
The accompanying financial statements have been prepared on the basis
that we will continue as a going concern, which contemplates the realization of
assets and satisfaction of liabilities in the normal course of business. We have
primarily incurred losses since our inception, fiscal year 2002 being our first
profitable year. We have a cumulative net loss of a $68,437,311 through
September 30, 2002. We have historically relied upon private placements of its
stock and issuance of debt to generate funds to meet our operating needs.
Management's plans include the raising of additional debt or equity capital.
However, there can be no assurance that additional financing will be available
on acceptable terms, if at all. We continue to work to improve the strength of
its balance sheet and has restructured its ongoing operations in an effort to
improve profitability and operating cash flow. If adequate funds are not
generated, we may not be able to execute our strategic plan and may be required
to obtain funds through arrangements that require it to relinquish rights to all
or part of the intellectual property of its Stores Online software or control of
its business. The consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
Cash
At September 30, 2002, we had $116,653 cash on hand, a decrease of
$403,095 from June 30, 2002.
Net cash used in operating activities was $151,347 for the quarter
ended September 30, 2002. Net cash used in operations was mainly net income of
$1,083,150, a provision for bad debts of $2,287,733, and depreciation and
amortization of $148,417, but offset by a decrease in accounts payable and
accrued liabilities of $229,471 and an increase in accounts receivable of
$3,452,066.
The decrease in accounts payable and other liabilities of $250,256 is
primarily the result of payments to vendors and elimination of an accrued
liability relative to two former officers in the amount of $110,000. David
Bassett-Parkins our former chief financial officer and chief operating officer,
and Hahn Ngo, our former executive vice president operations, each delivered
notice of intent to terminate their respective employment agreements for "good
reason," as that term is defined in his or her employment agreement. Each of
them has claimed that, under his or her employment agreement, he or she was
entitled to a lump sum severance payment as a result of terminating his or her
employment for "good reason." We entered into negotiations with Mr.
Bassett-Parkins and Ms. Ngo regarding their claims and other matters and now
believe, due to their failure to pursue their claims or further negotiations
concerning such claims, that the parties have abandoned their claims, though no
agreement was entered into or payments made by us to these parties.
The increase in accounts receivable occurred because we generated
approximately $3.6 million in installment contracts during the quarter ended
September 30, 2002 that were not sold to finance companies. Because of
additional arrangements we have made with finance companies as described above
in our discussion on bad debt expense we expect in the future to be able to sell
some of these contracts. Assuming that we will be able to continue to rely on
these or similar arrangements, we believe that at least $300,000 in net proceeds
to us can result from these sales each quarter if we choose to sell the
contracts. Because the contracts are sold on a discounted basis, over the life
of the contract we will have a greater cash flow from collecting the monthly
payments than from selling them. The decision to sell or retain the contracts is
part of our cash management system and is governed by our cash requirements at
the time.
Accounts Receivable
Accounts receivable, carried as a current asset, net of allowance for
doubtful accounts, were $3,914,628 at September 30, 2002 compared to $2,247,129
at June 30, 2002. Accounts receivable, carried as a long-term asset, net of
allowance for doubtful accounts, were $1,258,781 at September 30, 2002 compared
to $1,673,740 at June 30, 2002. We offer our customers a 24-month installment
contract as one of several payment options. The payments that become due more
than 12 months after the end of the fiscal year are carried as long-term trade
receivables. A relatively constant, and significant portion of our revenues have
been made on this installment contract basis. During the quarter ended September
30, 2002 we generated $4,375,758 in installment contracts of which $739,250 were
sold upon origination to finance companies with the balance being carried by us.
After the contracts carried by the company have been successfully collected for
a period of between 3 and 6 months they become eligible for purchase by finance
companies. During October 2002, we sold contracts having a principal balance of
approximately $405,000 that generated approximately $317,000 in cash for us.
Accounts Payable
Accounts payable, including related party transactions and a bank
overdraft, at September 30, 2002, totaled $1,206,712 as compared to $1,477,438
at June 30, 2002. As of September 30, 2002 our accounts payable were generally
within our vendor's terms.
Deferred Revenue
Deferred revenue, to be recognized in future periods, totaled $565,967
at September 30, 2002 as compared to $705,558 at June 30, 2002. We recognize
deferred revenue as our services are rendered or when the time period in which
customers have the right to receive the services expires. The decrease from the
prior fiscal year end is the result of a change in the products offered starting
October 1, 2000 at our Internet training workshops.
We changed the product offered through our Internet workshop training
business and since October 1, 2000, have delivered a new product called the
StoresOnline Software, as discussed above. Under this new model, we now
recognize all of the revenue generated at our Internet workshops at the time of
the sale and delivery of the SOS product to our customer.
Stockholders' Equity
Shareholders' equity increased to $3,569,852 at September 30, 2002, as
compared to $2,468,574 at June 30, 2002. This mainly resulted from net income
during the current quarter.
Financing Arrangements
We accept payment for the sales made at our Internet training workshops
by cash, credit card, installment contract, or until December 31, 2001, a third
party leasing option. As part of our cash flow management and in order to
generate liquidity, we have sold on a discounted basis a portion of the
installment contracts generated by us to third party financial institutions for
cash.
Impact of Recent Accounting Pronouncements
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations" (SFAS 143). Under this standard, asset retirement
obligations will be recognized when incurred at their estimated fair value. In
addition, the cost of the asset retirement obligations will be capitalized as a
part of the asset's carrying value and depreciated over the asset's remaining
useful life. SFAS No. 143 is effective for fiscal years beginning after June 15,
2002. We do not expect that adoption of SFAS No. 143 will have a material impact
on its financial condition or results of operations.
In October 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets (SFAS 144). This standard requires
that all long-lived assets (including discontinued operations) that are to be
disposed of by sale be measured at the lower of book value or fair value less
cost to sell. Additionally, SFAS 144 expands the scope of discontinued
operations to include all components of an entity with operations that can be
distinguished from the rest of the entity and will be eliminated from the
ongoing operations of the entity in a disposal transaction. SFAS 144 is
effective for fiscal years beginning after December 15, 2001. We do not expect
the implementation of SFAS 144 to have a material effect on its financial
condition or results of operations.
In April 2002, the FASB issued SFAS No. 145, "Rescission of SFAS Nos. 4,
44, and 64, Amendment of SFAS 13, and Technical Corrections as of April 2002"
(SFAS 145). This standard rescinds SFAS No. 4, Reporting Gains and Losses from
Extinguishment of Debt, and an amendment of that Statement, SFAS No. 64,
Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements and excludes
extraordinary item treatment for gains and losses associated with the
extinguishment of debt that do not meet the APB Opinion No. 30, Reporting the
Results of Operations -- Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions (APB 30) criteria. Any gain or loss on extinguishment of debt that
was classified as an extraordinary item in prior periods presented that does not
meet the criteria in APB 30 for classification as an extraordinary item shall be
reclassified. SFAS 145 also amends SFAS 13, Accounting for Leases as well as
other existing authoritative pronouncements to make various technical
corrections, clarify meanings, or describe their applicability under changed
conditions. Certain provisions of SFAS are effective for transactions occurring
after May 15, 2002 while other are effective for fiscal years beginning after
May 15, 2002. We have not assessed the potential impact of SFAS 145 on its
financial condition or results of operations.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" (SFAS 146). This standard addresses
financial accounting and reporting for costs associated with exit or disposal
activities and replaces Emerging Issues Task Force Issue No. 94-3, Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring) (EITF 94-3). SFAS
146 requires that a liability for costs associated with an exit or disposal
activity be recognized when the liability is incurred. Under EITF 94-3, a
liability for exit costs, as defined in EITF No. 94-3 were recognized at the
date of an entity's commitment to an exit plan. The provisions of SFAS 146 are
effective for exit or disposal activities that are initiated by the Company
after December 31, 2002.
Item 3. Quantitative and Qualitative Disclosures of Market Risk
We do not believe we have material market risk exposure. We do not
invest in market risk sensitive instruments for trading purposes. Our excess
cash is placed in short-term interest-bearing accounts or instruments that are
based on money market rates
Item 4. Controls and Procedures
Within the 90-day period prior to the filing of this report,
evaluations were carried out under the supervision and with the participation of
our management, including our Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of our disclosure
controls and procedures (as defined in Rule 13a-14(c) under the Securities
Exchange Act of 1934). Based upon those evaluations, the Chief Executive Officer
and Chief Financial Officer concluded that the design and operation of these
disclosure controls and procedures were effective. There have been no
significant changes in our internal controls or in other factors that could
significantly affect these controls subsequent to the date of the evaluations.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
None
Item 2. Changes in Securities and Use of Proceeds
Recent Sales of Unregistered Securities
During the quarter ended September 30, 2002, we issued 5,000 shares of
our common stock at a price of $3.00 a share. These shares formed part of our
private placement of common stock that closed during November 2001, but we did
not receive all necessary documentation relating to the sale until July 2002. We
had held the proceeds relating to these shares as a current liability pending
receipt of the documentation and issuance of the shares. In our opinion, the
offer and sale of these shares was exempt by virtue of Section 4(2) of the
Securities Act and the rules promulgated thereunder.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
99.1 Certification pursuant to 18 U.S.C. Section 1350
99.2 Certification pursuant to 18 U.S.C. Section 1350
(b) Reports on Form 8-K.
(i) Current Report on Form 8-K filed on July 1, 2002 with
respect to amendments to the Registrant's Certificate
of Incorporation
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Imergent, Inc.
By: /s/ John J. Poelman
November 8, 2002 John J. Poelman
Chief Executive Officer
November 8, 2002 /s/ Frank C. Heyman
Frank C. Heyman
Chief Financial Officer
CERTIFICATIONS
I, John J. Poelman, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Imergent,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and
the audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: November 8, 2002
/s/ John J. Poelman
John J. Poelman
Chief Executive Officer
I, Frank C. Heyman, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Imergent,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and
the audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: November 8, 2002
/s/ Frank C. Heyman
Frank C. Heyman
Chief Financial Officer