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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 December 31, 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
February 12, 2003: 11,026,195
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 December 31, 2002 (unaudited)
and at June 30, 2002...................................................3
Unaudited Condensed Consolidated Statements of Operations for the three
months and the six months ended December 31, 2002 and 2001.............4
Unaudited Condensed Consolidated Statement of Stockholders' Equity
for the six months ended December 31, 2002.............................5
Unaudited Condensed Consolidated Statements of Cash Flows for the
six months ended December 31, 2002 and 2001............................6
Notes to Unaudited Condensed Consolidated Financial Statements ................7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
General.......................................................................18
Critical Accounting Policies and Estimates....................................19
Results of Operation..........................................................22
Liquidity and Capital Resources...............................................28
Item 3. Quantitative and Qualitative Disclosures about Market Risk.......30
Item 4. Controls and Procedures..........................................31
Part II - OTHER INFORMATION
Item 1. Legal Proceedings................................................31
Item 2. Changes in Securities and Use of Proceeds........................32
Item 3. Defaults Upon Senior Securities..................................32
Item 4. Submission of Matters to a Vote of Security Holders..............32
Item 5. Other Information................................................32
Item 6. Exhibits and Reports on Form 8-K.................................33
IMERGENT, INC. AND SUBSIDIARIES
(formerly Netgateway, Inc.)
Unaudited Condensed Consolidated Balance Sheets
December 31,
2002
Unaudited June 30,2002
-------------------------------
Assets
Current assets
Cash $ 604,753 $ 519,748
Trade receivables, net of allowance for doubtful accounts of $2,924,440
at December 31, 2002 and $1,918,673 at June 30, 2002. 3,476,224 2,247,129
Inventories 43,812 23,416
Prepaid expenses 706,843 607,857
Credit card reserves, net of allowance for doubtful accounts of $150,686
at December 31, 2002 and $137,370 at June 30, 2002. 703,687 1,022,701
-------------- ---------------
Total current assets 5,535,319 4,420,851
Property and equipment, net 207,588 409,460
Goodwill, net 455,177 455,177
Trade receivables, net of allowance for doubtful accounts of $1,519,013
at December 31, 2002 and $1,357,938 at June 30, 2002. 1,687,428 1,673,740
Other assets, net of allowance for doubtful accounts of $4,874
at December 31, 2002 and $0 at June 30, 2002. 208,497 417,384
-------------- ---------------
Total Assets $ 8,094,009 $ 7,376,612
============== ===============
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable $ 1,076,208 $ 1,215,400
Accounts payable - related party 45,314 111,702
Bank overdraft 17,157 150,336
Accrued wages and benefits 459,778 681,472
Past due payroll taxes - 26,797
Accrued liabilities 408,740 548,016
Current portion of capital lease obligations 38,010 80,938
Current portion of notes payable 17,541 160,671
Other current liabilities 444,364 450,523
Other current liabilities - related party 50,000 -
Deferred revenue 400,067 705,558
-------------- ---------------
Total current liabilities 2,957,179 4,131,413
Capital lease obligations, net of current portion 12,921 27,906
Notes payable, net of current portion 430,088 393,560
-------------- ---------------
Total liabilities 3,400,188 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
11,026,195 and 10,995,774 shares, at December 31, 2002 and
June 30, 2002, respectively 11,027 10,996
Additional paid-in capital 72,058,239 72,017,928
Deferred compensation (28,732) (34,987)
Accumulated other comprehensive loss (4,902) (4,902)
Accumulated deficit (67,696,970) (69,520,461)
-------------- ---------------
Total stockholders' equity 4,338,662 2,468,574
-------------- ---------------
Total Liabilities and Stockholders' Equity $ 8,094,009 $ 7,376,612
============== ===============
See Notes to Condensed Consolidated Financial Statements
IMERGENT, INC. AND SUBSIDIARIES
(formerly Netgateway, Inc.)
Unaudited Condensed Consolidated Statements of Operations for the
Three Months and the Six Months Ended December 31, 2002 and 2001
Three Months Ended Six Months Ended
-------------------------------- --------------------------------
December 31, December 31, December 31, December 31,
2002 2001 2002 2001
--------------- -------------- --------------- ---------------
Revenue $ 10,588,680 $ 7,455,746 $ 21,872,529 $ 19,089,789
Cost of revenue 2,138,021 1,198,595 4,175,874 2,080,693
Cost of revenue - related party 164,937 97,972 585,517 805,442
--------------- -------------- --------------- ---------------
Total cost of revenue 2,302,958 1,296,567 4,761,391 2,886,135
--------------- -------------- --------------- ---------------
Gross profit 8,285,723 6,159,179 17,111,138 16,203,654
Operating Expenses
Product development - 14,550 - 67,950
Selling and marketing 3,601,993 2,764,178 7,983,605 6,375,976
Selling and marketing - related party 55,608 - 195,343 -
General and administrative 1,033,681 2,076,262 1,968,099 3,632,248
Depreciation and amortization 103,886 149,783 252,303 301,411
Bad debt expense 2,916,827 1,160,131 5,204,560 2,005,131
--------------- -------------- --------------- ---------------
Total operating expenses 7,711,995 6,164,904 15,603,910 12,382,716
Income (loss) from operations 573,728 (5,725) 1,507,228 3,820,938
Other income (expense) (1,006) 748 699 49,281
Interest income 174,284 116,146 331,216 169,385
Interest expense (6,664) (296,857) (15,652) (1,889,984)
--------------- -------------- --------------- ---------------
Total other income (expense) 166,614 (179,963) 316,263 (1,671,318)
--------------- -------------- --------------- ---------------
Net income (loss) $ 740,342 $ (185,688) $ 1,823,491 $ 2,149,620
=============== ============== =============== ===============
Basic earnings (loss) per share: $ 0.07 $ (0.04) $ 0.17 $ 0.57
Diluted earnings (loss) per share: $ 0.07 $ (0.04) $ 0.16 $ 0.56
Weighted average shares outstanding:
Basic 11,007,226 4,388,230 11,001,417 3,766,760
Diluted 11,208,171 4,388,230 11,119,593 3,831,262
See Notes to Condensed Consolidated Financial Statements
IMERGENT, INC. AND SUBSIDIARIES
(formerly Netgateway, Inc.)
Unaudited Condensed Consolidated Statement of Stockholders' Equity
For the Six Months Ended December 31, 2002
Accumulated
Additional Other Total
Common Stock 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 - - - 6,255 - _ 6,255
Private placement of common stock 5,000 5 14,995 _ - _ 15,000
Reconciliaton of common stock
following reverse stock split (1,254) (1) 1 - - - -
Common stock issued pursuant to
finder's agreement 26,675 27 25,315 - - - 25,342
Comprehensive income
Net income - - - - 1,823,491 - 1,823,491
Foreign currency translation adjustment - - - - - - -
-------------
Comprehensive income 1,823,491
- -------------------------------------- --------- -------- ------------ -----------------------------------------------------
Balance December 31, 2002 11,026,195 $ 11,027 $ 72,058,239 $(28,732) $ (67,696,970) $ (4,902) $ 4,338,662
========= ======== ============ =====================================================
See Notes to Condensed Consolidated Financial Statements
IMERGENT, INC AND SUBSIDIARIES
(formerly Netgateway, Inc.)
Unaudited Condensed Consolidated Statements of Cash Flows
For the Six Months Ended December 31, 2002 and 2001
2002 2001
----------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Income from continuing operations $ 1,823,491 $ 2,149,620
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation and amortization 252,303 301,411
Amortization of deferred compensation 6,255 9,851
Provision for bad debts 5,204,560 2,005,131
Common stock issued for services 25,342 199,657
Amortization of debt issue costs - 707,385
Amortization of beneficial conversion feature and debt discount - 1,752,056
Changes in assets and liabilities:
Trade receivables and unbilled receivables (6,137,577) (3,730,993)
Inventories (20,396) 16,614
Prepaid expenses and other current assets (98,986) (39,849)
Credit card reserves 9,248 406,925
Other assets 208,887 (223,658)
Deferred revenue (305,491) (4,761,973)
Accounts payable, accrued expenses and other
liabilities related party (54,338) 65,574
Accounts payable, accrued expenses and other
liabilities (462,167) (111,878)
----------------------------
Net cash provided by (used in) operating activities 451,131 (1,254,127)
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of equipment (50,891) 660
----------------------------
Net cash provided by (used in) investing activities (50,891) 660
----------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from common stock clearing liability - 255,096
Proceeds from issuance of common stock - 1,782,219
Proceeds from exercise of options and warrants - 1,727
Change in bank overdraft borrowings (133,179) (599,035)
Proceeds from short term note - 45,000
Repayment of convertible debenture - (100,000)
Repayment of note payable - bank - (97,779)
Repayment of capital lease obligations (57,913) (37,803)
Repayment of notes (124,143) (125,000)
----------------------------
Net cash provided by (used in) financing activities (315,235) 1,124,425
----------------------------
NET INCREASE (DECREASE) IN CASH 85,005 (129,042)
CASH AT THE BEGINNING OF THE PERIOD 519,748 149,165
----------------------------
CASH AT THE END OF THE PERIOD $ 604,753 $ 20,123
============================
Supplemental disclosures of non-cash transactions:
Conversion of debenture to common stock $ - $ 2,115,885
Notes payable settled on private placement of common stock - 465,000
Common stock issued for settlement agreements - 86,000
Conversion of convertible notes to common stock - 2,147,295
Common stock issued for outstanding liabilities 15,000 449,232
Accrued interest added to note payable balance 17,541 -
Supplemental disclosure of cash flow information:
Cash paid for Interest - 1,732
See Notes to 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 eCommerce 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 stockholders of the Company approved a one-for-ten
reverse split of the Company's outstanding common stock, which became effective
July 2, 2002. All data for common stock , options and warrants have been
adjusted to reflect the one-for-ten reverse split for all periods presented. In
addition, all common stock 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 (loss) 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. During the quarter ended
December 31, 2002 the Company engaged an independent consulting firm, LECG,
LLC., to test the Company's goodwill for impairment. Based on their analysis
management has concluded that the fair market value of the Company's assets
exceeded the carrying value at December 31, 2002 and determined that there is no
goodwill impairment as of that date. As a result, no change to the carrying
value of the goodwill is necessary as of 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 liability method. The
liability method recognizes deferred income taxes for the tax consequences of
"temporary differences" by applying currently 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 December 31, 2002 and June 30, 2002.
Fiscal year 2002 was the first profitable year for the Company since its
inception. However, differences in generally accepted accounting principals
("GAAP") and accounting for tax purposes caused us to have a tax loss for the
fiscal year ended June 30, 2002. We have net operating loss carry forwards
sufficient to reduce our taxable income generated in the period ended December
31, 2002 to zero, therefore, we have not paid or accrued any federal income
taxes in this fiscal year 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 license to use 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 license he or she receives a CD-ROM containing
a link to be used on 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 for an additional setup and hosting fee
(currently $150). This fee 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. A separate file is available and can be used if the customer decides to
create and host their site with another hosting service.
The revenue from the sale of the SOS license 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, all of fiscal year 2002,
and continues for the current fiscal year 2003.
Extended payment term arrangements for software sales that are longer
than twelve 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 five 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 license. 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 five-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% 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 30 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 license 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 . 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 six months ended
December 31, 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 $4,443,453 and $3,276,611 as of December 31, 2002 and June
30, 2002, respectively. In addition, the Company has recorded an allowance for
doubtful accounts of $150,686 at December 31, 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 non material 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 adoption of SFAS No. 143 did not have a material impact on the
Company's 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 our
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 145 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 was 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 $67,696,970 through December 31, 2002. At December 31,
2002 the Company had working capital of $2,578,140 and an equity balance of
$4,338,662. For the six months ended December 31, 2002 the Company recorded
positive cash flows from operations of $451,131 as compared to negative cash
flows of $1,254,127 for the six months ended December 31, 2001. 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 six
months ended December 31, 2002 and December 31, 2001, the Company sold contracts
totaling $1,738,824 and $1,969,256, respectively. The Company maintains
approximately 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 December 31, 2002 consist of
$447,629 of principal and interest payable to King William (see Note 6).
Maturities of notes payable are as follows:
Year ending June 30,
2003 $ 17,541
2004 -
2005 -
2006 -
2007 430,088
Thereafter -
------------
$ 447,629
============
(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 December 31, 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 was 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 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 had 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, were netted against the $2,076,500 balance of the Notes
on the Balance Sheet were 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 December 31, 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
Six months ended December 31, 2001
During the six month period ended December 31, 2001, the Company issued
691 shares of common stock upon the exercise of employee stock options.
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).
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 and 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 Convertible Promissory Notes. The Notes were convertible into
shares of common stock of the Company by dividing the Note balance on the date
of conversion by $.25, subject to Conversion Price Adjustments as defined in the
agreement. 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.
During the six months ended December 31, 2001 the Company issued
967,892 shares of common stock pursuant to a private placement agreement and
recorded $258,257 of placement agent and finders' fees, relating to the private
placement offering, against Additional Paid in Capital.
On November 13, 2001, the Company issued 233,333 shares of the common
stock of the Company, and recorded an amount of $150,000 in its accounts
payable, pursuant to the October 10, 2001 agreement with SBI E-2 Capital (USA)
Ltd., for services as a financial advisor to the Company in connection with the
acquisition of the Company by Category 5 Technologies. At the time the shares
were issued the managing director of SBI E-2 Capital was a member of the
Company's Board of Directors. That director subsequently resigned his position
on the Board of Directors. The business combination transaction between the
Company and Category Five Technologies, Inc. was never consummated. On account
of the termination of this proposed transaction, SBI E-2 Capital (USA) Ltd. was
not able to complete the provision of the financial advisory services to the
Company. On February 1, 2002 an agreement was entered into between the Company
and SBI E-2 Capital (USA) Ltd. to rescind and nullify the issuance of the common
stock pursuant to the October 10 agreement and the related designation by SBI
E-2 Capital (USA) Ltd. of certain persons to whom certain of the shares should
be issued. Pursuant to the Rescission Agreement, the certificates representing
all 233,333 shares of the common stock were returned to the Company, together
with all documentation to transfer legal title in the common stock back to the
Company. In addition, SBI E-2 and the designees disclaimed any interest
whatsoever in the common stock. Upon receipt of the certificates representing
the common stock, the Company directed its transfer agent to cancel the common
stock from its books and records. As a result of the Rescission Agreement, the
Company did not record the issuance of the common stock shares during the three
months ended December 31, 2001 and did not reflect the shares outstanding as of
December 31, 2001.
Six months ended December 31, 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.
On December 6, 2002, the Company issued 26,675 shares of common stock
at a price of $1.75 per share, in settlement of a finders fee earned in
connection with our private placement of common stock that closed in May 2002 .
(9) Related Entity Transactions
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
utilizes the services of 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, was the sole owner of ECI during the three months ended September 30,
2002 and the six months ended December 31, 2001. Total revenue generated by the
Company from the sale of ECI merchant account solutions, while owned by Mr.
Poelman, was $1,453,612 and $1,812,641 for the six months ended December 31,
2002 and 2001, respectively. The cost to the Company for these products and
services totaled $223,716 for the quarter ended September 30, 2002 and $563,493
for the six months ended December 31, 2001. During the six months ended December
31, 2002 and 2001 the Company processed leasing transactions for its customers
through ECI, while owned by Mr. Poelman, in the amounts of $0 and $1,090,520,
respectively. In addition, the Company had $0 and $26,702 as of December 31,
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 while
owned by Mr. Poelman.
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. The Company's revenues generated from the above products and
services were $3,373,656 and $2,120,166 for the six months ended December 31,
2002 and 2001, respectively. The Company paid EMS $432,367 and $241,949 to
fulfill these services during the six months ended December 31, 2002 and 2001,
respectively. In addition, the Company had $29,930 and $53,023 as of December
31, 2002 and June 30, 2002, respectively, recorded in accounts payable relating
to the amounts owed to EMS for product and services.
The Company sends customers who make purchases at the Company's Preview
and Workshop training sessions complimentary gift packages. The Company utilizes
Simply Splendid, LLC ("Simply Splendid") to provide these gift packages to the
Company's customers. Aftyn Morrison, who owns Simply Splendid, is the daughter
of John J. Poelman, Chief Executive Officer, a director and a stockholder of the
Company. The Company paid Simply Splendid $124,776 and $0 to fulfill these
services during the six months ended December 31, 2002 and 2001, respectively.
In addition, the Company had $15,384 and $0 as of December 31, 2002 and June 30,
2002, respectively, recorded in accounts payable relating to the amounts owed to
Simply Splendid for services.
(10) Earnings (loss) Per Share
Unexercised stock options to purchase 657,190 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 December 31, 2002, of which no
stock options and 269,643 warrants were included in the diluted per share
computation. Unexercised stock options to purchase 329,665 shares of the
Company's common stock and unexercised warrants to purchase 229,055 shares of
the Company's common stock were not included in the computation of diluted loss
per share for the quarter ending December 31,2001 because their impact would
have been antidilutive, while for the six month period ending December 31, 2001
unexercised options and warrants totaling 320,948 and 125,692, respectively,
were included in the per share calculations.
The following data was used in computing earnings per share:
Three Months Ended Six Months Ended
------------------------------ -----------------------------
December 31, December 31, December 31, December 31,
2002 2001 2002 2001
-------------- -------------- -------------- -------------
Net income (loss) available to common shareholders $ 740,341 $ (185,688) $1,823,491 $2,149,620
Basic EPS
- ----------------------------------------------------------------------------------------------------------------
Common shares outstanding entire period 10,999,520 4,200,927 10,995,774 2,446,019
Weighted average common shares:
Issued during period 7,706 187,303 5,643 1,320,741
Canceled during period - - - -
-------------- -------------- -------------- -------------
Weighted average common shares outstanding
during period 11,007,226 4,388,230 11,001,417 3,766,760
-------------- -------------- -------------- -------------
Earnings (loss) per common share - basic $ 0.07 $ (0.04) $ 0.17 $ 0.57
============== ============== ============== =============
Diluted
- ----------------------------------------------------------------------------------------------------------------
Weighted average common shares outstanding
during period - basic 11,007,226 4,388,230 11,001,417 3,766,760
Dilutive effect of stock stock equivalents 200,945 - 118,176 64,502
-------------- -------------- -------------- -------------
Weighted average common shares outstanding
during period - diluted 11,208,171 4,388,230 11,119,593 3,831,262
-------------- -------------- -------------- -------------
Earnings (loss) per common share - diluted $ 0.07 $ (0.04) $ 0.16 $ 0.56
============== ============== ============== =============
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.
On November 6, 2002 in a telephone conversation with the SEC staff we resolved
the remaining issues without any change in our accounting policies or previously
reported financial statements.
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 Consolidated 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 these 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 license to use 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 license 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. A
separate file is available and can be used if the customer decides to create and
host their site with another hosting service.
The revenue from the sale of the SOS license 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. At that same time 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 six-month period ended December 31, 2002.
The American Institute of Certified Public Accountants 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 license
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% 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 30 percent
of all EPTAs are determined to be uncollectible. All uncollectible EPTAs are
written off against an allowance for doubtful accounts. The 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 trade accounts receivable
balances on our condensed consolidated balance sheets, totaled approximately
$4.4 million as of December 31, 2002 compared to approximately $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 deteriorates, 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. 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 December 31, 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.
Our net operating loss carry forward ("NOL"), representing the losses
reported for tax purposes from the inception of the Company through June 30,
2002 may be subject to a limitation as defined in Section 382 of the Internal
Revenue Code. Operating losses from prior years are normally available to offset
taxable income in subsequent years. However, Section 382 places a limitation on
the amount that can be used in any one year if a "change in control" has
occurred. Since its formation, the Company has issued a significant number of
shares and purchasers of those shares have sold some of them, with the result
that there is a significant probability that a change of control as defined by
Section 382 has occurred. We have estimated that the available NOL is sufficient
to off set our taxable income for the six-month period ended December 31, 2002.
We have undertaken a study to determine the exact effect of the Section 382
limitation.
Related Party Transactions
During the six-month period ended December 31, 2002 we derived
approximately $3.5 million, or 16% 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 for the quarter ended September 30, 2002 and $1,812,641
for the six-month period ended December 31, 2001, the periods reported upon
during which ECI was a related party. The cost to us for these products and
services totaled $223,716 for the quarter ended September 30, 2002 and $563,493
for the six-month period ended December 31, 2001, the periods during which ECI
was a related party. We had $26,702 recorded in accounts payable as of June 30,
2002, relating to the amounts owed to ECI for the purchase of its merchant
account product. At December 31, 2002 no amounts were payable to ECI for
purchases made by us from ECI while ECI was a related party.
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 $1,943,832 and $1,099,815 for the quarters ended December 31, 2002
and 2001, respectively and $3,373,656 and $2,120,166 for the six-month periods
ended December 31, 2002 and 2001, respectively. We paid EMS $145,307 $134,090 to
fulfill these services during the quarters ended December 31 , 2002 and 2001,
respectively and $432,367 and $241,949 for the six-month periods ended December
31, 2002 and 2001, respectively.
We send customers who make purchases at our Preview and Workshop
training sessions complimentary gift packages. We utilize Simply Splendid, LLC
("Simply Splendid") to provide these gift packages. Aftyn Morrison, who owns
Simply Splendid, is the daughter of John J. Poelman, Chief Executive Officer, a
director and a stockholder of the Company. We paid Simply Splendid $124,776 and
$0 to fulfill these services during the six months ended December 31, 2002 and
2001, respectively. In addition, we had $15,384 and $0 as of December 31, 2002
and June 30, 2002, respectively, recorded in accounts payable relating to the
amounts owed to Simply Splendid for services.
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
Six-month period ended December 31, 2002 compared to the six-month
period ended December 31, 2001
Revenue
Revenues for the six-month period ended December 31, 2002, the first
half of our fiscal year 2003, increased to $21,872,529 from $19,089,789 in the
six-month period ended December 31, 2001, an increase of 15%. Revenues generated
at our Internet training workshops for the periods in both fiscal years were
from the sale of the SOS product as described above. Other revenues also 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 increase in revenues from the six-month period ended December 31,
2002 compared to the six-month period ended December 31, 2001 can be attributed
to various factors. There was an increase in the number of Internet training
workshops conducted during the current fiscal year to date. The number increased
to 146, including 11 that were held outside the United States of America, for
the current fiscal year from 137 in the six-month period ended December 31,
2001, 9 of which were held outside the United States. Also, the average number
of persons attending each workshop increased which further increased revenues
during the current period. Approximately 35% 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.
Revenue during the six-month period ended December 31, 2002 compared to
the same six-month period in the prior year was higher in spite of 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 six-month period ended December 31,
2002, we recognized only $305,491 in net revenue from sales made in prior
periods compared to $4,761,973 recognized from sales made in prior periods
during the six-month period ended December 31, 2001.
This benefit experienced during the six-month period ended December 31,
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 stand alone 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.
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 six-month ended December 31, 2002 increased
to $17,111,138 from $16,203,654 for the same six-month period in the prior year.
The increase in gross profit primarily reflects the increased revenue recognized
during the period.
Gross profit as a percent of revenue for the six-month period ended
December 31, 2002 was 78% compared to 85% for the six -month period ended
December 31, 2001. The reduction in the gross margin percentage was primarily
attributable to the $4,761,973 in deferred revenue that was recognized during
the six-month period ended December 31, 2001 that had no costs associated with
it because those costs were recognized at the time the products were delivered
in the relevant prior periods. 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 $585,517 in the
six-month period ended December 31, 2002 and $805,442 in the comparable period
of the prior fiscal year. These are more fully described in the notes to the
condensed consolidated 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 six-month period ended
December 31, 2002. Product development expenses in the six-month period ended
December 31, 2001 were $67,950. They consisted of work on the StoresOnline,
version 4 product which is used in the StoresOnline Software sold at our
Internet training workshops.
We intend to make enhancements to our technology as new methods and
business opportunities present themselves 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 six-month period ended December 31, 2002
increased to $8,178,948 from $6,375,976 in the six-month period ended December
31, 2001. The increase in selling and marketing expenses is primarily
attributable to the increase in the number of workshops held during the current
year including having a greater number of attendees on average at each workshop
and the associated expenses including advertising and promotional expenses
necessary to attract the attendees. Advertising expenses for the six-month
period ended December 31, 2002 were approximately $3.4 million compared to $2.2
million in the six-month period ended September 30, 2001. Selling and marketing
expenses as a percentage of sales were 37% of revenues for the current fiscal
year to date and with the deferred revenue mentioned above, selling and
marketing expenses were 33% for the six-month period ended December 31, 2001.
Selling and marketing expense includes related party transactions of
$195,343 and $0 in the six-month periods ended December 31, 2002 and 2001,
respectively. These are more fully described in the notes to the condensed
consolidated 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 six-month period ended December 31, 2002 decreased to $1,968,099 from
$3,632,248 in the comparable period of the previous fiscal year. This decrease
is partially attributable to the fact that in the period ended December 31, 2001
we incurred $555,201 in debt issuance costs associated with our convertible
debenture owned by 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 and
other professional 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 22, 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 authorized an increased in 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 low marginal cost associated with theses sales .
Bad debt expense was $5,204,560 in the six-month period ended December
31, 2002 compared to $2,005,131 in the prior fiscal year. 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 six-month period ended December 31, 2002 the
contracts carried by us increased by approximately $3.8 million. This required
an increase in our allowance for doubtful accounts of approximately $1.8
million. 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.
We do not expect this increase in bad debt expense to continue
during the remainder of the current fiscal year. 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 were also
able to sell contracts during October 2002 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 Income
Interest income is derived from the installment contracts carried by
the Company. Our contracts have an 18% simple interest rate and interest income
for the six-month period ended December 31, 2002 was $331,216 compared to
$169,385 in the comparable period of the prior fiscal year. In the future as our
cash position strengthens we may be able to carry more installment contracts
rather than selling them at a discount to finance companies. If we are able to
carry more of these contracts this would increase interest income and reduce
administrative expenses. The discounts are included in administrative expenses.
Interest Expense
Interest expense during the six-month period ended December 31, 2002
decreased to $15,652 from $1,889,984 in the six-month period ended December 31,
2001. Included in interest expense in the six-month period ended December 31,
2001 was a one-time charge of $437,474 relating to the conversion of an 8%
convertible debenture belonging to King William, LLC into common stock and a
charge of $708,542 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 six-month period ended
December 31, 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 six-month period ended December 31, 2001.
Income Taxes
Fiscal year 2002 was the first profitable year for the Company since
its inception. However, differences in generally accepted accounting principals
("GAAP") and accounting for tax purposes caused us to have a tax loss for the
fiscal year ended June 30, 2002. We have a net operating loss carry forward
("NOL") sufficient to reduce our pretax profits generated in the six-month
period ended December 31, 2002 to zero, therefore, we have not paid or accrued
any federal income taxes in this six-month period or in prior fiscal years.
Our NOL, representing the losses reported for tax purposes from the
inception of the Company through June 30, 2002 may be subject to a limitation as
defined in Section 382 of the Internal Revenue Code. Operating losses from prior
years are normally available to offset taxable income in subsequent years.
However, Section 382 places a limitation on the amount that can be used in any
one year if a "change in control" has occurred. Since its formation, the Company
has issued a significant number of shares and purchasers of those shares have
sold some of them with the result that there is a significant probability that a
change of control as defined by Section 382 has occurred. We have estimated that
the available NOL is sufficient to off set any taxable income for the six-month
period ended December 31, 2002.
Three-month period ended December 31, 2002 compared to the three-month
period ended December 31, 2001
Revenue
Revenues for the three-month period ended December 31, 2002, our second
fiscal quarter of fiscal year 2003, increased to $10,588,680 from $7,455,746 in
the three month period ended December 31, 2001, an increase of 42%. Revenues for
the quarter were from the same business model described above in the discussion
of the six-month period ended December 31, 2002.
The increase in revenues for the quarter ended December 31, 2002
compared to the three-month period ended December 31, 2001 can be attributed to
various factors. There was an increase in the number of Internet training
workshops conducted during the current quarter. The number increased to 68, all
of which were held within the United States of America compared to 64 (including
10 that were held outside the United States) for the quarter ended December 31,
2001. The international workshops generated less revenue per workshop than those
held within the United States. Also the average number of persons attending each
workshop during the period ended December 31, 2002 increased which further
increased revenues during the current period.
Revenue during the quarter ended December 31, 2002 compared to the
prior year's period was higher in spite of 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 deferred from the current period. During the
quarter ended December 31, 2002, we recognized only $165,900 in net revenue from
sales made in prior periods compared to $1,008,966 recognized from sales made in
prior periods during the three-month period ended December 31, 2001.
This benefit experienced during fiscal 2001 resulted from a
change in the business model and product offering at the workshops as noted
above.
Gross Profit
Gross profit for the fiscal quarter ended December 31, 2002 increased
to $8,285,722 from $6,159,179 in the comparable period of the prior year. The
increase in gross profit primarily reflects the increased revenue. The cost of
revenue in the fiscal quarter ended December 31, 2001 included the costs
associated with international workshops which are greater than those for
domestic workshops.
Gross profit as a percent of revenue for the quarter ended December 31,
2002 was 78% compared to 83% for the quarter ended December 31, 2001. However,
the $1,008,966 in deferred revenue that was recognized during the quarter ended
December 31, 2001 from prior periods had no costs associated with it since those
costs were recognized at the time the products were delivered.
Cost of revenues includes related party transactions of $164,937 in the
quarter ended December 31, 2002 and $97,972 in the comparable period of the
prior fiscal year. These are more fully described in the notes to the condensed
consolidated 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
We had no product development expenses for the quarter ended December
31, 2002. Product development expenses in the quarter ended December 31, 2001
were $14,550. They consisted of work on the StoresOnline, version 4 product
which is used in the StoresOnline Software sold at our Internet training
workshops.
Selling and Marketing
Selling and marketing expenses for the quarter ended December 31, 2002
increased to $3,657,601 from $2,764,178 in the quarter ended December 31, 2001.
The increase in selling and marketing expenses is primarily attributable to the
increase in the number of workshops held during the current quarter including
having a greater number of attendees on average at each workshop and the
associated expenses including advertising and promotional expenses necessary to
attract the attendees. Advertising expenses for the quarter ended December 31,
2002 were approximately $1.4 million compared to $0.9 million in the quarter
ended December 31, 2001. Selling and marketing expenses as a percentage of sales
were 35% of revenues for the current fiscal quarter and with the deferred
revenue mentioned above, selling and marketing expenses were 37% for the quarter
ended December 31, 2001.
Selling and marketing expense includes related party transactions of
$55,608 and $0 in the quarters ended December 31, 2002 and 2001, respectively.
These are more fully described in the notes to the condensed consolidated
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 for quarter ended December 31, 2002
decreased to $1,033,681 from $2,076,262 in the comparable quarter of the
previous fiscal year. This decrease is attributable a reduction 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 and other professional 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 22, 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 was $2,916,827 in the quarter ended December 31, 2002
compared to $1,160,131 in the same quarter of the prior fiscal year, an increase
of $1,756,696. The increase is due to an increase in the number of workshops
held, an increase in the number of installment contracts generated at those
workshops as a percentage of total units sold, an increase in the number of
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 December 31, 2002 the contracts carried by us
increased by approximately $2.8 million. This required an increase in our
allowance for doubtful accounts of approximately $1.5 million. 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.
We do not expect this increase in bad debt expense to continue during
future quarters. 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 Income
Interest income for the three-month period ended December 31, 2002 was
$174,284 compared to $116,146 in the comparable period of the prior fiscal year.
Interest income is derived from the installment contracts carried by the
Company.
Interest Expense
Interest expense during the quarter ended December 31, 2002 decreased
to $6,664 from $296,857 in the quarter ended December 31, 2001. We have repaid
most of the various debt instruments, which created the interest expense for the
three-month period ended December 31, 2001.
Income Taxes
Fiscal year 2002 was the first profitable year for the Company since
its inception. We believe we have net operating loss carry forwards sufficient
to reduce our pretax profits generated in the quarter ended December 31, 2002 to
zero, therefore, we have not paid or accrued any federal income taxes in this
quarter or prior fiscal years. See the discussion above for the six-month period
ended December 31, 2002 for a more detailed explanation of our net operating
loss carryforward.
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 $67,696,970 through December
31, 2002. We have historically relied upon private placements of our common
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
our balance sheet and have restructured our ongoing operations in an effort to
improve profitability and operating cash flow. During the six-month period ended
December 31, 2002 we had net income of $1,823,491 and net cash provided by
operating activities of $451,131. Nonetheless, if adequate funds are not
generated in future periods, we may not be able to execute our strategic plan
and may be required to obtain funds through arrangements that require us to
relinquish rights to all or part of the intellectual property of our
StoresOnline Software or control of our business. The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
Cash
At December 31, 2002, we had $604,753 of cash on hand, an increase of
$85,005 from June 30, 2002.
Net cash provided by operating activities was $451,131 for the
six-month period ended December 31, 2002. Net cash provided by operating
activities was mainly due to net income of $1,823,491, a provision for bad debts
of $5,204,560, and depreciation of $252,303, but offset by an increase in
accounts receivable of $6,137,577, a decrease in accounts payable and accrued
liabilities of $516,505 and a decrease in deferred revenue of $305,491.
The decrease in accounts payable and other liabilities of $516,505 is
primarily the result of payments to vendors, the elimination of an accrued
liability relative to two former officers in the amount of $110,000 and the
elimination of a bonus accrual for the current officers of $255,357.
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.
On June 13, 2002 bonuses in the amount of $290,000 were paid to five
executive officers in recognition of past accomplishments. On October 22, 2002
the officer's compensation was reviewed by the Board of Directors and salary
increases were awarded to them. Total annual base pay for the group was
increased from $482,780 to $568,000 effective November 1, 2002. The Board of
Directors also agreed to develop an incentive compensation plan for the officers
going forward. It is estimated that the new program could result in incentive
compensation equal to approximately 30% of base pay.
The increase in accounts receivable occurred because we generated
approximately $5.9 million in installment contracts during the six-month period
ended December 31, 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. 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 $3,476,224 at December 31, 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 $1,687,428 at December 31, 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 six months ended
December 31, 2002 we generated approximately $9.0 million in installment
contracts of which approximately $3.1 million 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 December 31, 2002, totaled $1,138,679 as compared to $1,477,438 at
June 30, 2002. As of December 31, 2002 our accounts payable were generally
within our vendor's terms.
Deferred Revenue
Deferred revenue, to be recognized in future periods, totaled $400,067
at December 31, 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. Under this new model, we now
recognize most 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
Stockholders' equity increased to $4,338,662 at December 31, 2002, as
compared to $2,468,574 at June 30, 2002. This mainly resulted from net income
during the current six month period.
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, by 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 Financial Accounting Standards Board (FASB) issued
Statements of Financial Accounting Standards No. 141, "Business Combinations"
and No. 142 ("SFAS 142"), "Goodwill and Other Intangible Assets", which
establishes new standards for the treatment of goodwill and other intangible
assets. SFAS 142 is effective for fiscal years beginning after December 31, 2001
and permits early adoption for companies with a fiscal year beginning after
March 15, 2001. SFAS 142 prescribes that amortization of goodwill will cease as
of the adoption date. Additionally, we were required to perform an impairment
test within six months as of the adoption date, annually thereafter, and
whenever events and circumstances occur that might affect the carrying value of
these assets.
SFAS 142 was applicable to the Company beginning July 1, 2002. As a
result we discontinued the amortization of goodwill and arranged for an
independent evaluation to determine if an impairment to our goodwill existed. We
hired LECG, LLC, a management consulting company, to perform the analysis as of
December 31, 2002. Based on their analysis, management found that no impairment
existed. We are now obligated to make this review annually as of December 31 of
each year or sooner if events and circumstances occur that might affect the
carrying value of our goodwill.
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 adoption of SFAS No. 143 did not have a material impact on our
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 our 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 145 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 our 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 about 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.
The Company previously reported that it was the subject of a nonpublic
investigation by the Federal Trade Commission. The first investigation activity
began nearly five years ago when the FTC had announced what they refer to as a
"sweep" of the industry. The Company cooperated fully with all requests for
information and details, and after over a year's investigation, no action
against the Company was taken and the case went dormant. During this same period
of time, other unrelated companies and individuals targeted by the FTC were
subject to consent agreements and injunctions and paid large financial
penalties. Some of those companies are no longer in business.
About two years ago, based on various allegations and customer
complaints, the FTC re-opened its investigation of the Company, requesting once
again complete details about the Company, its marketing, sales, customer service
policies and other matters. The FTC also obtained details regarding customer
complaints from the Better Business Bureau and various AG offices, and was fully
aware of the "wrong doings" alleged by a nationally broadcast television story.
In addition, FTC representatives attended one or more of the Company's
workshops, visited the Company's offices and were afforded an opportunity to
review the Company's customer files. After nearly two years in this most recent
investigation, the Company recently received written notice that the FTC
investigation was being officially closed.
In its letter the FTC's states that it ". . .has conducted a nonpublic
investigation to determine whether Galaxy Mall and related entities have
violated the Federal Trade Commission Act through the use of deceptive practices
in connection with the sale of electronic "storefronts" or web sites or
storefront-related products or services." and concludes in part by stating,
"Upon further review of this matter, it now appears that no further action is
warranted by the Commission at this time. Accordingly, the investigation has
been closed." The FTC letter also states that "The Commission reserves the right
to take such further action as the public interest may require."
The Company certainly regrets even one complaint, but can no more
accept responsibility for failure of a business that purchases its products and
services than the telephone company, a computer manufacturer or a business
college, can accept responsibility for the failure of a customer or student to
achieve success using, or not using, their telephone or computer or the
knowledge learned from a college course. Although the Company is constantly
looking for ways to improve its products and services, because its products and
services are used by entrepreneurs and small businesses with such a broad range
of objectives, backgrounds and skills, the Company anticipates that it will
continue to receive complaints from some of its customers who are not able to
successfully extend their business on the Internet.
Regardless, the Company remains committed to work with and assist each
of its customers by providing them information and tools necessary to help them
extend their business to the Internet.
The Company is pleased that the FTC's investigations over this long
period of time have been closed without any formal action by the agency. The
Company has long believed that it operates its business with integrity and in
compliance with applicable laws and regulations. The Company fully supports the
various federal and state agencies that it interacts with and, as in the past,
will continue to cooperate with them.
Item 2. Changes in Securities and Use of Proceeds
Recent Sales of Unregistered Securities
On December 6, 2002 we issued 26,675 shares of our common stock at a
price of $1.75 per share in settlement of a finders fee earned in connection
with our private placement of common stock that closed in May 2002. 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.
The Company held an annual meeting of stockholders on December 19,
2002. The security holders were asked to vote for the election of directors and
to ratify the appointment of Grant Thornton LLP as our auditors for the fiscal
year ending June 30, 2003.
The results of the voting for directors were as follows:
Class I Directors:
Donald L. Danks Votes for 5,912,592 Votes Withheld 2,682
John J. Poelman Votes for 5,910,092 Votes Withheld 5,182
Class II Director
Brandon Lewis Votes for 5,910,089 Votes Withheld 5,185
The results of the vote for ratification of Grant Thornton LLP as
auditors were as follows:
Votes for 5,904,105 Votes Against 7,846 Votes Abstaining 3,323
Item 5. Other Information
On January 14, 2003 Peter Fredericks was appointed to the Board of
Directors of the Company. Mr. Fredericks is a private equity investor, who has
worked with numerous technology companies since 1982, with a particular focus on
software and Internet infrastructure. Mr. Fredericks' experience also includes
working as a strategy consultant with the Boston Consulting Group. Mr.
Fredericks received his Bachelor of Arts degree in Economics with distinction
from Stanford University, his Masters in Business Administration from Harvard
University, where he was a Baker Scholar, and his Ph.D. from the Vienna
University of Economics and Business Administration. Mr. Fredericks is also a
director of Flanders Corp.
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
None.
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
February 14, 2003 John J. Poelman
Chief Executive Officer
February 14, 2003 /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 officer 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 officer 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 officer 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: February 14, 2003
/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 officer 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 officer 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 officer 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: February 14, 2003
/s/ Frank C. Heyman
Frank C. Heyman
Chief Financial Officer