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Washington, D.C. 20549

FORM 10-Q

(Mark One)

OR

Commission File Number: 000-29037

(Exact name of registrant as specified in its charter)

10305 102nd Terrace Sebastian, Florida 32958
(Address of principal executive offices)

(772) 299-8000
Registrant’s telephone number, including area code:

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 preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days:
YES x NO o

The number of shares of the registrant’s common stock, $0.008 par value, outstanding as of August 9, 2002, was 39,883,338. There were 34,188,893 shares of Class A common stock outstanding and 5,694,445 shares of Class B common outstanding as of this date.

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eMerge Interactive, Inc.

FORM 10-Q QUARTERLY REPORT
(For Three Months Ended June 30, 2002)

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PART I.  FINANCIAL INFORMATION

eMerge Interactive, Inc.
Condensed Consolidated Balance Sheets
(Unaudited)

See accompanying notes to condensed consolidated financial statements.

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See accompanying notes to condensed consolidated financial statements.

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eMerge Interactive, Inc.
Condensed Consolidated Statements of Operations
For the Three Months Ended June 30, 2002 and 2001
(Unaudited)

See accompanying notes to condensed consolidated financial statements.

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eMerge Interactive, Inc.
Condensed Consolidated Statements of Operations
For the Six Months Ended June 30, 2002 and 2001
(Unaudited)

See accompanying notes to condensed consolidated financial statements.

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EMerge Interactive, Inc.
Condensed Consolidated Statements of Cash Flows
For the Six Months Ended June 30, 2002 and 2001
(Unaudited)

See accompanying notes to condensed consolidated financial statements. 

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EMerge Interactive, Inc.
Condensed Consolidated Statements of Cash Flows
For the Six Months Ended June 30, 2002 and 2001
(Unaudited)

See accompanying notes to condensed consolidated financial statements.

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eMerge Interactive, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)

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		Three Months Ended June 30,
		Actual 2002			Actual 2001			Pro Forma 2001
Loss from continuing operations		$	7.3 million		$	18.7 million		$	18.4 million
Loss from continuing operations per share		$	.18		$	0.53		$	0.52
Loss from discontinued operations		$	7.8 million		$	5.5 million		$	2.4 million
Loss from discontinued operations per share		$	0.19		$	0.15		$	0.07
Net loss		$	16.9 million		$	24.2 million		$	20.8 million
Net loss per share		$	0.42		$	0.68		$	0.59

 

		Six Months Ended June 30,
		Actual 2002			Actual 2001			Pro Forma 2001
Loss from continuing operations		$	11.4 million		$	26.2 million		$	25.6 million
Loss from continuing operations per share		$	0.28		$	0.74		$	0.72
Net loss from discontinued operations		$	7.9 million		$	8.0 million		$	1.8 million
Net loss from discontinued operations per share		$	0.20		$	0.22			0.05
Net loss		$	21.0 million		$	34.5 million		$	27.7 million
Net loss per share		$	0.53		$	0.97		$	0.78

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            The following discussion of our financial condition and results of operations should be read together with the condensed consolidated financial statements and the related notes included elsewhere in this report.

            During the quarter, we announced that we were divesting our cattle operations and plan to either sell or dispose of these operations. Accordingly, operating results from continuing operations for all periods presented exclude the cattle operations that are held for sale and are classified as discontinued operations in the accompanying financial statements. The remaining cattle operations, which are in the process of being disposed, are considered held and used and are included in the operating results from continuing operations for all periods presented.

Results of Operations

Three months ended June 30, 2002 and June 30, 2001

Revenue

            Revenue decreased to $24.0 million for the quarter ended June 30, 2002 from $43.5 million for the quarter ended June 30, 2001. Revenue from cattle sales decreased to $23.9 million for the quarter ended June 30, 2002 from $43.3 million for the quarter ended June 30, 2001. This decrease reflects a lower volume of cattle sales transactions brought about primarily by a decrease in feeder cattle available for sale. During the quarter ended June 30, 2002, we sold approximately 50,000 head of cattle in continuing operations, versus 89,000 head sold in the comparable prior year period. Revenue from other products and services decreased by 47% to $95,000 for the quarter ended June 30, 2002 from $179,000 for the quarter ended June 30, 2001. This decrease is due primarily to discontinuation of on-line product and service offerings such as Interactive Manager and our on-line storefront in the second quarter of 2001.

Cost of Revenue

            Cost of revenue consists primarily of the direct cost to acquire cattle and cattle-related products. In addition, cost of revenue also includes the indirect overhead costs, such as support personnel, facilities costs, telecommunication charges and material purchases that are primarily associated with supporting our information management and individual-animal tracking products and services. Cost of revenue attributed to cattle sales decreased to $23.7 million for the quarter ended June 30, 2002 from $42.8 million for the quarter ended June 30, 2001, corresponding with the decreased cattle sales activity. Cost of revenue attributed to other products and services decreased by 76% to $74,000 for the quarter ended June 30, 2002 from $315,000 for the quarter ended June 30, 2001. This decrease is due primarily to discontinuation of on-line product and service offerings such as Interactive Manager and our on-line storefront in the second quarter of 2001, which contributed costs of approximately $241,000 in the three months ended June 30, 2001.

            We generated a gross profit of $180,000 and $371,000 for the quarters ended June 30, 2002 and 2001, respectively. The decrease in gross profit is due primarily to the decrease in cattle revenue and a comparable decrease in cost of goods, principally direct cost to acquire cattle.

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Selling, General and Administrative Expenses

            Our selling, general and administrative expenses consist primarily of salaries and related benefit costs, insurance program charges, material and supply purchases, professional service fees, telephone, travel, consulting and advertising and media expenses. Selling, general and administrative expenses decreased 25% to $3.5 million for the quarter ended June 30, 2002 from $4.7 million for the quarter ended June 30, 2001. The decrease in selling, general and administrative expenses was primarily associated with the impacts of cost saving initiatives that began during the second quarter of 2001 and continued into 2002, which included several workforce reductions. This cost savings was partially offset by a provision against uncollectible receivables/cattle deposits of approximately $863,000 recorded in the quarter ended June 30, 2002. We anticipate selling, general and administrative expenses to continue to decline in the foreseeable future as the impacts of these cost saving initiatives become fully realized and our divestiture activity is completed.

Technology and Development

            Our technology and development expenses consist primarily of salaries and related benefit costs, payments to outside consultants, maintenance charges and project material costs. Our expenses decreased by 33% to $804,000 for the quarter ended June 30, 2002 from $1.2 million for the quarter ended June 30, 2001. The decrease was primarily associated with the impacts of cost saving initiatives begun during the second quarter of 2001, which included workforce reductions. Furthermore, the Company has fewer products under development and products such as CattleLog, our exclusive individual-animal data collection and reporting system, which is essentially complete. The primary focus of our development team is our meat inspection system, VerifEYE. We expect to continue to incur costs to develop and commercialize new products, expand our offerings and adapt our technologies to new markets. However, we anticipate that our technology and development expenses will continue to decline in the remainder of 2002.

Impairment, Restructuring and Related Charges

            In April 2002, we began the process of selling or disposing of our cattle operations. The operations we are selling have been evaluated to determine the fair value of the assets held for sale. Both the adjustment to fair value and the results of operations for these cattle operations have been recorded in discontinued operations. The operations we are disposing were also evaluated to determine the fair value of the assets and we recorded impairment of the associated goodwill in the amount of $1.7 million. The remaining $345,000 consists of severance and related outplacement benefits for the 16 employees who were terminated during the second quarter of 2002 and costs to exit a lease.

Depreciation and Amortization

            Depreciation and amortization expense decreased 28% to $1.0 million for the quarter ended June 30, 2002 from $1.4 million for the quarter ended June 30, 2001. The decrease is primarily due to the adoption of SFAS No. 142, which changes the accounting for goodwill from an amortization method to an impairment-only approach. Goodwill amortization charges of $286,000 are included in the three months ended June 30, 2001 compared to $0 in the three months ended June 30, 2002. If we had not adopted SFAS No. 142 we would have recorded $200,000 in amortization expense for the current quarter. The decrease between actual depreciation and amortization for the period ended June 30, 2001 and the expense that would have been recorded for the period ended June 30, 2002 without SFAS No. 142 is due to the impairment of tangible and intangible assets recorded during 2001.

Other Income and Expense

            Interest and other income, net increased to $78,000 for the quarter ended June 30, 2002 from $8,000 for the quarter ended June 30, 2001. This increase was primarily due to miscellaneous income received for the sale of infrared technologies and products.

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            Interest expense increased to $118,000 for the quarter ended June 30, 2002 from $0 for the quarter ended June 30, 2001 as a result of increased borrowings under the LOC, which was terminated on May 1, 2002.

            Due to the losses incurred, we did not recognize income tax expense for the quarter ended June 30, 2002 or the quarter ended June 30, 2001.

Discontinued Operations

            During the quarter ended June 30, 2002, we sold Jordon Cattle Auction that was acquired in June 2000 for $1.2 million and approximately $800,000 of working capital was returned. We also sold the tangible assets of RPT Land and Cattle Company acquired in September 2000 for $400,000 plus the return of 89,585 shares of eMerge Class A common stock. The shares were valued at the closing market price ($0.38 per share) on the date of sale and amounted to $34,042. In addition, the Company is in negotiations to sell assets acquired from Eastern Livestock, Inc. in May 2000, Ed Edens Farms in July 2000, LeMaster Livestock, Inc. in August 2000, Mountain Plains Video Auction in August 2000, J&L Livestock Company in December 2000, Blue Grass Stockyards in January 2001 and Pennell Cattle Company in January 2001. The Company expects to complete these negotiations in the third quarter. The assets held for sale include only property and equipment. All associated goodwill was reduced to zero. There are no liabilities in the disposal group. The impairment loss, revenue and pretax profit (loss) related to assets held for sale amounted to:

            Included in the pretax loss for the three months ended June 30, 2002 is a provision for bad debts of $443,000 and a provision for obsolete inventory of $144,000.

            All assets held for sale are components of the cattle segment.

            In addition to the assets held for sale, the Company plans to close the two remaining components of the cattle segment - Runnells Peters Cattle Company acquired in January 2001 and the Austin facility. These facilities do not meet the criteria of held for sale and, accordingly, will be classified as held and used until the date of disposal. At that time, the results of operations will be classified as discontinued operations. The Company expects to close these facilities in the third quarter. The impairment loss is included in continuing operations and amounted to $1.7 million for the three months ended June 30, 2002.

Extraordinary Item

            On May 1, 2002, we terminated our $30 million revolving line of credit agreement from CIT and agreed to pay a termination fee of $425,000. As a result of the termination, we recorded a loss of $1.8 million in the second quarter of 2002 related to the write-off of unamortized financing costs and the termination fee.

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Six months ended June 30, 2002 and June 30, 2001

Revenue

            Revenue decreased to $55.8 million for the six months ended June 30, 2002 from $90.2 million for the six months ended June 30, 2001. Revenue from cattle sales decreased to $55.4 million for the six months ended June 30, 2002 from $89.8 million for the six months ended June 30, 2001. This decrease reflects a lower volume of cattle sales transactions brought about primarily by a decrease in feeder cattle available for sale. During the six months ended June 30, 2002, we sold approximately 131,000 head of cattle in continuing operations, versus 196,000 head sold in the comparable prior year period. Revenue from other products and services increased by 3% to $363,000 for the six months ended June 30, 2002 from $354,000 for the six months ended June 30, 2001. This increase is due primarily to an increase in CattleLogTM and related revenues in the six months ended June 30, 2002, which is partially offset by a decrease in revenues related to the discontinuation of on-line product and service offerings such as Interactive Manager and our on-line storefront in the second quarter of 2001.

Cost of Revenue

            Cost of revenue consists primarily of the direct cost to acquire cattle and cattle-related products. In addition, cost of revenue also includes the indirect overhead costs, such as support personnel, facilities costs, telecommunication charges and material purchases that are primarily associated with supporting our information management and individual-animal tracking products and services. Cost of revenue attributed to cattle sales decreased to $54.9 million for the six months ended June 30, 2002 from $88.5 million for the six months ended June 30, 2001, corresponding with the decreased cattle sales activity. Cost of revenue attributed to other products and services decreased by 66% to $222,000 for the six months ended June 30, 2002 from $654,000 for the six months ended June 30, 2001. This decrease is due primarily to the discontinuation of on-line product and service offerings such as Interactive Manager and our on-line storefront in the second quarter of 2001, which contributed costs of approximately $526,000 in the six months ended June 30, 2001.

            We generated a gross profit of $615,000 and $1.1 million for the six months ended June 30, 2002 and 2001, respectively. The decrease in gross profit is due primarily to the decrease in cattle revenue and a comparable decrease in cost of goods, principally direct cost to acquire cattle.

Selling, General and Administrative Expenses

            Our selling, general and administrative expenses consist primarily of salaries and related benefit costs, insurance program charges, material and supply purchases, professional service fees, telephone, travel, consulting and advertising and media expenses. Selling, general and administrative expenses decreased 40% to $6.0 million for the six months ended June 30, 2002 from $9.9 million for the six months ended June 30, 2001. The decrease in selling, general and administrative expenses was primarily associated with the impacts of cost saving initiatives that began during the second quarter of 2001 and continued into 2002, which included several workforce reductions. This cost savings was partially offset by a provision against uncollectible receivables/cattle deposits of approximately $863,000 taken in the quarter ended June 30, 2002. We anticipate selling, general and administrative expenses to continue to decline in the foreseeable future as the impacts of these cost saving initiatives become fully realized and our divestiture activity is completed.

Technology and Development

            Our technology and development expenses consist primarily of salaries and related benefit costs, payments to outside consultants, maintenance charges and project material costs. Our expenses decreased by 47% to $1.4 million for the six months ended June 30, 2002 from $2.6 million for the six months ended June 30, 2001. The decrease was primarily

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associated with the impacts of cost saving initiatives begun during the second quarter of 2001, which included workforce reductions. In addition, approximately $201,000 of involuntary termination costs and related charges were incurred in the three months ended March 31, 2001 and included in technology and development expenses. These charges, primarily related to employee severance and related benefit costs, were associated with a realignment of our corporate operations in connection with our decision to discontinue support of Nutricharge and infrared imaging products. Furthermore, the Company has fewer products under development and products such as CattleLog, our exclusive individual-animal data collection and reporting system, which is essentially complete. The primary focus of our development team is our meat inspection system, VerifEYE. We expect to continue to incur costs to develop and commercialize new products, expand our offerings and adapt our technologies to new markets. However, we anticipate that our technology and development expenses will continue to decline in the remainder of 2002.

Impairment, Restructuring and Related Charges

            In April 2002, we began the process of selling or disposing of our cattle operations. The operations we are selling have been evaluated to determine the fair value of the assets held for sale. Both the adjustment to fair value and the results of operations for these cattle operations have been recorded in discontinued operations. The operations we are disposing were also evaluated to determine the fair value of the assets and we recorded impairment of the associated goodwill in the amount of $1.8 million. The remaining $403,000 consists of severance and related outplacements benefits for the 16 employees who were terminated during the second quarter of 2002 and costs to exit a lease.

Depreciation and Amortization

            Depreciation and amortization expense decreased 28% to $2.0 million for the six months ended June 30, 2002 from $3.0 million for the six months ended June 30, 2001. The decrease is primarily due to the adoption of SFAS 142, which changes the accounting for goodwill from an amortization method to an impairment-only approach. Goodwill amortization charges of $643,000 are included in the six months ended June 30, 2001 compared to $0 in the six months ended June 30, 2002. If we had not adopted SFAS 142 we would have recorded $443,000 in amortization expense for the current six months. The decrease between actual depreciation and amortization for the six month period ended June 30, 2001 and the expense that would have been recorded for the six month period ended June 30, 2002 without SFAS 142 is due to the impairment of both tangible and intangible assets recorded during 2001.

Other Income and Expense

            Interest and other income, net increased to $175,000 for the six months ended June 30, 2002 from $124,000 for the six months ended June 30, 2001. This increase was primarily due to miscellaneous income received in the three months ended June 30, 2002, for the sale of infrared technologies and products. .

            Interest expense increased to $426,000 for the six months ended June 30, 2002 from $0 for the six months ended June 30, 2001 as a result of increased borrowings under the LOC, which was terminated on May 1, 2002.

            Due to the losses incurred, we did not recognize income tax expense for the six months ended June 30, 2002 or the six months ended June 30, 2001.

Discontinued Operations

            During the quarter ended June 30, 2002, we sold Jordon Cattle Auction that was acquired in June 2000 for $1.2 million and received approximately $800,000 in returned working capital. We also sold the tangible assets of RPT Land and Cattle Company

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acquired in September 2000 for $400,000 plus the return of 89,585 shares of eMerge Class A common stock. The shares were valued at the closing market price ($0.38 per share) on the date of sale and amounted to $34,042. In addition, the Company is in negotiations to sell assets acquired from Eastern Livestock, Inc. in May 2000, Ed Edens Farms in July 2000, LeMaster Livestock, Inc. acquired in August 2000, Mountain Plains Video Auction acquired in August 2000, J&L Livestock Company acquired in December 2000, Blue Grass Stockyards acquired in January 2001 and Pennell Cattle Company acquired in January 2001. The Company expects to complete these negotiations in the third quarter. The assets held for sale include only property and equipment. All associated goodwill was reduced to zero. There are no liabilities in the disposal group. The impairment loss, revenue and pretax loss related to assets held for sale amounted to:

            Included in the pretax loss for the six months ended June 30, 2002 is a provision for bad debt of $443,000 and a provision for obsolete inventory of $144,000.

            All assets held for sale are components of the cattle segment.

            In addition to the assets held for sale, the Company plans to close the two remaining components of the cattle segment - Runnells Peters Cattle Company acquired in January 2001 and the Austin facility. These facilities do not meet the criteria of held for sale and, accordingly, will be classified as held and used until the date of disposal. At that time, the results of operations will be classified as discontinued operations. The Company expects to close these facilities in the third quarter. The impairment loss is included in continuing operations and amounted to $1.8 million for the six months ended June 30, 2002.

Extraordinary Items

            On May 1, 2002, we terminated our $30 million revolving line of credit agreement from CIT and agreed to pay a termination fee of $425,000. As a result of the termination, we recorded a loss of $1.8 million in the second quarter of 2002 related to the write-off of unamortized financing costs and the termination fee.

            On January 1, 2001, we adopted the provisions of SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities”, as amended, and recorded a charge to operations of $232,688, which is included as a cumulative effect of a change in accounting principle in the condensed consolidated financial statements.

Liquidity and Capital Resources

            As of June 30, 2002, our principle sources of liquidity are existing cash balances and working capital and borrowings available from lessee/operators’ lines of credit used to support the activities under the lease and operating agreements. We expect that our existing cash balances, working capital and divestiture activities will meet our cash flow needs for the foreseeable future. However, if we are unable to complete the divestitures and receive the expected return of working capital, we may need to seek additional sources of liquidity.

            Non-current restricted cash consists of cash invested in certificates of deposit with maturities of 180 days or less. These certificates of deposit are necessary to support our bond requirement with the U.S. Department of Agriculture Grain Inspection, Packers and Stockyards Administration to buy and sell cattle in the U.S. public market. The leased operations are

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required to post their own bonds. As we continue to complete the cattle operations divestitures we expect our bond requirement to be significantly reduced during the third quarter of 2002, thus increasing our owned unrestricted cash balance.

            We continue to explore other debt or equity financing alternatives to meet our working capital requirements. If additional funds are raised through the issuance of equity securities or through alternative debt financing that provides for the issuance of equity securities, our stockholders may experience significant dilution. Furthermore, there can be no assurance that any additional funding will be available when needed, or that if available, such financing will include favorable terms. See also “Factors Affecting Our Business, Financial Condition and Results of Operations” below.

            As of June 30, 2002, we had cash and cash equivalents totaling $9.4 million compared to $18.7 million at December 31, 2001. As of June 30, 2002, $3.3 million of our cash and cash equivalents were held by our leased facilities compared to $9.8 million as of December 31, 2001 and are classified as restricted. Our working capital balance as of June 30, 2002 was $9.3 million compared to $17.9 million as of December 31, 2001.

            From August 2001 to May 2002, the Company had a $30 million LOC from CIT. As of May 1, 2002, we terminated the LOC and agreed to pay a termination fee of $425,000. In addition, the $9.0 million in irrevocable letters of credit have been released by CIT as of May 1, 2002 and the unissued stock purchase warrants will not be issued. As a result of the termination, we recorded a loss of $1.8 million in the second quarter of 2002 related to the write-off of unamortized financing costs and the termination fee.

            We have had significant negative cash flows from operating activities for each fiscal and quarterly period to date. For the six months ended June 30, 2002, net cash used in operating activities was $13.6 million and primarily consisted of net operating losses, increases in trade accounts receivable, inventories and cattle deposits and decrease in accounts payable and accrued liabilities. Of the $13.6 million net cash used in operating activities, $3.0 million was used by our owned operations and $10.6 million was used by the leased operations. The decrease in working capital requirements corresponded with a decrease in cattle sales activity and a reduction in the net operating loss.

            Net cash used in investing activities was $424,000 for the six months ended June 30, 2002. Our investing activities include additional acquisition costs paid in compliance with earn-out agreements in the asset purchase agreements executed in January 2001 for Runnells-Peters Stockyards, and Pennell Order Buying for a combined cash payment of $688,000. In addition, we had capital expenditures of $494,000. These payments were offset by $1.6 million provided by the sale of assets associated with the divestiture of two of our cattle operations in the second quarter. All of the cash used in investing activities was used by the owned operations.

            Net cash provided by financing activities was $3.9 million for the six months ended June 30, 2002. Of the $3.9 million of net cash provided by financing activities, $4.9 million was provided by the leased operations, principally due to net borrowings on the lines of credit held by these leased operations. In addition, one of the divested cattle operations was a leased operation and a distribution of the $501,000 minority interest was made in completing the divestiture. The owned operations used $213,000 to repay capital lease obligations.

            Our future working capital requirements will depend on a variety of factors including our ability to successfully implement our current business plan, reduce our net cash outflow and manage the working capital required by seasonal fluctuations in cattle sales, which should have significantly less impact going forward as we complete the divestiture of the cattle operations.

Cattle Order Buying Lease and Operating Agreements

            During the fourth quarter of 2001, we finalized lease and operating agreements with three of our largest order buying businesses. Beginning with the effective date of each agreement, the cattle brokerage operations formerly conducted in wholly-owned facilities are conducted in entities owned solely by employees of eMerge. The lease and operating agreements are generally for a one year term, renewable, and provide for us to receive 70% of the net profits or losses (as defined in the agreements) and have certain control over operating activities while the lessee/operators are responsible for obtaining lines of credit for working capital purposes and are responsible for the day-to-day operations of the facilities, including payroll and operating expenses. Effective May 31, 2002, we divested one of these facilities and plan to divest the two remaining facilities during the third quarter of 2002 of which one has been completed as of this filing date.

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Other Matters

            We are not engaged in off-balance sheet arrangements or trading activities that involve non-exchange traded contracts. We do engage in a limited number of cattle futures contracts. As of June 30, 2002, we held $43,000 in open cattle future positions. We also engage in both cattle purchase and sale transactions with certain related parties, primarily entities related to or owned by acquired companies. These sales are made on the same credit terms as our other customers and suppliers. We generally purchase from or sell to related parties in order to satisfy sales commitments or balance our inventory position. Purchase and sales prices are negotiated based on current market conditions in the cattle industry.

            Our stock price has been trading below $1 since February 1, 2002 and we are currently not in compliance with the NASDAQ'S listing requirements. We have moved from the NASDAQ National Market to the NASDAQ SmallCap Market, which extends our bid price grace period until March 23, 2003, if we are in compliance with certain listing criteria. This move to the SmallCap market has extended the bid price grace period and provides us with more flexibility and additional time to regain compliance and to execute our plan while being able to maintain NASDAQ listing status.

            An important point to make is that this transition does not impact the method in which our securities are bought and sold. Stock information is available through Yahoo, NASDAQ Online, etc. end the NASDAQ SmallCap listing in the newspaper.

Critical Accounting Policies

Our critical accounting Policies are as follows;

Revenue Recognition

            We generate the majority of our revenue is from cattle soles transactions where we act as either a principal or agent in the purchase and sale of cattle. For cattle soles transactions where we are the principal in the arrangement, we purchase cattle and take title from the seller, record the cattle as inventory until delivered to an accepted buyer and we are exposed to both the inventory and credit risk that results from the transaction. In these types of transactions, we record the gross revenue earned and related product costs incurred. For cattle sales transactions in which we act as an agent, we sell cattle consigned to US on a commission basis, where we are not subject to inventory and credit risk, or we sell cattle on a fee basis and we record the net revenue earned. For all other products and services offered by us, we act as a principal to the transaction and gross revenue and related product cost arc recognized as products are shipped or services are provided.

            In December 1999, the Securities and Exchange Commission (the "SEC") issued Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial Statements." SAB 101 was followed by Staff Accounting Bulletin No. 101A, "Implementation Issues Related to SAB 101B, in March 2000 and by Staff Accounting Bulletin No. 101B, "Second Amendment: Revenue Recognition in Financial Statements " ("SAB 101 B"), in June 2000. In October 2000, the SEC issued a Frequently Asked Questions and Answers document to provide additional guidance. These documents summarize certain views of the SEC regarding applying generally accepted accounting principles to revenue recognition in financial statements. The SEC has provided this guidance due, in part to the large number of revenue recognition issues that registrants encounter. We believe that our current revenue recognition policies comply with SAB 101.

Principles of Consolidation

            The consolidated financial statements include the financial statements of eMerge Interactive, Inc and its wholly owned subsidiaries. The consolidation also includes all activities with related entities, notwithstanding the lack of technical majority ownership, which is necessary to present fairly the financial position and results of operations of the Company, because of the existence of a parent-subsidiary relationship by means other than record ownership of voting stock. Specifically, the activities conducted by related party entities related to the lease and operating agreements are consolidated even thought we don't have a 51% voting control (technical majority ownership). Rather we have consolidated these activities due to the parent subsidiary relationship created by the lease and operating agreements. Minority interest reflects the lessee/operators' equity interest in the activities under the lease and operating agreements consolidated in the financial statements. All intercompany balances and transactions have been eliminated in consolidation.

Impairment of Long-lived Assets

            We account for long lived assets in accordance with the provisions of Statement of Financial Accounting Standard No. 144, "Accounting For the Impairment or Disposal of Long-lived Assets" (SFAS No. 144), which we adopted as of January 1, 2002. This statement addresses the financial accounting and reporting for the impairment of long-lived assets and for long-lived assets to be disposed of. SFAS No. 144 supercedes Statement of Financial Accounting Standard No. 121, "Accounting for the impairment of Long-Lived Assets and for Assets to be Disposed Of" (SFAS No. 121), but retains the fundamental provision of SFAS No. 121 for (a) recognition and measurement of the impairment of long-lived assets to be held and used and (b) measurement of long-lived assets to be disposed by sale. SFAS No. 144 also supercedes the accounting and reporting provisions of Accounting Principles Board 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."

            Under SFAS No. 144, long-lived assets to be disposed of by sale are classified as held for sale when six specific criteria are met. Assets held for sale are measured at the lower of their carrying amount or fair value less cost to sell. Goodwill is included in an asset group when the asset group is or includes a reporting unit. The results of operations of a component of an entity that has either been disposed of or is classified as held for sale is reported in discontinued operations when the operations and cash flows of the component have been or will be eliminated form the ongoing operations of the entity as a result of the disposal transaction and the entity will not have any significant continuing involvement in the operations of the component after the disposal transaction. A component of an entity comprises operations and cash flows that can clearly be distinguished, operationally and for financial reporting purposes from the rest of an entity. In the period in which a component of an entity has been disposed of or is classified as held for sale, the income statement for current and prior periods report the results of operations of the component, including any gain or loss resulting from adjustments to fair value, in discontinued operations.

            Assets not meeting the criteria of held for sale continue to be classified as held and used until they are disposed of. Impairment losses for assets held and used are measured as the amount by which the carrying amount of the long-lived asset (asset group) exceeds its fair value and are included in continuing operations.

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Factors Affecting Our Business, Financial Condition and Results of Operations

Cautionary Statement

            This Quarterly Report on Form 10-Q contains statements that constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These statements can be identified by the use of predictive, future tense or forward-looking terminology, such as “anticipates,” “believes,” “estimates,” “expects,” “intends,” “may,” “will” and words of similar meaning. These statements include statements regarding, among other things, our electronic commerce strategy, acquisition and expansion strategy, product and service development, projected capital expenditures, liquidity and capital, development of additional revenue sources, expansion into new market segments, technological advancement, ability to develop “brand” awareness and the market acceptance of the Internet as a medium of commerce. These statements are based on management’s current expectations and are subject to a number of uncertainties and risks that could cause actual results to differ significantly from those described in the forward-looking statements, including the acceptance by our customers of electronic commerce as a means of conducting business, our ability to grow revenue, our ability to increase margins, our ability to implement our acquisition and expansion strategy, the impact of competition on pricing, general economic conditions, employee turnover, the impact of litigation and other factors. Other factors that may cause such a difference include, but are not limited to, those discussed in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” as well as those discussed elsewhere in this report and as set forth from time to time in our other public filings and public statements. Readers of this report are cautioned to consider these risks and uncertainties and to not place undue reliance on these forward-looking statements.

            In addition to the other information included in this report and our other public filings and releases, a discussion of factors affecting our business is included in our December 2001 Form 10-k and should be considered while evaluating our business, financial condition, results of operations and prospects.

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ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

            Our exposure to market risk relates to changes in interest rates and their potential impact on our investment portfolio and debt structure. We invest in marketable debt securities that meet high credit quality standards and limit our credit exposure to any one issue, issuer and type of investment. As of June 30, 2002, our investments consisted of $104,000 in cash equivalents with maturities of less than three months and $1.5 million in certificates of deposit with a maturity of less than six months. Due to the short-term, conservative nature of our investment portfolio, a 10% increase or decrease in interest rates would not have a material effect on our results of operations or the fair value of our portfolio. The impact on our future results of operations and the future value of our portfolio will depend largely on the gross amount of our investments.

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            The interest rate on our debt floats based on an index rate. Accordingly, increases or decreases in the index rate would increase or decrease our interest expense. A 10% increase or decrease in interest rates would have increased or decreased our interest expense approximately $32,000 for the three months ended June 30, 2002.

            In the ordinary course of business, we enter into purchase and sale contracts for cattle that require delivery at a future date. We also enter into a limited number of cattle futures transactions. The contract lives are generally less than six months. As of June 30, 2002, there was $43,000 in open positions.

PART II.     OTHER INFORMATION

            There have been no material developments in the legal proceedings previously reported.

            We held our Annual Meeting of Stockholders on May 23, 2002. At the meeting, the shareholders voted in favor of the following items listed in our Proxy Statement dated April 18, 2002:

I.   Election of Nine Directors

The number of votes cast for or withheld with respect to the election of each of the directors is set forth below:

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            There were no broker non-votes with respect to the election of directors.

II.   Approve Amendment to the Amended and Restated 1999 Equity Compensation Plan

(a)   Exhibits

______________

(a)   Reports on Form 8-K

There were no reports filed on Form 8-K for the quarter ended June 30, 2002.

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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.