For the quarterly period ended July 31, 2002
OR
Commission file number 0-26715
ROANOKE TECHNOLOGY CORP.
(Exact name of registrant as specified in its charter)
| Florida | 22-3558993 |
| (State or other jurisdiction of | (I.R.S. Employer |
| incorporation or organization) | Identification No.) |
539 Becker Drive,
Roanoke Rapids, North Carolina 27870
(Address of principal executive offices) (Zip Code)
(252) 537-9222
(Registrant''s telephone number, including area code)
Not applicable
(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 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 |_|
State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date: As of September 19,2002, we had 46,582,874 shares of common stock outstanding, $0.0001 par value.
BASIS OF PRESENTATION
The accompanying unaudited financial statements are presented in accordance with generally accepted accounting principles for interim financial information and the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. The accompanying statements should be read in conjunction with the audited financial statements for the year ended October 31, 2001. In the opinion of management, all adjustments (consisting only of normal occurring accruals) considered necessary in order to make the financial statements not misleading, have been included. Operating results for the nine months ended July 31, 2002 are not necessarily indicative of results that may be expected for the year ending October 31, 2002. The financial statements are presented on the accrual basis.
For the information required by this Item, refer to the Index to Financial Statements appearing on page F-1 of the registration statement.
ROANOKE TECHNOLOGY CORPORATION
Financial Statements Table of Contents
| Page # | |
| Balance Sheets As of July 31, 2002 and October 31, 2001 |
1 - 2 |
| Statements of Operations For the Nine Months Ended July 31, 2002 and 2001 |
3 |
| Statements of Operations For the Three Months Ended July 31, 2002 and 2001 |
4 |
| Statement of Stockholders'Equity As of July 31, 2002 |
5 - 6 |
| Statements of Cash Flow For the Nine Months Ended July 31, 2002 and 2001 |
7 |
| Notes to the Financial Statements | 8 - 13 |
ROANOKE TECHNOLOGY CORPORATION
AND SUBSIDIARY
BALANCE SHEETS
As of July 31, 2002 and October 31, 2001
ASSETS
2002 2001
------------ ------------
CURRENT ASSETS
Cash $ 16,436 $ 35
Employee advances 13,159 5,494
Accounts receivable 152,705 64,598
Less: allowance for doubtful accounts (7,000) (30,000)
----------- -----------
Total Current Assets 175,300 40,127
PROPERTY AND EQUIPMENT
Equipment and leasehold improvements 533,533 517,220
Less: accumulated depreciation (179,836) (133,647)
----------- -----------
Total Property and Equipment 353,697 383,573
OTHER ASSETS
Organization costs 1,000 1,000
Loan origination costs 13,927 13,927
Goodwill 19,614 19,614
Software 313,000 313,000
Less: Accumulated amortization (347,541) (294,419)
----------- -----------
Net intangibles 0 53,122
Deposits 19,850 19,850
Officers' receivable 36,434 76,368
----------- -----------
Total Other Assets 56,284 149,340
TOTAL ASSETS $ 585,281 $ 573,040
=========== ===========
1
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 254,821 $ 294,427
Payroll tax and penalty payable 708,178 332,293
Credit card payable 9,784 17,588
Current maturity of long-term debt 35,557 35,411
----------- -----------
Total current liabilities 1,008,340 679,719
LONG TERM LIABILITIES
Long term debt 309,360 284,024
Debenture bond 184,240 0
Less: current portion (35,557) (35,411)
----------- -----------
Total long term liabilities 458,043 248,613
----------- -----------
TOTAL LIABILITIES 1,466,383 928,332
STOCKHOLDERS' EQUITY
Common stock - $.0001 par value;
150,000,000 shares authorized;
39,737,597 and 34,337,597 issued
and outstanding, respectively 3,974 3,434
Additional paid-in capital 6,226,405 5,783,045
Allowance for long-term
Stock compensation 0 (205,199)
Retained earnings (7,111,481) (5,936,572)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY (881,102) (355,292)
----------- -----------
TOTAL LIABILITIES AND EQUITY $ 585,281 $ 573,040
=========== ===========
2
ROANOKE TECHNOLOGY CORPORATION
AND SUBSIDIARY
STATEMENTS OF OPERATIONS
For the Nine Months Ended July 31, 2002 and 2001
2002 2001
------------ ------------
REVENUE
Sales $ 1,270,989 $ 1,357,673
Cost of sales (758,001) (549,088)
------------ ------------
GROSS PROFIT 512,988 808,585
GENERAL & ADMINISTRATIVE EXPENSES (1,510,833) (1,933,673)
RESEARCH & DEVELOPMENT (154,173) (187,027)
------------ ------------
INCOME (LOSS) FROM OPERATION (1,152,018) (1,312,115)
OTHER INCOME AND (EXPENSE)
Interest - net (22,891) (22,980)
------------ ------------
Total Other (22,981) (22,980)
------------ ------------
NET INCOME (LOSS) $(1,174,909) $(1,335,095)
============ ============
NET EARNINGS PER SHARE
Basic and Diluted
Net loss per share (.03) (.24)
Basic and Diluted Weighted Average
Number of Common Shares Outstanding 36,312,597 5,476,359*
*as revised for a 7 for 1 reverse stock split
3
ROANOKE TECHNOLOGY CORPORATION
AND SUBSIDIARY
STATEMENTS OF OPERATIONS
For the Three Months Ended July 31, 2002 and 2001
2002 2001
------------ ------------
REVENUE
Sales $ 415,987 $ 376,805
Cost of sales (217,282) (185,082)
------------ ------------
GROSS PROFIT 198,705 191,723
GENERAL &ADMINISTRATIVE EXPENSES (548,630) (397,620)
RESEARCH & DEVELOPMENT (87,500) (61,300)
------------ ------------
INCOME (LOSS) FROM OPERATION (437,425) (267,197)
OTHER INCOME AND (EXPENSE)
Interest - net (12,591) (2,916)
------------ ------------
Total Other (12,591) (2,916)
------------ ------------
NET INCOME (LOSS) $ (450,016) $ (270,113)
============ ============
4
ROANOKE TECHNOLOGY CORPORATION
STATEMENT OF STOCKHOLDERS' EQUITY
As of July 31, 2002
ADDITIONAL
COMMON STOCK PAID
SHARES AMOUNT CAPITAL ALLOWANCES DEFICIT TOTAL
----------------------------------------------------------------------------
Issuance for services 1,525,000 $ 153 $ 59,323 $ 0 $ 0 $ 59,476
Acquisition 500,000 50 19,450 19,500
First offering 800,000 80 19,920 20,000
Second offering 1,000,000 100 49,900 50,000
Third offering 880,000 88 87,912 88,000
Stock compensation 3,175,000 318 123,507 123,825
Net loss for the year (305,545) (305,545)
----------------------------------------------------------------------------
Balance at October 31, 1998 7,880,000 $ 789 $ 360,012 $ 0 $ (305,545) $ 55,256
Third offering 1,349,572 135 354,635 354,770
Issuance for consulting fees 250,000 25 24,975 25,000
Officer compensation 850,000 85 1,991,165 1,991,250
Asset acquisition 999,111 99 629,901 630,000
Stock issued for services 1,500 11,813 11,813
Net loss for the year (2,686,404)(2,686,404)
---------------------------------------------------------------------------
Balance at October 31,1999 11,330,183 $1,133 $3,372,501 $ 0 $ (2,991,949)$ 381,685
Officer compensation 1,500,000 150 899,850 900,000
Net loss for the year (1,065,244)(1,065,244)
---------------------------------------------------------------------------
Balance at October 31, 2000 12,830,183 $1,283 $4,272,351 $ 0 $ (4,057,193)$ 216,441
Stock issued for cash 1,000,000 100 49,900 50,000
Reverse stock split (11,854,443) (1,185) 1,185 0
Stock issued for cash 3,000,000 300 174,700 175,000
Officer compensation 5,200,000 520 811,720 812,240
Stock issued for services 4,161,857 416 455,189 455,605
5
Stock issued to retire
short-term note payable 20,000,000 2,000 18,000 20,000
Allowance for prepaid
stock compensation
for services (205,199)
Net loss for the year (1,879,379)(1,879,379)
---------------------------------------------------------------------------
Balance at October 31, 2001 34,337,597 $3,434 $5,783,045 $ (205,199) $ (5,936,572)$ (355,292)
---------------------------------------------------------------------------
Stock issued for services 3,400,000 340 303,560 303,900
Stock issued for
Litigation settlement 2,000,000 200 139,800 140,000
Allowance for prepaid
stock compensation 205,199 205,199
Net Loss (1,174,909) (1,174,910)
---------------------------------------------------------------------------
Balance at July 31, 2002 39,737,597 $3,974 $6,226,405 $ (0) $(7,111,481) $ (881,102)
===========================================================================
6
ROANOKE TECHNOLOGY CORPORATION
AND SUBSIDIARY
STATEMENTS OF CASH FLOWS
For the Nine Months ending July 31, 2002 and 2001
2002 2001
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $(1,174,909) $(1,335,095)
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 99,312 137,674
Compensation in the form of stock 632,855 917,685
(Increase) decrease in accounts receivable (111,107) 31,271
(Increase) decrease in employee advance (7,665) (4,266)
(Increase) decrease in officers' receivable 39,934 (61,558)
(Increase) decrease in deposits 0 (24,827)
Increase (decrease) in payables & accrued expenses 328,475 219,585
Increase (decrease) in accrued interest 25,336 0
------------ ------------
Total adjustments to net income 1,007,140 1,215,564
------------ ------------
Net cash flows from operations (167,769) (119,531)
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures on equipment (16,313) (240,471)
------------ ------------
Net cash flows from investing (16,313) (240,471)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from note payable 0 290,000
Proceeds from debenture bond 184,240 0
Proceeds from issuance of common stock 0 60,000
Payments on notes 0 (20,070)
------------ ------------
Net cash flows from financing 184,240 329,930
------------ ------------
CASH RECONCILIATION
Net increase (decrease) in cash 16,471 (30,072)
Cash at beginning of year 35 40,994
------------ ------------
CASH BALANCE AT APRIL 30, 2002 AND 2001 $ 16,436 $ 10,922
============ ============
7
Industry - Roanoke Technology Corporation (The Company) was incorporated December 11, 1997 as Suffield Technologies Corp., its original name, under the laws of the State of Florida. The Company is headquartered in Roanoke Rapids, North Carolina and does business as Top-10 Promotions, Inc. The Company is engaged in the design, development, production, and marketing of technology to provide enhanced internet marketing capabilities.
Revenue Recognition and Service Warranty - Revenues resulting from technology consulting services are recognized as such services are performed and paid. A deferred revenue account had been established in the financial statements during 1999 to account for revenue and costs of revenue to be recognized in the income statement at the end of the service agreement period. During February of 2000 the service agreement was changed thus not requiring a deferred revenue account. Services are most often paid for in advance of the service being performed. The services performed are completed by software programs leaving the time when a service is paid for and the time the service is performed immaterial. The Company has no extended maintenance contracts and warrants its consulting services to meet the consulting service contract guarantee. No provision for estimated future costs relating warranties have been made as these costs have been historically immaterial.
Cash and Cash Equivalents - The Company considers cash on hand and amounts on deposit with financial institutions which have original maturities of three months or less to be cash and cash equivalents.
Basis of Accounting - The Company's financial statements are prepared in accordance with generally accepted accounting principles. All costs associated with software development and advancement are expensed as a cost of sales through an ongoing research and development program.
Property and Equipment - Property and equipment are recorded at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the various classes of assets as follows:
| Machinery and equipment | 2 to 10 years |
| Furniture and fixtures | 5 t0 10 years |
Leasehold improvements are amortized on the straight-line basis over the lessor of the life of the asset or the term of the lease. Maintenance and repairs, as incurred, are charged to expenses; betterments and renewals are capitalized in plant and equipment accounts. Cost and accumulated depreciation applicable to items replaced or retired are eliminated from the related accounts; gain or loss on the disposition thereof is included as income.
Long-lived Assets - Long lived assets, including property and equipment and certain intangible assets to be held and used by the Company are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of the assets may not be recoverable. Impairment losses are recognized if expected future cash flows of the related assets are less than their carrying values. Measurement of an impairment loss is based on the fair value of the asset. Long-lived assets and certain identifiable intangibles to be disposed of are reported at the lower of carrying amount or fair value less costs to sell.
Intangibles - Goodwill represents the excess of purchase price over the fair value of business acquired and is amortized on a straight-line basis over 3 years.
Other acquired intangibles principally include core technology in the form of software programs and are amortized over their estimated lives of primarily 3 to 5 years., existing Organization costs are being amortized by the straight-line method over 5 years.
Research and Development - Research and development costs incurred in the discovery of new knowledge and the resulting translation of this new knowledge into plans and designs for new services, prior to the attainment of the related products’ technological feasibility, are recorded as expenses in the period incurred.
Income Taxes - The Company utilizes the asset and liability method to measure and record deferred income tax assets and liabilities. Deferred tax assets and liabilities reflect the future income tax effects of temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and are measured using enacted tax rates that apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized.
Fair Value of Financial Instruments - The Company's financial instruments include cash and cash equivalents, short-term investments, accounts receivable, accounts payable and liabilities to banks and shareholders. The carrying amount of long-term debt to banks approximates fair value based on interest rates that are currently available to The Company for issuance of debt with similar terms and remaining maturities. The carrying amounts of other financial instruments approximate their fair value because of short-term maturities.
Earnings Per Share - Basic earnings per share ("EPS") is computed by dividing earnings available to common shareholders by the weighted-average number of common shares outstanding for the period as required by the Financial Accounting Standards Board (FASB) under Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per Shares". Diluted EPS reflects the potential dilution of securities that could share in the earnings.
Concentrations of Risk - Financial instruments which potentially expose The Company to concentrations of credit risk consist principally of operating demand deposit accounts. The Company’s policy is to place its operating demand deposit accounts with high credit quality financial institutions.
No customer represented 10 % or more of The Company’s total sales as of the current reporting period.
The Company has a concentration of revenue dependancy on a limited number of services.
Stock-Based Compensation - In accordance with the recommendations in SFAS No. 123, “Accounting for Stock-Based Compensation,” (“SFAS No. 123”), The Company’s management has considered adopting this optional standard for disclosure purposes, along with Accounting Principles Board opinion no. 25. The Company may consider using full implementation of SFAS No. 123 at a future date. The Company accounted for stock bonus’ during the years ending October 31, 2000 and 1999 of 1,500,00 shares and 850,000 shares of restricted stock, respectively, given to the President of the company as compensation. The bonus was accounted for in the periods in order to match the compensation expense with the time in which it was earned. In accordance with the tax accounting, the compensation will not be deductible until the President sells those shares. The shares are restricted from sale for a period of two years from the date of issuance and are accounted for at their fair value.
The Company’s financial statements have been presented on the basis that it is a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company has suffered losses from operations and may require additional capital to continue as a going concern as The Company develops its new markets. Management believes The Company will continue as a going concern in its current market and is actively marketing its services which would enable The Company to meet its obligations and provide additional funds for continued new service development. In addition, management is currently negotiating several additional contracts for its services. Management is also embarking on other strategic initiatives to expand its business opportunities. However, there can be no assurance these activities will be successful.
Accounts receivable historically have been immaterial as The Company’s policy is to have the software that it sells paid for in advance. As of the balance sheet date there were no deposits paid in advance.
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that effect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
The Company uses the accrual basis of accounting for financial statement reporting. Revenues are recognized when services are performed and expenses realized when obligations are incurred.
Accounts payable and accrued expenses consist of trade payables and accrued payroll and payroll taxes created from normal operations of the business.
Long - term debt consists of:
On May 31, 2002, The Company entered into a stock purchase agreement which was comprised of convertible debenture bonds with attached warrants. The bonds provide interest in the amount of 12% per year. The offering involved 80,000 common shares with attached warrants for the purchase of 3,600,00 shares. The total offering is in the amount of $600,000 of which $184,240 has been issued.
On November 7, 2000, The Company entered into a loan agreement with First International Bank, Hartford, CT. The U.S. Small Business Administration is the guarantor on this loan in the amount of $290,000. The initial interest rate, a variable rate, is 11.50% per year. This initial rate is the prime rate on the date The U.S. Small Business Administration received the loan application, plus two percent. The Company must pay principal and interest payments each month, beginning two months from the date of the note. Payments will be made on the first calendar day in the months that they are due. The note has a term of seven years with a late fee of up to four percent of the unpaid portion of the regularly scheduled payment. The President of The Company maintains a life insurance policy as required by the loan agreement. The following is a schedule of the intended use of funds received:
| Leasehold improvements | $ | 120,000 |
| Fixtures | 109,000 | |
| Equipment | 47,000 | |
| Working capital | 14,000
| |
| Total | $ | 290,000 |
During the July quarter of 1998, the Company entered into a note payable to a finance company which bears interest at 16.53%. The note is collateralized by equipment and requires that monthly payments of $197 be made through the maturity date of June, 2003.
During the April quarter of 1999, the Company entered into a capital Lease with a finance company which bears an interest rate of 13.61%. The lease is collateralized by equipment and requires that monthly payments of $534 be made through the maturity date of April, 2002.
Aggregate maturities of long – term debt over the next five years are as follows:
| For the quarter ended July 31, 2002 | For the year ended October 31, 2001 | ||
| YEAR | AMOUNT | YEAR | AMOUNT |
| 2003 | 35,557 | 2002 | 35,411 |
| 2004 | 36,652 | 2003 | 35,746 |
| 2005 | 40,407 | 2004 | 38,180 |
| 2006 | 45,258 | 2005 | 42,764 |
| 2007 | 50,692 | 2006 | 47,898 |
The Company rents office space with monthly payments of $6,000. The lease term for this space is seven years beginning on October 1, 2000. This lease includes an option to purchase whereby $1,000 of each month’s rent may be applied to the purchase price.
The Company also rents a house for the convenience of Company employees that are relocating to the area and out of town business guests. The house also serves as a satellite office as added security for computer system continuation in the event that the main office should encounter problems with their system. The house has monthly payments of $1,200. The lease term is on a month to month basis.
The Company also leases its phone systems, internet lines and various equipment . The lease terms are month to month leases.
For this reason, The Company considers all of these types of lease arrangements as operating. Currently the lease costs are at $33,800 per year and shown as part of cost of sales.
Preferred Stock
The Company has been authorized 10,000,000 shares of preferred stock at $.0001 par value. As of October 31, 2000, none of these shares had been issued and the limitations, rights, and preferences were yet to be determined by the Board of Directors.
Common Stock
On February 15, 2002 the Company entered into a consulting agreement for services regarding tax representation, the Company issued 70,000 shares of common stock for a value of $31,950.
On February 22, 2002 the Company entered into a settlement agreement regarding litigation. The Company agreed to issue 2,000,000 shares of common stock for a value of $140,000 and a payment in cash of $20,000. The shares will be issued in amounts of 500,000 each six months until expired. The Company also issued stock options for the purchase of 2,000,000 shares of common stock in the amount of $.04 per share with an expiration date of 20 years from the date of the agreement.
On April 4, 2002 the Company entered into a consulting agreement with Nicole Leigh Van Coller for financial consulting services. As compensation, the Company issued 1,000,000 shares of common stock for a value of $120,000.
On February 15, 2002 the Company entered into a consulting agreement with Byron Rambo for representation on the Company’s payroll tax liabilities with the Internal Revenue Service. As compensation, the Company issued 700,000 shares of common stock for a value of $31,950.
On August 14, 2001, the Company received proceeds of a loan from the Company’s President in the amount of $20,000 with a provision of conversion of the loan to 20,000,000 shares of restricted common stock after a 15 day period if not repayed. The loan was converted by the Company as called for in the agreement for a value of $20,000.
On August 27, 2001, the Company issued 2,500,000 shares of common stock as compensation for a one year consulting contract valued at $52,500. The compensation is amortized to expense over the contract term from an allowance account as can be reviewed in the statement of equity.
During the quarter ended July 31, 2001, the Company filed S-8 stock registrations for consulting services for a value of $364,534 and the issuance of 3,519,000 common shares. Of these shares, 2,000,000 common shares per the agreement call for the purchase of these shares at a value of a 40% discount on the bid price when purchased. The discount has been accounted for as an expense for consulting services. The term of services per the registrations range from five months to a year from the contract agreement date. The stock has been accounted for as issued and an allowance account has been set against this stock account to amortize the costs over the term as an expense over the service term as can be reviewed in the statement of equity.
On April 12, 2001, the Company issued 5,200,000 shares of common stock to the president of the Company valued at market price in the amount of $812,240. These shares were issued in accordance with the compensation agreement.
On March 15, 2001, the Company elected a 7 for 1 reverse stock split. The statements of operations have been adjusted to reflect this split with the earnings per share calculation.
During the quarter ended January 31, 2001, The Company filed an SB-2 filing with the U.S. Securities and Exchange Commission. The filing called for 2,000,000 common shares to be offered at a price of $.05 per share. 1,000,000 common shares have been sold for cash and 1,000,000 (142,857 after the 7 for 1 reverse stock split) shares were issued for services.
During the period ending October 1998, the Board of Directors issued 1,525,000 shares of restricted common stock to The Company’s officer’s, and legal counsel in exchange for services, and issued 500,000 shares of restricted common stock in the acquisition of Top-10 Promotions, Inc.
In addition to the restricted shares issued, The Company sold common stock through two separate private offerings during the period. In the initial offering 800,000 shares were sold each at a price of $0.025. In the second offering 1,000,000 shares were sold each at a price of $0.05.
On October 15, 1998, the majority shareholders of The Company undertook a Regulation – D, Rule 504, offering whereby it sold 2,000,000 shares of common stock, $.0001 par value per share or an aggregate of $200,000. In addition, each investor in the offering received an option to purchase, for a twelve month period commencing on the date of this offering, an additional one share of The Company at $1.00 per share for each eight (8) shares purchased in the original offering (or $250,000). In addition, each investor received an option to purchase for an eighteen month period commencing on the date of this offering an additional one (1) share of The Company for each 8.88 shares previously purchased at $2.00 per share or an aggregate of 225,000 shares (or $450,000).
The Company also approved of the investment by Arthur Harrison & Associates in the offering provided that such investment in The Company was in lieu of monies owed to Arthur Harrison & Associates by The Company for two (2) promissory notes dated September 22, 1998 and October 10, 1998. Further more, Arthur Harrison & Associates agreed to waive its rights to any interest on promissory notes.
On March 30, 1999 The Company acquired assets of Offshore Software Development Ltd. (“Offshore”) in an exchange of assets for 999,111 shares of The Company issued to the shareholders of that company. The Company’s management has valued the transaction at $630,000.
The assets included were comprised of four computers valued at $8,000 and two software programs valued at $622,000. The value of these assets was determined on the basis of the management’s estimation.
An unusual impairment loss of $257,075 was recorded in October of 1999 to reflect an impairment of the intangible assets resulting from the acquired “Offshore” assets on March 30, 1999. The impairment resulted from the Company’s revised forecast of the cash inflows expected from intangible assets. Amortization expenses will drop by $8,583 per month.
Effective May 29, 1998, The Company acquired all the outstanding common stock of Top-10 Promotions, Inc., consisting of 100 shares, effective. These shares were redeemed and canceled. The 100 shares of Top-10 Promotions, Inc. were acquired in exchange for 500,000 “restricted” shares of The Company’s common stock issued to David Smith, the sole shareholder of Top-10 Promotions, Inc. This transaction has been accounted for using the purchase method of accounting. The value of the share exchanged by both parties was determined to be $19,500, including a value of $(114) attributed to the fair value of assets and liabilities, and $19,614 of goodwill attributed to the method of doing business and the internally developed software.
Simultaneous with the acquisition, The Company purchased all of the remaining authorized shares of Top-10 Promotions, Inc. for $50,000 payable at closing and $17,500 per month payable over an eleven month period as other consideration. The Company borrowed funds for this transaction and later, upon agreement with the lender, converted a portion of the amount due as capital contributed to The Company.
Also, the former owner of Top-10 Promotions, Inc. was given the right to borrow up to 25% of retained earnings of Roanoke Technology Corporation in fiscal year 1998 or the first two quarters of fiscal 1999. Such borrowings shall be secured by his restricted stock received in the acquisition at a 75% discount value to market. Repayment shall be for a two-year period at a 5% annual interest rate. The Company also entered into an employment contract with the former owner of Top-10 Promotions.
The Company has entered into a five year employment contract with the former owner of Top-10 Promotions as amended on April 12, 2001.
The contract provides for a salary of $150,000; a stock bonus of 5,200,000 restricted common shares; a stock bonus of 1,000,000 common shares per year for each year that the Company generates a profit during the five year term; quarterly bonus of 30% of the net income before income tax of The Company; standard non-competition clause; an option to renew the employment agreement for an additional two year term (provided he is not in default under the employment agreement); and annually, with approval of the Board of Directors, receive up to one percent of the issued and outstanding shares of the Company determined on December 31st of each year.
On November 1, 1998 The Company’s management approved the issuance of 750,000 shares of restricted common shares of The Company to the former owner of Top-10 Promotions for attaining gross revenues in excess $200,000.00 or more in sales for the first three month period of 1999. The shares have been issued at a market value of $1,181,250. An additional 1,500,000 shares of restricted were issued in accordance with the revised employment agreement during the year ended October 31, 2000 for a value of $900,000.
The Company accrues payroll and income taxes. The Company, currently a C-Corporation, accounts for income taxes in accordance with Statements on Financial Accounting Standards 109. As of October 31, 2000, The Company had a deferred tax asset in the amount of approximately $440,000 that is derived from a net operating tax loss carryforward associated with stock compensation. The deferred tax assets will expire during the years ending October 31, 2018 and 2019 in the amounts of $40,000 and $400,000 respectively. It is uncertain as to when this compensation will be deductible as it can only be deducted for tax purposes when the officers sell the respective shares.
The Company paid interest in the amount of $10,301 during the quarters ended April 30, 2002. The Company had no income tax payments due and did not pay any income tax amounts during the period.
There are various lawsuits and claims pending against The Company. Management believes that any ultimate liability resulting from those actions or claims will not have a material adverse affect on The Company’s results of operations, financial position or liquidity. The following is management’s disclosure regarding litigation, claims and assessments:
Oyster Software, Inc. (Plaintiff) v. Roanoke Technology Corp. (Defendant and Cross-Defendant), Forms Processing, Inc. (Defendant) and Barry Matz (Defendant); United States District Court, Northern District of California, Case No. C000724 filed on March 1, 2000. Plaintiff, Oyster Software, Inc. claims trademark and copyright infringement, misappropriation and unfair competition based on the placement of its trademarks and copyrighted material into HTML web pages utilized by defendant Forms Processing, Inc. (FPI). FPI claims that it had no knowledge of this fact and that the web pages were created for it by Roanoke Technology Corp. as part of the purchase of the product known as "Premium Service." We deny placing the allegedly infringing material into FPI's web pages. Plaintiff's complaint seeks declaratory relief, an injunction, an accounting, damages in excess of $1,600,000 and an award of attorneys fees and costs. Through its cross-complaint, FPI seeks declaratory relief and indemnity.
RTCHosting Corp (RTCH) is a wholly owned subsidiary of The Company. RTCH was incorporated on June 12, 2000 in the state of North Carolina. RTCH has 1,000 common shares authorized with no par value and 100 common shares outstanding. The Company has determined that separate financial statements and other disclosures concerning RTCH are not material to investors. RTCH was formed to hold the copyrights of an on line procurement system being developed by The Company. The Company has expensed all research and development costs. The only costs incurred by RTCH has been its incorporation and start-up costs which have been expensed in the amount of $3,050. RTCH currently has no material values of assets, liabilities or equity.
RFQHosting Corp (RFQ) is a 35% owned joint venture in Roanoke Online, LLC. The Company and Roanoke Energy Resources, Inc., a subsidiary of Roanoke Electric Cooperative, entered into a joint venture whereby the Company, through RFQ, receives 35% of the gross revenues of Roanoke Online, LLC, a business to business online procurement service. The Company is responsible for providing software maintenance and support personnel. Roanoke Energy Resources, Inc. is responsible for the day to day management and marketing of RFQ.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Gross revenues refer to fees earned in the design, development, production, and marketing of technology to provide enhanced Internet marketing capabilities. We earn revenue when we provide Internet services that improve an Internet site’s ranking when searched on the leading Internet search engines. Generally, the payment terms require payment to us at, or prior to, the time that the services are performed. Historically, we have has not experienced substantial problems with unpaid accounts or had to refund significant monies. Our premium Service and renewals of the same account for 97.5% of our business.
We have technological expertise in the preparing and submitting web site pages with “key search words” to the targeted search engines. The web site page is configured so that when these key search words are entered into a search engine, the search will most likely hit on this web page.
Primarily as a result of the acquisition of Top-10 Promotions, Inc. on May 28, 1998, our revenue has been generated from the sale of services of Top-10 Promotions, Inc. as of the date of acquisition. The acquisition was accounted for using the purchase method of accounting and the results of operations of Top-10 Promotions, Inc. from the date of purchase are included in the financial statements. In the first year of business activity, we were building a sales team and experienced gross revenue of $54,032. During the years ended October 31, 1999, 2000and 2001, we had gross revenue of $1,144,122, $1,999,103 and $1,551,609, respectively .
Revenues for the quarter of fiscal years 2002 and 2001 were $415,987 and $376,805, respectively. This represents a 10.4% increase. Management expects to see sales continue to improve throughout the remainder of the fiscal year.
Cost of sales was $217,282 or 47.8% of revenues as compared to $185,082or 50.9% of revenues in the prior year. The decrease as a percentage of sales is attributable primarily to increased productivity within the sales force.
General and administrative costs increased from $397,620 or 105%% of revenues in the prior year quarter to $548,630 or 131.89% of revenues. The current year quarter costs were higher mainly due to compensation in the form of a stock settlement for an outstanding lawsuit.
Cash flows from operating activities were $16,471for the nine months ended April 30, 2002 as compared with cash flows of ($30,072) in the prior year. Cash Flows from Investing Activities were ($16,313) as compared with ($240.471) in the prior year. The purchase in the prior year was primarily of leasehold improvements, computer equipment, furniture and fixtures for expansions in our newly leased office space. Financing activities were $184,240 as compared to $329,930 in the prior year.
Considerable effort has continued to be put into concentrating on two key areas since the close of our fiscal year: increasing sales and reducing expenses. Several non-revenue positions have either been eliminated or moved to revenue-producing activities. We continue to look at every opportunity to reduce our cost structure without sacrificing the quality of our service offering. Our hardware infrastructure is adequate to support our projected growth and we do not anticipate any major expenditure in this area during the 2001-2002 fiscal year.
We are continuing to give attention to increasing the size and the productivity of our sales force. Training sessions are conducted daily with all newly hired employees that help them become a contributor to our revenues in a much shorter time frame than they had historically.
We recently released our newest RTC Hosting software product, RTC Storebuilder, which is a turnkey e-commerce software system that allows one to conduct commerce on the Internet. We expect to see sales for this product to increase in the coming months.
By focusing on increasing sales of our flagship product, Top-10 Promotions, and by introducing our newest modules of RTC Hosting, we expect to enjoy increased sales over the same previous periods for the foreseeable future. By examining every opportunity to reduce cost, we are making significant improvements in our cost to serve. The combination of improvements to these two key areas will continue to be our driving force in order that we can provide a fair return to all of our stockholders.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Market risk represents the risk of loss that may impact our financial position, results of operations or cash flows due to adverse changes in market prices and rates. We are exposed to market risk because of changes in foreign currency exchange rates as measured against the U.S. dollar. We do not anticipate that near-term changes in exchange rates will have a material impact on our future earnings, fair values or cash flows. However, there can be no assurance that a sudden and significant decline in the value of European currencies would not have a material adverse effect on our financial conditions and results of operations.
Our short-term bank debt bears interest at variable rates; therefore our results of operations would only be affected by interest rate changes to the short-term bank debt outstanding. An immediate 10 percent change in interest rates would not have a material effect on our results of operations over the next fiscal year.
Oyster Software, Inc. (Plaintiff) v. Roanoke Technology Corp. (Defendant and Cross-Defendant), Forms Processing, Inc. (Defendant) and Barry Matz (Defendant); United States District Court, Northern District of California, Case No. C000724 filed on March 1, 2000. Plaintiff, Oyster Software, Inc. claims trademark and copyright infringement, misappropriation and unfair competition based on the placement of its trademarks and copyrighted material into HTML web pages utilized by defendant Forms Processing, Inc. (FPI). FPI claims that it had no knowledge of this fact and that the web pages were created for it by us as part of the purchase of the product known as "Premium Service." We deny placing the allegedly infringing material into FPI's web pages. Plaintiff's complaint seeks declaratory relief, an injunction, an accounting, damages in excess of $1,600,000 and an award of attorneys fees and costs. Through its cross-complaint, FPI seeks declaratory relief and indemnity.
Plaintiff settled their claim against FPI for $80,000.00. FPI sought to indemnify us for the full settlement price. Our legal counsel withdrew and we were ordered by the court to obtain new counsel before December 14, 2001, which we failed to do. Forms Processing's request for entry of default was granted on January 22, 2002, after which FPI sought a default judgment. Default Judgment was entered against us for $80,000.00. However, Forms Processing failed to establish a cause of action against us because they did not allege that Top-Ten was a mere alter-ego of us, nor did they have any basis for tort liability. Therefore, default judgment was denied as to us and all claims by Forms Processing against us were dismissed with prejudice.
In addition, we settled with Plaintiff by agreeing to pay $20,000 and issue 2,000,000 shares of our common stock to Plaintiff and Barry Bhangoo.
None.
None.
None.
None.
a. Exhibits
None.
b. Reports on Form 8-K
None.
No reports on Form 8-K were filed for this quarter of 2002.
Pursuant to the requirements 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.
ROANOKE TECHNOLOGY CORP.
| By: | /s/ David L. Smith
DAVID L. SMITH CEO and Director |
Dated: September, 2002
| By: | /s/ Jack M. Webb, Jr.
JACK WEBB, JR. President, Chief Operating Officer Chief Financial Officer, Secretary and Director |
Dated: September 19, 2002
| By: | /s/ Ryan A. Brown
RYAN A. BROWN Chief Technology Officer and Director |
Dated: September 19, 2002
I, David L. Smith, Jr. certify that:
| 1. | I have reviewed this quarterly report on Form 10-Q of Roanoke Technology Corp. |
| 2. | Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; |
| 4. | The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and 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 with 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and |
| c) | presented in this quarterly report our conclusions about effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; |
| 5. | The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions): |
| 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 and material weakness in internal controls; and |
| b) | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and |
| 6. | The registrant’s other certifying officers and I have indicated in this quarterly report whether 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. |
Dated: September 19, 2002
| /s/ David L. Smith, Jr.
David L. Smith Chief Executive Officer |