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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIESEXCHANGE ACT OF 1934
For the quarterly period ended January 31, 2003
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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 March 24, 2003, we had
125,235,605 shares of common stock outstanding, $0.0001 par value.
ROANOKE TECHNOLOGY CORP.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements:
---------------------
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,
2002. 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 three
months ended January 31, 2003 are not necessarily indicative of results that may
be expected for the year ending October 31, 2003. The financial statements are
presented on the accrual basis.
FINANCIAL STATEMENTS AND EXHIBITS.
- ----------------------------------
FINANCIAL STATEMENTS
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
FINANCIAL STATEMENTS Page #
Balance Sheets 1 - 2
As of January 31, 2003 and 2002
Statements of Operations 3
For the Three Months Ended
January 31, 2003 and 2002
Statement of Stockholders'Equity 4 - 5
As of January 31, 2003
Statements of Cash Flow 6
For the Three Months Ended
January 31, 2003 and 2002
Notes to the Financial Statements 7 - 12
ROANOKE TECHNOLOGY CORPORATION
AND SUBSIDIARY
BALANCE SHEETS
As of January 31, 2003 and October 31, 2002
ASSETS
2003 2002
------------ ------------
CURRENT ASSETS
Cash $ 29,472 $ 18,587
Accounts receivable 0 10,524
Less: allowance for doubtful accounts 0 (3,500)
Prepaid Insurance 8,859 13,289
Employee advances 0 2,030
------------ ------------
Total Current Assets 38,331 40,930
PROPERTY AND EQUIPMENT
Equipment and leasehold improvements 552,628 552,628
Less: accumulated depreciation (214,640) (198,033)
------------ ------------
Total Property and Equipment 337,988 354,595
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) (347,541)
------------ ------------
Net intangibles 0 0
Deposits 5,250 5,250
Officers' receivable 8,500 8,500
------------ ------------
Total Other Assets 13,750 13,750
TOTAL ASSETS $ 390,069 $ 409,275
============ ============
1
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 352,565 $ 396,662
Payroll tax and penalty payable 591,780 600,910
Credit card payable 9,784 9,784
Current maturity of long-term debt 83,813 69,993
------------ ------------
Total current liabilities 1,037,942 1,077,349
LONG TERM LIABILITIES
Long term debt 361,817 290,652
Debenture bond 362,250 438,000
Less: current portion (83,813) (69,993)
------------ ------------
Total long term liabilities 640,254 658,659
------------ ------------
TOTAL LIABILITIES 1,678,196 1,736,008
STOCKHOLDERS' EQUITY
- --------------------
STOCKHOLDERS' EQUITY
Common stock - $.0001 par value;
150,000,000 shares authorized;
59,059,057 and 38,337,597 issued
and outstanding, respectively 8,836 5,906
Additional paid-in capital 6,496,932 6,307,696
Allowance for long-term
Stock compensation (75,428) (153,429)
Retained earnings (7,718,467) (7,486,906)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY (1,288,127) (1,326,733)
------------ ------------
TOTAL LIABILITIES AND EQUITY $ 390,069 $ 409,275
============ ============
2
ROANOKE TECHNOLOGY CORPORATION
AND SUBSIDIARY
STATEMENTS OF OPERATIONS
For the Three Months Ended January 31, 2003 and 2002
2003 2002
------------ ------------
REVENUE
Sales $ 393,941 $ 391,464
Cost of sales (300,946) (248,131)
------------ ------------
GROSS PROFIT 92,995 143,333
GENERAL & ADMINISTRATIVE EXPENSES (260,719) (476,471)
RESEARCH & DEVELOPMENT (49,423) (65,024)
------------ ------------
INCOME (LOSS) FROM OPERATION (217,147) (398,162)
OTHER INCOME AND (EXPENSE)
Interest - net (14,414) (7,919)
------------ ------------
Total Other (14,414) (7,919)
------------ ------------
NET INCOME (LOSS) $ (231,561) $ (406,081)
============ ============
NET EARNINGS PER SHARE
Basic Net loss per share (*) (.01)
Fully diluted Net Loss per share (*) (.01)
Basic and fully diluted Weighted Average
Number of Common Shares Outstanding 73,708,295 34,337,597
* Less Than (.01) per share.
3
ROANOKE TECHNOLOGY CORPORATION
STATEMENT OF STOCKHOLDERS' EQUITY
As of January 31, 2003
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 5,000,000 500 49,500 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
4
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 38,337,597 $3,834 $5,782,645 $ (205,199) $ (5,936,572)$ (355,292)
---------------------------------------------------------------------------
Stock issued for services 14,300,000 1,430 321,520 322,950
Stock issued in debenture
bond conversion 4,321,460 432 46,741 47,173
Stock issued for
Litigation settlement 2,100,000 210 156,790 157,000
Allowance for prepaid
stock compensation 51,770 51,770
Net Loss (1,550,334) (1,550,334)
---------------------------------------------------------------------------
Balance at October 31, 2002 59,059,057 5,906 6,307,696 (153,429) (7,486,906) (1,326,733)
Stock issued in debenture
bond conversion 29,298,475 2,930 189,237 192,167
Allowance for prepaid
Stock compensation 78,000 78,000
Net Loss (231,561) (231,561)
---------------------------------------------------------------------------
88,357,532 $ 8,836 $6,496,933 $ (75,429) $(7,718,467) $(1,288,127)
===========================================================================
5
ROANOKE TECHNOLOGY CORPORATION
AND SUBSIDIARY
STATEMENTS OF CASH FLOWS
For the Three Months ending January 31, 2003 and 2002
2003 2002
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (231,561) $ (406,081)
Adjustments to reconcile net
income to net cash provided by (used in)
operating activities:
Depreciation and amortization 16,607 43,049
Compensation in the form of stock 78,000 104,376
(Increase) decrease in accounts receivable 7,024 (34,912)
(Increase) decrease in employee advance 2,030 (1,405)
(Increase) decrease in officers' receivable 0 (38,189)
(Increase) decrease in prepaid expense 4,430 0
Increase (decrease) in payables & accrued expenses (53,227) 201,702
Increase (decrease) in accrued interest and costs 107,386 19,063
Increase (decrease) in credit card payable (7,804) (19)
Increase (decrease) in officer loan 0 15,000
------------ ------------
Total adjustments to net income 154,446 387,853
------------ ------------
Net cash flows from operations (77,115) (18,228)
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures on equipment 0 0
------------ ------------
Net cash flows from investing 0 0
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from note payable 0 0
Proceeds from debenture bond 88,000 0
Proceeds from issuance of common stock 0 0
Proceeds from short-term note payable 0 0
Payments on notes 0 0
------------ ------------
6
Net cash flows from financing 88,000 0
------------ ------------
CASH RECONCILIATION
Net increase (decrease) in cash 10,885 (18,228)
Cash at beginning of year 18,587 35
------------ ------------
CASH BALANCE AT APRIL 30, 2002 AND 2001 $ 29,472 $(18,193)
============ ============
7
ROANOKE TECHNOLOGY CORPORATION
AND SUBSIDIARY
NOTES TO THE FINANCIAL STATEMENTS
1. Summary of significant accounting policies:
-------------------------------------------
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
8
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
9
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.
2. Going Concern:
--------------
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
10
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. There is also uncertainty with regard to managements projected
revenue being in excess of its operating expenditures for the fiscal year ending
October 31, 2003.
Items of uncertainty include the Company's liabilities with regard to its
payroll tax liability of $600,910 and its Small Business Administration loan
with a principal balance of $270,807 and accrued interest of $48,290. The
Company is currently in default of these liabilities and is in negotiations
regarding resolution of these matters. The outcome of these negotiations is
uncertain as of October 31, 2002. If the Company is not successful in these
negotiations, there is substantial doubt as to the ability of the Company to
continue as a going concern.
3. Accounts Receivable and Customer Deposits:
------------------------------------------
Accounts receivable historically have been immaterial as The Company's policy is
to have the internet services provided paid for in advance. As of the balance
sheet date there were no deposits paid in advance.
4. Use of Estimates:
-----------------
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.
11
5. Revenue and Cost Recognition:
-----------------------------
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.
6. Accounts payable and accrued expenses:
--------------------------------------
Accounts payable and accrued expenses consist of trade payables and accrued
payroll and payroll taxes created from normal operations of the business.
7. Long-term debt:
---------------
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 attached
warrants for the purchase of 3,600,000 shares. The total offering is in the
amount of $600,000 of which $501,500 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:
12
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 October 31, 2002 For the year ended October 31, 2001
YEAR AMOUNT YEAR AMOUNT
2003 69,993 2002 35,411
2004 38,180 2003 35,746
2005 42,764 2004 38,180
2006 47,898 2005 42,764
2007 53,648 2006 47,898
8. Operating Lease Agreements:
---------------------------
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 rented a house for the convenience of Company employees that are
relocating to the area and out
13
of town business guests. The house also served 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 had monthly payments of
$1,200. The lease term was on a month to month basis and expired during the year
2002.
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.
9. Stockholders' Equity:
---------------------
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
- ------------
During the fiscal year end October 31, 2002, the Company converted debenture
bond principal and interest into 4,321,460 common shares for a value of $47,172.
The Company continues to convert debenture bond principal and interest into
common shares subsequent to fiscal year end.
On October 28, 2002 the Company entered into consulting agreements with Nicole
Leigh Van Coller, John A. Palmer, Jeremy Leigh Van Coller, Christopher Ebersole
and Mary Gimmelli for financial consulting services over a six month term. As
compensation, the Company issued 12,000,000 shares of common stock for a value
of $156,000. The shares were registered on Form S-8 with the U.S. Securities and
Exchange Commission.
On January 7, 2002 the Company entered into a settlement agreement
14
regarding litigation. The Company agreed to issue 100,000 shares
of common stock for a value of $17,000.
On February 15, 2002 the Company entered into a consulting agreement for
services regarding tax representation with Byron Rambo. The Company issued
700,000 shares of common stock for a value of $31,920. The shares were
registered on Form S-8 with the U.S. Securities and Exchange commission.
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. The shares were
registered on Form S-8 with the U.S. Securities and Exchange commission.
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
15
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
16
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.
10. Acquisitions:
-------------
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
17
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.
11. Employment Contract and Incentive Commitments:
-----------------------------------------------
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
18
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.
12. Payroll Taxes Payable and Deferred Tax Assets and Liabilities:
--------------------------------------------------
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, 2002, The Company had a
deferred tax asset in the amount of approximately $1,871,726 that is derived
from a net operating tax loss carryforward. A portion of this carryforward is
associated with stock compensation to officers and is deductible for tax
purposes when the stock is sold by the officers. The deferred tax assets will
expire during the years ending October 31, 2013 through 2022 if not used to
offset taxable income.
13. Required Cash Flow Disclosure for Interest and Taxes Paid:
----------------------------------------------------
The Company paid interest in the amount of $3,434 during the quarter ended
January 31, 2003. The Company had no income tax payments due and did not pay any
income tax amounts during the period.
14. Litigation, claims and assessments:
-----------------------------------
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.
19
15. Condensed consolidating financial statements:
---------------------------------------------
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.
16. Employee stock option:
----------------------
The Company originated employee stock option plans with 2 of its employees
during fiscal year end October 31, 2001. The plan calls for 300,000 option
shares to vest on May 2, 2001 for a conversion price of $.001 per share. The
plan continues to ratably vest 470,000 option shares over a 4 year period that
are convertable for $.001 per share. The intrinsic value of these vested shares
is $0 and a fair value compensation value of $6,750 if exercised at the vesting
dates.
20
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Overview
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 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 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, 2000, 2001, and 2002 we had gross revenue of $1,144,122, $1,999,103,
$1,551,609, and $1,715,387 respectively .
THE THREE MONTHS ENDED JANUARY 31, 2003 COMPARED TO THE THREE MONTHS ENDED
JANUARY 31, 2002
Revenues for the first quarter of fiscal years 2003 and 2002 were $393,941 and
$391,464, respectively. Depreciation and amortization expenses decreased to
$16,607 or 7% of revenues from $43,049 or 11% of revenues because of certain
assets that have been completely depreciated or amortized.
21
Research and development costs decreased to $49,423 or 13% of revenues from
$65,024 or 17% of revenues.
The loss from operations decreased from a loss of $406,081 or 104% of revenues
to a loss of $231,561 or 59% of revenues. Management believes that this decrease
in loss is due to several cost cutting measures and restructuring of the
employee base.
LIQUIDITY AND CAPITAL RESOURCES
Cash outflows from operating activities were ($77,115) for the three months
ended January 31, 2003 as compared with cash outflows of ($18,228) in the prior
year's quarter. Cash Flows from Investing Activities were $0 as compared with
($0) in the prior year's quarter.
Outlook
Considerable effort has been 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 2002-2003 fiscal year.
Top-10 Promotions December 2002 sales were up twenty percent over December 2001
sales. Sales for January 2003 were up by one percent over January 2002. We
expect to see sales continue to be up over same-month sales from the previous
year. We are continuing to give attention to increasing 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.
By focusing on increasing sales of our flagship product, Top-10 Promotions,
introducing our newest modules of RTC Hosting, and by introducing RTC FunDrive,
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.
22
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.
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
On January 31, 2003 we received notice from Gordon & Rees, LLP a law firm
located in San Francisco, California, that they were owed a total of $106,719.64
for services rendered to us. To date, no litigation has been served upon us for
such amount.
Item 2 - Changes in Securities
None.
Item 3 - Defaults Upon Senior Securities
None.
23
Item 4 - Submission of Matters to a Vote of Security Holders
None.
Item 5 - Other Information
None.
Item 6 - Exhibits and Reports on Form 8-K
a. Exhibits
99.1 Certification of David L. Smith, Jr., CEO and CFO
b. Reports on Form 8-K None.
No reports on Form 8-K were filed for this quarter.
SIGNATURES
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.
/s/ David L. Smith
By: -------------------------------------
DAVID L. SMITH Chairman of the Board
of Directors, CEO and CFO
Dated: March 24, 2003
/s/ Russel J. Jones
By: -------------------------------------
Russel J. Jones
Secretary
Dated: March 24, 2003
24
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
AND CHIEF FINANCIAL OFFICER
PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF
THE SARBANES-OXLEY ACT OF 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 amended yearly 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. I am 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 me by others within those
entities, particularly during the period in which this amended yearly
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 my conclusions about effectiveness
of the disclosure controls and procedures based on my evaluation as
of the Evaluation Date;
5. I have disclosed, based on my 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. 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 my most recent
evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.
Dated: March 24, 2003
/s/ David L. Smith
- ------------------------------------------------
David L. Smith
Chief Executive Officer, Chief Financial
Officer
25