For the quarterly period ended March 31, 2001
OR
Commission File Number 0-23952
Colorado 84-1028716
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
301 Remington, Fort Collins, Colorado 80524
(Address of principal executive offices)
970/484-7722
(Registrant's telephone number, including area code)
Check whether the registrant (1) 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 issuer was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
As of May 10, 2001 the issuer had 3,266,705 shares of Common Stock, no par value, outstanding.
Transitional Small Business Disclosure Format.
Yes [ ] No [X]
Part I — FINANCIAL INFORMATION
ITEM 1. Financial Statements
Unaudited balance sheets................................ ....................................... 3
Unaudited statements of income. ........................................................... 4
Unaudited statements of cash flows....................................................... 5
Notes to unaudited financial statements................ ................................ 6
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.......................................... 7
ITEM 3. Quantitative and Qualitative Disclosures
About Market Risks..................................................................................... 10
Part II — OTHER INFORMATION
ITEMS 1, 2, 3, 4, and 5............................................. .............. Not applicable
Signature.................... ............................................................................ 11
ASSETS
MARCH 31, DECEMBER 31,
2001 2000
--------- -----------
(unaudited) ***
Current assets:
Cash and cash equivalents ................................. $ 2,622,000 $ 666,000
Marketable securities ..................................... 4,979,000 7,319,000
Accounts receivable, net of allowance ..................... 2,210,000 2,287,000
Note receivable ........................................... 1,000,000 1,000,000
Income taxes receivable ................................... -- 115,000
Deferred income taxes .................................. 125,000 125,000
Prepaid assets and other .................................. 177,000 80,000
----------- -----------
Total current assets ............................. $11,113,000 11,592,000
Property and equipment, net ........................................ 3,173,000 2,361,000
Intangible Assets .................................................. 1,976,000 --
Other Assets ....................................................... 175,000 625,000
----------- -----------
Total assets ....................................................... $16,437,000 $14,578,000
=========== ===========
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable .......................................... $ 1,240,000 $ 655,000
Accrued expenses and other ................................ 2,035,000 645,000
Deferred income ........................................... 264,000 190,000
----------- -----------
Total current liabilities ........................ 3,539,000 1,490,000
Deferred Taxes ............................................ 376,000 376,000
----------- -----------
Total liabilities ................................ $ 3,915,000 $ 1,866,000
Shareholders’ equity:
Preferred shares, no par value; authorized
1,000,000 shares; none outstanding ...................... -- --
Common stock, no par value; authorized
9,000,000 shares; 3,302,845 shares issued
and outstanding.......................................... 3,730,000 3,618,000
Retained earnings ......................................... 8,792,000 9,094,000
----------- -----------
Total shareholders' equity ....................... $12,522,000 $12,712,000
----------- -----------
Total liabilities and shareholders' equity ......................... $16,437,000 $14,578,000
=========== ===========
See accompanying notes to the financial statements.
***NOTE: Amounts have been derived from audited financial statements.
Three Months Ended
March 31,
----------------------
2001 2000
(unaudited) (unaudited)
Net revenues:
Search and product fees .......... $ 4,664,000 $ 3,653,000
Interest and other income ........ 126,000 92,000
----------- -----------
4,790,000 3,745,000
Expenses:
Search and product costs ......... 2,206,000 1,700,000
Marketing ........................ 589,000 432,000
General and administrative ....... 439,000 406,000
Software development ............. 199,000 142,000
Depreciation and amortization .... 195,000 165,000
----------- -----------
3,628,000 2,845,000
----------- -----------
Income before income taxes ................ 1,162,000 900,000
Income tax expense ............... (464,000) (334,000)
----------- -----------
Net income ................................ $ 698,000 $ 566,000
=========== ===========
Net income per common share
Basic ............................ $ .21 $ .17
Diluted .......................... $ .20 $ .17
=========== ===========
Basic weighted average common
shares outstanding
Basic ............................ 3,263,127 3,285,919
Diluted .......................... 3,547,412 3,285,990
=========== ===========
See accompanying notes to the financial statements.
THREE MONTHS ENDED
MARCH 31,
-----------------
2001 2000
Cash Flows From Operating Activities:
Net income ..................................................... $ 698,000 $ 566,000
Adjustments to reconcile net income to net cash
(used in)/provided by operating activities:
Depreciation .............................................. 195,000 165,000
Loss (gain) on sale of asset .............................. 2,000 --
Bad debt expense .......................................... (21,000) 18,000
Deferred income taxes ..................................... -- (50,000)
Changes in operating assets and liabilities:
Accounts receivable................................... 122,000 (169,000)
Marketable securities ................................ 2,340,000 (994,000)
Prepaid expenses and other current assets ............ (96,000) (77,000)
Other long-term assets ............................... (318,000) --
Accounts payable ..................................... 435,000 602,000
Accrued expenses ..................................... (309,000) (208,000)
Income taxes payable ................................. 225,000 (101,000)
Deferred income ...................................... 74,000 31,000
----------- -----------
Net cash (used in)/provided by operating activities ....... $ 3,347,000 $ (217,000)
Cash Flows from Investing Activities:
Purchase of property and equipment ............................ (502,000) (187,000)
----------- -----------
Net cash used in investing activities ................... (502,000) (187,000)
----------- -----------
Cash Flows from Financing Activities:
Proceeds from exercise of options .............................. 111,000 200,000
Dividends declared ............................................. (1,000,000) (595,000)
----------- -----------
Net cash used in financing activities ................... ( 889,000) (395,000)
----------- -----------
Increase/(Decrease) in Cash and Cash Equivalents ................... 1,956,000 (799,000)
Cash and Cash Equivalents, beginning of period ..................... 666,000 1,569,000
----------- -----------
Cash and Cash Equivalents, end of period ........................... $ 2,622,000 $ 770,000
=========== ===========
See accompanying notes to the financial statements.
The financial information contained herein is unaudited, but includes all adjustments (consisting of only normal recurring accruals) which, in the opinion of management, are necessary to present fairly the information set forth. The financial statements should be read in conjunction with the Notes to Financial Statements which are included in the Annual Report on Form 10-KSB of the Company for the year ended December 31, 2000.
The results for interim periods are not necessarily indicative of results to be expected for the fiscal year of the Company ending December 31, 2001. The Company believes that the three month report filed on Form 10-Q is representative of its financial position, its results of operations and its cash flows as of and for the periods ended March 31, 2001 and 2000 covered thereby.
In previous periods, the Company recognized set-up fees when received. In response to SAB 101, the Company has adopted a policy of deferring set-up fees and incremental direct acquisition costs over the estimated life of the customer (generally three years). As incremental acquisition costs exceed the set-up fees received, incremental acquisition costs are only deferred to the extent of set-up fee income. Therefore, the change in policy had no effect on net income. This change in policy also did not have a material effect on prior or current revenues or expenses.
The Company executed a Convertible Promissory Note with eScreen Holdings, Inc., in July 2000 in the amount of $1,000,000. The interest rate is 10%, with all principal and interest due and payable in July, 2001. The indebtedness is guaranteed by both the entity itself, as well as personally by its owner. The Company has accrued interest on a monthly basis.
On March 30, 2001, Avert, Inc. acquired the business and substantially of the assets of Advantage Assessment, Inc., (“Advantage”) for a combination of cash, assumption of certain liabilities and common stock valued at $1.7 million. Advantage has been a provider of assessment testing since 1998. The Advantage Assessment Testing System is a dual approach to employment screening, which includes a personality inventory and cognitive ability test. The system provides for an evaluation of prominent personal and interpersonal competencies and the cognitive abilities of the applicant. The testing period is brief and the test(s) may be administered either on-line or in a paper and pencil format. The transaction was accounted for using the purchase method of accounting and resulted in the purchase price being totally allocated to net tangible assets and intangible assets totaling $1,198,000. The purchase price was $1 million in cash and 45,000 shares of unregistered common stock, no par value, of Avert and the assumption of approximately $150,000 in liabilities. The cash and stock purchase price was paid in April, 2001 and as a result an acquisition liability was recorded as of March 31, 2001 and is included in “Accrued expenses and other” on the Balance Sheet. The results of the Advantage acquisition have been consolidated with those of Avert, Inc. effective March 31, 2001. There was no net effect on the cash flow statement as of March 31, 2001, as the stock and cash disbursements were not made until April, 2001.
“The Company” or “Avert” is used in this report to refer to Avert, Inc. The Company may from time to time make written or oral forward-looking statements, including statements contained in the Company’s filings with the Securities and Exchange Commission and its reports to shareholders. This document may contain forward-looking statements that are made pursuant to the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. These statements include, without limitation, statements relating to Avert’s growth and business strategies, regulatory matters affecting Avert, other plans and objectives of Avert, management for future operations and activities, expansion and growth of Avert’s operations and other such matters. The words “believes,” “expects,” “intends,” “strategy,” “considers” or “anticipates” and similar expressions identify forward-looking statements. The Company does not undertake to update, revise or correct any of the forward-looking information.
The Company’s financial position at March 31, 2001 remained strong with working capital at that date of 7,574,000 compared to $10,102,000 at December 31,2000. Cash and cash equivalents at March 31, 2001 were $2,622,000 and increased from $666,000 at December 31, 2000. Marketable Securities at March 31, 2001 were $4,979,000 as compared to $7,319,000 at December 31, 2000. Net cash provided from operations for the three month period ended March 31, 2001 was $3,347,000 and consisted primarily of $2,340,000 decrease in marketable securities, a $435,000 increase in accounts payable and a net income of $698,000. The Company had capital expenditures of $502,000 for the three month period ended March 31, 2001 as compared to $187,000 for the three months ended March 31, 2000. The majority of the capital expenditures during the three months ended March 31, 2001 was attributable to ongoing implementation of software development and enhancements and upgrades to internal software programs used in servicing customers and upgrades of existing hardware. In addition, initial expenses were incurred for a 6,000 square foot addition to the building is planned to be completed by approximately Fall 2001. The estimated construction cost is approximately $600,000 with an additional $100,000 for furniture, and is estimated to accommodate up to approximately 50-60 additional personnel. Net cash used in financing activities for the three month period ended March 31, 2001 was $889,000 and consisted primarily of a $1,000,000 cash dividend of $.30 per common share payable in March 30, 2001 to shareholders of record on March 9, 2001.
On March 30, 2001, Avert, Inc. acquired the business and substantially of the assets of Advantage Assessment, Inc., (“Advantage”) for a combination of cash, assumption of certain liabilities and common stock valued at $1.7 million. Advantage has been a provider of assessment testing since 1998. The Advantage Assessment Testing System is a dual approach to employment screening, which includes a personality inventory and cognitive ability test. The system provides for an evaluation of prominent personal and interpersonal competencies and the cognitive abilities of the applicant. The testing period is brief and the test(s) may be administered either on-line or in a paper and pencil format. The transaction was accounted for using the purchase method of accounting and resulted in the purchase price being totally allocated to net tangible assets and intangible assets totaling $1,198,000. The purchase price was $1 million in cash and 45,000 shares of unregistered common stock, no par value, of Avert and the assumption of approximately $150,000 in liabilities. The cash and stock purchase price was paid in April, 2001 and as a result an acquisition liability was recorded as of March 31, 2001 and is included in “Accrued expenses and other” on the Balance Sheet. The results of the Advantage acquisition have been consolidated with those of Avert, Inc. effective March 31, 2001. There was no net effect on the cash flow statement as of March 31, 2001, as the stock and cash disbursements were not made until April, 2001.
The primary objective of the acquisition of AIS was the addition of a product line that expanded Avert’s offering of employment screening services. Avert is offering assessment testing as a stand alone solution to customers who are not traditional users of other employment screening products (background checking), and as a component of a complete applicant management and screening solution. Customers may purchase the product on a single use or subscription basis. Avert believes that the product offering is applicable to both small and large businesses. Avert plans to sell through assessment testing through in-house tele-sales to small and mid-sized businesses, corporate account sales and through partnerships with providers of human resources software and service products.
Avert intends to enhance the existing assessment product through (1) addition of new features, functionality, and improved integration with existing products; (2) addition of improved reporting capabilities, and (3) addition of other testing components. Avert is conducting a number of research studies to measure the reliability and validity of the both the personal inventory section and cognitive ability test of the assessment system. The studies are expected to run from April 2001 to December 2001. Based on the results of the studies additional enhancement may be necessary. Product releases are scheduled throughout 2001.
Comparison of quarters ended March 31, 2001 and March 31, 2000
Total net revenues increased from $3,745,000 for the three-month period ended March 31, 2000 to $4,790,000 for the comparable three-month period in 2001 or approximately 27.9%. This increase was primarily due to:
• Overall growth of Avert's customer base
• Continued use of Avert's criminal history products
• Increased membership in Avert subscription models
• Increased usage of package orders
During the first quarter of 2001, Avert launched a program to build communities of subscription accounts using our human resource help desk and best business practices. Through this program and a continued focus on our traditional account growth Avert added 4,773 new accounts. 1,431 of these accounts represented background checking accounts comparable with the growth of 1,448 accounts added in Q1 200 There were 10,218 customers that actually used Avert services the first three months of 2001. This compares to 9,190 the first three months of 2000, and represents approximately a 11.2% increase. The dollars spent per customer in the first quarter 2001 increased from $397 in the first quarter 2000 to $456 in the first quarter 2001 representing an approximate 14.9% increase.
Revenues generated from the criminal history product line continues to represent the largest revenue producing product, and accounts for approximately $2,199,000 or 46% of total net revenues in first quarter 2001 as compared to $1,871,000 or 50% of total net revenues in first quarter 2000. This growth of approximately 17.5% results from the continued use of the product of its existing customers, as well as the new customers.
The Company’s distribution arrangement with ADP in which Avert services are sold to ADP customers, generated revenues of approximately $350,000 in first quarter 2000, and increased to approximately $635,000 in revenues in first quarter 2001. This represents an 81.4% increase. Avert has a User Agreement with the ADP customer, which is cancellable at any time by either party. The ADP partnership continues to be developed, and the Company believes it to be one that could create substantial revenues upcoming year as well.
In addition, the increase in the customer base mentioned above, resulted in increased revenues from the Avert Advantage On-line subscriptions, and accounted for approximately $132,000 in the first three months of 2000, as compared to approximately $169,000 in the first three months of 2001. As the customer base continues to grow, revenues from memberships will continue to grow accordingly, and represent a recurring revenue stream.
As part of its on-line order entry system, Avert has created the ability for its customers to order through packages, which is a bundling of Avert’s products and services. This method enables them to consistently order a pre-determined group of products at a flat-rate price, with a simplified order entry screen. Revenues generated increased from approximately $22,000 in first three month period ended March 31, 2000 to approximately $279,000 in the same period in 2001, or approximately 1168%.
Avert implemented a new entity and chart of accounts structure in January, 2001. As a result, there have been re-classifications for simpler reporting. The breakdown of net revenues, exclusive of miscellaneous income items, is as follows:
Three Months Ended Three Months Ended
March 31, 2001 March 31, 2000 Percent of
---------------------- ---------------------- Increase
Revenues % total Revenues % total (Decrease)
-------- ------- -------- ------- --------
PRODUCT SALES:
Background Stand-Alone:
Workers compensation histories $ 161,000 3.4% $ 208,000 5.5% (22.6)%
Criminal history reports $ 2,199,000 45.9% $ 1,871,000 50.0% 17.5%
Previous employment reports/ $ 425,000 8.9% $ 367,000 9.8% 15.8%
credit reports
Motor vehicle driving records $ 588,000 12.3% $ 476,000 12.7% 23.5%
Other Stand-Alone $ 140,000 2.9% $ 132,000 3.5% 6.1%
Packages $ 279,000 5.8% $ 22,000 0.6% 1168.2%
Subscriptions $ 804,000 16.8% $ 482,000 12.9% 66.8%
SERVICE AND SETUP SALES: $ 151,000 3.1% $ 160,000 4.3% (5.6)%
CREDITS: $ (83,000) (1.7)% $ (65,000) (1.7)% 27.7%
INTEREST INCOME: $ 126,000 2.6% $ 92,000 2.4% 36.9%
---------- ---- ---------- -----
NET REVENUES $ 4,790,000 100% $ 3,745,000 100% 27.9%
Revenues generated from driving records increased approximately 23.5% from $476,000 in first three month period ended March 31, 2000 to $588,000 in the same period in 2001. Driving records continue to be an important background check for employers, and one that has quick turn-around for fast hiring decisions.
Workers’ compensation histories revenues continued to decline as a percentage of net revenues as previously predicted. In first quarter, 2000 workers’ compensation reports, represented, $208,000 or approximately 5.5% of total net revenues, as compared to $161,000 in the first three months of 2001, or approximately 3.4% of total net revenues.
Interest income increased approximately 36.0%, generating approximately $92,000 in first quarter 2000 and $126,000 in first quarter 2001. The increase is primarily a result of a $1,000,000 loan made in July 2000 to a firm called eScreen. This loan was made in the form of a one-year, convertible promissory note at an interest rate of 10%, with all principal and interest due at maturity in July 2001. EScreen is a start-up company that has a cutting edge drug-screening product that Avert wishes to pursue as a potential addition to its product line and/or a business relationship with eScreen. The loan is collateralized by both company assets and a personal guaranty of its founder. Even though eScreen is a start-up company with losses from operations, and is currently seeking capital, management believes eScreen’s business plan is achievable, and that the $1,000,000 loan will be paid when due. The amount of interest recorded in 1st quarter 2000 for this loan was approximately $25,000.
Total expenses, when expressed as a percentage of total net revenues, decreased from approximately 76.0% in the first quarter 2000, representing $2,845,000, to approximately 75.7% in the first quarter 2001 representing $3,628,000. A breakdown in expenses is as follows:
Three Months Ended Three Months Ended Increase (Decrease)
March 31, 2001 March 31, 2000 % of Revenues
----------------------- ---------------------- ------------------
Expenses % of Revenue Expenses % of Revenue 2001 over 2000
-------- ------------ -------- ------------ --------------
Search and product $2,206,000 46.0% $1,700,000 45.4% 0.6%
Marketing 589,000 12.3 432,000 11.5 0.8
General and administration 439,000 9.2 406,000 10.8 (1.6)
Software development 199,000 4.1 142,000 3.9 0.2
Depreciation and amortization 195,000 4.1 165,000 4.4 (0.3)
---------- ---- --------- ----- ----
Expenses $3,628,000 75.7% $2,845,000 76.0% (0.3)%
========== ==== ========= ===== ====
Search and product fees increased slightly from approximately 45.4% of total net revenues in first quarter 2000 to approximately 46.0% of total net revenues in first quarter 2001. The Company was able to produce approximately 31.8% more actual reports in the three month period in 2001 as compared to the three month period in 2000. Product costs were reduced for the largest product line – criminal history searches – from approximately 18.8% of total net revenues in 2000 to approximately 17.0% of total net revenues in 2001. The majority of the decrease was attributable to the improved automation of the Company’s acquisition of data supplied to its customers, specifically decreasing costs of obtaining criminal history information from sources. The largest area of increase in search and product fees was a result of the increased usage in package orders, which tend to be more competitively priced for larger customers. Package costs increased from approximately 0.8% of total net revenues in first quarter 2000 to approximately 2.3% of total net revenues in first quarter 2001.
There was an approximate 0.8% increase as a percentage of total net revenues in marketing expenses, in the first three months of 2001, representing approximately 12.3% of total net revenues, as compared to the same period of 2000, representing approximately 11.5% of total net revenues. The Company maintained consistent expenditures in certain lead generation activities such as trade shows and yellow pages advertising as well as continuing its transition to web-based lead generation programs. In regards to personnel, there was an addition of a Director of Marketing and Channel Partner Development, and movement of national account support personnel from customer service to marketing area. Lastly, as more revenues are generated through the ADP partnership, there will be an increased marketing expense in the way of revenue pass-through payment to distribution partnerships, as well as any other distribution partnerships that may be developed and implemented.
General and Administrative expenses decreased approximately 1.6% of total net revenues in first three-month period ended March 31, 2001, representing approximately 9.2% of total net revenues, as compared to the first three-month period ended March 31, 2000 representing 10.8% of total net revenues.
There was a slight increase in software development and maintenance expenses expressed as a percentage of total net revenues from approximately 3.9% in first quarter 2000 to approximately 4.1% in the comparable period of 2001. The Company continues to focus on making technology its strategic advantage in its relationships with customers, partners and suppliers.
There was a decrease in depreciation and amortization expenses when expressed as a percentage of total net revenues, from approximately 4.4% in the first three months of 2000, to approximately 4.1% in the comparable period of 2001.
Income before income taxes increased from $900,000 in first quarter 2000 to $1,162,000 in first quarter 2001, or approximately 29.1%, and represented approximately 24.0% in 2000, as compared to approximately 24.3% in the comparable period of 2001.
The combined federal and state income tax rates for 1st quarter 2001 and 2000 was 39.9% and 37.1% respectively, resulting in net income of approximately $698,000 (weighted average shares) was $.21 per share on 3,263,127 shares in 2001 and $.17 per share on 3,285,919 shares in 2000. Diluted earnings per share were $.20 per share on 3,547,412 (weighted average shares plus common stock equivalents) in 2001 and $566,000 ($.17 per share on 3,285,990 shares (weighted average shares plus common stock equivalents) in 2000.
None
None
None
None
(a) February 13, 2001 announcing 4th Quarter and 2000 Release
(b) February 26, 2001 announcing dividend
In accordance with 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.
AVERT, INC.
DATE: May 14, 2001 BY:/s/ Dean A. Suposs
Dean A. Suposs, President
DATE: May 14, 2001 BY:/s/ Jamie M. Burgat
Jamie M. Burgat, Vice President of
Operations and Chief Financial Officer