UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE QUARTERLY PERIOD ENDED MAY 31, 2001
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE TRANSITION PERIOD FROM ___________ TO ___________
COMMISSION FILE NUMBER: 000-09322
IEXALT, INC.
NEVADA 75-1667097
- -------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
12000 AEROSPACE AVENUE, SUITE 375
HOUSTON, TEXAS 77034 - 5576
(Address of principal executive offices)
281-464-8400
(Registrant's telephone number, including area code)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or 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 [XX] NO[ ]
State the number of shares outstanding of each of the issuer's classes of common
equity as of the latest practicable date:
June 30, 2001: 47,572,431 Shares
Transitional Small Business Disclosure Format (check one): YES[ ] NO [XX]
iEXALT, INC.
TABLE OF CONTENTS
Page
-----
Part I Financial Information
Item 1 Condensed Consolidated Financial Statements 3
Item 2 Management's Discussion and Analysis of Financial Condition 23
and Results of Operations
Part II Other Information
Item 2 Changes in Securities 31
Item 6 Exhibits and Reports on Form 8-K 32
Signatures 35
2
Part I - Item 1. Condensed Consolidated Financial Statements.
iEXALT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(Unaudited)
ASSETS
May 31, August 31,
2001 2000
-------------- --------------
CURRENT ASSETS
Cash and cash equivalents $ 83,849 $ 278,164
Accounts receivable, trade, net of allowance for doubtful accounts 912,901 661,680
Accounts receivable, other and notes receivable, current 336,561 3,500
Accounts receivable, affiliate 68,983 86,384
Inventory, prepaid expenses and other current assets 584,436 265,758
-------------- --------------
TOTAL CURRENT ASSETS 1,986,730 1,295,486
-------------- --------------
PROPERTY AND EQUIPMENT, net 753,443 717,025
-------------- --------------
OTHER ASSETS
Goodwill and other intangible assets, net 5,451,576 2,462,244
Other assets 1,324,713 272,853
-------------- --------------
$ 9,516,462 $ 4,747,608
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term borrowings $ 1,456,128 $ 241,678
Notes payable to shareholders 545,000 557,000
Current maturities of long-term debt 587,302 613,037
Current maturities of obligations under capital lease 92,401 8,235
Accounts payable, trade 1,425,910 622,007
Accounts payable, affiliate 18,521 20,633
Deferred revenue 543,459 323,035
Other accrued liabilities 474,594 509,326
-------------- --------------
TOTAL CURRENT LIABILITIES 5,143,315 2,894,951
-------------- --------------
LONG-TERM DEBT 83,785 90,050
OBLIGATIONS UNDER CAPITAL LEASE 10,686 8,024
SHAREHOLDERS' EQUITY
Preferred stock, $.001 par value, 20,000,000 shares authorized, no shares
issued and outstanding - -
Common stock, $.001 par value, 100,000,000 shares authorized, 42,425,931 and
28,646,876 shares, issued and outstanding, respectively 42,426 28,647
Paid-in capital 17,216,239 9,810,457
Receivable from shareholder (9,239) (9,239)
Retained deficit (12,970,750) (8,075,282)
-------------- --------------
TOTAL SHAREHOLDERS' EQUITY 4,278,676 1,754,583
-------------- --------------
$ 9,516,462 $ 4,747,608
============== ==============
See accompanying notes.
3
iEXALT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
Three Months Ended Nine Months Ended
-------------- -- ------------- ------------- -- --------------
May 31, 2001 May 31, 2000 May 31, 2001 May 31, 2000
-------------- ------------- ------------- --------------
REVENUES $ 2,839,073 $ 1,222,483 $ 7,742,216 $ 2,517,926
COST OF SALES AND SERVICES 2,039,491 891,952 5,336,292 1,868,936
-------------- ------------- ------------- --------------
GROSS PROFIT 799,582 330,531 2,405,924 648,990
SELLING, GENERAL, AND ADMINISTRATIVE 1,026,163 573,710 4,270,260 1,389,711
PAYROLL COSTS 903,451 594,190 2,191,536 1,296,216
DEPRECIATION AND AMORTIZATION 124,981 56,291 349,970 111,607
LOSS/(GAIN) ON DISPOSAL OF ASSETS (25,445) - 127,817 -
-------------- ------------- ------------- --------------
LOSS FROM OPERATIONS (1,229,568) (893,660) (4,533,659) (2,148,544)
OTHER INCOME (EXPENSES)
Interest Income, Other (9,317) 22,073 (5,405) 27,325
Interest Expense (131,726) (5,651) (356,404) (10,015)
-------------- ------------- ------------- --------------
LOSS BEFORE INCOME TAXES (1,370,611) (877,238) (4,895,468) (2,131,234)
INCOME TAXES - - - -
-------------- ------------- ------------- --------------
NET LOSS $(1,370,611) $ (877,238) $(4,895,468) $(2,131,234)
============== ============= ============= ==============
NET LOSS PER SHARE $ (0.03) $ (0.03) $ (0.14) $ (0.09)
============== ============= ============= ==============
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 40,904,146 26,776,709 35,352,647 24,126,377
============== ============= ============= ==============
See accompanying notes.
4
iEXALT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(Unaudited)
Common
Stock Receivable Total
------------------------------ Paid-In from Retained Shareholders
Shares Amount Capital Shareholder Deficit Equity
------------- ------------- -------------- ------------ -------------- ------------
BALANCE August 31, 2000 28,646,876 $ 28,647 $ 9,810,457 $ (9,239) $ (8,075,282) $ 1,754,583
Issuance of stock for
acquisitions 5,390,105 5,391 4,166,519 - - 4,171,910
Issuance of stock for
dispositions 275,000 275 188,912 - - 189,187
Issuance of stock for cash 879,906 880 559,120 - - 560,000
Issuance of stock for services 1,384,047 1,383 721,979 - - 723,362
Issuance of stock for loans
and settlement 5,249,997 5,250 610,934 - - 616,184
Exercise of options 600,000 600 11,400 - - 12,000
Issue stock options/warrants - - 1,146,918 - - 1,146,918
Net loss - - - - (4,895,468) (4,895,468)
------------- ------------- -------------- ------------ -------------- -------------
42,425,931 $ 42,426 $ 17,216,239 $ (9,239) $ (12,970,750) $ 4,278,676
BALANCE May 31, 2001
============= ============= ============== ============ ============== =============
See accompanying notes.
5
iEXALT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
------------------------------------
May 31, 2001 May 31, 2000
------------------ ----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (4,895,468) (2,131,234)
Adjustments to reconcile net loss to net cash used by operating
activities:
Depreciation and amortization 349,970 111,607
Loss (Gain) on disposition of assets 127,817 -
Non-cash expense of issuing stock options/warrants 998,118 -
Compensation and other expense for common shares issued for 723,362 148,850
services
Common stock issued to settle interest 16,184 -
Changes in assets and liabilities, net of effects of acquisitions:
Accounts receivable (42,043) (98,821)
Inventory, prepaid expenses and other current assets (309,342) (46,835)
Other assets (212,252) (287,410)
Accounts payable 540,336 149,044
Deferred revenue 169,820 34,547
Other accrued expenses (210,641) (113,270)
------------------ ----------------
Net cash used by operating activities (2,744,139) (2,233,522)
------------------ ----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net cash from acquisitions 157,869 61,110
Purchases of property and equipment (56,229) (483,477)
------------------ ----------------
Net cash provided by investing activities 101,640 (422,367)
------------------ ----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 560,000 3,350,981
Proceeds from exercise of options 12,000 600,000
Payments on borrowings from shareholders (12,000) -
Proceeds from issuance of debt 1,695,809 300,000
Proceeds from issuance of warrants 148,800 -
Payments of capital lease obligations (38,052) -
Proceeds from other notes payable 183,250 (47,463)
Repayments of debt (101,623) (456,000)
------------------ ----------------
Net cash provided by financing activities 2,448,184 3,747,518
------------------ ----------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(194,315) 1,091,629
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 278,164 351,312
------------------ ----------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 83,849 1,442,941
================== ================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 85,723 13,548
================== ================
See accompanying notes.
6
iEXALT, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE A SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION, BUSINESS AND BASIS OF PRESENTATIONS - iExalt, Inc.,
("iExalt" or "Company"), was originally incorporated as Louisiana
Northern Gas, Inc. a Nevada corporation on April 23, 1979. The
name of the Company was changed to Sunbelt Exploration, Inc. on
December 21, 1979. From 1989 until September 1, 1999, the Company
had very limited operations.
On September 1, 1999, the Company consummated a merger
(hereinafter referred to as the "Merger") with iExalt, Inc., a
Texas corporation incorporated on January 7, 1999,
("iExalt-Texas") whereby the shareholders of iExalt-Texas
acquired an approximate 89% ownership interest in the Company.
The Merger has been accounted for as a reverse takeover with the
Company being the surviving legal entity and iExalt-Texas being
the acquiror for accounting purposes. Concurrent with the Merger,
the Company changed its name from Sunbelt Exploration, Inc. to
iExalt, Inc.
iExalt blends the positive modern technologies available through
the Internet with traditional media to provide products,
services, and Internet solutions to Christian families,
businesses, schools, communities, and organizations. iExalt
currently markets filtered internet service, publishes Christian
electronic books and reference materials, a Christian events
magazine, a Christian business directory, and a Christian
newspaper, produces a radio program five nights per week and is
affiliated with a youth oriented Christian radio program,
operates a comprehensive contemporary Christian music website,
one of the largest speaker's bureaus dedicated to Christian
speakers, and an agency business for Christian artists. In
addition, iExalt sells tickets for Christian events, manages one
of the most popular Christian portal sites, provides access to
on-line web based sermon resources through its web site, and
provides through the Internet a cutting-edge, information-packed,
online monthly newsletter for local youth programs. iExalt
provides psychiatric counseling services for senior citizens
earning healthcare revenues from the implementation and
management of geriatric psychiatric programs for hospitals and
other health facilities. iExalt also operates a Christian
inpatient mental health management company.
PRINCIPLES OF CONSOLIDATION - The consolidated financial
statements include the accounts of the Company and its wholly
owned subsidiaries. All significant intercompany balances and
transactions have been eliminated.
INTERIM RESULTS - The accompanying unaudited condensed
consolidated financial statements of the Company and its
subsidiaries reflect, in the opinion of management, all
adjustments necessary to present fairly the Company's
consolidated financial position at May 31, 2001 and the Company's
consolidated results of operations and cash flows for the three
and nine month periods ended May 31, 2001 and May 31, 2000.
Interim period results are not necessarily indicative of the
results that may be expected for an entire year.
These consolidated financial statements and the notes thereto
should be read in conjunction with the Company's Annual Report on
Form 10-KSB for the year ended August 31, 2000, including the
financial statements and notes thereto.
CASH AND CASH EQUIVALENTS - The Company considers all highly
liquid debt instruments having maturities of three months or less
at the date of purchase to be cash equivalents.
7
iEXALT, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE A SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
PROPERTY AND EQUIPMENT - Property and equipment is carried at
original cost or adjusted net realizable value, as applicable.
Maintenance and repair costs are charged to expense as incurred.
When assets are sold or retired, the remaining costs and related
accumulated depreciation are removed from the accounts and any
resulting gain or loss is included in income.
For financial reporting purposes depreciation of property and
equipment is provided using the straight-line method based upon
the expected useful lives of each class of assets. Estimated
lives of assets are as follows: Furniture and fixtures - five to
seven years; computers and software - three to five years;
automobiles - three to five years; and leasehold improvements -
over the estimated useful life or the remaining life of the
lease, whichever is shorter.
FINANCIAL INSTRUMENTS - FAIR VALUE - The carrying values of the
Company's financial instruments, which include cash and cash
equivalents, accounts receivable, accounts payable and accrued
liabilities, royalties and debt, approximate their respective
fair values because of short lives and the use of market interest
rates.
CREDIT RISK - The Company maintains its cash and cash equivalents
with high credit quality institutions and limits the credit
exposure to any one institution. The Company's accounts
receivable arise from sales to customers and the Company
periodically evaluates its credit exposure with its customers.
Included in accounts receivable is $326,338 due from one customer
of PremierCare, a subsidiary of the Company. The Company has
fully reserved this receivable since the payment has been
disputed for more than twelve months, however, management is
vigorously pursuing collection of this balance.
GOODWILL AND OTHER INTANGIBLES - Goodwill represents the cost in
excess of fair value of the assets of businesses acquired and is
being amortized using the straight-line method over 20 years.
Other intangible assets represent costs allocated to covenants
not to compete and other intangibles acquired in business
acquisitions. Other intangible assets are being amortized using
the straight-line method over their estimated useful lives, which
range from two to five years.
STOCK BASED COMPENSATION - Under SFAS No. 123, "Accounting for
Stock-Based Compensation," the Company has elected the method
that requires disclosure of stock-based compensation. The Company
accounts for its employee stock-based compensation plan under
Accounting Principles Board ("APB") Opinion No. 25 and the
related interpretations. Accordingly, deferred compensation is
recorded for stock-based compensation grants to employees based
on the excess of the estimated fair value of the common stock on
the measurement date over the exercise price. The deferred
compensation is amortized over the vesting period of each unit of
stock-based compensation. If the exercise price of the
stock-based compensation grant is equal to or greater than the
estimated fair value of the Company's stock on the date of grant,
no compensation expense is recorded. Additionally, for
stock-based compensation grants to consultants, the Company
recognizes as compensation expense the estimated fair value of
such grants as calculated pursuant to SFAS No. 123, recognized
over the related service period.
IMPAIRMENT OF LONG LIVED ASSETS - In September 2000, management
made the decision to dispose of two acquisitions and terminate a
funding arrangement with another potential acquisition. The
carrying values of goodwill and intangible assets of the related
dispositions were not recovered. Therefore, an impairment loss of
$3,451,407 was recognized during August 2000 on these assets.
Management believes there is no other impairment of goodwill and
other intangibles.
8
iEXALT, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE A SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
REVENUE RECOGNITION - The Company generally recognizes revenue on
services as they are performed and on products when they are sold
net of sales returns. Speaker revenues are recognized when the
speech or event occurs. The Company grants refunds and returns on
electronic publishing products if the software and publications
sold are returned within thirty days. Revenue from ticket
operations is recognized as tickets are sold. Although iExalt
collects ticket receipts representing the full ticket price on
behalf of its clients, the Company only records as revenue the
convenience charges and handling fees included in the ticket
price.
In December 1999, the Securities and Exchange Commission ("SEC")
issued Staff Accounting Bulletin No. 101, "Revenue Recognition in
Financial Statements" ("SAB 101"), which clarifies certain
existing accounting principles for the timing of revenue
recognition and its classification in the financial statements.
The SEC delayed the required implementation date of SAB 101 by
issuing Staff Accounting Bulletins No. 101A, "Amendment: Revenue
Recognition in Financial Statements" and 101B, "Second Amendment:
Revenue Recognition in Financial Statement" in March and June
2000, respectively. As a result, the SAB 101 will become
effective for the Company in the fourth quarter of fiscal year
end August 31, 2001. The Company believes the adoption of SAB 101
will not be material to the earnings and financial position of
the Company.
MANAGEMENT'S ESTIMATES - The preparation of financial statements
in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses
during the reporting period. While it is believed that such
estimates are reasonable, actual results could differ from those
estimates.
CONDITIONS AFFECTING ONGOING OPERATIONS - The Company is
currently dependent upon external financing to continue its
current level of operations. The Company hopes to obtain
additional debt and equity financing from various sources in
order to finance its operations, repay current debt in default as
discussed in Note D and continue to grow through merger and
acquisition opportunities. In the event the Company is unable to
obtain additional debt and equity financing, the Company may not
be able to continue its current level of operations. If the
Company is unable to continue its current level of operations,
the value of the Company's assets could experience a significant
decline in value from the net book values reflected in the
accompanying consolidated balance sheet.
The Company's continuation as a going concern is dependent upon
its ability to generate sufficient cash flow to meet its
obligations on a timely basis, to comply with the terms of its
financing agreements, to obtain additional financing or
refinancing as may be required, and ultimately to attain
profitability. Accordingly, management believes that
period-to-period comparisons of results of operations should not
be relied upon as an indication of future results of operations.
NOTE B ACQUISITIONS AND DISPOSITIONS
During September 2000, the Company re-evaluated its business mix
and projected cash flows and made decisions to dispose of First
Choice and the Company's filtering software and related
technology. First Choice was sold to a company owned by a former
member of the Board of Directors in exchange for the assumption
of future liabilities. As a part of the transaction, the Company
made a payment to First Choice of $25,000 during October and
issued 25,000 shares of the Company's common stock to an employee
for past services rendered. The filtering software and related
technology was sold to a former employee of the Company. The
Company issued 150,000 shares of the Company's common stock with
piggyback registration rights to the former employee in exchange
for a note receivable of $84,359, the total of existing
liabilities related to the filtering technology at the closing.
The note receivable is secured by the 150,000 shares of common
stock.
9
iEXALT, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE B ACQUISITIONS AND DISPOSITIONS (continued)
The note is to be repaid upon sale of the stock or six months,
whichever occurs first. The Company is currently working to
resolve the outstanding note receivable collection. The Company
retained the right to use and market the filtering technology to
the Christian market. The Company had also made the decision to
cancel its acquisition efforts related to a start-up Internet
Company. The Company had been funding the start-up under a
management and funding agreement since April, 2000. Under the
Termination Agreement, the Company issued 100,000 shares of the
Company's common stock with piggyback registration rights,
retained a 49% interest in the start-up and received a note
receivable for the total funds advanced of $368,112. An
impairment loss of the total of all funds advanced and the
related acquisition costs incurred was recorded due to the low
probability of collecting the note receivable or realizing future
income from the equity interest. Related impairment costs
recorded during fiscal year 2000 totaled $3,451,407 and an
additional $240,813 loss was recognized from operations and
losses on disposal of fixed assets on the dispositions during the
three months ended November 30, 2000 and nine months ended May
31, 2001.
On September 29, 2000 the Company acquired a seven percent
indirect interest in Sonora Behavioral Hospital, a 30-plus-bed
psychiatric hospital in Arizona. The Company exchanged 150,000
shares of its common stock for the interest in Integral
Behavioral Health Services, Inc., the 100% owner and operator of
Sonora. This acquisition has been accounted for under the cost
method.
On October 3, 2000, the Company acquired all the stock of
ListenFirst.com ("ListenFirst"), a Christian music news website
for 60,000 shares of the Company's common stock. If certain
revenue or profit levels are reached over the next three years, a
maximum of 50,000 additional shares will be issued for the
acquisition. The transaction was accounted for as a purchase and
goodwill was recorded in the amount of $60,588.
On October 18, 2000, the assets of Northwest Christian Journal
("NWCJ"), a monthly Christian newspaper in the Seattle area, were
acquired for 37,500 shares of the Company's common stock and cash
proceeds of $7,500. The transaction was accounted for as a
purchase and goodwill was recorded in the amount of $41,250. On
October 29, 2000, the assets of the Christian Blue Pages, LLC
("Blue Pages") that produces a directory of Christian businesses
in four editions in Southern California, were acquired in
exchange for 60,000 shares of the Company's common stock and a
percentage of the first year's advertising revenues. The
transaction was accounted for as a purchase and goodwill was
recorded in the amount of $112,182. Both of these acquisitions
were added to the operations of Christian Times, a subsidiary of
the Company.
All the outstanding stock of Clean Web, Inc. ("Clean Web"), a
national filtered ISP with approximately 6,000 users, was
acquired on October 24, 2000 for 2,313,000 shares of the
Company's common stock. The transaction was accounted for as a
purchase and goodwill was recorded in the amount of $2,236,680.
Effective November 1, 2000, the Company acquired all the assets
of Rapha ("Rapha"), a Christian inpatient mental health
management company. Under the terms of the acquisition agreement,
the Company issued 200,000 shares of common stock at closing.
When contracts noted within the purchase agreement are certified
by PsyCare that such contracts have been assigned within 180 days
of closing, then final valuation will be increased by $200,000
per contract, not to exceed $1,000,000 in total, and settled with
additional shares of common stock, if necessary, in October,
2002. The transaction was accounted for as a purchase and
originally goodwill was recorded in the amount of $284,228. As of
the period ended May 31, 2001 the contracts had been certified
and goodwill was recorded in the amount of an additional $715,772
as an adjustment to the purchase price.
10
iEXALT, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE B ACQUISITIONS AND DISPOSITIONS (continued)
On November 21, 2000, in exchange for 30,000 shares of the
Company's common stock, the Company acquired all of the speaker
contracts and speaking engagements related to the Christian
market from Alive Communications ("Alive"). The transaction was
accounted for as a purchase and goodwill was recorded in the
amount of $10,969. Alive is a leading provider of speakers to the
Christian community and the business will be combined with
ChristianSpeakers.com.
On December 1, 2000, in exchange for 50,000 shares of the
Company's common stock, the Company acquired the assets of
Gilmore Marketing Company. The company provides marketing related
products and services such as multi media development,
advertising art work and content, publication brochures, printing
designs, and logos. The transaction was accounted for as a
purchase and goodwill was recorded in the amount of $20,718.
On March 1, 2001, the Company completed the acquisition of the
Global Christian Network, Inc. (GCN), a technology company and
the creators of an online Christian Community based in Reno,
Nevada. GCN will substantially increase the Company's online
presence and add significant technology improvements. As
consideration for the acquisition, the Company issued a total of
1,520,105 of its common shares to certain GCN shareholders and
$11,958 of cash to certain GCN shareholders in exchange for all
issued and outstanding stock of GCN. The Company issued 500,000
of its common shares for full payment of an outstanding
promissory note owed by GCN to an investor (which upon the
anniversary of closing the value of such shares must equal a
minimum of $273,104 or additional shares must be issued to for
the difference). The Company issued 207,000 of its common shares
to four employees of GCN for past services. The Company agreed to
a contingent payment of $26,033 of cash to selected employees for
past services based on the achievement of certain performance
objectives. Pursuant to the execution of a funding agreement
dated June 30, 2000, the Company had advanced cash totaling
$369,170 for pre-acquisition expenditures. The transaction was
accounted for as a purchase and goodwill of $1,102,828 was
recorded.
On March 1, 2001, the Company completed the acquisition of
Capital Artists Agency, Inc., a full service talent agency
representing a variety of names in contemporary Christian music
headquartered in Nashville, TN. The purchase will substantially
increase the Company's presence in the Christian entertainment
service sector. In conjunction with the acquisition, Capital
Artist Agency changed its name to ChristianArtists.com. The
Company paid 187,500 shares of its common stock and additional
shares may be issued under certain contingencies to provide for a
purchase price of $150,000 at the final closing on March 1, 2002.
The transaction was accounted for as a purchase and goodwill of
$169,789 was recorded.
On May 31, 2001, the Company completed the sale of certain assets
to 711.NET, Inc. Assets sold include iExalt's right, title and
interest in all of CleanWeb's current internet access
subscribers, selected other assets used in, related to, and
common and necessary to the operations of the business including
the assignment of certain lease obligations and certain
tangible/intangible property (which will be specifically
identified within an exhibit being developed by the company and
711.NET, Inc.) CleanWeb will continue to market, resell, and
produce additional business and Internet subscriber sales and
services to iExalt constituency, market influences, and other
organizations as a Reseller of such Internet services of the
buyer's ISPBrand Internet access services through a Strategic
Marketing and Reseller Agreement with the Buyer. iExalt expects
to produce additional subscribers for Buyer and has committed to
securing at least 10,000 new subscribers to the Buyer within the
initial twelve months following closing. iExalt will receive
royalty amounts on a monthly basis for all active fully paying
subscribers developed through the Marketing relationship. For
subscribers up to 10,000 a royalty of $5.00 per subscriber per
month will be remitted. For subscribers from 10,001 - 20,000 a
royalty of $6.00 per subscriber per month will be remitted. For
subscribers over 20,000 a royalty of $7.00 per subscriber per
month will be remitted. Should iExalt not equal or exceed 10,000
subscribers in the initial twelve months after closing then it
will pay the Buyer $50,000 worth of common shares
11
iEXALT, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE B ACQUISITIONS AND DISPOSITIONS (continued)
of iExalt not to exceed 100,000 shares. As consideration for the
sale, iExalt received a lump sum payment of $150,000 cash at
closing, an agreement for $648,000 such amount to be paid in
monthly payments of not less than $24,000 and payable in not more
than 25 months from the date of transition, and an agreement to
receive 438,667 shares of Buyer's common stock issued at a price
of $1.50 per share for a value of $658,000. Proceeds of
$1,456,000 and a net gain of $25,445 were recorded. An
allocation, based upon estimated market values, of CleanWeb's
goodwill ($2,236,680) was developed to determine the amount
attributable to the assets that were sold. As a result of the
analysis $1,606,262 of goodwill was determined to relate to the
assets that were sold and goodwill was reduced accordingly
The following unaudited pro forma combined results of operations
of the Company for the nine months ended May 2001 and 2000 assume
significant acquisitions and dispositions had occurred as of the
beginning of the respective periods.
PRO FORMA
NINE MONTHS ENDED
-----------------
May 31, May 31,
2001 2000
---------------- ---------------
Revenues $ 6,867,539 $ 5,970,383
Loss from operations $ (4,244,495) $ (2,444,736)
Net loss $ (4,592,955) $ (2,511,768)
Net loss per share $ (0.13) $ (0.09)
Pro Forma Weighted Average Number of
Shares Outstanding 35,810,163 28,881,882
The pro forma information has been adjusted to reflect the
amortization of goodwill from the beginning of the respective
periods for each of the acquired companies that were significant.
The pro forma financial information is not necessarily indicative
of the combined results that would have occurred had the
acquisitions taken place at the beginning of the period, nor is
it necessarily indicative of results that may occur in the
future. .
NOTE C PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at:
May 31, August 31,
2001 2000
---------------- ----------------
Computer equipment and software $ 473,561 $ 383,532
Furniture, fixtures and office equipment 255,126 224,390
Automobiles 190,091 186,090
Leasehold improvements 62,836 34,360
---------------- ----------------
981,614 828,372
Less accumulated depreciation (228,171) (111,347)
---------------- ----------------
$ 753,443 $ 717,025
================ ================
12
iEXALT, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE D SHORT-TERM BORROWINGS
Short-term borrowings consisted of the following at:
May 31, August 31,
2001 2000
-------------- ---------------
Revolving line of credit with bank, interest at prime $ 150,000 $ 150,000
payable monthly, due December 18, 2000, guaranteed by
shareholder
Convertible debentures, interest at prime plus one
half, due March 22, 2001 500,000 -
Bridge loan, non-interest bearing, due April 9, 2001 180,000 -
Convertible debentures, non-interest bearing, due
April 15, 2001 180,000 -
Convertible debentures, interest at 11%, initial
$200,000 payment due August 28, 2001 500,000 -
Less: Discounts on debentures (148,800) -
Other unsecured revolving lines of credit in the form of
credit cards, interest ranging from 11.9% to 22.9%,
payable monthly 94,928 91,678
-------------- ---------------
$ 1,456,128 $ 241,678
============== ===============
In August 1999, the Company negotiated a $50,000 revolving line
of credit with a bank. The credit line was increased to $150,000
in December 1999. The line was guaranteed by a shareholder
without the Company's authority, and matured in late December
2000. The bank has provided forbearance and the Company continues
to service the debt with monthly interest payments. The Company
is working with the bank to develop a mutually agreeable plan to
repay the debt. In October 2000, the shareholder/guarantor of the
line indicated that the guarantee would not be renewed.
On September 20, 2000, the Company agreed to issue $500,000 in
convertible debentures. The debentures bear interest at prime
plus one half and were convertible into common stock at the
lesser of $0.17 per share or fifty percent of the current market
price. Principal and interest were due on October 20, 2000 but
the due date was extended to January 15, 2001 and as additional
consideration, the Company issued a five-year warrant to purchase
one million shares at $1.13 per share to the holders of the
convertible debentures. The debenture holders subsequently agreed
to again extend the due date to March 22, 2001, convert no more
than 4,950,000 shares, and provide a bridge loan of $180,000 in
return for the adjustment of the conversion price per share to
$0.07 and the adjustment of the exercise price of outstanding
warrants to $0.21. Currently, these amounts are in default for
lack of payment. The Company is working with the debenture
holders to determine the form of repayment.
On February 16, 2001, the Company agreed to issue $180,000 in the
form of a convertible debenture. The debenture bears no interest,
provides for conversion of $90,000 of the principal for shares
with a conversion price of $0.18, and matured on April 15, 2001.
Additional consideration was issued in the form of warrants for
the purchase of up to 1,000,000 shares, the first 818,182 at an
exercise price of $0.11 and the balance of 181,818 shares at an
exercise price of $0.18. The Company is working with the
debenture holder to determine the form of repayment.
13
iEXALT, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE D SHORT-TERM BORROWINGS (continued)
In November 2000, the Company agreed to terms for issuing
convertible debentures for $1,200,000 and the establishment of an
18-month equity line of $3,000,000. Subsequently on December 11,
2000 the terms were modified to issue $600,000 in convertible
debentures and a $3,400,000 equity line. The agreement was with
Thomson Kernaghan & Co. Limited and provided for two year
debentures carrying a 10% accumulating interest rate and
convertible into common shares. In addition, the Company had
agreed to issue five-year warrants to purchase 1,250,000 shares
of its common stock with an exercise price equal to 110% of the
average closing bid price for the three trading days preceding
closing. The Company also agreed to place 2,883,333 shares of its
common stock (loaned by three shareholders) as collateral.
Definitive agreements were signed and effective December 11,
2000. The Company complied with all requirements for closing
including the placement of the shares as collateral but the
transaction did not close under the terms of the agreement and
the equity line was not established. Funds totaling $600,000 were
ultimately received and the Company has reached an agreement with
Thomson Kernaghan & Co. Limited regarding repayment. Thomson
Kernaghan & Co. Limited retained the collateralized shares and
was issued an additional 250,000 of restricted shares in
repayment for the $600,000. The Company provided 4,999,997
restricted shares of common stock to the three shareholders in
repayment for the collateralized shares.
On February 23, 2001, the Company agreed to a $6,000,000 capital
investment by Woodcrest Capital II Limited Partnership. The
initial funding will be $1,000,000 paid in installments over nine
months and subsequent funding of $5,000,000 subject to the
following loan conditions: (a) the Company is not in default
under the Note, nor any of the Loan Documents (b) The Company is
in full compliance with all applicable and materially mandated
SEC filings, rules, and regulations (c) the Company is cash flow
positive, as determined by the Lender (d) the Company is earnings
positive, as determined by the Lender (e) Lender determines, in
Lender's sole discretion, that the Company is still an acceptable
credit risk and (f) Lender determines, in Lender's sole
discretion, that the Company is not a going concern risk. The
Company received $200,000 at closing and is able to receive an
additional $100,000 each month thereafter. The loans are to be
repaid within six months of funding and bear interest at 11%. As
additional consideration, the Company issued warrants totaling
10,812,500 shares at an exercise price of $0.16 related to the
first $1,000,000 loaned. The warrants are vested and have a
five-year term. The Company has the option to repay the principal
and interest with cash or shares of common stock which shares
will be valued at the lesser of $0.20 per share or 75% of the
average of the stock's closing price in the previous 5 trading
days. If the Company borrows amounts over the initial loan of
$1,000,000 the interest rate and repayment terms are similar and
additional warrants to purchase shares of common stock would be
granted of 5 shares for every $1.00 loaned. As of May 31, 2001
the Company has received $500,000 in cash advances from Woodcrest
Capital II Limited Partnership.
NOTE E NOTES PAYABLE TO SHAREHOLDERS
Notes payable to shareholders consist of the following at:
May 31, August 31,
2001 2000
-------------- --------------
Non-interest bearing note payable to shareholder, due $ 350,000 $ 350,000
on demand secured by all assets of NetXpress
Unsecured note payable to shareholder, 8% interest, due
on demand 195,000 195,000
Unsecured note payable to shareholder, 8% interest, due
on demand - 12,000
------------- ------------
$ 545,000 $ 557,000
============= ============
14
iEXALT, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE E NOTES PAYABLE TO SHAREHOLDERS (continued)
In connection with the acquisition of NetXpress, iExalt, Inc.
(Texas) assumed a $350,000 note payable to a shareholder of the
Company. Under the terms of this note, the balance becomes
payable on demand when net assets of iExalt, Inc. (Texas) exceed
$5,000,000. As of November 2000, the shareholder made demand for
payment through his attorney and the Company is evaluating
this claim. As an alternative, the Company is offering Christian
mediation under the rules of the Institute for Christian
Conciliation.
During August 2000, U.S. Sporting Interests LLC and a shareholder
loaned the Company $195,000 and $12,000 respectively under two
separate demand notes each with an 8% interest rate. The $12,000
demand note was repaid in November 2000. Demand for payment of
the $195,000 has been made and the company is currently
evaluating this claim.
During September 2000, a shareholder loaned the Company $55,000
under a promissory note with an 11.75% interest rate due on or
before March 16, 2001. The note was repaid in December 2000.
During November 2000, three shareholders loaned a total of
2,883,333 common shares in conjunction with its funding agreement
with Thomson Kernaghan & Co. Limited to the Company to be held as
collateral by Thomson Kernaghan. The Company agreed to repay the
shareholders within six months. The shareholders agreed that the
collateralized shares could be repaid in restricted shares in the
event the shares loaned were not returned. As further
consideration, the shareholders also receive interest on the fair
market value of the shares loaned paid at 12%. On March 28, 2001,
the Company provided 4,999,997 restricted shares of common stock
to the three shareholders in repayment for the collateralized
shares of which 86,957 shares was earned interest.
NOTE F LONG-TERM DEBT
Long-term debt consisted of the following at:
May 31, August 31,
2001 2000
-------------- --------------
Note payable to bank, interest at prime payable $ 550,000 $ 550,000
quarterly, due June 30, 2001, unsecured, guaranteed by
shareholder
Vehicle notes payable, interest ranging from 1.9% to 14.25%,
maturing June 2001 to June 2004, secured by
vehicles 99,217 131,173
Notes payable on various insurance policies 14,358 19,414
Other unsecured note payables, due on demand 7,512 2,500
------------- -------------
671,087 703,087
Less: current maturities 587,302 613,037
------------- -------------
$ 83,785 $ 90,050
============= =============
The note payable to the bank matured on June 30, 2001; however,
the bank has provided forbearance and the Company continues to
service the debt with interest payments. The Company is working
with the bank to develop a mutually agreeable plan to repay the
debt.
15
iEXALT, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE G SHAREHOLDERS' EQUITY
First Choice was sold to a company owned by a former member of
the Board of Directors in exchange for the assumption of future
liabilities. As a part of the transaction, the Company made a
payment to First Choice of $25,000 during October and issued
25,000 shares of the Company's common stock to an employee for
past services rendered.
The filtering software and related technology was sold to a
former employee of the Company. The Company issued 150,000 shares
of the Company's common stock with piggyback registration rights
to the former employee in exchange for a note receivable of
$84,359, the total of existing liabilities related to the
filtering technology at the closing. The note is to be repaid
upon sale of the stock or six months, whichever occurs first. The
Company is currently working to resolve the outstanding note
receivable collection.
A funding agreement related to the acquisition of a start-up
Internet Company that the Company had signed in April 2000 was
terminated. The Company issued 100,000 shares of the Company's
common stock with piggyback registration rights, retained a 49%
interest in the start-up company, and received a note receivable
for the total funds advanced of $368,112. These assets were fully
impaired at August 31, 2000 due to the low probability of
collecting the note receivable or realizing future income from
the equity interest.
On September 16, 2000, the Company issued 300,000 shares of its
common stock valued at $274,212 to SunState Equity Inc., for
consulting services related to corporate financing activities,
market acceptance of the Company's business and securities,
recommendations relating to specific business operations and
investments, advice relating to financial planning, and advice
regarding future finances involving securities of the Company.
On September 25, 2000, the Company granted a one-year option to
purchase 600,000 shares of the Company's common stock at an
exercise price of $0.02 per share to Consulting Strategies, Inc.
for consulting services provided as part of the Company's
reorganization and restructuring. These options were exercised on
October 10, 2000 for $12,000. The Company incurred non-cash
expense of $681,773 for the fair value of the options under SFAS
No. 123.
On September 29, 2000, the Company acquired a seven percent
indirect interest in Sonora Behavioral Hospital, a 30-plus-bed
psychiatric hospital in Arizona. The Company exchanged 150,000
shares of its common stock for the interest in Integral
Behavioral Health Services, Inc., to the 100% owner and operator
of Sonora.
On October 3, 2000, the Company acquired all the stock of
ListenFirst.com ("ListenFirst"), a Christian music news website
for 60,000 shares of the Company's common stock. If certain
revenue or profit levels are reached over the next three years, a
maximum of 50,000 additional shares will be issued for the
acquisition.
On October 17, 2000, the Company sold 879,906 shares of common
stock to an accredited investor for $560,000.
On October 18, 2000, the assets of Northwest Christian Journal
("NWCJ"), a monthly Christian newspaper in the Seattle area, were
acquired for 37,500 shares of the Company's common stock and cash
proceeds of $7,500. On October 29, 2000, the assets of the
Christian Blue Pages, LLC ("Blue Pages") that produces a
directory of Christian businesses in four editions in Southern
California, were acquired in exchange for 60,000 shares of the
Company's common stock and a percentage of the first year's
advertising revenues.
16
iEXALT, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE G SHAREHOLDERS' EQUITY (continued)
All the outstanding stock of CleanWeb, Inc. ("CleanWeb"), a
national filtered ISP with approximately 6,000 users, was
acquired on October 24, 2000 for 2,313,000 shares of the
Company's common stock.
Effective November 1, 2000, the Company acquired all the assets
of Rapha ("Rapha"), a Christian inpatient mental health
management company. Under the terms of the acquisition agreement,
the Company issued 200,000 shares of common stock at closing.
When contracts noted within the purchase agreement are certified
by Psycare that such contracts have been assigned within 180 days
of closing, then the final valuation will be increased by
$200,000 per contract, not to exceed $1,000,000 in total, and
settled with additional shares of common stock, if necessary, in
October, 2002. The transaction was accounted for as a purchase
and originally goodwill was recorded in the amount of $284,228.
The contracts have been certified and goodwill was recorded in
the amount of an additional $715,772.
On November 21, 2000, in exchange for 30,000 shares of the
Company's common stock, the Company acquired all of the speaker
contracts and speaking engagements related to the Christian
market from Alive Communications ("Alive").
On November 21, 2000, in exchange for 75,000 shares of the
Company's common stock, the Company concluded a strategic
relationship agreement with Shepherd Productions, Inc. in which
two websites were purchased and commitments for future
collaborative efforts were formalized such as the development of
radio and Internet related programs.
On November 29, 2000, in exchange for 75,000 shares of the
Company's common stock, the Company concluded a strategic
relationship agreement with Dawson McAllister in which the
Company's products and services will be marketed through radio
and Internet related communications.
On November 2, 2000 a signing bonus of 50,000 shares of the
Company's common stock was provided per an agreement of
employment and non-competition with the Company's Vice President
- Marketing.
On December 1, 2000, in exchange for 50,000 shares of the
Company's common stock, the Company acquired all of the assets of
Gilmore Marketing.
On December 11, 2000, in exchange for 20,000 shares of the
Company's common stock, the Company concluded a strategic
relationship agreement with Wes Holloman for services related to
the TheParentLink on-line site that offers an online monthly
newsletter for parents that youth ministers can download and
customize for their own use.
On December 15, 2000 the Board of Directors provided that 150,000
shares of common stock be issued to two individuals as
compensation for services provided to the Company and 100,000
shares of common stock be issued to a director for services.
On February 9, 2001, in exchange for 100,000 shares of the
Company's common stock, the Company concluded a strategic
relationship agreement with TeamImpact, Inc. in which TeamImpact
will promote the Company's internet service provider product, and
other related products and services as well as naming iExalt as a
key sponsor of TeamImpact promotional events.
On February 15, 2001, the warrant issued to Robert Horn as
compensation for services performed related to the CleanWeb, Inc.
acquisition was exercised resulting in 10,000 shares of the
Company's stock being issued.
17
iEXALT, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE G SHAREHOLDERS' EQUITY (continued)
On February 23, 2001, the Company provided 93,500 shares of its
common stock to W. Michael Greene as compensation for services
related to the closing of the Woodcrest Capital investment.
On March 1, 2001 the Company completed its acquisition of Global
Christian Network, Inc. ("GCN"), a technology company and the
creators of an online Christian Community based in Reno, Nevada.
The Company issued a total of 1,520,105 of its common shares to
certain GCN shareholders and $11,958 of cash to certain GCN
shareholders in exchange for all issued and outstanding stock of
GCN. The Company also issued 500,000 of its common shares for
full payment of an outstanding promissory note owed by GCN to an
investor. The Company issued 207,000 of its common shares to four
employees of GCN for past services.
On March 1, 2001, the Company completed the acquisition of
Capital Artists Agency, Inc., a full service talent agency
representing a variety of names in contemporary Christian music
headquartered in Nashville, TN. The Company paid 187,500 shares
of its common stock and additional shares may be issued under
certain contingencies to provide for a purchase price of $150,000
at the final closing on March 1, 2002.
On March 28, 2001, the Company provided 4,999,997 restricted
shares of common stock to three shareholders in repayment for the
collateralized shares. The shareholders had loaned a total of
2,883,333 common shares in conjunction with its funding agreement
with Thomson Kernaghan & Co. Limited to the Company to be held as
collateral by Thomson Kernaghan & Co. Limited. Thomson Kernaghan
& Co. Limited retained the collateralized shares and was issued
an additional 250,000 of restricted shares in repayment for the
$600,000 in convertible debentures.
On March 23, 2001, the Company provided 100,000 shares of its
common stock to its Chief Financial Officer, Chris L. Sisk,
related to compensation for services provided during December,
2000.
On April 15, 2001, the company provided 45,000 shares of its
common stock to three employees based on terms of their
employment contracts.
On April 24, 2001, the Company provided 100,000 shares of its
common stock to Roger Dartt as a settlement of the compensation
for services agreement.
On April 24, 2001, the Company provided a total of 222,547 shares
of its common stock to pay for radio airtime related to the
broadcast of iExalt's radio program Life Perspectives. These
radio stations will carry the Life Perspectives program five days
each week and agreed to stock as compensation in lieu of cash.
NOTE H STOCK OPTIONS AND WARRANTS
The board of directors elected to issue stock options at an
exercise price of $0.20 per share to directors for a number of
shares equal to the number of dollars loaned or guaranteed
personally by any such director. Accordingly, options to purchase
an aggregate 800,000 shares of common stock were granted within
the quarter ended February 28, 2001. A non-cash expense of
$13,249 was recorded related to the fair value of the options.
The board of directors elected to issue stock options at an
exercise price of $0.19 per share to directors for serving on the
executive committee. Accordingly, options to purchase an
aggregate 750,000 shares of common stock were granted within the
quarter ended February 28, 2001.
18
iEXALT, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE H STOCK OPTIONS AND WARRANTS (continued)
The board of directors elected to issue stock warrants at an
exercise price of $0.14 per share to Wes Christian for legal
services. Accordingly, warrants to purchase an aggregate 300,000
shares of common stock were granted within the quarter ended
February 28, 2001. A non-cash expense of $37,500 was recorded
related to the fair value of the warrants.
NOTE I INCOME TAXES
The Company has had losses since inception and, therefore, has
not been subject to federal income taxes. As of May 31, 2001 the
Company estimates an accumulated taxable net operating loss
("NOL") carryforward for income tax purposes of approximately
$12.9 million, resulting in a deferred tax asset of $4.5 million.
These carryforwards begin to expire in 2019. Because U.S. tax
laws limit the time during which NOL and tax credit carryforwards
may be applied against future taxable income and tax liabilities,
the Company may not be able to take full advantage of its NOL and
tax credits for federal income tax purposes. A valuation
allowance has been established to fully offset the deferred tax
assets.
NOTE J BUSINESS SEGMENTS
The Company's operations are grouped into three business segments
based on types of service and delivery media: Internet and
technology applications, print publications, and healthcare
services. Internet and technology applications consist of
CleanWeb, iExalt.com (portal), Electronic Publishing,
ChristianSpeakers.com, ListenFirst.com, Global Christian Network,
ChristianArtists.com, Gilmore Marketing, iSermons, the
ParentLink, and Life Perspectives. Print publications consist of
Christian Happenings, Christian Times, and Christian Blue Pages.
Healthcare services consist of the counseling programs of
PremierCare and Rapha.
19
iEXALT, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE J BUSINESS SEGMENTS (continued)
The Company's reportable segment information for the nine months
ended May 31, 2001 and May 31, 2000 is as follows:
Nine Months Ended Internet & Print Healthcare Corporate/ Reportable
May Technology Publications Services Other Segments
------------------------ --------------- -------------- -------------- --------------- ---------------
Revenues:
2001 $ 3,654,146 $ 1,487,804 $ 2,600,266 $ - $ 7,742,216
2000 $ 1,795,413 $ 722,513 $ - $ - $ 2,517,926
Gross Profit:
2001 $ 980,188 $ 436,303 $ 989,433 $ - $ 2,405,924
2000 $ 382,292 $ 266,698 $ - $ - $ 648,990
(Loss)/Income from
Operations:
2001 $ (767,825) $ (153,839) $ 149,106 $ (3,761,101) $ (4,533,659)
2000 $ (947,859) $ (40,493) $ - $ (1,160,192) $ (2,148,544)
Depreciation/Amort:
2001 $ 144,419 $ 67,858 $ 88,078 $ 49,615 $ 349,970
2000 $ 78,269 $ 16,723 $ - $ 16,615 $ 111,607
Assets:
2001 $ 5,324,471 $ 1,378,258 $ 2,376,637 $ 437,096 $ 9,516,462
2000 $ 4,796,582 $ 211,503 $ - $ 1,812,071 $ 6,820,156
The following table reconciles reportable segment gross profit to
the Company's consolidated loss before income taxes for the nine
months ended May 31, 2001 and May 31, 2000:
May 31, May 31,
2001 2000
---------------- ----------------
Gross profit of reportable segments $ 2,405,924 $ 648,990
Other expenses 6,939,583 2,797,534
---------------- ----------------
Loss from operations (4,533,659) (2,148,544)
Other Income/(Expense)
Interest income/other (5,405) 27,325
Interest expense (356,404) (10,015)
---------------- ----------------
Loss before income taxes $ (4,895,468) $ (2,131,234)
================ ================
20
iEXALT, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE J BUSINESS SEGMENTS (continued)
The Company's reportable segment information for the three months
ended May 31, 2001 and May 31, 2000 is as follows:
Three Months Internet & Print Healthcare Corporate/ Reportable
Ended May Technology Publications Services Other Segments
------------------------ --------------- -------------- -------------- --------------- ---------------
Revenues:
2001 $ 1,458,376 $ 535,219 $ 845,478 $ - $ 2,839,073
2000 $ 952,279 $ 270,204 $ - $ - $ 1,222,483
Gross Profit:
2001 $ 365,563 $ 141,541 $ 292,478 $ - $ 799,582
2000 $ 232,273 $ 98,258 $ - $ - $ 330,531
(Loss)/Income from
Operations:
2001 $ (391,810) $ (57,970) $ (5,149) $ (774,639) $ (1,229,568)
2000 $ (386,079) $ (34,819) $ - $ (472,762) $ (893,660)
Depreciation/Amort:
2001 $ 49,214 $ 23,505 $ 35,510 $ 16,752 $ 124,981
2000 $ 46,251 $ 8,423 $ - $ 1,617 $ 56,291
Assets:
2001 $ 5,324,471 $ 1,378,258 $ 2,376,637 $ 437,096 $ 9,516,462
2000 $ 4,796,582 $ 21,503 $ - $ 1,812,071 $ 6,820,156
The following table reconciles reportable segment gross profit to
the Company's consolidated loss before income taxes for the three
months ended May 31, 2001 and May 31, 2000:
May 31, May 31,
2001 2000
---------------- ----------------
Gross profit of reportable segments $ 799,582 $ 330,531
Other expenses 2,029,150 1,224,191
---------------- ----------------
Loss from operations (1,229,568) (893,660)
Other Income/(Expense)
Interest income/other (9,317) 22,073
Interest expense (131,726) (5,651)
---------------- ----------------
Loss before income taxes $ (1,370,611) $ (877,238)
================ ================
21
iEXALT, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE K CONTINGENCIES
A disclosure was included within the Company's 10-KSB annual
report as of August, 31, 2000 that noted the Company had received
written demand from three shareholders who had purchased shares
of common stock and claimed the right to additional shares based
on claimed anti-dilution provisions associated with their
investment. The Company has held several discussions with the
shareholders and expects to resolve the differences in a mutually
beneficial manner. Though not formally resolved as of the date of
this report, Management has estimated that a contingent liability
exists as of the end of the third quarter and accrued $100,000 as
a potential liability for this demand.
NOTE L SUBSEQUENT EVENTS
On June 1, 2001, the company provided 100,000 shares of its
common stock to two employees based on terms of their employment
as compensation.
On June 5, 2001, the Company agreed to issue $100,000 in the form
of a convertible debenture. The debenture bears interest payable
monthly of 22,500 of the company's restricted common shares,
provides for conversion of $25,000 of the principal for common
shares with a conversion price of $0.08, and matures on December
31, 2001.
On June 5, 2001, the Company agreed to issue $150,000 in the form
of a convertible debenture. The debenture bears interest payable
monthly of 33,750 of the company's restricted common shares,
provides for conversion of $150,000 of the principal for common
shares with a conversion price of $0.08, and matures on December
31, 2001.
On June 13, 2001, the Company provided 46,500 shares of its
common stock to Steve Tuggle as partial compensation for services
related to the preparation of the company's federal income tax
filing for the fiscal year 2000.
On June 25, 2001, the Company filed a Form S-8 with the
Securities and Exchange Commission to register 5,000,000 of its
common shares. The company signed three consulting contracts that
each have a term of two years and provide for consulting and
advisory services to iExalt towards developing iExalt's
technology plan to accomplish its strategic and business plans
and integrate the Company's business operations, assistance with
debt consolidation and cash-flow planning and assistance in
negotiations with creditors, for rationalization of subsidiary
structure and divestiture of lines of business, rationalization
of personnel post-divesture consolidation and related
compensation issues for 5,000,000 of its common shares.
22
Part I- Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
The following discussion should be read together with our financial
statements, which are included earlier within this Form 10-QSB. The discussion
contains certain forward-looking statements regarding our expectations for our
business and our capital resources. These expectations are subject to various
uncertainties and risks that may cause actual results to differ significantly
from these forward-looking statements.
General
iExalt, Inc., ("iExalt" or "Company"), was originally incorporated as
Louisiana Northern Gas, Inc. a Nevada corporation on April 23, 1979. The name of
the Company was changed to Sunbelt Exploration, Inc. on December 21, 1979. From
1989 until September 1, 1999, the Company had very limited operations.
On September 1, 1999, the Company consummated a merger (hereinafter
referred to as the "Merger") with iExalt, Inc., a Texas corporation incorporated
on January 7, 1999, ("iExalt-Texas") whereby the shareholders of iExalt-Texas
acquired an approximate 89% ownership interest in the Company. The Merger has
been accounted for as a reverse takeover with the Company being the surviving
legal entity and iExalt-Texas being the acquiror for accounting purposes.
Concurrent with the Merger, the Company changed its name from Sunbelt
Exploration, Inc. to iExalt, Inc.
iExalt blends the positive modern technologies available through the
Internet with traditional media to provide products, services, and Internet
solutions to Christian families, businesses, schools, communities, and
organizations. iExalt currently markets filtered internet service, publishes
Christian electronic books and reference materials, a Christian events magazine,
a Christian business directory, a Christian newspaper, produces a radio program
five nights per week, is affiliated with a youth oriented Christian radio
program, operates a comprehensive contemporary Christian music website, one of
the largest speakers bureaus dedicated to Christian speakers, and an agency that
provides Christian artists. In addition, iExalt sells tickets for Christian
events, manages one of the most popular Christian portal sites, provides access
to on-line web based sermon resources through its web site, and provides,
through the internet, a cutting-edge information-packed, online monthly
newsletter for local youth programs called the ParentLink. iExalt provides
psychiatric counseling services for senior citizens from the implementation and
management of geriatric psychiatric programs for hospitals and other health
facilities. iExalt also operates a Christian inpatient mental health management
company.
iExalt is a company formed to meet the needs of the Christian
community. Our vision is to reflect Jesus Christ by providing the highest
quality Christian products, services and Internet solutions. iExalt's primary
goals are as follows:
o Media: iExalt will acquire, develop and expand our influence
through print, radio, television, and the Internet
o Migration: iExalt will migrate each company in the iExalt family
to a Web related strategy
o Market: iExalt will enter fields where we can reasonably
expect to be the dominant entity
o Ministry: iExalt must ensure that each company within the
family of iExalt companies has a ministry focus, and
shares our commitment to the Christian faith
o Monetary: iExalt must create positive returns for our
shareholders
On September 13, 2000, Donald W. Sapaugh, who had served as President
of iExalt from the Company's inception was elected to the office of Chairman of
The Board and Chief Executive Officer. This action was initiated subsequent to
the resignation of some of the Company officers and Board members. Both the
Board of Directors and the resigning directors and officers stated that the
resignations resulted from philosophical management differences and were
unrelated to operating performance or accounting issues.
Subsequent to those actions, we re-evaluated our business mix and
reviewed economic expectations from the various businesses. This analysis
allowed management to determine which lines of business would best enable iExalt
to achieve the company goals. Decisions were made that resulted in the
disposition of two businesses and the termination of an acquisition effort
related to a third business. We divested all of our interest in First Choice to
the management of that subsidiary for their assumption of future liabilities. We
divested ourselves of our filtering software and related technologies to the
management of that function for their assumption of future liabilities, while
retaining the rights to use the filtering software in our ISP business and to
market it to the Christian community.
23
Our management believed that the effort to take this technology to
other markets would have diverted too much capital and management attention away
from the goals of the company. We terminated the acquisition of a start-up
Internet company with which we had signed a funding agreement in April 2000,
because of our perception of delays in business prospects necessary for it to
reach positive cash flow. The value of the goodwill and intangible assets on our
books as of August 31, 2000, relating to First Choice and the prospective
acquisition was fully impaired and written down to zero within the year then
ended. The carrying value of the filtering and related software was reduced to
the value of future cost savings that we estimate will be realized by having our
own filtering technology rather than having to license it as is generally the
case with other filtered internet service providers. In addition to writing off
the associated assets and paying expenses through the time of disposition, we
have made a supplemental payment of $25,000 to First Choice and have issued
150,000 shares of our common stock to the filtering software acquirer and
100,000 shares to the terminated acquisition target. We acquired a note
receivable from the filtering software acquirer of $84,359 and a note receivable
from the terminated acquisition target of $368,112 Also, as a result of the
funding agreement, we retained a 49% interest in the acquisition target as the
note was not repaid by the agreed upon date of January 1, 2001. These assets
were fully impaired at August 31, 2000 due to the low probability of collecting
the note receivable or realizing future income from the equity interest.
On September 16, 2000, the Company issued 300,000 shares of common
stock to a financial advisor for consulting services.
On September 29, 2000, we acquired an indirect seven percent interest
in Sonora Behavioral Health Hospital, LLC, a 30-plus-bed psychiatric hospital in
Arizona. Management believes this acquisition provides us with an opportunity to
expand our counseling activities. Our interest is held through Integral
Behavioral Health Service, Inc., in which we acquired a seven percent interest
in exchange for 150,000 shares of our common stock.
On October 3, 2000, we acquired all of the stock of ListenFirst.com,
Inc., which operates a music news website, for 60,000 shares of our common
stock. If certain revenue and profit levels are reached over the next three
years, a maximum of 50,000 additional shares of common stock will be issued.
This acquisition provides us with another element to our mix of Internet
websites oriented to the Christian market. Management also believes it provides
potential synergies with radio programs and Christian events.
On October 17, 2000, the Company sold 879,906 shares of common stock to
an accredited investor for $560,000.
On October 18, 2000, we acquired substantially all of the assets of
Northwest Christian Journal for 37,500 shares of our common stock plus $7,500.
Northwest Christian Journal is a monthly Christian newspaper with a circulation
of about 20,000 published in the Seattle area. The newspaper is being renamed
Northwest Christian Times and is now operated by our Christian Times subsidiary.
On October 24, 2000, we acquired all of the outstanding stock of
CleanWeb, Inc., another filtered ISP, for 2,313,000 shares. iExalt is combining
the operations of iExalt.net and CleanWeb and markets the product through
CleanWeb, Inc.
On October 29, 2000, we acquired all of the assets of Christian Blue
Pages, LLC in exchange for 60,000 shares of our common stock and 25%-50% of the
first year's advertising revenues. Christian Blue Pages produces a "yellow
pages" of Christian businesses in four editions in southern California. Its
operations are now conducted through our Christian Times subsidiary.
Effective November 1, 2000, we acquired the assets of Rapha from
PsyCare America, LLC, expanding our counseling services to Christian inpatient
mental health management. Under the terms of the acquisition, we issued 200,000
shares of common stock. If the contracts noted within the purchase agreement are
certified by PsyCare America, LLC that such contracts have been assigned within
180 days of closing then the final valuation will be increased by $200,000 per
contract, not to exceed $1,000,000 in total, and settled with additional shares
of common stock, if necessary, in October 2002. Our chairman, chief executive
officer, and president had been president of Rapha Treatment Centers from 1987
to 1996, prior to its sale to PsyCare America, LLC.
On November 2, 2000, a signing bonus of 50,000 shares of the Company's
common stock was paid per an agreement of employment and non-competition with
the Company's Vice President - Marketing.
24
On November 21, 2000, in exchange for 30,000 shares of our common
stock, we acquired from Alive Communications all of its speaker contracts and
speaking engagements relating to the Christian market. Alive is a leading
provider of speakers to the Christian community. Their business has been
combined with ChristianSpeakers.com.
On November 21, 2000, in exchange for 75,000 shares of the Company's
common stock, the Company concluded a strategic relationship agreement with
Shepherd Productions, Inc. in which two websites were purchased and commitments
for future collaborative efforts were formalized such as the development of
radio and internet related programs.
On November 29, 2000, in exchange for 75,000 shares of the Company's
common stock, the Company concluded a strategic relationship agreement with
Dawson McAllister in which the Company's products and services will be marketed
through radio and internet related communications.
On December 1, 2000, in exchange for 50,000 shares of the Company's
common stock, the Company acquired the assets of Gilmore Marketing Company. The
company provides marketing related products and services such as multi media
development, advertising art work and content, publication brochures, printing
designs, and logos.
On December 11, 2000, in exchange for 20,000 shares of the Company's
common stock, the Company concluded a strategic relationship agreement with Wes
Holloman for services related to the TheParentLink on-line site that offers an
online monthly newsletter for parents that youth ministers can download and
customize for their own use.
On February 9, 2001, in exchange for 100,000 shares of the Company's
common stock, the Company concluded a strategic relationship agreement with Team
Impact, Inc. in which Team Impact will promote the Company's internet service
provider product, and other related products and services as well as naming
iExalt as a key sponsor of Team Impact promotional events.
On March 1, 2001, the Company completed the acquisition of the Global
Christian Network, Inc. (GCN), a technology company and the creators of an
online Christian Community based in Reno, Nevada. GCN will substantially
increase the Company's online presence and add significant technology
improvements. As consideration for the acquisition, the Company issued a total
of 1,520,105 of its common shares to certain GCN shareholders and $11,958 of
cash to certain GCN shareholders in exchange for all issued and outstanding
stock of GCN. The Company issued 500,000 of its common shares for full payment
of an outstanding promissory note owed by GCN to an investor (which upon the
anniversary of closing the value of such shares must equal a minimum of $273,104
or additional shares must be issued to for the difference). The Company issued
207,000 of its common shares to four employees of GCN for past services. The
Company agreed to a contingent payment of $26,033 of cash to selected employees
for past services based on the achievement of certain performance objectives.
Pursuant to the execution of a funding agreement between the companies dated
June 30, 2000, the Company had advanced cash totaling $369,170 for
pre-acquisition expenditures.
On March 1, 2001, the Company completed the acquisition of Capital
Artists Agency, Inc., a full service talent agency representing a variety of
names in contemporary Christian music headquartered in Nashville, TN. The
purchase will substantially increase the Company's presence in the Christian
entertainment service sector. In conjunction with the acquisition, Capital
Artist Agency changed its name to ChristianArtists.com. The Company provided
187,500 shares of its common stock and additional shares may be issued under
certain contingencies to provide for a purchase price of $150,000 at the final
closing on March 1, 2002.
On April 24, 2001, the Company provided a total of 222,547 shares of
its common stock to pay for radio airtime related to the broadcast of iExalt's
radio program Life Perspectives. These radio stations will carry the Life
Perspectives program five days each week receiving stock as compensation.
On May 31, 2001, the Company completed the sale of certain assets to
711.NET, Inc. Assets sold include iExalt's right, title and interest in all of
CleanWeb's current internet access subscribers, selected other assets used in,
related to, and common and necessary to the operations of the business including
the assignment of certain lease obligations and certain tangible/intangible
property (which will be specifically identified within an exhibit being
25
developed by the company and 711.NET, Inc.) CleanWeb will continue to market,
resell, and produce additional business and Internet subscriber sales and
services to iExalt constituency, market influences, and other organizations as a
Reseller of such Internet services of the buyer's ISPBrand Internet access
services through a Strategic Marketing and Reseller Agreement with the Buyer.
iExalt expects to produce additional subscribers for Buyer and has committed to
securing at least 10,000 new subscribers to the Buyer within the initial twelve
months following closing. iExalt will receive royalty amounts on a monthly basis
for all active fully paying subscribers developed through the Marketing
relationship. For subscribers up to 10,000 a royalty of $5.00 per subscriber per
month will be remitted. For subscribers from 10,001 - 20,000 a royalty of $6.00
per subscriber per month will be remitted. For subscribers over 20,000 a royalty
of $7.00 per subscriber per month will be remitted. Should iExalt not equal or
exceed 10,000 subscribers in the initial twelve months after closing then it
will pay the Buyer $50,000 worth of common shares of iExalt not to exceed
100,000 shares. As consideration for the sale, iExalt received a lump sum
payment of $150,000 cash at closing, an agreement for $648,000 such amount to be
paid in monthly payments of not less than $24,000 and payable in not more than
25 months from the date of transition, and an agreement to receive 438,667
shares of Buyer's common stock issued at a price of $1.50 per share for a value
of $658,000. Proceeds of $1,456,000 and a net gain of $25,445 were recorded. An
allocation, based upon estimated market values, of CleanWeb's goodwill
($2,236,680) was developed to determine the amount attributable to the assets
that were sold. As a result of the analysis $1,734,189 of goodwill was
determined to relate to the assets that were sold and goodwill was reduced
accordingly.
iExalt has a limited operating history upon which an evaluation of
business results can be based. The company is involved in a dynamic and rapidly
developing technology and is attempting to incorporate the tremendous power of
the internet to market its products and services while seeking to generate
revenues from its internet portal through advertising and sponsorship. Partnered
with its technology efforts, iExalt is also providing products and services
through print media and healthcare services. The risk and rewards associated
with start-up ventures or early developmental companies like iExalt are often
volatile. iExalt has incurred net losses since its inception and expects to
continue to operate at a loss until its companies generate sufficient revenues
in excess of expenditures. As of May 31, 2001, iExalt has experienced a
cumulative deficit of $12,970,750 comprised of both cash and non cash
components. Management has determined that the Company will emphasize the
monetary goal, and to that end, will execute plans that will increase revenues
while simultaneously seeking acquisitions that add immediate positive value to
earnings during the final months of fiscal year 2001.
Results of Operations
Our operating units are grouped into three business segments based on
types of service and delivery media: (1) Internet & Technology Applications, (2)
Print Publications, and (3) Healthcare Services. Internet & Technology
Applications consist of CleanWeb, iExalt.com (portal), Electronic Publishing,
ChristianSpeakers.com, ListenFirst.com, Global Christian Network,
ChristianArtists.com, Gilmore Marketing, iSermons, the ParentLink, and Life
Perspectives radio. Print Publications consist of Christian Happenings,
Christian Times, and Christian Blue Pages. Healthcare Services consist of the
counseling programs of PremierCare and Rapha.
Net loss for the nine months ended May 31, 2001 totaled $4,895,468
compared to a net loss of $2,131,234 for the same period ended May 31, 2000.
However, this loss includes significant non-cash expenses totaling $2,199,267
related to businesses that we disposed of during September 2000, depreciation,
amortization, common stock shares issued for services, and stock options and
warrants that were issued. Excluding these non-cash expenses, the loss for the
nine months ended May 31, 2001 was $2,696,201. Net loss for the quarter ended
May 31, 2001 totaled $1,370,611 compared to a net loss of $877,238 for the same
quarter in year 2000.
Revenues
Internet & Technology Applications generate revenues from product
sales, speaker fees, artists fees, subscriptions, user fees, and advertising.
Revenues for Print Publications consist of advertising and ticket service fees.
Healthcare Services revenues are earned from hospitals for providing services in
accordance with our contracts. Total revenues were $7,742,216 for the nine
months ended May 31, 2001 compared with $2,517,926 for the nine months ended May
31, 2000. Increases to revenue are primarily attributable to sales recognized
from the businesses and the business assets that have been purchased through the
company's aggressive acquisition program. Revenues by segment for the two
periods are as follows.
26
Nine Months Ended
-------------------------------------------------------------
May 31, May 31,
2001 2000
----------------------------- ----------------------------
REVENUES AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ -------
Internet and Technology Applications $ 3,654,146 47% $ 1,795,413 71%
Print Publications 1,487,804 19% 722,513 29%
Healthcare Services 2,600,266 34% - -%
Total revenues were $2,839,073 for the quarter ended May 31, 2001
compared with $1,222,483 for the quarter ended May 31, 2000. Revenues by segment
for the two periods are as follows.
Three Months Ended
-------------------------------------------------------------
May 31, May 31,
2001 2000
----------------------------- ----------------------------
REVENUES AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ -------
Internet and Technology Applications $ 1,458,376 51% $ 952,279 78%
Print Publications 535,219 19% 270,204 22%
Healthcare Services 845,478 30% - -%
Cost of Sales and Services
Cost of Sales and Services for Internet & Technology Applications
includes royalties, direct labor, payments to speakers and artists, Internet
connectivity, and communications costs. Cost of Sales and Services for Print
Publications consists of printing, shipping, delivery, credit card fees and
direct labor. Healthcare Services Cost of Sales and Services is primarily direct
personnel costs. Increases to costs are primarily attributable to expenditures
incurred from the businesses and the business assets that have been purchased
through the company's aggressive acquisition program. The Cost of Sales and
Services was $5,336,292 for the nine months ended May 31, 2001 compared with
$1,868,936 for the nine months ended May 31, 2000. Cost of Sales and Services by
segment for the two periods is shown below.
Nine Months Ended
-------------------------------------------------------------
May 31, May 31,
2001 2000
----------------------------- ----------------------------
COST OF SALES AND SERVICES AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ -------
Internet and Technology Applications $ 2,673,958 50% $ 1,413,121 76%
Print Publications 1,051,501 20% 455,815 24%
Healthcare Services 1,610,833 30% - -%
The Cost of Sales and Services was $2,039,491 for the quarter ended May
31, 2001 compared with $891,952 for the quarter ended May 31, 2000. Cost of
Sales and Services by segment for the two periods is shown below.
Three Months Ended
----------------------------------------------------------
May 31, May 31,
2001 2000
---------------------------- --------------------------
COST OF SALES AND SERVICES AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ -------
Internet and Technology Applications $ 1,092,813 54% $ 720,006 81%
Print Publications 393,678 19% 171,946 19%
Healthcare Services 553,000 27% - -%
27
Selling, General and Administrative
Selling, General and Administrative costs for Internet & Technology
Applications include primarily personnel and advertising costs. Selling, General
and Administrative costs for Print Publications consist of personnel and
communication services. Healthcare Selling, General and Administrative costs are
primarily personnel, travel and transportation. Corporate overhead costs are
primarily professional fees, costs of issuing stock options and warrants and
costs of issuing shares for services.
Selling, General and Administrative costs were $4,270,260 for the nine
months ended May 31, 2001 compared with $1,389,711 for the nine months ended May
31, 2000. Included in the nine months ended May 31, 2001 are significant
non-cash expenses totaling $1,721,480 related to stock options and warrants that
were issued and common stock shares issued for services provided. Excluding
these non-cash expenses, the total Selling, General and Administrative costs
were $2,548,780 for the nine months ended May 31, 2001. Increases to Selling,
General and Administrative costs are primarily attributable to expenditures
incurred from the businesses and the business assets that have been purchased
through the company's aggressive acquisition program along with the costs of
implementing the company's growth strategy. Selling, General and Administrative
costs by segment for the two periods are shown below.
Nine Months Ended
----------------------------------------------------------
May 31, May 31,
2001 2000
---------------------------- --------------------------
SELLING, GENERAL, AND ADMINISTRATIVE AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ -------
Internet and Technology Applications $ 919,702 22% $ 650,553 47%
Print Publications 234,256 6% 87,707 6%
Healthcare Services 246,500 6% - -%
Corporate Overhead 2,869,802 66% 651,451 47%
Selling, General and Administrative costs were $1,026,163 for the
quarter ended May 31, 2001 compared with $573,710 for the quarter ended May 31,
2000. Selling, General and Administrative costs by segment for the two periods
are shown below.
Three Months Ended
----------------------------------------------------------
May 31, May 31,
2001 2000
---------------------------- --------------------------
SELLING, GENERAL, AND ADMINISTRATIVE AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ -------
Internet and Technology Applications $ 371,835 36% $ 229,176 40%
Print Publications 73,705 7% 36,343 6%
Healthcare Services 80,979 8% - -%
Corporate Overhead 499,644 49% 308,191 54%
Payroll costs were $2,191,536 for the nine months ended May 31, 2001
compared with $1,296,216 for the nine months ended May 31, 2000. Increases to
costs related to payroll are primarily attributable to the additional personnel
added to provide for effective human resources to manage, operate, and
administer the efforts of a rapidly growing and dynamic business. Payroll costs
were $903,451 for the three months ended May 31, 2001 compared with $594,190 for
the three months ended May 31, 2000.
Liquidity and Capital Resources
As of May 31, 2001, iExalt had $1,986,730 in current assets, $5,143,315
in current liabilities and a retained deficit of $12,970,750. We had a net loss
of $4,895,468 for the nine months ended May 31, 2001. Net cash used by operating
activities for the period was $2,760,323.
28
In August 1999, the Company negotiated a $50,000 revolving line of
credit with a bank. The credit line was increased to $150,000 in December 1999.
The line is guaranteed by a shareholder, and matured in late December 2000. The
bank has provided forbearance and the Company continues to service the debt with
monthly interest payments. The Company is working with the bank to develop a
mutually agreeable plan to repay the debt. In October 2000, the
shareholder/guarantor of the line indicated that the guarantee would not be
renewed.
In July 2000, iExalt borrowed $550,000 from a bank under a term loan
that is due on June 30, 2001. A shareholder guaranteed the term loan. The bank
has provided forbearance and the Company continues to service the debt with
interest payments. The Company is working with the bank to develop a mutually
agreeable plan to repay the debt. In October 2000, the shareholder/guarantor of
the debt indicated that the guarantee would not be renewed.
During August 2000, U.S. Sporting Interests LLC and a shareholder
loaned the Company $195,000 and $12,000 respectively under two separate
demand notes each with an 8% interest rate. The $12,000 demand note was
repaid in November 2000. Demand for payment of the $195,000 has been made
through an attorney and the company is currently evaluating this claim.
During September 2000, a shareholder loaned the Company $55,000 under a
promissory note with an 11.75% interest rate due on or before March 16, 2001.
The note was repaid in December 2000.
In connection with the acquisition of NetXpress, iExalt, Inc.
(Texas) assumed a $350,000 note payable to a shareholder of the Company.
Under the terms of this note, the balance becomes payable on demand when net
assets of iExalt, Inc. (Texas) exceed $5,000,000. As of November 2000, the
shareholder made demand for payment through his attorney and the Company is
evaluating this claim.
On September 20, 2000, the Company agreed to issue $500,000 in
convertible debentures to Travin Partners LLLP and TCA Investments, Inc. The
debentures bear interest at prime plus one half percent and were convertible
into common stock at the lesser of $0.17 per share or fifty percent of the
current market price. Principal and interest were due on October 20, 2000 but
the due date was extended to January 15, 2001 and as additional consideration,
the Company issued a five-year warrant to purchase one million shares at $1.13
per share to the holders of the convertible debentures. The debenture holders
subsequently agreed to again extend the due date, convert no more than to
4,950,000 shares, and provide a bridge loan of $180,000 in return for the
adjustment of the conversion price from $0.17 per share to $0.07 per share and
the adjustment of the exercise price of outstanding warrants to $0.21. As of May
31, 2001, both the $500,000 convertible debenture and $180,000 bridge loan are
in default. The Company is working with the debenture holders to determine the
form of repayment.
On September 25, 2000, we granted options to the principals of
Consulting and Strategy International Inc. to purchase 600,000 shares at an
option price of $0.02 as compensation for services since August 2000. The
underlying shares were registered on our Form S-8 filed with the Commission on
October 6, 2000, and we received $12,000 to exercise the options on October 10,
2000.
On October 17, 2000, we sold 879,906 unregistered shares of common
stock to an accredited investor for $560,000.
In November 2000, the Company agreed to terms for issuing convertible
debentures for $1,200,000 and the establishment of an 18-month equity line of
$3,000,000. Subsequently, the terms were modified to issue $600,000 in
convertible debentures and a $3,400,000 equity line. The agreement was with
Thomson Kernaghan & Co. Limited and provided for two year debentures carrying a
10% accumulating interest rate and convertible into common shares. In addition,
the Company had agreed to issue five-year warrants to purchase 1,250,000 shares
of its common stock with an exercise price equal to 110% of the average closing
bid price for the three trading days preceding closing at December 11, 2000. The
Company also agreed to place 2,883,333 shares of its common stock (loaned by
three shareholders) as collateral. Definitive agreements were signed and
effective December 11, 2000. The Company complied with all requirements for
closing including the placement of the shares as collateral but the transaction
did not close under the terms of the agreement and the equity line was not
established. Funds totaling $600,000 were ultimately received and the Company
has reached an agreement with Thomson Kernaghan & Co. Limited regarding
repayment. Thomson Kernaghan & Co. Limited retained the collateralized shares
and was issued an additional 250,000 of restricted shares in repayment for the
$600,000 in convertible debentures. The Company
29
provided 4,999,997 restricted shares of common stock to the three
shareholders in repayment for the collateralized shares.
On February 16, 2001, the Company agreed to issue $180,000 in the
form of a convertible debenture to Ignatius Leonards. The debenture bears no
interest, provides for conversion of $90,000 of the principal for shares with a
conversion price of $0.18, and matured on April 15, 2001. Additional
consideration was issued in the form of warrants for the purchase of up to
1,000,000 shares, the first 818,182 at an exercise price of $0.11 and the
balance of 181,818 shares at an exercise price of $0.18. The Company is working
with the debenture holder to determine the form of repayment.
On February 23, 2001, the Company agreed to a $6,000,000 capital
investment by Woodcrest Capital. The initial funding will be $1,000,000 paid in
installments over nine months and subsequent funding of $5,000,000 subject to
the following loan conditions: (a) the Company is not in default under the Note,
nor any of the Loan Documents (b) The Company is in full compliance with all
applicable and materially mandated SEC filings, rules, and regulations (c) the
Company is cash flow positive, as determined by the Lender (d) the Company is
earnings positive, as determined by the Lender (e) Lender determines, in
Lender's sole discretion, that the Company is still an acceptable credit risk
and (f) Lender determines, in Lender's sole discretion, that the Company is not
a going concern risk. The Company received $200,000 at closing and is able to
receive an additional $100,000 each month thereafter. The loans are to be repaid
within six months of funding and bear interest at 11%. As additional
consideration, the Company issued warrants totaling 10,812,500 shares at an
exercise price of $0.16 related to the first $1,000,000 loaned. The warrants are
vested and have a five-year term. The Company has the option to repay the
principal and interest with cash or shares of common stock which shares will be
valued at the lesser of $0.20 per share or 75% of the average of the stock's
closing price in the previous 5 trading days. If the Company borrows amounts
over the initial loan of $1,000,000 the interest rate and repayment terms are
similar and additional warrants to purchase shares of common stock would be
granted of 5 shares for every $1.00 loaned.
Our working capital requirements and cash flow provided by operating
activities can vary from quarter to quarter, depending on revenues, operating
expenses, capital expenditures and other factors. Working capital is critical to
our on-going business and from inception has been provided primarily through
external investment instead of cash flow from the various businesses. Since
inception, we have experienced negative cash flow from operations and expect to
experience negative cash flow until at least the end of this fiscal year ending
August 31, 2001. With the investment from Woodcrest Capital and expected
improvements with regard to revenue generation, the Company is anticipating that
reliance on other sources for working capital should be diminished. Nonetheless,
it is not expected that the internal source of liquidity will improve until
operating activities provide significant net cash, and until such time, we will
need to rely upon external sources for liquidity.
We have not entered into any arrangements with any other financial
institutions or third parties to provide additional financing, other than as
described above. If we are unable to maintain adequate working capital in the
amounts desired and on acceptable terms, we may be required to reduce the scope
of our presently anticipated activities and we may not be able to assure
continuation as a going concern.
Our financial statements are prepared using principles applicable to a
going concern, which contemplates the realization of assets and liquidation of
liabilities in the normal course of business. We may in the future experience
significant fluctuations in our results of operations. Such fluctuations may
result in volatility in the price and/or value of our common stock. Shortfalls
in revenues may adversely and disproportionately affect our results of
operations because a high percentage of our operating expenses are relatively
fixed. Accordingly, we believe that period-to-period comparisons of results of
operations should not be relied upon as an indication of future results of
operations.
FORWARD LOOKING INFORMATION
This report on Form 10-QSB includes "forward-looking statements"
within the meaning of SECTION 27A of the Securities Act of 1933 and SECTION
21E of the Securities Exchange Act of 1934. These forward-looking statements
may relate to such matters as anticipated financial performance, future
revenues or earnings, business prospects, projected ventures, new products
and services, anticipated market performance and similar matters. The
30
Private Securities Litigation Reform Act of 1995 provides a safe harbor for
forward-looking statements. To comply with the terms of the safe harbor, we
caution readers that a variety of factors could cause our actual results to
differ materially from the anticipated results or other matters expressed in
our forward-looking statements. These risks and uncertainties, many of which
are beyond our control, include (i) the sufficiency of our existing capital
resources and our ability to raise additional capital to fund cash
requirements for future operations, (ii) uncertainties involved in the rate
of growth and acceptance of the Internet, (iii) adoption by the Christian
community of electronic technology for gathering information, facilitating
e-commerce transactions, and providing new products, websites, and services,
(iv) volatility of the stock market, particularly within the technology
sector, and the ability to use our capital stock as a currency for
acquisitions, and (v) general economic conditions. Although we believe that
the expectations reflected in these forward-looking statements are
reasonable, the expectations reflected in these forward-looking statements
may prove to be incorrect.
Part II - Item 2. Changes in Securities
We cannot guarantee any future results, levels of activity, performance
or achievements. Except as required by law, we undertake no obligation to update
any of the forward-looking statements in this Form 10-QSB after the date of this
report.
The following transactions involving unregistered securities occurred
during the three months ended May 31, 2001, in transactions in which the Company
relied on the exemption from registration available under SECTION 4(2) of the
Securities Act of 1933, as amended.
All the outstanding stock of Global Christian Network, Inc. ("GCN"), a
technology company and the creators of an online Christian Community based in
Reno, Nevada was acquired on March 1, 2001.As consideration for the acquisition,
the Company issued a total of 1,520,105 of its common shares to certain GCN
shareholders and $11,958 of cash to certain GCN shareholders in exchange for all
issued and outstanding stock of GCN. The Company issued 500,000 of its common
shares for full payment of an outstanding promissory note owed by GCN to an
investor. The Company issued 207,000 of its common shares to four employees of
GCN for past services.
On March 1, 2001, the Company completed the acquisition of Capital
Artists Agency, Inc., a full service talent agency representing a variety of
names in contemporary Christian music headquartered in Nashville, TN. The
Company provided 187,500 shares of its common stock and additional shares may be
issued under certain contingencies to provide for a purchase price of $150,000
at the final closing on March 1, 2002.
Three shareholders loaned a total of 2,883,333 common shares in
conjunction with its funding agreement with Thomson Kernaghan & Co. Limited to
the Company to be held as collateral by Thomson Kernaghan. On March 28, 2001,
the Company provided 4,999,997 restricted shares of common stock to the three
shareholders in repayment for the collateralized shares. Thomson Kernaghan & Co.
Limited retained the collateralized shares and was issued an additional 250,000
of restricted shares in repayment for the $600,000 in convertible debentures.
On March 23, 2001, the Company provided 100,000 shares of its common
stock to its Chief Financial Officer, Chris L. Sisk, related to compensation for
services provided during December, 2000.
On April 15, 2001, the company provided 45,000 shares of its common
stock to three employees based on terms of their employment contracts.
On April 24, 2001, the Company provided 100,000 shares of its common
stock to Roger Dartt as a settlement of the compensation for services agreement.
On April 24, 2001, the Company provided a total of 222,547 shares of
its common stock to pay for radio airtime related to the broadcast of iExalt's
radio program Life Perspectives. These radio stations will carry the Life
Perspectives program five days each week and agreed to stock as compensation in
lieu of cash.
31
Part II - Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
EXHIBIT DESCRIPTION OF EXHIBIT
---------- ----------------------
3.1 Restated Articles of Incorporation of the Company (filed
as Exhibit 3.1 to the Company's Quarterly Report on Form
10-QSB for the quarter ending May 31, 2000, as filed with
the Commission on April 14, 2000, is incorporated herein
by reference).
3.2 Amended Bylaws of the Company as adopted on April 24, 1979
(filed as Exhibit 3.2 to the Company's Quarterly Report on
Form 10-QSB for the quarter ending May 31, 2000, as filed
with the Commission on April 14, 2000, is incorporated
herein by reference).
4.1 Investor's Rights Agreement, dated October 24, 2000 by and
among iExalt, Inc., certain shareholders of iExalt, and
Ted L. Parker (filed as Exhibit 4.1 to the Company's
Current Report on Form 8-K, as filed with the Commission
on November 8, 2000, is incorporated herein by reference).
4.2 Convertible Debenture issued to TCA Investments, Inc. on
September 20, 2000 (filed as Exhibit 4.4 to the Company's
Annual Report on Form 10-KSB for the year ended August 31,
2000, is incorporated herein by reference).
4.3 Convertible Debenture issued to Travin Partners LLLP on
September 20, 2000 (filed as Exhibit 4.5 to the Company's
Annual Report on Form 10-KSB for the year ended August 31,
2000, is incorporated herein by reference).
4.4 Warrants issued to TCA Investments, Inc. on September 20,
2000 (filed as Exhibit 4.6 to the Company's Annual Report
on Form 10-KSB for the year ended August 31, 2000, is
incorporated herein by reference).
4.5 Warrants issued to Travin Partners LLLP September 20, 2000
(filed as Exhibit 4.7 to the Company's Annual Report on
Form 10-KSB for the year ended August 31, 2000, is
incorporated herein by reference).
4.6 Letter Agreement between iExalt, Inc. and Consulting &
Strategy International LLC dated September 25, 2000 (filed
as Exhibit 4.1 to the Company's Form S-8 as filed with the
Commission on October 6, 2000, is incorporated herein by
reference).
4.7 Registration Rights Agreement dated November 1, 2000
between iExalt, Inc. and PsyCare America LLC. (filed as
Exhibit 4.1 to the Company's Current Report on Form 8-K,
as filed with the Commission on February 23, 2001, is
incorporated herein by reference).
4.8 Convertible Debenture issued to Thomson Kernaghan & Co.,
Ltd. on December 11, 2000 (filed as Exhibit 4.8 to the
Company's Quarterly Report on Form 10-QSB for the quarter
ended February 28, 2001, is incorporated herein by
reference).
4.9 Registration Rights Agreement dated December 11, 2000
between iExalt, Inc. and Thomson Kernaghan & Co., Ltd.
(filed as Exhibit 4.9 to the Company's Quarterly Report on
Form 10-QSB for the quarter ended February 28, 2001, is
incorporated herein by reference).
4.10 Warrant issued to Thomson Kernaghan & Co., Ltd. on
December 11, 2000. (filed as Exhibit 4.10 to the Company's
Quarterly Report on Form 10-QSB for the quarter ended
February 28, 2001, is incorporated herein by reference).
4.11 Convertible Debenture issued to Ignatius Leonards on
February 15, 2001. (filed as Exhibit 4.11 to the Company's
Quarterly Report on Form 10-QSB for the quarter ended
February 28, 2001, is incorporated herein by reference).
32
4.12 Warrant issued to Ignatius Leonards on February 15, 2001.
(filed as Exhibit 4.12 to the Company's Quarterly Report
on Form 10-QSB for the quarter ended February 28, 2001, is
incorporated herein by reference).
4.13 Warrant issued to Woodcrest Capital II Limited Partnership
on February 23, 2001. (filed as Exhibit 4.13 to the
Company's Quarterly Report on Form 10-QSB for the quarter
ended February 28, 2001, is incorporated herein by
reference).
4.14 Warrant issued to Woodcrest Capital, L.L.C. on February
23, 2001. (filed as Exhibit 4.14 to the Company's
Quarterly Report on Form 10-QSB for the quarter ended
February 28, 2001, is incorporated herein by reference).
4.15 Registration Rights Agreement dated February 23, 2001
between iExalt, Inc. and Woodcrest Capital II Limited
Partnership and Woodcrest Capital, L.L.C. (filed as
Exhibit 4.15 to the Company's Quarterly Report on Form
10-QSB for the quarter ended February 28, 2001, is
incorporated herein by reference).
*4.16 Convertible Debenture issued to Don Ballard on June 5, 2001.
*4.17 Convertible Debenture issued to Don Ballard on June 5, 2001.
10.1 Exchange Agreement among the Company, iExalt, Inc.-Texas,
and the Shareholders of iExalt, Inc.-Texas dated August
12, 1999 (filed as Exhibit 1.1 to the Company's Current
Report on Form 8-K, as filed with the Commission on
September 14, 1999, is incorporated herein by reference).
10.2 Stock Purchase Agreement, dated September 27, 2000,
between iExalt, Inc. and iExalt Financial Services, Inc.
(filed as Exhibit 2.1 to the Company's Current Report on
Form 8-K, as filed with the Commission on October 12,
2000, is incorporated herein by reference).
10.3 Stock Exchange Agreement, dated October 24, 2000, between
iExalt, Inc. and Ted L. Parker, the sole shareholder of
Cleanweb, Inc. (filed as Exhibit 2.1 to the Company's
Current Report on Form 8-K, as filed with the Commission
on November 8, 2000, is incorporated herein by reference).
10.4 Employment Agreement dated November 27, 2000 between
iExalt, Inc. and Chris L. Sisk. (filed as Exhibit 10.4 to
the Company's Quarterly Report on Form 10-QSB for the
quarter ended February 28, 2001, is incorporated herein by
reference).
10.5 Amended and Restated Asset Purchase Agreement, dated
February 12, 2001, between iExalt, Inc. and PsyCare
America LLC. (filed as Exhibit 2.1 to the Company's
Current Report on Form 8-K, as filed with the Commission
on February 23, 2001, is incorporated herein by
reference).
10.6 Agreement and Plan of Reorganization, dated November 30,
2000, between iExalt, Inc., GCN Combination Corp. and
Global Christian Network, Inc. and its Principal
Shareholders. (filed as Exhibit 2.1 to the Company's
Current Report on Form 8-K, as filed with the Commission
on March 13, 2001, is incorporated herein by reference).
10.7 Plan of Merger, dated November 30, 2000, between iExalt,
Inc., GCN Combination Corp. and Global Christian Network,
Inc. (filed as Exhibit 2.2 to the Company's Current Report
on Form 8-K, as filed with the Commission on March 13,
2001, is incorporated herein by reference).
10.8 Plan Asset Purchase Agreement, dated December 12, 2000,
between iExalt, Inc. and Barry Wineroth trustee for the
Showcase Financial Services, Inc. Profit Sharing Plan.
(filed as
33
Exhibit 2.3 to the Company's Current Report on Form 8-K,
as filed with the Commission on March 13, 2001, is
incorporated herein by reference).
10.9 Written Consent of Contingent Closing of Global Christian
Network, Inc., iExalt, Inc., David Fritsche, GCN
Combination Corp. & Princ. Shareholders. (filed as Exhibit
2.4 to the Company's Current Report on Form 8-K, as filed
with the Commission on March 13, 2001, is incorporated
herein by reference).
10.10 Demand Note dated November 22, 2000 issued to Hunter M.A.
Carr. (filed as Exhibit 10.10 to the Company's Quarterly
Report on Form 10-QSB for the quarter ended February 28,
2001, is incorporated herein by reference).
10.11 Demand Note dated November 22, 2000 issued to Morris
Chapman. (filed as Exhibit 10.11 to the Company's
Quarterly Report on Form 10-QSB for the quarter ended
February 28, 2001, is incorporated herein by reference).
10.12 Demand Note dated November 22, 2000 issued to Donald
Sapaugh. (filed as Exhibit 10.12 to the Company's
Quarterly Report on Form 10-QSB for the quarter ended
February 28, 2001, is incorporated herein by reference).
10.13 Demand Note dated November 22, 2000 issued to Donald
Sapaugh. (filed as Exhibit 10.13 to the Company's
Quarterly Report on Form 10-QSB for the quarter ended
February 28, 2001, is incorporated herein by reference).
10.14 Loan Agreement dated February 23, 2001 between iExalt,
Inc. and Woodcrest Capital II Limited Partnership. (filed
as Exhibit 10.14 to the Company's Quarterly Report on Form
10-QSB for the quarter ended February 28, 2001, is
incorporated herein by reference).
10.15 Warrant issued to James W. Christian on March 21, 2001.
(filed as Exhibit 10.15 to the Company's Quarterly Report
on Form 10-QSB for the quarter ended February 28, 2001, is
incorporated herein by reference).
*10.16 Stock Purchase Agreement issued to Don Ballard on July 3,
2001.
*10.17 Stock Purchase Agreement issued to Randy James on July 16,
2001.
99.1 Press Release, dated February 26, 2001, related to the
announcement of $6,000,000 of funding from Woodcrest
Capital II LP. (filed as Exhibit 99.1 to the Company's
Current Report on Form 8-K, as filed with the Commission
on March 7, 2001, is incorporated herein by reference).
99.2 Press Release, dated March 12, 2001, related to the
acquisition of Capital Artist Agency, Inc. (filed as
Exhibit 99.2 to the Company's Quarterly Report on Form
10-QSB for the quarter ended February 28, 2001, is
incorporated herein by reference).
99.3 Press release issued by iExalt relating to the acquisition
of Global Christian Network, Inc. (filed as Exhibit 99.1
to the Company's Current Report on Form 8-K, as filed with
the Commission on March 13, 2001, is incorporated herein
by reference).
-------------
* Filed herewith
(b) Reports on Form 8-K and Form 8-K/A filed during the three months ended May
31, 2001:
34
Form 8-K filed on March 6, 2001, reporting the agreement to a
capital investment by Woodcrest Capital II Limited Partnership of
up to $6,000,000.
Form 8-K filed on March 13, 2001, reporting the acquisition by
iExalt of Global Christian Network, Inc.
SIGNATURES
In accordance with the requirements Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
IEXALT, INC.
July 12, 2001 /s/ Donald W. Sapaugh
------------------------------
Donald W. Sapaugh, C.E.O. / Chairman /
President (Principal Executive Officer)
/s/ Russell Ivy
------------------------------
Russell Ivy, Executive Vice President/
Chief Operating Officer
/s/ Chris L. Sisk
------------------------------
Chris L. Sisk, Executive Vice President/CFO
(Primary Financial Officer)
35