U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSBA/1
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2000
or
[ ] 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: 000-26903
booktech.com, inc.
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(Exact name of small business issuer as specified in its charter)
Nevada 88-0409153
- ------------------------------- ----------------------
(State or other jurisdiction of (IRS Employer ID. No.)
incorporation or organization)
42 Cummings Park, Woburn, Massachusetts 01801
---------------------------------------------------
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (781) 933-5400
---------------
(Former name and address, if changed since last report)
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes X No
--- ----
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:
Common Stock 19,146,546 Shares
------------ -----------------
$.00042 Par Value (Outstanding on August 10, 2000)
booktech.com, inc. and Subsidiary
INDEX TO FORM 10-QSBA/1
PART I. FINANCIAL INFORMATION
ITEM 1--Financial Statements:
Condensed Consolidated Statements of Operations for the Three Months Ended June 30, 2000 (As Restated)
and 1999............................................................................................3
Condensed Consolidated Statements of Operations for the Six Months Ended June 30, 2000 (As Restated)
and 1999............................................................................................4
Condensed Consolidated Balance Sheets as of June 30, 2000 (As Restated) and December 31, 1999............5
Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2000 (As Restated)
and 1999.............................................................................................6
Notes to Unaudited Condensed Consolidated Financial Statements...........................................7
ITEM 2--Management's Discussion and Analysis..............................................................................14
PART II. OTHER INFORMATION
ITEM 6--Exhibits and Reports on Form 8-K..................................................................................17
Signatures................................................................................................................18
Exhibit Index.............................................................................................................19
2
PART I. FINANCIAL INFORMATION
Prefatory Statement
to Form 10-QSBA/1
Amending Form 10-QSB for quarter ended June 30, 2000
This interim Report on Form 10-QSBA/1 is being filed as a result of the
Company's (as defined herein) restatement of its Condensed Consolidated
Financial Statements as of and for the three and six months ended June 30, 2000
as discussed in Note 10 to the Unaudited Condensed Consolidated Financial
Statements.
booktech.com, inc. and Subsidiary
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
Three Months Ended June 30,
-----------------------------------
2000 (1) 1999
-------- ----
Net sales....................................................................... $ 168,009 $ 61,926
Cost of sales................................................................... 351,043 273,875
----------- ---------
Gross margin......................................................... (183,034) (211,949)
----------- ---------
Operating expenses:
Selling, marketing and general and administrative (excluding
stock-based compensation costs of $1,413,379 in 2000)........................... 1,573,924 416,866
Stock-based compensation........................................................ 1,413,379 --
----------- ---------
Total operating expenses............................................. 2,987,303 416,866
----------- ---------
Loss from operations............................................................ (3,170,337) (628,815)
----------- ---------
Interest expense to related parties............................................. -- 50,514
Other interest expense.......................................................... 14,497 6,420
----------- ---------
Total interest expense............................................... 14,497 56,934
----------- ---------
Interest income................................................................. 26,679 102
----------- ---------
Net loss........................................................................ (3,158,155) (685,647)
Accrued dividends on preferred stock............................................ 64,771 --
----------- ---------
Net loss attributable to common stockholders.................................... $(3,222,926) $(685,647)
=========== =========
Net loss attributable to common stockholders per share - basic
and diluted..................................................................... $(0.17) $(0.11)
=========== =========
Shares used in computing basic and diluted net loss per share................... 18,739,933 6,016,552
=========== =========
(1) Restated. See Note 10.
See Notes to Unaudited Condensed Consolidated Financial Statements.
3
booktech.com, inc. and Subsidiary
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
Six Months Ended June 30,
-----------------------------------
2000 (1) 1999
-------- ----
Net sales....................................................................... $ 492,743 $ 421,886
Cost of sales................................................................... 834,415 696,021
----------- -----------
Gross margin......................................................... (341,672) (274,135)
----------- -----------
Operating expenses:
Selling, marketing and general and administrative (excluding
stock-based compensation costs of $1,660,793 in 2000)........................... 2,534,760 709,715
Stock-based compensation........................................................ 1,660,793 --
----------- -----------
Total operating expenses............................................. 4,195,553 709,715
----------- -----------
Loss from operations............................................................ (4,537,225) (983,850)
----------- -----------
Interest expense to related parties............................................. 57,858 90,683
Other interest expense.......................................................... 40,351 7,630
----------- -----------
Total interest expense............................................... 98,209 98,313
----------- -----------
Interest income................................................................. 26,679 102
----------- -----------
Net loss........................................................................ (4,608,755) (1,082,061)
Accrued dividends on preferred stock............................................ 64,771 --
----------- -----------
Net loss attributable to common stockholders.................................... $(4,673,526) $(1,082,061)
=========== ===========
Net loss attributable to common stockholders per share - basic
and diluted..................................................................... $(0.35) $(0.18)
=========== ===========
Shares used in computing basic and diluted net loss per share................... 13,277,210 6,016,552
=========== ===========
(1) Restated. See Note 10.
See Notes to Unaudited Condensed Consolidated Financial Statements.
4
booktech.com, inc. and Subsidiary
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
June 30, 2000 (1) December 31, 1999
----------------- -----------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents....................................................... $ 1,214,678 $ 82,753
Accounts receivable, less allowance for returns of $30,100 in
2000 and $91,700 in 1999........................................................ 137,873 228,466
Other current assets............................................................ 115,707 --
------------ ----------
Total current assets............................................................ 1,468,258 311,219
----------- -----------
PROPERTY AND EQUIPMENT, at cost................................................. 3,363,923 808,298
Accumulated depreciation........................................................ (157,103) (73,928)
------------ ----------
Property and equipment, net..................................................... 3,206,820 734,370
----------- -----------
ACQUIRED TECHNOLOGY AND PATENT APPLICATION...................................... 993,103 --
DEPOSITS AND OTHER ASSETS....................................................... 312,500 25,200
------------ ----------
TOTAL........................................................................... $ 5,980,681 $1,070,789
============ ==========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
CURRENT LIABILITIES:
Current portion of long-term debt............................................... $ 456,443 $ 437,838
Current portion of loans from related parties................................... -- 2,953,759
Accounts payable................................................................ 1,149,486 1,282,385
Accrued payroll and other expense............................................... 1,204,841 410,817
Accrued interest expense to related parties..................................... -- 354,130
------------ ----------
Total current liabilities....................................................... 2,810,770 5,438,929
----------- -----------
LONG-TERM DEBT.................................................................. 454,952 591,824
----------- -----------
DEFERRED LEASE OBLIGATION....................................................... 123,750 146,250
----------- -----------
COMMITMENTS AND CONTINGENCIES (NOTE 6)
STOCKHOLDERS' EQUITY (DEFICIENCY):
Convertible preferred stock, Series A........................................... 897 --
Convertible preferred stock, Series B........................................... 462 --
Common stock.................................................................... 7,941 760,000
Additional paid-in capital...................................................... 12,951,296 --
Deferred compensation........................................................... (81,918) --
Treasury stock.................................................................. -- (187,500)
Accumulated deficit............................................................. (10,287,469) (5,678,714)
----------- ----------
Total stockholders' equity (deficiency)......................................... 2,591,209 (5,106,214)
----------- ----------
TOTAL........................................................................... $ 5,980,681 $1,070,789
=========== ==========
(1) Restated. See Note 10.
See Notes to Unaudited Condensed Consolidated Financial Statements.
5
booktech.com, inc. and Subsidiary
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Six Months Ended June 30,
----------------------------------
2000 (1) 1999
-------- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss........................................................................ $ (4,608,755) $(1,082,061)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization................................................... 83,175 23,478
Stock-based compensation........................................................ 1,660,793 --
Related party interest expense satisfied by issuing Convertible
Preferred Stock, Series A....................................................... 56,839 --
Change in assets and liabilities:
Accounts receivable, net........................................................ 90,593 21,588
Other current assets............................................................ (115,707) (11,369)
Deposits and other assets....................................................... (287,300) (1,200)
Accounts payable................................................................ (603,431) (72,675)
Accrued payroll and other expense............................................... 2,919 19,441
Accrued expenses to related parties............................................. (9,798) 89,394
Deferred lease obligation....................................................... (22,500) 54,000
------------ -----------
Net cash used in operating activities........................... (3,753,172) (959,404)
------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for property and equipment......................................... (459,526) (10,836)
Payment of merger costs......................................................... (588,426) --
------------ -----------
Net cash used in investing activities............................... (1,047,952) (10,836)
------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from loans from related parties........................................ 317,951 1,180,000
Repayments of loans to related parties.......................................... (456,710) (7,000)
Proceeds from other debt financings............................................. 1,500,000 --
Repayments of other debt financings............................................. (428,192) (162,945)
Net proceeds from issuance of common stock...................................... 5,000,000 --
------------ -----------
Net cash provided from financing activities..................... 5,933,049 1,010,055
------------ -----------
NET INCREASE IN CASH AND EQUIVALENTS............................................ 1,131,925 39,815
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.................................. 82,753 16,413
------------ -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD........................................ $ 1,214,678 $ 56,228
============ ===========
(1) Restated. See Note 10.
See Notes to Unaudited Condensed Consolidated Financial Statements.
6
booktech.com, inc. and Subsidiary
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF BUSINESS AND BASIS OF PRESENTATION
Nature of Business - booktech.com, inc., a Nevada corporation (the
"Company"), is a digital and on-demand publisher of custom textbooks, also
known as coursepacks, which are distributed primarily through college
bookstores. The Company is organized as one segment reporting to the chief
operating decision-maker.
Basis of Presentation - The accompanying financial statements are unaudited
and have been prepared assuming that the Company will continue as a going
concern. As shown in the financial statements, the Company incurred net
losses of $4,608,755 and $1,082,061 in the six-month periods ended June 30,
2000 and 1999, respectively. Prior to the Merger, as defined in Note 2, the
Company's operating losses and working capital needs were funded principally
by loans from its shareholders. The Company expects that it will continue to
incur losses as it continues its activities pursuant to the current business
plan, particularly those related to sales, marketing and content
development. These factors, among other things, raise substantial doubt
about the Company's ability to continue as a going concern for a reasonable
period of time.
The financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts or the amounts
and classification of liabilities that might be necessary should the Company
be unable to continue as a going concern. As described in Note 4, the
Company was in default on certain provisions of its lending agreements prior
to the Merger. The Company's continuation as a going concern is dependent
upon its ability to generate sufficient cash flow through increased net
sales to meet its obligations on a timely basis, comply with the terms and
covenants of its financing agreements, obtain additional financing or
refinancing, and ultimately to attain profitable operations. Management is
continuing its efforts to increase net sales and obtain additional funds so
that the Company can meet its obligations and sustain operations.
2. MERGER TRANSACTION
On March 31, 2000, EG Acquisitions Corporation, a Nevada corporation, the
wholly owned sole subsidiary of the Company, merged (the "Merger") with and
into booktech.com, inc., a Massachusetts corporation ("booktechMass"),
pursuant to an Agreement and Plan of Merger dated March 31, 2000 (the
"Merger Agreement"). Following the Merger, the business to be conducted by
the Company was the business conducted by booktechMass prior to the Merger.
In conjunction with the Merger, the Company which was formerly known as
Ebony & Gold Ventures, Inc. changed its name to "booktech.com, inc."
Pursuant to the terms of the Merger Agreement, the Merger involved the
following transactions: (a) the Company issued 7,520,690 shares of its
authorized but unissued common stock (the "Common Stock") and 1,100,000
shares of its authorized but unissued Series B Preferred Stock to the former
shareholders of booktechMass in exchange for the 25,000 shares of common
stock of booktechMass issued and outstanding as of the effective time of the
Merger; (b) certain debt and accrued interest totaling $3,216,171 owed by
booktechMass to related parties was converted into 2,135,301 shares of the
Company's Series A Preferred Stock; (c) the Company sold to certain
investors (the "Purchasers") 4,666,667 shares of its Common Stock and
warrants to purchase 833,333 shares of common stock in a private placement
for an aggregate purchase price of $7,000,000, including conversion of the
notes payable, advances and accrued interest owed to Verus Investments
Holdings, Inc.. (at the time of the Merger, the Company received net cash
proceeds of $5,000,000 from this transaction); and (d) the Company purchased
technology and a related patent application from Virtuosity Press LLC, a
Delaware Limited Liability Company ("Virtuosity"), in exchange for 1,379,310
shares of its Common Stock.
7
At the time of the Merger, the common and preferred shares issued to the
former stockholders of booktechMass represented a majority of the Company's
voting stock, enabling them to retain voting and operating control of the
Company. The Merger has been accounted for as a capital transaction and was
treated as a reverse acquisition as the shareholders of booktechMass
received a larger portion of the voting interests in the combined
enterprise. Estimated costs of the Merger were $588,426, which have been
reflected as a reduction to additional paid-in capital.
Under the terms of the Merger Agreement, the Company is required to use its
best efforts to file a registration statement to register 5,111,667 shares
of common stock by July 31, 2000 and an additional registration statement to
register 1,928,823 shares of common stock within six (6) months of the
effective date of the first registration statement or within 30 days of the
exercise, in whole or in part, by Verus Investments Holdings Inc. of its
warrant to purchase 833,333 shares of common stock. The Company expects to
file the initial registration statement for the shares of common stock
during the third quarter of 2000.
Since the accounting applied differs from the legal form of the Merger, the
Company's financial information for periods prior to the Merger represent
the financial results of booktechMass.
Pro Forma Disclosure - The following table presents the unaudited pro forma
results of operations for the six months ended June 30, 2000 and 1999
assuming the merger had occurred on January 1, 1999, the beginning of the
earliest period presented in the accompanying Condensed Consolidated
Statements of Operations. These pro forma results have been prepared for
comparative purposes only and are not necessarily indicative of what would
have occurred had the Merger occurred at that date or of results which may
occur in the future.
Six Months Ended June 30,
-----------------------------------
2000 1999
---- ----
Net sales............................................................. $ 492,743 $ 421,886
Loss from operations.................................................. (4,537,225) (997,075)
Net loss.............................................................. (4,552,276) (1,006,969)
Net loss attributable to common stockholders.......................... (4,681,818) (1,135,799)
Net loss attributable to common stockholders per
share - basic and diluted......................................... $(0.25) $(.07)
Shares used in computing net loss per common share.................... 18,739,507 17,062,529
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Condensed Consolidated Financial Statements (Unaudited) - The Condensed
Consolidated Financial Statements furnished herein are unaudited and in the
opinion of management, reflect all adjustments which are of a normal
recurring nature, necessary to fairly state the Company's financial
position, cash flows and the results of operations for the periods presented
and have been prepared on a basis substantially consistent with the audited
financial statements as of and for the five-month period ended December 31,
1999. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with accounting principles
generally accepted in the United States of America for annual periods have
been condensed or omitted. Accordingly, these unaudited Condensed
Consolidated Financial Statements should be read in conjunction with the
Company's annual financial statements included in a Form 8-K filed with the
Securities and Exchange Commission on April 4, 2000. The operating results
for the interim periods are not necessarily indicative of the expected
performance for the entire year.
Concentration of Credit Risk and Major Customer Information - Financial
instruments that potentially expose the Company to concentrations of credit
risk include cash and accounts receivable. The Company performs ongoing
credit evaluations of its customers and does not require collateral. In
addition, the Company maintains allowances for potential credit losses, and
such losses, in the aggregate, have not exceeded management expectations.
One customer accounted for 52% and 40% of net sales for the three months
ended June 30, 2000 and 1999, respectively, and 50% and 58% of net sales for
the six months ended June 30, 2000
8
and 1999, respectively. This same customer accounted for 47% and 77% of the
accounts receivable at June 30, 2000 and December 31, 1999, respectively.
Property and Equipment - Property and equipment are recorded at cost.
Expenditures for maintenance and repairs are charged to expense as incurred.
Depreciation and amortization are provided using the straight-line method
over the estimated useful lives of the various classes of assets or lease
terms, whichever is shorter. Estimated ranges of useful lives are as
follows:
Years
-----
Furniture and fixtures 7
Office and computer equipment 3-5
Leasehold improvements 1-5
Computer software 3
Property and equipment consisted of the following at:
June 30, 2000 December 31, 1999
------------- -----------------
Computer software.................................................. $1,793,299 $314,491
Office and computer equipment...................................... 1,226,381 263,241
Furniture and fixtures............................................. 196,364 149,934
Leasehold improvements............................................. 80,963 80,632
Vehicles........................................................... 66,916 --
---------- --------
Total property and equipment.......................... 3,363,923 808,298
Less accumulated depreciation and amortization .... (157,103) (73,928)
---------- --------
Property and equipment, net............................. $3,206,820 $734,370
========== ========
The Company had $1,573,315 of computer software and related installation
costs at June 30, 2000 which are included in property and equipment in the
accompanying balance sheet, but were not yet placed in service.
Accordingly, no depreciation or amortization was recorded on these assets
during the three and six months ended June 30, 2000. The Company has
adopted Statement of Position ("SOP") No. 98-1 which requires computer
software costs associated with internal use software to be charged to
operations as incurred until certain capitalization criteria are met.
Stock-Based Compensation - The Company accounts for stock options granted to
employees and non-employee directors using the intrinsic value method in
accordance with Accounting Principles Board Opinion ("APB") No. 25,
"Accounting for Stock Issued to Employees", and complies with the disclosure
provisions of Statement of Financial Accounting Standards ("SFAS") No. 123,
"Accounting for Stock-Based Compensation."
Equity instruments issued to non-employees are accounted for in accordance
with the provisions of SFAS No. 123 and Emerging Issues Task Force ("EITF")
Issue No. 96-18, "Accounting for Equity Instruments That Are Issued To Other
Than Employees for Acquiring, or in Conjunction with Selling, Goods or
Services". All transactions in which goods or services are the consideration
received for the issuance of equity instruments are accounted for based on
the fair value of the consideration received or the fair value of the equity
instrument issued, whichever is more reliably measurable. The measurement
date of the fair value of the equity instrument issued is the earlier of the
date on which the counterparty's performance is complete or the date on
which it is probable that performance will occur.
Comprehensive Income - Comprehensive loss was equal to net loss for each
period presented.
Earnings Per Share - The Company computes basic and diluted earnings (loss)
per share in accordance with SFAS No. 128, "Earnings Per Share". Basic
earnings per common share is computed by dividing the net loss attributable
to common stockholders by the weighted average number of common shares
outstanding during the
9
period. Dividends on the Series A Preferred Stock, which are payable in
additional shares of common stock, have been accrued at the rate of 8% per
annum in determining the net loss attributable to common stockholders. Such
accrued dividends are reported within additional paid-in capital.
Basic and diluted loss per common share are the same for all periods
presented, as potentially dilutive stock options, common stock warrants,
common stock issuable upon the conversion of the convertible preferred stock
and unvested restricted stock of 4,484,652 in 2000 and 344,828 in 1999 have
been excluded from the calculation as their effect is antidilutive.
Future Adoption of Accounting Pronouncements - In June 1998, the Financial
Accounting Standards Board ("FASB") issued SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities." SFAS No. 133 establishes
accounting and reporting standards for derivative instruments, including
certain derivative instruments embedded in other contracts, and for hedging
activities. The provisions of SFAS No. 133 are effective for periods
beginning after June 15, 2000. The Company is currently evaluating, and has
not determined, the effect, if any, SFAS No. 133 will have on the Company's
financial position and its results of operations. The Company will adopt
this accounting standard on January 1, 2001, as required.
On December 3, 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements." SAB No. 101 provides guidance on the recognition, presentation
and disclosure of revenues in financial statements filed with the Securities
and Exchange Commission. The Company is currently evaluating, and has not
determined, the effect, if any, SAB No. 101 will have on the Company's
financial position and its results of operations. The Company will adopt
this accounting standard during the fourth quarter of 2000, as required.
Reclassifications - Certain reclassifications have been made to the 1999
amounts to conform to the 2000 presentation.
Supplemental Cash Flow Information - The following table sets forth certain
supplemental cash flow information for the six-month periods ended June 30,
2000 and 1999:
2000 1999
---- ----
Cash paid during the period for interest............................................... $ 10,829 $ 22,660
Non-Cash Financing Activities
Conversion of related party loans and accrued interest into preferred stock.......... $3,216,171 $ --
Acquisition of technology and related patent application with the issuance of
common stock..................................................................... 993,103 --
Conversion of Verus Investments Holdings, Inc. notes payable, advances and related
accrued interest into common stock............................................... 2,024,537 --
Equipment acquired through the issuance of debt and trade credit..................... 2,096,099 --
Liabilities to the former officers of Ebony & Gold Ventures, Inc. forgiven in
conjunction with the reverse merger............................................... 17,564 --
Conversion of accounts payable into long-term debt................................... -- 406,514
4. LONG-TERM DEBT
Long-term debt consisted of the following at:
June 30, December 31,
2000 1999
---- ----
Computer equipment promissory notes............................................. $790,750 $ --
Capital lease obligations....................................................... 101,470 108,051
Ford Motor Credit Company....................................................... 19,175 --
Purchasers notes payable........................................................ -- 500,000
Equipment supplier promissory note.............................................. -- 231,254
Advance under line of credit.................................................... -- 95,539
10
Small Business Administration loans............................................. -- 94,818
911,395 1,029,662
Less current portion .................................................... (456,443) (437,838)
-------- ---------
Long-term debt ............................................................... $454,952 $ 591,824
======== =========
Computer Equipment Promissory Notes - During the three months ended June 30,
2000, the Company financed the purchase of $790,750 in computer hardware and
software through the issuance of promissory notes with a final maturity of
June 2002. Monthly payments are $36,906, which include interest at 9.4% per
annum. The promissory notes are collateralized by all the assets purchased
by the notes.
Capital lease obligations - The Company leases certain equipment under
noncancelable leases expiring at various dates through 2004. Of the total
future minimum lease payments, approximately $23,730 is due within the next
twelve (12) months and included within current long-term debt in the
accompanying condensed consolidated June 30, 2000 balance sheet.
Ford Motor Credit Company - On March 2, 2000, the Company financed the
purchase of a motor vehicle. The loan is due in 48 monthly installments of
$435, including interest at an annual rate of 0.9%, with a final maturity on
April 15, 2004.
Purchasers Notes Payable - During 1999, the Company obtained two promissory
notes from Verus Investments Holdings, Inc. ("Verus") in the amounts of
$250,000 each, bearing an annual interest rate of 8%. The notes payable,
advances and accrued interest were converted into the Company's common stock
on March 31, 2000 in conjunction with the Merger.
Equipment Supplier Promissory Note - On April 15, 1999, the Company
converted $406,514 of amounts due to an equipment supplier into a promissory
note due December 15, 1999. At December 31, 1999, the Company was in default
of the promissory note. Accordingly, the note has been classified and
included within current long-term debt in the accompanying condensed
consolidated balance sheet at December 31, 1999. In April 2000, the Company
repaid the note, including the related accrued interest, with the proceeds
from the sale of common stock issued in conjunction with the Merger.
Line of Credit - The Company had a line of credit which allowed borrowings
up to $100,000. In April 2000, the Company repaid the line in full,
including the related accrued interest, with the proceeds from the sale of
the common stock issued in conjunction with the Merger, and the line of
credit was cancelled.
Small Business Administration Loans - In April 2000, the Company repaid the
loans in full, including the related accrued interest, with the proceeds
from the sale of common stock issued in conjunction with the Merger.
5. STOCK-BASED COMPENSATION
During the six months ended June 30, 2000, the Company granted options to
purchase 1,429,738 shares of its common stock at a weighted-average exercise
price of $.66 per share to its employees. In addition, in connection with
the Merger on March 31, 2000, the Company adjusted the number and exercise
price of certain unexercised options. These adjustments were accounted for
in accordance with EITF No. 90-9, "Changes to Fixed Employee Stock Option
Plans as a Result of Equity Restructuring". Certain options granted during
the six months ended June 30, 2000 include a cashless exercise feature
allowing the grantee to exercise the option and to utilize the appreciation
in the value of the common stock as payment for the shares received. The
Company also granted 341,581 restricted stock awards to certain employees
during the six months ended June 30, 2000 and recorded compensation expense
of $112,200.
As discussed in Note 3, the Company accounts for stock options granted to
employees and non-employee directors in accordance with APB No. 25. Under
APB No. 25, compensation expense is recorded when fixed award options are
granted with exercise prices at less than the fair value of the common stock
on the date of grant. Options with a cashless exercise feature are accounted
for as variable award options. Variable award options are subject to
remeasurement criteria and could result in additional future compensation
expense until such time as the options are either exercised, forfeited or
expire without exercise.
The Company recorded stock-based compensation expense of $1,413,379 and
$1,660,793 during the three and six months ended June 30, 2000,
respectively, relating to the outstanding options and restricted stock
awards. Additional stock-based compensation expense will be recorded in the
future as the deferred compensation of $81,918 at June 30, 2000 is amortized
to expense, and as the variable award options are remeasured at each future
reporting date.
11
6. COMMITMENTS AND CONTINGENCIES
In connection with the Merger (Note 2), the Company entered into a
consulting arrangement with Verus International, Ltd. The consulting
agreement requires payments of $15,000 per month for a period of two years.
The consulting agreement is terminable by either party for cause with five
(5) days written notice. Additionally, Verus International, Ltd. may
terminate the agreement without cause upon five (5) days written notice.
Amounts due under this agreement at June 30, 2000 totaled $45,000 and are
included in accounts payable in the accompanying condensed consolidated
balance sheet.
Services Agreement - In March 1999, the Company entered into an agreement
with Xerox Corporation ("Xerox") to provide reproduction services. The term
of the agreement is 60 months and initially included base payment increases
over the term of the agreement. For financial statement reporting purposes,
the Company has recognized the aggregate expenses associated with the
agreement using the straight-line method resulting in deferred credits of
approximately $168,500 and $180,000 being reported in the accompanying
respective June 30, 2000 and December 31, 1999 condensed consolidated
balance sheets. The agreement was renegotiated in May 2000 and the monthly
payment was set at $74,523 for the remaining term of the agreement. An
executive of Xerox is a member of the Company's Board of Directors.
7. TRANSACTIONS WITH RELATED PARTIES
Stockholders' Notes Payable - The Company has been financed principally by
loans from shareholders. In conjunction with the Merger, a total of
$2,815,000 in loans from shareholders plus the related accrued interest of
$401,171 (including $57,858 and $210,734 expensed during the years ended
December 31, 2000 and 1999, respectively) were converted into 2,135,301
shares of Series A preferred stock.
During the three months ended March 31, 2000, the Company repaid $434 in
principal on loans from shareholders. On March 31, 2000, the Company
received $317,951 in advances from a shareholder.
On March 31, 2000, the Company entered into a consulting arrangement with
Verus International, Ltd., an affiliate of a Company shareholder (Note 6).
On March 31, 2000, pursuant to the terms of the Merger Agreement, the
Company sold to certain investors 4,666,667 shares of its common stock and
warrants to purchase 833,333 shares of its common stock for an aggregate
purchase price of $7,000,000 including conversion of the notes payable,
advances and accrued interest owed to Verus Investments Holdings, Inc.
In April 2000, the Company repaid $466,074 in principal and accrued interest
on loans from shareholders, including the $317,951 received on March 31,
2000, using a portion of the proceeds from the sale of the common stock in
conjunction with the Merger.
One member of the Company's Board of Directors serves in an executive
capacity with the holder of the equipment supplier promissory note.
8. PREFERRED STOCK
The Company has 5 million shares of authorized preferred stock. In
connection with the Merger, the Company issued 2,135,301 shares of Series A
Preferred Stock, $.00042 par value (the "Series A Preferred Stock") and
1,100,000 shares of Series B Preferred Stock, $.00042 par value (the "Series
B Preferred Stock").
The Series A Preferred Stock carries a dividend at the rate of 8% per annum,
payable on January 1 of each year in additional shares of common stock. The
number of shares of common stock issued is determined based upon the fair
market value of the Company's common stock during the twenty-five (25) days
prior to the dividend payment
12
date. In the event of any liquidation, dissolution or winding up of the
Company, either voluntary or involuntary, the holders of the Series A
Preferred Stock have a liquidation preference over any distribution to
securities junior to the Series A Preferred Stock equal to $1.50 per share
plus any accrued but unpaid dividends. The Series A liquidation preference
approximated $3.3 million at June 30, 2000. The Series A Preferred Stock is
convertible into common stock at the option of the holder at a ratio of
three and one-half (3 1/2) shares of Series A Preferred Stock for each
common share to be issued. The conversion rate is subject to adjustment for
stock splits, stock dividends or other similar events. The holders of the
Series A Preferred Stock vote together with the holders of the common stock.
Each set of three and one half (3 1/2) shares of Series A Preferred Stock
has one (1) vote.
The Series B Preferred Stock, which is junior to the Series A Preferred
Stock, carries no dividend and is convertible into common stock at the
option of the holder at a ratio one (1) share of Series B Preferred Stock
for each common share to be issued. The conversion rate is subject to
adjustment for stock splits, stock dividends or other similar events. In the
event of any liquidation, dissolution or winding up of the Company, either
voluntary or involuntary, the holders of the Series B have a liquidation
preference over any distribution to any securities junior to the Series B
and to the Company's common stock equal to the original issue price, as
determined by the Company's Board of Directors. The holders of the Series B
Preferred Stock vote together with the holders of the common stock. Each
share of Series B Preferred Stock has six (6) votes.
9. SUBSEQUENT EVENT
On August 2, 2000, the Company entered into an Asset Purchase Agreement (the
"Agreement") with Copytron, an unrelated entity, to purchase a customer list
for a maximum aggregate purchase price of up to $1,300,000. The terms of the
agreement required aggregate cash payments of $300,000, $100,000 at closing,
and $200,000 payable in three installments with the last $100,000 due on
October 9, 2000, and the $1.0 million balance of the purchase price to be
paid through the issuance of three tranches of our common stock. The Company
paid $100,000 at closing. On August 2, 2000, the Company issued 238,298
shares of common stock with an aggregate value of $700,000 as payment of the
first tranche under the Agreement. On the one year anniversary of the
Agreement, and in the event that the fair value of the Company's common
stock is less than the fair market value, as defined in the Agreement, the
Company is obligated to pay, either in cash or in common stock at the
discretion of the Company, an amount, which when combined with the value of
the original issuance of the Company common stock has an aggregate value of
$700,000. The Company intends to satisfy this requirement by issuing
additional shares of common stock. In addition, the Company will issue
additional shares of common stock on August 2, 2001 and 2002, if annual
sales from customers previously served by Copytron exceed $700,000, with
each issuance having a then current fair market value of up to $150,000.
In connection with the asset purchase agreement, the Company entered into a
two-year consulting agreement (extendable for a third year at the option of
the Company) with a principal of the selling entity. The agreement provides
for annual cash compensation of $50,000.
10. RESTATEMENT
Subsequent to the issuance of the Company's Condensed Consolidated Financial
Statements as of and for the three and six month periods ended June 30,
2000, the Company's management determined that (1) the stock-based
compensation expense for the three and six months ended June 30, 2000, (2)
the number of common shares outstanding at June 30, 2000, (3) the
weighted-average number of common shares outstanding for the three and six
months ended June 30, 2000 were incorrect due to certain equity awards not
being considered in the preparation of the Company's interim financial
statements, and (4) the value assigned to the acquired technology and patent
application was in excess of the consideration given. As a result, the
accompanying Condensed Consolidated Financial Statements as of and for the
three and six month periods ended June 30, 2000 have been restated from the
amounts previously reported to reflect the appropriate accounting and
reporting of the aforementioned items. The significant effects of the
restatement are as follows:
As
Previously
Reported As Restated
----------- -----------
At June 30, 2000:
Acquired technology and patent application $ 2,068,965 $ 993,103
Common stock 7,799 7,941
Additional paid-in capital 12,714,581 12,951,297
Deferred compensation -- (81,918)
Accumulated deficit (9,056,668) (10,287,469)
Number of common shares outstanding 18,568,667 18,908,248
For the three months ended June 30, 2000:
Stock-based compensation expense $ 12,750 $ 1,413,379
Loss from operations (1,769,708) (3,170,337)
Net loss (1,757,526) (3,158,155)
Net loss attributable to common stockholders (1,822,297) (3,222,926)
Net loss per share - basic and diluted (0.10) (0.17)
Shares used in computing basic and diluted net loss per common share 18,567,326 18,739,933
For the six months ended June 30, 2000:
Stock-based compensation expense $429,992 $ 1,660,793
Loss from operations (3,306,424) (4,537,225)
Net loss (3,377,954) (4,608,755)
Net loss attributable to common stockholders (3,442,725) (4,673,526)
Net loss per share - basic and diluted (0.26) (0.35)
Shares used in computing basic and diluted net loss per common share 13,135,551 13,277,210
11. NET LOSS PER SHARE
A reconciliation of net loss and weighted-average common shares outstanding
for purposes of calculating basic and diluted net income per share is as
follows for the three and six months ended June 30:
2000 1999
----------- ----------
Three months ended June 30:
NUMERATOR:
Net loss .................................. $(3,158,155) $ (685,647)
Preferred stock dividends.................. (64,771) --
----------- -----------
Net loss attributable to common
stockholders ............................ $(3,222,926) $ (685,647)
----------- -----------
DENOMINATOR:
Weighted average number of common shares
outstanding:
Common stock .......................... 18,739,933 6,016,552
Effect of potentially dilutive common
shares............................... -- --
----------- -----------
Total............................. 18,739,933 6,016,552
----------- -----------
Six months ended June 30:
NUMERATOR:
Net loss .................................. $(4,608,755) $(1,082,061)
Preferred stock dividends.................. (64,771) --
----------- -----------
Net loss attributable to common
stockholders ............................ $(4,673,526) $(1,082,061)
----------- -----------
DENOMINATOR:
Weighted average number of common shares
outstanding:
Common stock .......................... 13,277,210 6,016,552
Effect of potentially dilutive common
shares............................... -- --
----------- -----------
Total............................. 13,277,210 6,016,552
----------- -----------
*******
13
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
Safe Harbor Statement
Certain statements in this Form 10-QSBA/1, including information set forth under
Item 2 Management's Discussion and Analysis, contains trend analysis and other
"forward-looking statements." These statements relate to future events or other
future financial performance, and are identified by terminology such as "may",
"will", "should", "expects", "anticipates", "plans", "intends", believes",
"estimates", or "continues" or the negative of such terms or other comparable
terminology. These statements are only predictions. Actual events or results
could differ materially from those set forth in the forward-looking statements.
Moreover, this discussion and analysis should be read in conjunction with the
accompanying Condensed Consolidated Financial Statements for the periods
specified and the associated notes. Further reference should be made to the
Company's audited financial statements as of December 31, 1999 and for the five
months then ended.
Restatement of Financial Statements
Subsequent to the issuance of the Company's Condensed Consolidated Financial
Statements as of and for the three and six month periods ended June 30, 2000,
the Company's management determined that (1) the stock-based compensation
expense for the three and six months ended June 30, 2000, (2) the number of
common shares outstanding at June 30, 2000, (3) the weighted-average number of
common shares outstanding for the three and six months ended June 30, 2000 were
incorrect due to certain equity awards not being considered in the preparation
of the Company's interim financial statements, and (4) the value assigned to the
acquired technology and patent application was in excess of the consideration
given. As a result, the accompanying Condensed Consolidated Financial Statements
as of and for the three and six month periods ended June 30, 2000 have been
restated from the amounts previously reported to reflect the appropriate
accounting and reporting of the aforementioned items. The significant effects of
the restatement are disclosed in Note 10 to the Unaudited Condensed Consolidated
Financial Statements. The following discussions give rise to the restated
amounts.
Overview
As described in Note 2 to the Condensed Consolidated Financial Statements, the
accounting applied in the merger of booktech.com, inc., a Nevada corporation
(the "Company") and booktech.com, inc., a Massachusetts corporation
("booktechMass") differs from the legal form. As the Merger was was accounted
for as a capital transaction and was treated as a reverse acquisition, the
historical financial results of the Company prior to the Merger are those of
booktechMass.
The Company is a digital and on-demand publisher of custom textbooks, also known
as coursepacks, which are distributed primarily through college bookstores. The
Company is subject to a number of risks similar to those of other companies in
an early stage of development. Principal among these risks are dependencies on
key individuals, competition from other substitute products and larger
companies, the successful development and marketing of its products and the need
to obtain adequate additional financing necessary to fund future operations.
The Company's business is highly seasonal in nature. More than 75% of its
revenues are generated in the third and fourth quarters of the fiscal year since
that period includes the traditional educational publishing selling season.
Operating losses have historically been greater in the first and second quarters
during a period when publishing revenues are at their lowest levels. See Note 3
to the accompanying Unaudited Condensed Consolidated Financial Statements,
"Concentration of Credit Risk and Major Customers Information.
The discussion below assumes that the Company can continue to do business on a
going concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. As shown in the
financial statements, during the six months ended June 30, 2000 and 1999, the
Company incurred net losses of $4,608,755 and $1,082,061, respectively. These
factors, among others, raise substantial doubt about the Company's ability to
continue as a going concern.
In addition, the financial statements do not include any adjustments relating to
the recoverability and classification of liabilities that might be necessary
should the Company be unable to continue as a going concern. 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, and
ultimately to attain profitability.
Results of Operations - Three Months Ended June 30, 2000 and 1999
Net sales increased to $168,009 in 2000 from $61,926 in 1999 due to higher sales
volumes to the Company's largest customer, which accounted for approximately 52%
and 40% of the net sales in 2000 and 1999, respectively. No other single
customer represented 10% or more of sales during 2000 or 1999.
14
Cost of sales was $351,043 in 2000 compared to $273,875 in 1999. The higher cost
of sales in 2000 was due to an increase in certain fixed production costs as the
Company expands its capacity in anticipation of increased sales levels.
Selling, marketing, and general and administrative expenses (excluding
stock-based compensation) increased to $1,573,924 in 2000 from $416,866 in 1999
due primarily to higher compensation and related benefits and facility costs
associated with the increase in the number of employees hired by the Company to:
(a) build market share in higher education; (b) research and identify new
markets for the Company's products; (c) develop the Company's e-commerce portal
to meet the demand for customized learning materials; and (d) expand the
Company's digital library of educational content. Legal and accounting expenses
also increased due to the costs normally associated with being a public company.
Stock-based compensation expense of $1,413,379 in 2000 represents costs relating
to stock options and restricted stock awards. Additional stock-based
compensation expense will be recorded in the future as the unvested stock
options and restricted stock awards become vested, and as the variable award
options are remeasured at each future reporting date until the options are
exercised, forfeited or expire unexercised.. There were no stock-based
compensation costs in 1999.
Interest expense decreased to $14,497 in 2000 from $56,934 in 1999 due primarily
to the conversion of $2,815,000 of related party debt in conjunction with the
Merger and to the repayment of approximately $884,902 in debt during April 2000.
Interest income increased to $26,679 in 2000 from $102 in 1999 due primarily to
higher average cash balances resulting from the sale of the common stock in
conjunction with the Merger.
Due to the uncertainty that exists regarding the future realization of our Tax
Net Operating loss carryforwards, we have not recorded a net tax asset.
The net loss increased to $3,158,155 in 2000 from $685,647 in 1999, primarily
due to higher selling, marketing and general and administrative expenses and to
the stock-based compensation expenses.
Results of Operations - Six Months Ended June 30, 2000 and 1999
Net sales increased to $492,743 in 2000 from $421,886 in 1999 due to higher
penetration in independent schools. Sales to the Company's largest customer
accounted for approximately 50% and 58% of the net sales in 2000 and 1999,
respectively. No other single customer represented 10% or more of sales during
2000 or 1999.
Cost of sales were $834,415 in 2000 compared to $696,021 in 1999. The higher
cost of sales in 2000 was due to an increase in certain fixed production costs
as the Company expands its capacity in anticipation of increased sales levels,
and to higher average copyright fees due to the mix of coursepacks sold.
Selling, marketing, and general and administrative expenses (excluding
stock-based compensation) increased to $2,534,760 in 2000 from $709,715 in 1999
due primarily to higher compensation and related benefits and facility costs
associated with the increase in the number of employees hired by the Company to:
(a) build market share in higher education; (b) research and identify new
markets for the Company's products; (c) develop the Company's e-commerce portal
to meet the demand for customized learning materials; and (d) expand the
Company's digital library of educational content. Legal and accounting expenses
also increased due to the costs normally associated with being a public company.
Stock-based compensation expense of $1,660,793 in 2000 represents costs relating
to stock options and restricted stock awards. Additional stock-based
compensation expense will be recorded in the future as the unvested stock
options and restricted stock awards become vested, and as the variable award
options are remeasured at each future reporting date until the options are
exercised, forfeited or expire unexercised. There were no stock-based
compensation costs in 1999.
Interest expense of $98,209 in 2000 approximated the $98,313 in 1999.
Due to the uncertainty that exists regarding the future realization of our tax
net operating loss carryforwards, we have not recorded a net tax asset.
15
The net loss increased to $4,608,755 in 2000 from $1,082,061 in 1999 primarily
due to higher selling, marketing and general and administrative expenses and to
the stock-based compensation costs.
Financial Condition, Liquidity and Capital Resources
To meet its financing needs, the Company has primarily depended upon loans from
stockholders and directors and sales of its common stock. Other sources of
financing have included bank debt and credit from suppliers. The Company has
generally not been in compliance with the provisions contained in certain of its
long-term debt agreements, and accordingly, the amounts outstanding under these
agreements have been classified as a current liability. As such, the Company has
generally operated from a negative working capital position. At June 30, 2000
and December 31, 1999, the Company's current liabilities of $2,810,770 and
$5,438,929, respectively, exceeded its current assets by $1,342,512 and
$5,127,710, respectively.
In conjunction with the Merger, the Company (a) refinanced $2,815,000 of
shareholder and director loans plus $401,171 in related accrued interest by the
issuance of 2,135,301 shares of Series A Preferred Stock; (b) purchased new
technology and a related patent application with the issuance of 1,379,310
shares of common stock; and (c) sold 4,666,667 shares of common stock and
warrants to purchase 833,333 shares of its common stock for an aggregate
purchase price of $7 million, including conversion of the notes payable,
advances and accrued interest owed to Verus Investments Holdings, Inc.
The Company had a cash balance of $1,214,678 at June 30, 2000.
During the three months ended June 30, 2000, the Company's property and
equipment increased by $2.6 million, primarily due to the purchase of a new
management information system. Approximately, $1.6 million of the computer
software and related installation costs were not yet placed in service as of
June 30, 2000. The $2.6 million in capital equipment was financed as follows:
$.8 million in debt, $1.3 million in trade credit and the balance in cash.
On August 2, 2000, the Company entered into an asset purchase agreement with an
unrelated entity to purchase a customer list for $1,300,000. The terms of the
agreement require cash payments of $300,000, payable in four installments, with
the balance of the purchase price to be paid through the issuance of three
tranches of the Company's common stock. In connection with the asset purchase
agreement, the Company entered into a two-year consulting agreement (extendable
for a third year at the option of the Company) with a principal of the selling
entity. The agreement provides for annual cash compensation of $50,000.
Unless the Company can generate a significant level of on-going revenue and
attain adequate profitability in the near-term, it will be necessary to seek
additional sources of equity or debt financing. Although the Company has been
successful in raising financing in the past, there can be no assurance that any
additional financing will be available to the Company on commercially reasonable
terms, or at all. Any inability to obtain additional financing when needed will
have a material adverse effect on the Company, requiring the Company to
significantly curtail or possibly cease its operations. In addition, any
additional equity financing may involve substantial dilution to the interests of
the Company's then existing shareholders.
Recently Issued Accounting Standards
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. The provisions of SFAS No. 133 are effective for periods
beginning after June 15, 2000. The Company is currently evaluating, and has not
determined, the effect, if any, SFAS No. 133 will have on the Company's
financial position and its results of operations. The Company will adopt this
accounting standard on January 1, 2001, as required.
On December 3, 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements." SAB No. 101 provides guidance on the recognition, presentation and
disclosure of revenues in financial statements filed with the Securities and
Exchange Commission.
16
The Company is currently evaluating, and has not determined, the effect, if any,
SAB No. 101 will have on the Company's financial position and its results of
operations. The Company will adopt this accounting standard during the fourth
quarter of 2000, as required.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
11. Computation of Net Loss Per Common Share
(b) Reports on Form 8-K
The registrant filed a report on Form 8-K on April 4, 2000 which reported that
EG Acquisitions Corporation, a Nevada corporation, a wholly owned subsidiary of
the Company, merged with and into booktechMass, pursuant to an Agreement and
Plan of Merger dated March 31, 2000 between EG Acquisitions Corporation, the
Company, and booktechMass. Following the Merger, the business of the Company was
the business of booktechMass conducted prior to the Merger. In conjunction with
the Merger, the Company changed its name to booktech.com, inc.
The registrant filed a report on Form 8-K on May 15, 2000 which reported that
the Company appointed Deloitte & Touche LLP as its independent auditors.
The registrant filed a report on Form 8-K on June 16, 2000 which reported that
the purchase of a patent application with shares of the Company's common stock
should not have been reported within the Condensed Consolidated Statement of
Cash Flows contained in the Company's Form 10-QSB for the period ended March 31,
2000.
17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
July 2, 2001 booktech.com, inc.
/S/ TED BERNHARDT
------------------------------
Ted Bernhardt
Chief Financial Officer
(Principal Financial and
Accounting Officer)
18
EXHIBIT INDEX
Exhibit Description
11. Computation of Net Loss Per Common Share
19