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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark one)
[X] Annual report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the fiscal year ended June 30, 2001.
[ ] Transition report under section 13 or 15(d) of the Securities Exchange
Act of 1934 for the transition period from to _______________ to
______________.
Commission file number 000-27941
NETGATEWAY, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 87-0591719
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
754 East Technology Avenue,
Orem, Utah 84097
(Address of principal executive office) (Zip Code)
(801) 227-0004
(Issuer's telephone number)
Securities to be registered under
Section 12(b) of the Act:
Title of Each Class Name of Each Exchange On Which Registered
None None
Securities to be registered pursuant
to Section 12(g)of the Act:
Common Stock, par value $.001
Indicate by check mark whether the registrant (1) filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), Yes[X] No [ ], and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [ ].
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
Based on the average of the bid and asked price for the registrant's
common stock on the Nasdaq OTC Bulletin Board on September 28, 2001, the
aggregate market value on such date of the registrant's common stock held by
non-affiliates of the registrant was $13,915,134. For the purposes of this
calculation, shares owned by officers, directors and 10% stockholders known to
the registrant have been deemed to be owned by affiliates.
The number of shares outstanding of the registrant's common stock, as
of September 30, 2001, was 41,998,565.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement for its 2001 Annual
Meeting of Stockholders, which is expected to be filed within 120 days after the
end of the registrant's fiscal year, are incorporated by reference in Part III
(Items 10, 11, 12 and 13) of this Report.
PART I
Throughout this report, we refer to Netgateway, Inc., together with its
subsidiaries, as "we," "us," or "our company."
THIS ANNUAL REPORT ON FORM 10-K CONTAINS FORWARD-LOOKING STATEMENTS.
THESE STATEMENTS RELATE TO FUTURE EVENTS OR OUR FUTURE FINANCIAL PERFORMANCE. IN
SOME CASES, YOU CAN IDENTIFY FORWARD-LOOKING STATEMENTS BY TERMINOLOGY SUCH AS
MAY, WILL, SHOULD, EXPECT, PLAN, INTEND, ANTICIPATE, BELIEVE, ESTIMATE, PREDICT,
POTENTIAL OR CONTINUE, THE NEGATIVE OF SUCH TERMS OR OTHER COMPARABLE
TERMINOLOGY. THESE STATEMENTS ARE ONLY PREDICTIONS. ACTUAL EVENTS OR RESULTS MAY
DIFFER MATERIALLY. IN EVALUATING THESE STATEMENTS, YOU SHOULD SPECIFICALLY
CONSIDER VARIOUS FACTORS, INCLUDING THE RISKS OUTLINED BELOW. THESE FACTORS MAY
CAUSE OUR ACTUAL RESULTS TO DIFFER MATERIALLY FROM ANY FORWARD-LOOKING
STATEMENT.
ALTHOUGH WE BELIEVE THAT THE EXPECTATIONS REFLECTED IN THE
FORWARD-LOOKING STATEMENTS ARE REASONABLE, WE CANNOT GUARANTEE FUTURE RESULTS,
LEVELS OF ACTIVITY, PERFORMANCE OR ACHIEVEMENTS. MOREOVER, NEITHER WE NOR ANY
OTHER PERSON ASSUMES RESPONSIBILITY FOR THE ACCURACY AND COMPLETENESS OF THE
FORWARD-LOOKING STATEMENTS. WE ARE UNDER NO DUTY TO UPDATE ANY OF THE
FORWARD-LOOKING STATEMENTS AFTER THE DATE OF THIS ANNUAL REPORT TO CONFORM SUCH
STATEMENTS TO ACTUAL RESULTS OR TO CHANGES IN OUR EXPECTATIONS.
Item 1. Business.
General
We are an e-Services company that provides eCommerce training,
technology, continuing education and a variety of other web-based resources to
over 100,000 small businesses and entrepreneurs annually. Our affordably priced
e-Services offerings leverage industry and client practices, and help increase
the predictability of success for Internet merchants. Our services also help
decrease the risks associated with e-commerce implementation by providing
low-cost, scalable solutions with minimal lead-time, ongoing industry updates
and support. Our strategic vision is to remain an eCommerce provider tightly
focused on our target market.
We are executing a strategic plan that is intended to allow us to
sustain revenue and profitability at acceptable levels after we cease
recognizing revenue from prior product offerings due to the chage in our product
offerings following our fiscal second quarter of this year. We will seek to
increase our revenue by enhancing the range of products and service offerings to
our customer base, increasing sales to our existing customer base, and by
increasing the number of our Internet Marketing Workshops. We will also seek to
reduce our cost of goods by creating new technology for our production staff.
Substantially all of our revenues are derived from our Galaxy Mall, Inc.
subsidiary.
We were incorporated under the laws of Nevada on April 13, 1995, under
the name Video Calling Card, Inc. In June 1998, we acquired all of the
outstanding capital stock of Netgateway, a Nevada corporation formerly known as
eClassroom.com, in exchange for 5,900,000 shares of its common stock. At the
same time, we acquired the assets of Infobahn, LLC d/b/a Digital Genesis, an
electronic commerce applications developer, in exchange for 400,000 shares of
our common stock.
In January 1999, StoresOnline.com, Ltd., a Canadian corporation and our
wholly owned subsidiary, acquired all of the outstanding capital stock of
Spartan Multimedia, Ltd., an Internet storefront developer and storefront
service provider, in exchange for 371,429 shares of Class B common stock of
StoresOnline.com. The Class B common stock is exchangeable on a one-to-one basis
for shares of our common stock. To date, a total of 276,713 shares have been
exchanged.
In November 1999, we reincorporated under the laws of Delaware.
In June 2000, we acquired all of the outstanding capital stock of
Galaxy Enterprises, Inc., a Nevada corporation, in exchange for approximately
3,900,000 shares of our common stock. Galaxy Enterprises was organized as a
Nevada corporation on March 3, 1994. Galaxy Enterprises was originally formed
under the name Cipher Voice, Inc., and was incorporated for the purpose of
developing, producing and marketing equipment related to computer hardware
security, known as a digital voice encryption-decryption electronic device.
Galaxy Enterprises was unsuccessful in developing that technology and
subsequently ceased operations.
In December 1996, Galaxy Enterprises acquired all of the issued and
outstanding common stock of GalaxyMall, Inc., a Wyoming corporation, in exchange
for 3,600,000 shares of Galaxy Enterprises common stock. As a result of this
stock acquisition, Galaxy Mall became a wholly owned subsidiary of Galaxy
Enterprises. On December 16, 1996, Galaxy Enterprises changed its name from
Cipher Voice, Inc. to Galaxy Enterprises, Inc.
Effective May 31, 1999, Galaxy Enterprises, through its wholly owned
subsidiary IMI, Inc., acquired substantially all of the assets of Impact Media,
L.L.C., a Utah limited liability company engaged in the design, manufacture and
marketing of multimedia brochure kits, shaped compact discs and similar products
and services intended to facilitate conducting business over the Internet. The
assets acquired included, among other things, equipment, inventory and finished
goods, intellectual property, computer programs and cash and accounts
receivable. The primary use of these assets relate to the design, manufacture
and marketing of Impact Media's products and services.
In August 2000, we announced that we would close our Long Beach
headquarters and consolidate it with our Orem, Utah operations. After the
relocation of our operations to Utah we dramatically slowed the development of
our Internet Commerce Center, or ICC, stopped substantially all sales and
marketing activity for business-to-business solutions based on the ICC and
terminated the employment of the ICC sales and marketing team. We are continuing
to support our existing business-to-business customers served by the ICC and are
seeking additional opportunities to derive revenue from this technology but
there can be no assurance that we will be successful in doing so. Although early
versions of the ICC are fully operational and being used by current customers,
we have suspended all ICC engineering and programming activities with respect to
new versions and features of the ICC pending receipt of actual ICC customer
orders. No such orders have been received to date. If and when ICC customer
orders are received, we will identify the actual customer needs and if further
ICC development work is required and appropriate, will do such work at that
time. Since the relocation of our operations to Utah we have also restructured
our cable commerce operations. Through July, 2001 we continued to work with our
cable operator partners in support of existing Internet cable malls and to
increase the number of merchants hosted on these malls but our activity in this
regard was greatly reduced effective January, 2001 as a result of reductions in
the size of the sales and marketing team. In July 2001, we transferred to a
third party the opportunity to market these product and service offerings to
both our existing cable operator business partners and others. Pursuant to this
arrangement we will continue to provide the underlying technology and hosting
and other services.
In January 2001 we sold our IMI subsidiary to
Capistrano Partners LLC for $1,631,589, including $1,331,589 owed to us by IMI
at the time of the sale. We received a cash payment of $300,000 and a promissory
note for the balance of the purchase price. At the time of the transaction,
Capistrano Partners LLC was an unrelated third party, but the sole member of
Capistrano is now an equity investor in us.
Industry Background
The Internet economy has transformed the way that business is
conducted. To address this more competitive environment companies are now
required to market dynamically, compete globally and communicate with a network
of consumers and partners. Introducing a business to the Internet economy can
unleash new opportunities for that business that can drive revenue growth,
services opportunities, product innovation, and operational efficiencies.
Companies must be able to offer and/or deliver their services and products
through the Internet to capitalize on its potential.
In 2001, Nielsen/NetRatings, Inc. estimated that there were as many as
159 million Americans with Internet access and that 63 million Americans were
actively on-line. These numbers mean that a large percentage of the United
States population (approximately 58 and 23 percent of the total, respectively)
has the means to engage in eCommerce over the Internet. According to research by
Jupiter Communications, business-to-consumer eCommerce in the United States
reached $45 billion in 2000, and is expected to reach $269 billion in 2005. A
United States Department of Commerce report released in January 2001 entitled
"Leadership for the New Millennium, Delivering on Digital Progress and
Prosperity," projects that business-to-consumer eCommerce could swell to between
$75 billion and $144 billion in 2003.
The growth of business-to-consumer eCommerce and the growing acceptance
of eCommerce as a mainstream medium for commercial transactions, presents a
significant opportunity for companies, including small businesses and
entrepreneurs. To take advantage of this opportunity they must extend their
marketing and sales efforts to the Internet and often must transform their core
business and technologies in order to be able to successfully conduct commerce
by means of the Internet. The transformation challenges include systems
engineering, technical, commercial, strategic and creative design challenges and
developing an understanding of how the Internet transforms relationships between
businesses and their internal organizations, customers, and business partners. A
company seeking to effect such a transformation often needs outside technical
expertise to assist in identifying viable Internet tools, and to develop and
implement reasonable strategies all within the company's budget, especially if
the company believes that rapid transformation will lead to a competitive
advantage.
This environment has created a significant and growing demand for
third-party Internet professional services and has resulted in a proliferation
of companies (eService companies) offering specialized solutions, such as order
processing, transaction reporting, helpdesk, training, consulting, security,
Website design and hosting. This specialization has resulted in a fragmented
market that often requires a company to combine solutions from different
providers that may be based on different, or even contradictory, strategies,
models and designs. We believe that there is a very large, fragmented and
under-served market for entrepreneurial companies searching for professional
services firms that offer turnkey business-to-consumer eCommerce solutions
coupled with training, consulting and continuing education.
We believe that few of the existing eServices providers targeting small
businesses and entrepreneurs have the range of product and service offerings
that focus on the peculiar needs of this market. This market requires a broad
range of product and services offerings that are necessary to assist in a
coordinated transformation of their business to embrace the opportunities
presented by the Internet. Accordingly, we believe that these organizations are
increasingly searching for an services firm such as ours that offers turn-key
business-to-consumer eCommerce solutions focused on their eServices
requirements, which include training, education, technology, creative design,
transaction processing, data warehousing, transaction reporting, help desk
support and consulting. Furthermore, we believe that organizations will
increasingly look to Internet solutions providers that leverage industry and
client practices, increase predictability of success for Internet solution
deployments and decrease implementation risks by providing low-cost, scalable
solutions with minimal lead-time.
Our Business
Small Business Offerings Through Galaxy Mall
We offer a continuum of services and technology to the small business
owner and entrepreneur. Our services start with a complimentary 90-minute
informational Preview Training Session for those interested in extending their
business to the Internet. These Training Sessions have proven to increase
awareness of and excitement for the opportunities presented by the Internet. We
typically conducted 20-30 sessions each week across the United States. At these
Preview Training Sessions, our instructors preview the advantages of
establishing a website on the Internet, answer in general terms many of the most
common questions new or prospective Internet merchants have (including the
identification of the types of products, services, and information that are best
marketed and/or sold on the Internet), how to develop an effective marketing and
advertising strategy, and how to transform an existing "brick and mortar"
company into a successful e-commerce enabled company.
Approximately two weeks after each Preview Training Session, we return
to conduct an intensive eight hour inexpensive internet training workshop which
provides Internet eCommerce and website implementation training to a subset of
individuals and companies that attended the preview session. At the Internet
training workshop, attendees learn some of the detail, tips, and techniques
needed to transform an existing "brick and mortar" company into an eCommerce
success. They learn how to open and promote a successful Internet business,
including a plain English explanation of computer/Internet/technical
requirements and e-commerce tools, specific details and tips on how to promote
and drive traffic to a website and techniques to complete more sales from
traffic to a website.
At the conclusion of the workshop, the attending individual or company,
typically a small business or individual entrepreneur, is presented an
opportunity to purchase a license to use our proprietary StoresOnline software
and website development platform and an integrated package of services and
thereby become a client and a GalaxyMall merchant.
Galaxy Mall is a virtual Internet online mall with thousands of
storefront websites. An independent survey conducted by PC Data Online ranked
Galaxy Mall well into the top 2,000 most visited websites. During the same
period, Google, a leading Internet search engine, reported that it had indexed
over 1.3 billion web pages. The traffic to Galaxy Mall is generated not because
it is an on-line mall, but because some of the merchants on the mall do the
things we teach at our workshops, and make available through the password
protected Merchant Services section of the mall.
The integrated package of services includes:
o The ability to create up to three different, fully eCommerce
enabled websites, with the option to host on Galaxy Mall
o Access to our detailed database of Internet marketing information
o Helpdesk technical support via on-line chat, email, and telephone
o Initial registration to over 300 different search engines
o Tracking software to monitor site traffic (hits, unique visitors,
page views, referring URL, search engine and keywords used, time
of visit, etc.)
o Internet classified advertisements
o Merchant accounts for real-time on-line credit card and check
processing
o Testing and marketing tools (auto responders)
The license to our Complete Store Builder (StoresOnline) software and
website development platform permits the client to create up to three custom
websites. If the client prefers, the client can hire our development team of
employees and contractors to design and program the website for an additional
charge rather than use the store builder software. The client's website(s) can
either be a static, standalone site hosted by a third party, or it can be hosted
by us. If we host it the client will be able to take advantage of the dynamic
website updating capabilities of the StoresOnline platform and can be included
in our Internet online Galaxy Mall (www.galaxymall.com).
Following the initial sale to a client, we seek to provide additional
technology and services to our clients. On the services side, we offer custom
programming to create distinctive web page graphics and banners and advanced
programming to enhance websites with things such as streaming audio and video
media, Macromedia(TM) Flash and Director programming techniques, commitments to
deliver page view traffic to the website and a ten week coaching and mentoring
program. The coaching and mentoring program involves a series of telephone
training sessions with a tutor who provides specific assistance in a variety of
areas, including Internet marketing.
We are exploring the process of developing an extension to our existing
coaching and mentoring service offering to include a "distance learning" service
based on streaming media technology in a virtual classroom setting.
We will seek to increase sales to our existing client base by more
aggressively imposing and collecting hosting fees, selling programming services
to update existing client websites and an outsourced outbound telemarketing
program through which we periodically contact persons who attended our Internet
training workshops. In particular we will focus on selling Internet training
workshop attendees who did not purchase at the workshop our basic package, and
will focus on selling additional product and service offerings (both ours and
third parties) to persons who purchased at the workshop and activated a website.
Through this program we also seek to increase the website activation rate of
customers who purchase at our Internet training workshops but have not yet
designed or activated their website and thereby establish a stronger
relationship with these persons and offer them additional products and services.
We may also, for a fee, allow third parties to seek to sell to our clients and
Preview Training Workshop and Internet training workshop attendees, products and
services that are complimentary with our product and service offerings. In some
situations this could result in the client purchasing additional products and
services from us and in the client selling additional products and services
through their websites.
In addition to seeking to grow by increasing the number of preview
training sessions and Workshops in the United States we are launching an
international expansion of our business, initially into selected predominantly
English speaking countries in the Asia Pacific region and possibly thereafter to
additional countries in Asia and Europe. Our research indicates that we should
experience lower customer acquisition costs in these regions than we currently
experience in the United States and that our turnkey product and service
offering for small businesses and entrepreneurs may enjoy a first mover
advantage in these markets. We are forming strategic alliances with other
companies with experience in these countries to assist in a launch currently
underway.
Seasonality. Revenues during the year for our Galaxy Mall business are
subject to seasonal fluctuations. The first and second calendar quarters are
generally stronger than the third and fourth calendar quarters. Customers seem
less interested in attending our workshops during the period between July 15th
through Labor day, and again during the holiday season from Thanksgiving Day
through the first week of the following January.
Other Product and Service Offerings
Our business-to-business group delivers eCommerce solutions to a
limited number of clients. We are no longer actively promoting this line of
business and are not spending significant resources to further develop or expand
this business or its core technology - the Internet Commerce Center (ICC).
However, we do continue to host and support five customers for whom we maintain
custom eCommerce applications. Although these are not a part of our main core
business, the existing contracts provide for positive cash flow with minimum
resource requirements.
Our CableCommerce division originally partnered directly with cable
operators to combine the power of cable advertising with local eCommerce and
created and launched over 30 cable-branded electronic malls with leading cable
operators such as AT&T, CableOne, MediaOne and Cox Communications. These e-Malls
feature local establishments, allowing visitors to locate convenient services
and products. These CableCommerce e-Malls currently reach more than 1.1 million
households in over 10 markets across the nation. Through these cable commerce
e-Malls we sought to sell entry-level ICC services, such as simple Internet
storefronts and services based on our StoresOnline platform.
In July 2001, we entered into an agreement with a third party who will
continue to market and promote of our Cable Commerce e-Mall product. Pursuant to
this agreement the third party will be responsible for identifying and
developing new business relationships and will control pricing and we will host
the eCommerce websites and other product offerings as well as provide
maintenance and support for all customers on a percentage of net revenue basis.
Through this arrangement we continue to offer design, development, hosting and
site management of e-Malls and electronic storefronts sold through cable
operators and delivered to local merchants and subscribers. We also provide
training to the cable system sales personnel, and provide storefront creation
and maintenance services. In addition, we offer local and regional classified
advertisements, community calendars and coupons to optimize e-Mall content.
Through IMI, our former subsidiary doing business under the name Impact
Media, we formerly offered state-of-the-art multi-media marketing messages using
custom-cut compact discs. IMI also created full-motion CDs for Fortune 1000
companies, designed, manufactured and marketed multimedia brochures, and shaped
compact disks and other products and services to facilitate traditional
marketing and to bridge the gap between conventional and Internet marketing. We
sold this business in January 2001 to Capistrano Partners LLC.
Our Technology
We believe that a key component of our success will be a number of new
technologies we have developed. These technologies distinguish our services and
products from those of our competitors and help reduce our operating costs and
expenses. The most important of these are the recent version 4.0 of our
StoresOnline eCommerce-enabled website development and hosting platform and our
Dynamic Image Server technology.
The StoresOnline platform is a turnkey eCommerce development platform,
which has been continuously improved over the past decade. Version 4.0 of the
StoresOnline platform represents the culmination of over ten years of
development effort on a platform that has hosted over 15,000 eCommerce-enabled
websites and, in the past, has received broad acceptance in the fast growing
market of small businesses and in the entrepreneurial community. The
StoresOnline platform version 4.0 represents a continued stage of evolution
towards an easier to use and more scalable application and includes the
following new features.
o Variations or products, such as sizes, colors, etc. are
supported, and websites can be programmed to resolve possible
variation conflicts (e.g. we do not currently offer the red shirt
in size extra large)
o Multiple price sets allow a merchant to offer the same product at
different prices for different buyers, in a password-protected
environment, and allows the use of multiple currencies. We
believe multiple price and currency sets enhance acceptance of
this platform in international businesses
o Ability to deliver a digital product, such as software or an
eBook, through a download
o Import and export capabilities allow the exchange of product data
and order data in HTML and XML formats. This reduces programming
time and allows for easy transfer of order and other data into
other applications such as Intuit(R) QuickBooks(R) or
Microsoft(R) Money
o Page content (such as text, images, links, headers, footers,
etc.) can be easily customized and changed and automatically
cascaded throughout the website
o Customizable order and data collection forms enabling us to
address a merchant's specific needs
o The ability to capture and process in real time customer orders
in accordance with predetermined business rules and specific
"back office" requirements of each merchant.
o Preview functionality allowing a merchant to view and test of a
website prior to publishing it on the Internet
A unique technology innovation, which we feel gives us a competitive
advantage, is our DynamicImage Server. The DynamicImage Server allows images to
be created dynamically rather than by uploading images or using stock photos or
clip art. A user can create images dynamically through the manipulation of
multiple image variables (such as background color, text, borders, sizing,
dropshadows, etc.) in a simple "point and click" environment. This feature
allows the automatic generation of all possible image permutations; such as to
allow a customer to view all of the different possible combinations of shirts,
tie, sport coats, and slacks before purchase. The DynamicImage Server allows for
quick and easy creation of graphical and professional looking storefronts.
Transaction Processing
We offer solutions that capture and transact customer orders according
to the business rules and specific "back office" needs of the particular client.
Our eCommerce system solution acts as a gateway, so our clients can receive and
process orders and payments, provide order confirmation and reporting and
organize order fulfillment in conjunction with payment processes. We can provide
support for eCommerce transactions using checks, credit cards, electronic funds
transfers, purchase orders and other forms of payment. We currently provide this
capability in conjunction with certain third-party vendors, including
PaymentNet, AuthorizeNet, and Clear Commerce.
Sales and Marketing
Most of our products are Internet-related and, consequently, do not use
traditional distribution channels. Our principal distribution channel is our
Internet training workshops through which we sell directly to small businesses
and entrepreneurs. These workshops are presented several times a week during
most weeks of the year. We rent hotel conference rooms in various cities
throughout the United States in which we host preview training sessions and
Internet training workshops. Our workshop model requires that we make
significant expenditures to cover customer acquisition costs prior to realizing
any revenue or receiving an indication of interest from these potential clients
and to date have experienced only limited success in selling additional products
and services to our clients after the initial sale. Accordingly, the percentage
of the attendees at a workshop who purchase our products and services is a
critical factor to our success.
We advertise our preview sessions in direct mail and e-mail
solicitations targeted to potential customers meeting established demographic
criteria. The direct mail and e-mail pieces are sent several weeks prior to the
date of the preview session. Mailing lists are obtained from list brokers.
Announcements of upcoming preview sessions also appear occasionally in newspaper
advertisements in scheduled cities. Finally, we promote our preview and workshop
sessions through other third-party training companies.
We also use an outsourced telemarketing program to sell products and
services to preview and workshop attendees and to our existing client database.
Our business-to-business services were originally sold and marketed by
means of a combination of direct and indirect sales. We have eliminated that
sales force and an associated marketing and sales support group and are no
longer actively promoting this product.
Our CableCommerce division originally sold and marketed its services by
partnering with the cable operator's sales force through agreements with cable
operators. The CableCommerce sales force was terminated and we are now
continuing to develop our relationships with our cable company partners to sell
eCommerce-enabled websites and associated services to the cable company's
customers, through a third party.
Research and Development
Since June 1999, we have conducted considerable research and
development with respect to our technology. During the years ended June 30,
2001, and June 30, 2000, respectively, we invested, on a consolidated basis,
approximately $1,805,000 and $6,463,000 respectively, in the research and
development of our technology. Our specific accomplishments during fiscal year
2001 were completion of version 4.0 of the StoresOnline platform and the
DynamicImage Server. In general, our research and development efforts have:
o emphasized the development of advanced technology and new
services
o focused on the enhancement and refinement of existing services in
response to rapidly changing client specifications and industry
needs
o introduced support for evolving communications methodologies and
protocols, software methodologies and protocols and computer
hardware technologies
o improved functionality, flexibility and ease of use
o enhanced the quality of documentation, training materials and
technical support tools
o begun development of an internal database that will replace the
incompatible, standalone systems used in marketing, sales, store
building, and customer service, and which will be fully
integrated with the accounting systems
o completed a new merchant login system providing enhanced security
and management of password access to the Merchant Services
section of the mall, and
o reconfigured the entire company's computer networks, including
hardware and software upgrades, firewall protection, and the
creation of a new company data center.
Competition
Our markets are becoming increasingly competitive. Our competitors
include application service providers, software vendors, systems integrators and
information technology consulting service providers who offer some or all of the
same products as us to the small business and entrepreneur markets.
Most of these competitors do not yet offer a full range of Internet
professional services. Many are currently offering some of these services or
have announced their intention to do so. These competitors at any time could
elect to focus additional resources in our target markets, which could
materially adversely affect our business, prospects, financial condition and
results of operations. Many of our current and potential competitors have longer
operating histories, larger customer bases, longer relationships with clients
and significantly greater financial, technical, marketing and public relations
resources than us.
Additionally, should we determine to pursue acquisition opportunities,
we may compete with other companies with similar growth strategies. Some of
these competitors may be larger and have greater financial and other resources
than we do. Competition for these acquisition targets could also result in
increased prices of acquisition targets and a diminished pool of companies
available for acquisition.
There are relatively low barriers to entry into our business. We have
limited proprietary technology that would preclude or inhibit competitors from
entering our markets. In particular, we anticipate that new entrants will try to
develop competing products and services or new forums for conducting eCommerce
that could be deemed competitors. We believe, however, that we presently have a
competitive advantage due to our proven marketing strategies for GalaxyMall and
our other products. In 1995, certain of Galaxy Mall's principals, who at that
time were working with Profit Education Systems, were instrumental in creating
an Internet marketing workshop industry. Galaxy Enterprises obtained this
Internet marketing workshop expertise when it acquired Profit Education Systems.
To our knowledge, there were no other businesses engaged in the Internet
marketing workshop industry at that time. Due to this experience with such
marketing workshops, we believe we enjoy a strong competitive advantage in this
industry.
Anticipated and expected technology advances associated with the
Internet, increasing use of the Internet and new software products are welcome
advancements expected to attract more interest in the Internet and broaden its
potential as a viable marketplace and industry. We anticipate that we can
compete successfully, by relying on our infrastructure, existing and expanding
marketing strategies and techniques, systems and procedures, by adding
additional products and services in the future, by periodic revision of such
methods of doing business as we deem necessary and by an aggressive move into
international markets.
Intellectual Property
Our success depends in part upon our proprietary technology and other
intellectual property and on our ability to protect our proprietary technology
and other intellectual property rights. In addition, we must conduct our
operations without infringing on the proprietary rights of third parties. We
also rely upon unpatented trade secrets and the know-how and expertise of our
employees. To protect our proprietary technology and other intellectual
property, we rely primarily on a combination of the protections provided by
applicable copyright, trademark and trade secret laws as well as on
confidentiality procedures and licensing arrangements.
Although we believe that we have taken appropriate steps to protect our
intellectual property rights, including requiring that employees and third
parties who are granted access to our intellectual property enter into
confidentiality agreements, these measures may not be sufficient to protect our
rights against third parties. Others may independently develop or otherwise
acquire unpatented technologies or products similar or superior to ours.
We license from third parties certain software and Internet tools that
we include in our services and products. If any of these licenses were to be
terminated, we could be required to seek licenses for similar software and
Internet tools from other third parties or develop these tools internally. We
may not be able to obtain such licenses or develop such tools in a timely
fashion, on acceptable terms, or at all.
Companies participating in the software and Internet technology
industries are frequently involved in disputes relating to intellectual
property. We may in the future be required to defend our intellectual property
rights against infringement, duplication, discovery and misappropriation by
third parties or to defend against third-party claims of infringement. Likewise,
disputes may arise in the future with respect to ownership of technology
developed by employees who were previously employed by other companies. Any such
litigation or disputes could result in substantial costs to, and a diversion of
effort by, us. An adverse determination could subject us to significant
liabilities to third parties, require us to seek licenses from, or pay royalties
to, third parties, or require us to develop appropriate alternative technology.
Some or all of these licenses may not be available to us on acceptable terms or
at all. In addition, we may be unable to develop alternate technology at an
acceptable price, or at all. Any of these events could have a material adverse
effect on our business, prospects, financial condition and results of
operations.
We intend to change our corporate name, Netgateway, Inc., to a new name
in response to claims made by the holder of a registered trademark that the
name, "Netgateway," infringes their trademark.
Employees
As of June 30, 2001, we had approximately 121 full-time employees,
including 6 executive personnel, approximately 44 in sales and marketing,
approximately 4 in the development of our e-Business solutions, approximately 45
in customer support and approximately 22 in general administration and finance.
We also use some independent contractors who speak at our preview and/or
workshop training sessions, and others who provide some programming services.
Governmental Regulation
We are not currently subject to direct regulation by any government
agency, other than regulations applicable to businesses generally, and there are
currently few laws or regulations directly applicable to access to, or commerce
on, the Internet. However, due to the increasing popularity and use of the
Internet, it is possible that various laws and regulations may be adopted with
respect to the Internet, covering issues such as user privacy, pricing and
characteristics and quality of products and services. In 1998, the United States
Congress established the Advisory Committee on eCommerce which is charged with
investigating and making recommendations to Congress regarding, the taxation of
sales by means of the Internet. The adoption of any such laws or regulations
upon the recommendation of this Advisory Committee or otherwise may decrease the
growth of the Internet, which could in turn decrease the demand for our products
or services, our cost of doing business or otherwise have an adverse effect on
our business, prospects, financial condition or results of operations. Moreover,
the applicability to the Internet of existing laws governing issues such as
property ownership, libel and personal privacy is uncertain. Future federal or
state legislation or regulation could have a material adverse effect on our
business, prospects, financial condition and results of operations.
Risk Factors
We have limited operating history and may not maintain profitability at the
levels achieved during our past two fiscal quarters, or achieve full-year
profitability.
Given our limited operating history, there is little operating and
financial data about us, making evaluation of our business operations and
prospects more difficult. We are subject to the risks, expenses and
uncertainties frequently encountered by young companies operating exclusively in
the new and rapidly-evolving markets for Internet products and services. During
the past two quarters our profitability was based in large part on the benefit
of deferred revenue which benefit will not extend at current levels beyond the
second quarter of this fiscal year and does not contribute to our cash flow.
Successfully achieving our strategic plan and achieving profitability for our
2002 and future fiscal years depends on our ability to:
o increase the number of workshops held without experiencing a
reduction in the portion of attendees who purchase our products
and services at the workshops
o successfully develop and sell additional products to our existing
customers;
o maintain and increase the levels of interest in being hosted on
our Galaxy Mall
o generate revenues through sales of third party products and
services, and
o continue to identify, attract, retain and motivate qualified
personnel.
Furthermore, the growth of our business depends on factors outside our
control, including:
o adoption by the market of the Internet, and more specifically,
our company as an effective provider of Internet based solutions;
o continued acceptance by our target customers of a "clicks and
mortar" strategy, and
o acceptance of our basic outsourcing business model by our target
customers.
We have a capital deficit, we have a history of losses and we may in the future
experience losses.
We have incurred substantial losses in the past and may in the future
incur additional losses. At June 30, 2001 and 2000, we had working capital
deficits of $11,352,352 and $14,844,854 respectively; our capital deficit was
$9,306,829 and $10,776,300 at June 30, 2001 and June 30, 2000, respectively. We
generated revenues from continuing operations of $43,000,533 for the year ended
June 30, 2001 and $22,149,649 for the year ended June 30, 2000. For the year
ended June 30, 2001 and the year ended June 30, 2000, we incurred net losses of
$3,638,736 and $44,108,429, respectively. For the year ended June 30, 2001 and
the year ended June 30, 2000, we recorded negative cash flows from continuing
operations of $7,347,123 and $16,439,729, respectively.
We have historically invested heavily in sales and marketing,
technology infrastructure and research and development and must continue to
invest heavily in sales and marketing in connection with our Galaxy Mall
workshop business. As a result, we must generate significant revenues to achieve
and maintain profitability. If we are able to increase revenue, then we expect
our sales and marketing expenses, research and development expenses and general
and administrative expenses will increase in absolute dollars and may increase
as a percentage of revenues. In addition, our results for fiscal 2001 were
materially affected by a benefit of deferred revenue during the last two
quarters, which benefit we anticipate will not extend at current levels beyond
the second quarter of the current fiscal year due to the change in product
offerings and does not contribute to cash flow. As a result, we may not be able
to achieve and maintain profitability for a complete fiscal year.
Our auditors report on our financial statements includes an explanatory
paragraph with respect to substantial doubt existing about our ability to
continue as a going concern.
Our financial statements include a note that indicates that we had
losses from operations and a net capital deficit and that, accordingly, these
matters raise substantial doubt about our ability to continue as a going
concern. Our financial statements do not include any adjustments that might
result from this uncertainty.
Our previous private placement may be subject to rescission rights.
Our private placement conducted January-April 2001 to a group of our then
long-time stockholders who were accredited investors occurred in part while a
dormant but not effective registration statement was on file with the SEC with
respect to a public offering of our common stock by a third party deemed by
current SEC interpretations to be an offering by us. Although we believe that
these unregistered securities were issued pursuant to an available exemption
under applicable securities laws, we are aware of current interpretations of
securities regulators that are inconsistent with our view. If in fact our
interpretation is proven incorrect then, among other consequences, the
purchasers of such securities would be entitled to exercise rescission rights
with respect to their investment in us. If such rights were exercised by these
investors, we would be liable to them in an amount equal to the total proceeds
of such offering, $2,076,500, plus interest at rates determined by state
statutes from the date of such offering to the date of payment. We believe that,
if such an offer of rescission was made to these investors at this time, it
would not be accepted. If we were required to make such an offer and it was
accepted, then the required payments would exceed our cash resources and require
us to seek additional financing, most likely in the form of additional issuances
of common stock, to make such payments and would materially and adversely effect
our financial condition.
Our ability to use our net operating loss carryforwards has been reduced. This
could adversely affect our net income and cash flow.
As of June 30, 2001, we had net operating loss carryforwards of
approximately $44 million which expire between 2006 and 2021 that can be used to
reduce our future U.S. federal income tax liabilities. However, our ability to
use these loss carryforwards to reduce our future U.S. federal income tax
liabilities may already have been or could be reduced if we were to experience
more than a 50% change in ownership within the meaning of Section 382 of the
Internal Revenue Code. In addition, if our ability to use these carryforwards
has already been limited then future changes in ownership may further limit the
use of these carryforwards. If we have lost or were to have limited or lose the
benefits of these loss carryforwards, our earnings and cash resources would be
materially and adversely affected. The rules for determining changes in stock
ownership for purposes of section 382 are extremely complicated and in many
respects uncertain. A stock ownership change could occur as a result of
circumstances that are not within our control. In addition to the Section 382
limitations, uncertainties exist as to the future utilization of the operating
loss carryforwards under the criteria set forth under FASB Statement No. 109.
Therefore, we have fully reserved the deferred tax asset at June 30, 2001.
Our recent restructuring strained our managerial, operational and financial
resources.
During the past twelve months our business experienced many changes,
including the relocation of our headquarters from Long Beach, California to
Orem, Utah, a determination to focus our business on our Galaxy Mall operations
and a number of changes in our board of directors and executive officers,
including the loss of five directors and two chief executive officers since
November 2000. In addition, our reduction in management personnel and
administrative staff, our discontinuance of further development of our B2B and
Cable Commerce divisions, our merger with Galaxy Enterprises, Inc. and the
significant losses of our former B2B and Cable Commerce divisions, significantly
strained our operational and financial resources. As a result we would
experience significant difficulty absorbing the impact of a material adverse
event or group of insignificant minor adverse events.
We depend on our senior management, and their loss or unavailability could put
us at a serious disadvantage.
We depend on the continued services of our key personnel, including our
chief executive officer, president and chief operating officer, chief financial
officer, chief technical officer and executive vice president-sales and
marketing as well as the speakers at our Galaxy Mall workshops and other key
personnel of our Galaxy Mall subsidiary. Each of these individuals has acquired
specialized knowledge and skills with respect to our operations. As a result of
the recent changes and financial difficulties we have experienced, we could face
substantial difficulty in hiring qualified members of our senior executive
staff. We expect that we will need to hire additional personnel in all areas if
we are able to successfully execute our strategic plan, particularly if we are
successful in expanding our operations internationally. Competition for the
limited number of qualified personnel in our industry is intense. At times, we
have experienced difficulties in hiring personnel with the necessary training or
experience.
We may pursue acquisitions of complementary service or product lines,
technologies or business that may adversely affect our operations.
From time to time, we have evaluated and in the future may evaluate
potential acquisitions of businesses, services, products or technologies. These
acquisitions may result in a potentially dilutive issuance of equity securities,
the incurrence of debt and contingent liabilities, and amortization of expenses
related to intangible assets. In addition, acquisitions involve numerous risks,
including difficulties in the assimilation of the operations, technologies,
services and products of the acquired companies, the diversion of management's
attention from other business concerns, risks of entering markets in which we
have no or limited direct prior experience and the potential loss of key
employees of the acquired company. We have no present commitment or agreement
with respect to any material acquisition of other businesses, services, products
or technologies.
The market for our products and services is evolving and its growth is
uncertain.
The markets for our products and services are continuing to evolve and are
increasingly competitive. Demand and market acceptance for recently introduced
and proposed new products and services and sales of them through our proposed
international operations are subject to a high level of uncertainty and risk.
Our business may suffer if the market develops in an unexpected manner, develops
more slowly than in the past or becomes saturated with competitors, if any new
products and services do not sustain market acceptance or if our efforts to
expand internationally do not sustain market acceptance.
We will require additional capital in order to sustain our business and execute
our growth plan, which capital may not be available to us.
Our workshop business model requires significant outlays of money in
advance for directed sales and marketing expenses to obtain each new sale. This
requires us to continue to make significant ongoing expenditures to cover these
customer acquisition costs. Our experience over the past five years validates
this business model and we have generally experienced an immediate positive
financial return to these expenditures under current conditions. If these
conditions change then our operations and financial prospects will be adversely
effected. Our plan to grow our business includes increasing sales to our
existing customers, something with which we have had little success in the past.
We believe, based on our current strategic plan to increase revenues, that
we will need substantial amounts of additional financing by the end of our third
fiscal quarter (March 31, 2002), in addition to the capital raised in our
current private placement of unregistered common stock. Our success in raising
this capital will depend upon our ability to access equity capital markets and
obtain working capital through sales of our customer receivables. We may not be
able to obtain additional funds on acceptable terms. If we fail to obtain funds
on acceptable terms, we might be forced to delay or abandon some or all of our
plans for growth, including the development of products, the financing of
acquisitions, or the pursuit of business opportunities. If we issue securities
for capital, the interests of investors and shareholders could be diluted.
We may not have the resources to compete with other companies within our
industry.
Although most of our direct competitors have not to date offered a range of
Internet products and services comparable to those offered by us, many have
announced their intention to do so. These competitors at any time could elect to
focus additional resources in our target markets, which could materially and
adversely affect us. Many of our current and potential competitors have longer
operating histories, larger customer bases, longer relationships with clients
and significantly greater financial, technical, marketing and public relations
resources than we do. Competitors that have established relationships with large
companies, but have limited expertise in providing Internet solutions, may
nonetheless be able to successfully use their client relationships to enter our
target market or prevent our penetration into their client accounts. We believe
our competitors may be able to adapt more quickly to new technologies and
customer needs, devote greater resources to the promotion or sale of their
products and services, initiate or withstand substantial price competition, take
advantage of acquisition or other opportunities more readily or develop and
expand their product and service offerings more quickly.
Expansion into international markets and development of country-specific
eCommerce products and services may be difficult or unprofitable.
We currently do not have any international operations. However, we plan to
expand our current operations into selected international markets. Our failure
to establish successful operations and sales and marketing efforts in
international markets would likely seriously harm the financial results of our
operations.
There are difficulties inherent in doing business in international markets
such as:
o cultural and other differences between the markets with which we
are familiar and these international markets that could result in
lower than anticipated attendance at our preview sessions and
Internet training workshops and/or lower than anticipated sales
o unproven markets for our services and products
o less developed distribution and payment mechanisms that may
impede the growth of eCommerce;
o unexpected changes in regulatory requirements o potentially
adverse tax environment
o export restrictions and tariffs and other trade barriers
o difficulties in staffing and managing foreign offices
o burdens of complying with applicable foreign laws and exposures
to different legal standards, particularly with respect to
intellectual property, privacy and distribution of potentially
offensive or unlawful content over the Internet, and
o fluctuations in currency exchange rates.
We have experienced difficulty monetizing the customer receivables generated by
our workshop business that may require us to raise additional working capital.
One of the reasons that we have achieved our current level of sales at
our Internet training workshops is that we offer our customers a choice of
payment options, including a lease and an installment payment plan. The lease
arrangement is provided through a related third party that pays us an agreed
amount at the time of sale for the products and services acquired by the
customer, and we are in discussions with this related third party concerning the
terms upon which this option will be made available to our customers in the
future. The installment contracts are delivered to one of several third parties
for servicing and thereafter we seek to sell these contracts to the servicer and
other third parties. We experienced difficulties during fiscal year 2001 in
selling these installment contracts at historical levels, and a continuation or
exacerbation of these conditions will require us to raise additional working
capital to allow us to carry these assets on our balance sheet. All of these
leasing and installment contract arrangements are subject to termination at any
time by notice to us. The arrangements for the sale of the installment contracts
include a reserve account held by the purchaser of the contracts as security
against defaults by the customer. As a result of financial difficulties
experienced by one of these third party purchasers there is a substantial risk
that this third party may not be able to pay the amount due to us with respect
to the reserve account as it becomes payable. We have therefore reserved against
this item and may have to raise additional working capital to cover such a loss,
should it materialize.
Management beneficially owns approximately 13% of our common stock and their
interests could conflict with other stockholders.
Our current directors and executive officers beneficially own approximately
13% of our outstanding common stock. As a result, the directors and executive
officers collectively may be able to substantially influence all matters
requiring stockholder approval, including the election of directors and approval
of significant corporate transactions. Such concentration of ownership may also
have the effect of delaying or preventing a change in control.
Our future success depends on continued growth in acceptance of the Internet as
a business medium.
In order for us to attain success, the Internet must continue to achieve
widespread acceptance as a business medium. In addition, the businesses and
merchants to whom we market our products and services must be convinced of the
need for an online eCommerce presence and must be willing to rely upon third
parties to develop and manage their e-commerce offerings and marketing efforts.
It remains uncertain whether a significant market for our products and services
will grow or whether our products and services will become generally adopted.
Our business model may not be successful and may need to be changed, and if we
are not successful in responding to the evolution of the Internet and in
tailoring our product and service offerings to respond to this evolution, our
business will be materially and adversely affected.
The Internet may become subject to U.S. and foreign government regulation, the
impact of which is difficult to predict.
Any existing or new legislation applicable to the Internet could expose us
to substantial liability, including significant expenses necessary to comply
with such laws and regulations. Few laws or regulations currently directly apply
to the Internet. It is currently unclear what, if any, will be the potential
impact on Internet usage generally and e-commerce in particular, of new or
existing laws and regulations concerning such Internet-related issues as user
privacy, defamation, pricing, advertising, taxation, gambling, sweepstakes,
promotions, content regulation, national security, quality of products and
services, and intellectual property ownership and infringement.
Other nations have taken actions to restrict the free flow of material
deemed to be objectionable on the Internet. The European Union has adopted
privacy and copyright directives that may impose additional burdens and costs on
our proposed international operations and we have not yet completed our analysis
of the impact of these and other laws, regulations and directives on our
proposed international operations. In addition, several telecommunications
carriers, including America's Carriers' Telecommunications Association, are
seeking to have telecommunications over the Web regulated by the FCC in the same
manner as other telecommunications services. Many areas with high Internet use
have experienced interruptions in phone service, and local telephone carriers,
are seeking governmental action to regulate Internet service providers and
online service providers and to impose access fees.
A number of proposals have been made at the federal, state and local level
that would impose additional taxes on the sale of goods and services over the
Internet and certain states have taken measures to tax Internet-related
activities. Foreign countries also may tax Internet transactions. The taxation
of Internet-related activities could have the effect of imposing additional
costs on companies that conduct business over the Internet. This, in turn, could
lead to increased prices for products and services, which could decrease demand
for our solutions.
Our operations could be hurt by terrorist attacks and other activity that make
air travel difficult or reduce the willingness of our target customers to attend
our group meetings.
We rely on frequent presentations of our preview training sessions and
Internet training workshops by a limited number of persons in various cities and
these persons generally travel by air. In addition, these preview training
sessions and Internet training workshops involve large groups of persons in
upscale and sometimes marquis hotel facilities. Our business would be materially
and adversely affected by air travel becoming less available due to significant
cut backs in the frequency of service or significant increases in processing
times at airports due to security or other factors or by air travel becoming
unavailable due to governmental or other action as was the case during a brief
period during September 2001. In addition, our business would be materially and
adversely affected if our target customers were to become fearful of attending
large public meetings in large hotels.
Internet security issues pose risks to the development of e-commerce and our
business.
Security and privacy concerns may inhibit the growth of the Internet and
other online services generally, especially as a means of conducting commercial
transactions. Processing eCommerce transactions involves the transmission and
analysis of confidential and proprietary information of the consumer, the
merchant, or both, as well as our own confidential and proprietary information.
Anyone able to circumvent security measures could misappropriate proprietary
information or cause interruptions in our operations, as well as the operations
of the merchant. We may be required to expend significant capital and other
resources to protect against security breaches or to minimize problems caused by
security breaches. To the extent that we experience breaches in the security of
proprietary information which we store and transmit, our reputation could be
damaged and we could be exposed to a risk of loss or litigation and possible
liability.
We depend upon our proprietary intellectual property rights, none of which can
be completely safeguarded against infringement.
We are aware that third parties have, from time to time, copied significant
portions of our directory listings for use in competitive Internet navigational
tools and services. We rely upon copyright law, trade secret protection and
confidentiality or license agreements with our employees, customers, business
partners and others to protect our proprietary rights, but we cannot guarantee
that the steps we have taken to protect our proprietary rights will be adequate.
We do not have any patents or significant trademarks, and effective trademark,
copyright and trade secret protection may not be available in every country in
which our products and media properties are distributed or made available
through the Internet. In addition, while we attempt to ensure that our licensees
maintain the quality of our brand, these licensees may take actions that could
materially and adversely affect the value of our proprietary rights or the
reputation of our products and media properties.
We may incur substantial expenses in defending against third-party patent and
trademark infringement claims regardless of their merit.
We intend to change our corporate name, Netgateway, Inc., to a new name in
response to claims made by the holder of a registered trademark that our
"Netgateway" name and brand infringes their trademark, in which case we will
incur costs to adopt and develop the new corporate identify.
We are aware of lawsuits filed against certain of our competitors regarding
the presentment of advertisements in response to search requests on "keywords"
that may be trademarks of third parties. It is not clear what, if any, impact an
adverse ruling in these recently filed lawsuits would have on us. Many parties
are actively developing search, indexing, e-commerce and other Web-related
technologies. We believe that these parties will continue to take steps to
protect these technologies, including seeking patent protection. As a result, we
believe that disputes regarding the ownership of these technologies are likely
to arise in the future.
From time to time, parties may assert patent infringement claims against us
in the form of letters, lawsuits and other forms of communications. Third
parties may also assert claims against us alleging infringement of copyrights,
trademark rights, trade secret rights or other proprietary rights or alleging
unfair competition. If there is a determination that we have infringed
third-party proprietary rights, we could incur substantial monetary liability
and be prevented from using the rights in the future.
Our operations, based in Utah, could be hurt by a natural disaster or other
catastrophic event.
Substantially all of our network infrastructure is located in Utah, an
area susceptible to earthquakes. We do not have multiple site capacity if any
catastrophic event occurs and, although we do have a redundant network system,
this system does not guarantee continued reliability if a catastrophic event
occurs. Despite implementation of network security measures, our servers may be
vulnerable to computer viruses, break-ins and similar disruptions from
unauthorized tampering with our computer systems. In addition, if there is a
breach or alleged breach of security or privacy involving our services, or if
any third party undertakes illegal or harmful actions using our community,
communications or eCommerce services, our business and reputation could suffer
substantial adverse publicity and impairment. We do not carry sufficient
business interruption or other insurance at this time to compensate for losses
that may occur as a result of any of these events.
There are low barriers to entry into the e-commerce services market and as a
result we face significant competition in a rapidly evolving industry.
We have no patented, and only a limited amount of other proprietary,
technology that would preclude or inhibit competitors from entering our
business. In addition, the costs to develop and provide eCommerce services are
relatively low. Therefore, we expect that we will continually face additional
competition from new entrants into the market in the future. There is also the
risk that our employees may leave and start competing businesses. The emergence
of these enterprises could have a material adverse effect on us. Existing or
future competitors may better address new developments or react more favorably
to changes within our industry and may develop or offer e-commerce services
providing significant technological, creative, performance, price or other
advantages over the services that we offer.
Fluctuations in our operating results may affect our stock price and ability to
raise capital.
You should not rely on our results for any interim period as an indication
of future performance. Quarter to quarter comparisons of our results of
operations may not be meaningful as a result of (i) our limited operating
history; (ii) the emerging nature of the markets in which we compete, and (iii)
during the past two and next two fiscal quarters, a non-recurring benefit
resulting from the recognition of deferred revenue. In addition, future results
may fluctuate, causing our results of operations to fall below the expectations
of investors and potentially causing the trading price of our common stock to
fall, impairing our ability to raise capital. Our quarterly results may
fluctuate due to the following factors, among others:
o our ability to attract and retain clients
o one time events that negatively impact attendance and sales at
our preview sessions and Internet training workshops;
o intense competition
o Internet and online services usage levels and the rate of market
acceptance of these services for transacting commerce
o our ability to timely and effectively upgrade and develop our
systems and infrastructure
o our ability to attract, train and retain skilled management,
strategic, technical and creative professionals
o technical, legal and regulatory difficulties with respect to our
workshop distribution channel and Internet use generally;
o the availability of working capital and the amount and timing of
costs relating to our expansion, and
o general economic conditions and economic conditions specific to
Internet technology usage and eCommerce.
Investors will incur immediate and substantial dilution.
Significant additional dilution will result if outstanding options and
warrants are exercised. As of June 30, 2001, we had outstanding stock options to
purchase approximately 3,740,000 shares of common stock and warrants and
convertible securities to purchase approximately 16,732,000 shares of common
stock. To the extent that such options, warrants and convertible securities are
exercised, there will be further dilution. In addition, in the event future
financings should be in the form of, be convertible into, or exchangeable for
our equity securities, investors may experience additional dilution.
Some provisions of our certificate of incorporation and bylaws may deter
takeover attempts that may limit the opportunity of our stockholders to sell
their shares at a favorable price.
Some of the provisions of our certificate of incorporation and bylaws could
make it more difficult for a third party to acquire us, even if doing so might
be beneficial to our stockholders by providing them with the opportunity to sell
their shares at a premium to the then market price. Our bylaws contain
provisions regulating the introduction of business at annual stockholders'
meetings by anyone other than the board of directors. These provisions may have
the effect of making it more difficult, delaying, discouraging, preventing or
rendering more costly an acquisition or a change in control of our company.
In addition, our corporate charter provides for a staggered board of
directors divided into two classes. Provided that we have at least four
directors, it will take at least two annual meetings to effectuate a change in
control of the board of directors because a majority of the directors cannot be
elected at a single meeting. This extends the time required to effect a change
in control of the board of directors and may discourage hostile takeover bids.
We currently have three directors. Because we did not hold an annual meeting
during fiscal year 2000, the terms of all of our directors will expire at the
time of our next annual meeting.
Further, our certificate of incorporation authorizes the board of directors
to issue up to 5,000,000 shares of preferred stock, which may be issued in one
or more series, the terms of which may be determined at the time of issuance by
the board of directors without further action by stockholders. Such terms may
include voting rights, including the right to vote as a series on particular
matters, preferences as to dividends and liquidation, conversion and redemption
rights and sinking fund provisions. No shares of preferred stock are currently
outstanding and we have no present plans for the issuance of any preferred
stock. However, the issuance of any preferred stock could materially adversely
affect the rights of holders of our common stock, and therefore could reduce its
value. In addition, specific rights granted to future holders of preferred stock
could be used to restrict our ability to merge with, or sell assets to, a third
party. The ability of the board of directors to issue preferred stock could make
it more difficult, delay, discourage, prevent or make it more costly to acquire
or effect a change in control, thereby preserving the current stockholders'
control.
Our stock price and its volatility and our listing may make it more difficult to
resell shares when desired or at attractive prices.
Our common stock now trades on The Nasdaq Over the Counter Bulletin Board
as a result of its delisting from The Nasdaq National Market for reasons
including its low price. Some investors view low-priced stocks as unduly
speculative and therefore not appropriate candidates for investment. Many
institutional investors have internal policies prohibiting the purchase or
maintenance of positions in low-priced stocks. This has the effect of limiting
the pool of potential purchasers of our common stock at present price levels.
Stockholders may find greater percentage spreads between bid and asked prices,
and more difficulty in completing transactions and higher transaction costs when
buying or selling our common stock than they would if our stock were listed on
the Nasdaq National Market. In addition, the market for our common stock may not
be an active market.
The trading price of our common stock has been, and may continue to be,
subject to wide fluctuations. From November 18, 1999, when our stock first began
trading on The Nasdaq National Market, through September 30, 2001, following our
January 10, 2001 listing on the Over-the-Counter Bulletin Board, the closing
sale prices ranged from $0.125 to $12.25. The stock price may fluctuate in
response to a number of events and factors, such as quarterly variations in
operating results, announcements of technological innovations or new products
and services by us or our competitors, changes in financial estimates and
recommendations by financial analysts covering other companies, the operating
and stock price performance of other companies that investors may deem
comparable, and news reports relating to trends in our markets. In addition, the
stock market in general, and the market prices for Internet-related companies in
particular, have experienced extreme volatility that often has been unrelated to
the operating performance of such companies. These broad market and industry
fluctuations may adversely affect the price of our stock, regardless of our
operating performance.
Future sales of common stock by our existing stockholders and by holders of
warrants and stock options granted by us could adversely affect our stock price.
The market price of our common stock could decline as a result of sales of
a large number of shares of our common stock in the market or the perception
that these sales could occur, including as a result of our contractual
obligation to register for public resale certain of our outstanding shares.
These sales also might make it more difficult for us to sell equity securities
in the future at a time and at a price that we deem appropriate. As of September
30, 2001, we had outstanding 41,988,565 shares of common stock, of which
9,584,722 were freely tradable. An additional 5,847,722 shares were reserved for
issuance pursuant to exercise of warrants and options. Shares issued upon the
exercise of stock options granted under our stock option plans will be eligible
for resale in the public market from time to time subject to vesting and, in the
case of some options, the expiration of the lock-up agreements.
Item 2. Properties.
In October 2001, we completed the consolidation of our then existing
operations in southern California with those acquired through our merger with
Galaxy Enterprises by moving our headquarters from Long Beach, California to
Orem, Utah. Restructuring charges were approximately $275,000, which consisted
of severance packages, relocation expenses and equipment moving costs.
Our principal office is located at 754 East Technology Avenue, Orem, Utah
84097. The property consists of approximately 15,000 square feet leased from two
unaffiliated third parties with or a period of three years remaining on the
lease with an annual rental of $265,740. We maintain tenant fire and casualty
insurance on our properties located in these buildings in an amount that we deem
adequate. We also rent on a daily basis hotel conference rooms and facilities
from time to time in various cities throughout the United States and Canada at
which we host our preview sessions and Internet training workshops. We are under
no long-term obligations to such hotels.
Item 3. Legal Proceedings.
We are not a party to any material legal proceedings.
From time to time, Galaxy Mall receives inquiries from attorney general
offices and other regulators about civil and criminal compliance matters with
various state and federal regulations. These inquiries sometimes rise to the
level of investigations and litigation. In the past, our Galaxy Mall business
has received letters of inquiry from and/or has been made aware of
investigations by the attorneys general of Hawaii, Illinois, Kentucky, Nebraska,
North Carolina, Vermont, Utah and Texas and from a regional office of the
Federal Trade Commission and has responded to these inquiries and generally been
successful in addressing the concerns of these persons and entities, although
there is generally no formal closing of the inquiry or investigation. There can
be no assurance that these or other inquiries and investigations will not have a
material adverse effect on Galaxy Enterprises' business or operations. We
receive in the ordinary course complaints and inquiries with respect to our
business from both customers and governmental and non-governmental bodies on
behalf of customers. To date we have been able to resolve these matters on a
mutually satisfactory basis.
We owed approximately $437,000 to the IRS and other local authorities for
accrued unpaid payroll taxes, including interest and penalties, as of September
30, 2001. Through September 30, 2001, we have paid a total of $60,000 toward
back taxes and we expect to pay an additional $40,000 each month until the total
balance is paid.
Effective January 10, 2001, we entered into severance agreements with each
of Keith Freadhoff and Donald Corliss, former officers and directors of our
company. In consideration for the following, Messrs. Freadhoff and Corliss
agreed to release us from the provisions of their respective employment
agreements: engagement as a consultant and payment of consulting fees,
reimbursement of business expenses, continuation of health insurance benefits
for six months, the granting of a license to the code base of the ICC, an
interest in a server and a grant of options to purchase our common stock
proportionate to any options granted to Donald Danks. On August 30, 2001, Mr.
Freadhoff and Mr. Corliss issued a demand letter to us, claiming that the
payments stipulated in the severance agreements had not been made and purporting
to reassert their rights under their respective employment agreements. We
believe that we have complied with the terms of these agreements. We are
attempting to negotiate a resolution of the matters raised in the demand letter,
but there is no assurance that we will be successful in this regard.
David Bassett-Parkins our former chief financial officer and chief
operating officer, and Hahn Ngo, our former executive vice president operations,
each delivered notice of intent to terminate their respective employment
agreements for "good reason," as that term is defined in his or her employment
agreement. Each of them has claimed that, under his or her employment agreement,
he or she was entitled to a lump sum severance payment as a result of
terminating his or her employment for "good reason." We are in negotiations with
Mr. Bassett-Parkins and Ms Ngo regarding their claims and other matters, and it
is not possible to determine the outcome of these negotiations at this time. In
addition, an action has been commenced against Mr. Bassett-Parkins by Keith
Freadhoff, as trustee of Oceangate Trust No. 117, and against Ms. Ngo by Keith
Freadhoff, as trustee of Oceangate Trust No. 119, for amounts claimed to be due
to those trusts as a results of alleged transfers of our stock by those trusts
to those persons.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of our stockholders during the fourth
quarter of the fiscal year ended June 30, 2001.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters.
Market Information
Our common stock has traded on the Nasdaq OTC Bulletin Board since January
10, 2001 under the symbol "NGWY." Between November 18, 1999 and January 9, 2001,
our common stock traded on The Nasdaq National Market under the symbol "NGWY."
From June 2, 1998 until November 18, 1999, our common stock traded on the Nasdaq
OTC Bulletin Board under the symbol "NGWY." The following table sets forth the
range of high and low bid prices as reported on The Nasdaq National Market or
the Nasdaq OTC Bulletin Board, as applicable, for the periods indicated.
High Low
Fiscal 2001
First Quarter........................................... $ 2.44 $ 0.78
Second Quarter.......................................... 1.00 0.16
Third Quarter........................................... 0.69 0.16
Fourth Quarter.......................................... 0.75 0.28
Fiscal 2000
First Quarter........................................... 11.88 6.50
Second Quarter.......................................... 11.56 5.13
Third Quarter........................................... 13.38 7.94
Fourth Quarter.......................................... 9.17 1.59
These bid prices indicate the prices that a market maker is willing to pay.
These quotations do not include retail markups, markdowns or other fees and
commissions and may not represent actual transactions.
Security Holders
There were approximately 601 holders of our shares of common stock as of
September 30, 2001.
Dividends
We have never paid any cash dividends on our common stock and we anticipate
that we will retain future earnings, if any, to finance the growth and
development of our business. Therefor, we do not anticipate paying any cash
dividends on our shares for the foreseeable future.
Recent Sales of Unregistered Securities
On April 5, 2001, we entered into an agreement with four of our executive
officers to issue them a total of 1,906,500 shares of our common stock at a
price of $.30 per share, which price was equal to the market value of the stock
at the time, in exchange for the release by them of claims for loans made to us
and unpaid salaries and bonuses accrued during the period January 1999 to
February 2001 totaling $571,950 in the aggregate. In our opinion, the offer and
sale of these shares was exempt by virtue of Section 4(2) of the Securities Act
and the rules promulgated thereunder.
On August 1, 2001, we entered into an agreement with Electronic Commerce
International, pursuant to which, among other matters, we agreed to issue to
them a total of 831,915 shares of our common stock at a price of $.30 per share
in exchange for the release by it of trade claims by them against us totaling
$249,575 in the aggregate. In our opinion, the offer and sale of these shares
was exempt by virtue of Section 4(2) of the Securities Act and the rules
promulgated thereunder.
On September 10, 2001, we completed the conversion of the $2.5 million
convertible debenture held by King William and in connection therewith issued to
King William a total of 2,800,000 shares of our common stock. We believe this
transaction was exempt from registration by virtue of Sections 3(a)(9) and/or
4(2) of the Securities Act and the rules promulgated thereunder.
During the period from June 1, 2001 through September 30, 2001, we sold by
way of private placement, a total of 9,048,920 shares of our common stock for an
aggregate consideration of $2,714,676. In our opinion, the offer and sale of
these shares was exempt by virtue of Section 4(2) of the Securities Act and the
rules promulgated thereunder.
Item 6. Selected Financial Data
The following selected restated consolidated financial data should be
read in conjunction with our consolidated financial statements and related notes
thereto and Item 7, "Management's Discussion and Analysis of Financial Condition
and Results of Operations," and reflect the acquisitions of Infobahn
Technologies, LLC (d/b/a Digital Genesis) completed on June 2, 1998, Spartan
Multimedia, Ltd. completed on January 15, 1999 and Galaxy Enterprises, Inc.
completed on June 26, 2000. The acquisition of Galaxy Enterprises, Inc. was
accounted for as a pooling-of-interests. Accordingly, all periods prior to the
acquisition have been restated. The consolidated statement of operations data
for each of the years in the two-year period ended June 30, 2001, and the
consolidated balance sheet data at June 30, 2001 and 2000 are derived from our
consolidated financial statements and are included elsewhere in this document.
Prior to the combination, Galaxy Enterprises' fiscal years ended on December 31.
In recording the pooling-of-interests, Galaxy Enterprises' financial statements
for the years ended December 31, 2000 and 1999 have been restated to conform to
our fiscal years ended June 30, 2000 and 1999. The restatement of Galaxy
Enterprises' results include a duplication of operations for the period from
July 1, 1998 to December 31, 1998. As a result, we have eliminated the related
income of $1,733,441 from accumulated deficit for fiscal 1999, which includes
$3.7 million in revenue, and Galaxy Enterprises' financial statements for the
year ended December 31, 1998 have been combined with our financial statements
for the period from March 4, 1998 (inception) through June 30, 1998. The
unaudited consolidated statement of operations data for the year ended June 30,
1997 and the consolidated balance sheet data at June 30, 1997 are derived from
the unaudited consolidated financial statements of Galaxy Enterprises, Inc. as
of December 31, 1997 and 1996 and each of the years in the two-year period ended
December 31, 1997. In the opinion of management, these statements have been
prepared on the same basis as the audited consolidated financial statements and
include all adjustments, consisting of normal recurring adjustments, necessary
for the fair statement of the results of these periods. Historical results are
not necessarily indicative of the results to be expected in the future.
Year Ended
_________________________________________________________________
June 30, June 30, June 30, June 30, June 30,
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
Consolidated Statement of Operations Data: (in thousands
except per
share amounts) (unaudited)
Revenue $ 43,001 $ 22,150 $ 10,280 $ 7,268 $ 358
Loss from continuing operations (4,315) (42,790) (16,797) (8,521) (2,049)
Income (loss) from discontinued operations (286) (1,318) 3 - -
Income on extraordinary items 962 - 1,653 - -
Net Loss (3,639) (44,108) (15,141) (8,521) (2,049)
Basic and diluted (loss) income per share:
Loss from continuing operations (0.19) (2.31) (1.34) (0.97) (.61)
Loss from discontinued operations (0.01) (0.07) - - -
Income from extraordinary items 0.04 - 0.13 - -
Net loss per common share (0.16) (2.38) (1.21) (0.97) (.61)
Weighted average common shares outstanding
Basic and diluted 22,280 18,511 12,536 8,788 3,366
Consolidated Balance Sheet Data: As of June 30
_______________________________________________________________
2001 2000 1999 1998 1997
Cash $ 149 $ 2,607 $ 968 $ 279 $ 113
Working capital deficit (11,352) (14,845) (9,292) (8,733) (851)
Total assets 6,055 11,851 5,353 2,041 1,282
Short-term debt 3,759 409 1,535 2,152 -
Long-term debt 442 - - 383 15
Capital deficit (9,307) (10,776) (8,106) (7,692) (1,929)
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
This management's discussion and analysis of financial condition and
results of operations and other portions of this prospectus contain
forward-looking information that involves risks and uncertainties. Our actual
results could differ materially from those anticipated by this forward-looking
information. Factors that may cause such differences include, but are not
limited to, those discussed under the heading "Risk Factors" and elsewhere in
this prospectus. This management's discussion and analysis of financial
condition and results of operations should be read in conjunction with the
financial statements and the related notes included elsewhere in this
prospectus.
General
The financial statements for the year ended June 30, 2000 have been
reclassified to conform to current year presentation, including disclosures for
discontinued operations.
We have in the past been operating with large losses as discussed in
our quarterly reports for the quarters ending March 31, 2001 and December 31,
2000 as well as previous filings. Our liquidity was severely strained to the
point where as of January 1, 2001 it was not possible to continue operations
without significant changes.
At a board meeting on January 3, 2001, Donald L. Danks was appointed as
a director, and on January 5, 2001, Mr. Danks was appointed as our Chairman and
Chief Executive Officer. At that meeting, John J. Poelman was appointed as our
President and Chief Operating Officer. The board also accepted the resignations
of Chairman and Chief Executive Officer, Keith D. Freadhoff; Chief Operating
Officer and Director Donald C. Corliss, and Directors Scott Beebe and Robert
Ciri. The board thereafter consisted of three members, Donald L. Danks, John J.
Poelman and Shelly Singhal.
Following the January 2001 change in the board and management, we
implemented a restructuring process intended to allow us to begin to operate
immediately on a cash flow positive basis. The Business-to-Business Solutions
division and the CableCommerce division were reduced to a maintenance staff
supporting existing customers, and all other employees were laid off. Our
wholly-owned subsidiary, IMI, Inc., also known as Impact Media, was sold. We
entered into an agreement with a third party to negotiate a compromise payment
schedule with non-essential vendors for less than the full amount owed. In
addition, key management employees agreed to voluntarily reduce their salaries.
This restructuring allowed us to focus our attention and resources on
our core Galaxy Mall Division, an eCommerce company, with a view to it providing
sufficient revenues to finance continued operations. Approximately $2.1 million
was raised through the private placement of convertible notes to support the
Galaxy Mall operations and assist in repaying our heavy debt load. The following
discussion of the results of operations will further expand upon the effects of
these changes.
Fluctuations in Quarterly Results and Seasonality
In view of the rapidly evolving nature of our business and our limited
operating history, we believe that period-to-period comparisons of our operating
results, including our gross profit and operating expenses as a percentage of
net sales, are not necessarily meaningful and should not be relied upon as an
indication of future performance.
While we cannot say with certainty the degree to which we experience
seasonality in our business because of our limited operating history, our
experience to date indicates that we experience lower sales from our Galaxy Mall
business during our first and second fiscal quarters. We believe this to be
attributable to summer vacations and the Thanksgiving and December holiday
seasons.
Merger of Netgateway, Inc. and Galaxy Enterprises, Inc.
On June 26, 2000, we completed the merger of Galaxy Enterprises, Inc.
into one of our wholly owned subsidiaries. The merger was accounted for as a
pooling-of-interests. Accordingly, our historical consolidated financial
statements and the discussion and analysis of financial condition and results of
operations for the prior periods have been restated to include the operations of
Galaxy Enterprises, Inc. as if it had been combined with our company at the
beginning of the first period presented.
Results of Operations
Years Ended June 30, 2001 and 2000
Revenue
Revenues for the year ended June 30, 2001 increased to $43,000,533 from
$22,149,649 in the prior fiscal year, an increase of 94%. Operating revenues for
both years are from the design and development of Internet web sites and related
consulting projects, revenues from our Internet training workshops (including
attendance at the workshop, rights to activate web sites and hosting), sales of
banner advertising, web traffic building products, mentoring and transaction
processing. We expect future operating revenues to be generated principally from
our Internet training workshops following a business model similar to the one
used in the latter part of fiscal year 2001. The Internet environment continues
to evolve, and we intend to offer future customers new products as they are
developed. We anticipate that our offering of products and services will evolve
as some products are dropped and are replaced by new and sometimes innovative
products intended to assist our customers achieve success with their
Internet-related businesses.
Formerly we reported product sales that came from our subsidiary, IMI,
Inc. On January 11, 2001, we sold IMI for $1,631,589, including $1,331,589 owed
to us by IMI at the time of the sale. We received a cash payment of $300,000 and
a promissory note for the balance. Accordingly, IMI operations from this and
prior periods are now reported as discontinued operations in the accompanying
consolidated statement of operations.
The increase in revenues from fiscal 2000 to 2001 can be attributed to
two major factors. First, there was an increase in the number of Internet
training workshops conducted during the years. The number increased to 337
workshops for the current fiscal year from 250 in the fiscal year ended June 30,
2000. We expect this trend to continue since we intend to expand into
international operations.
The second factor contributing to the increased revenue was a change in
the business model for our Galaxy Mall Internet workshop training business.
Since October 1, 2000, the product sold to our customers at our Internet
training workshop has been a "Complete Store-Building Packet" which contains a
CD- ROM that includes the necessary computer software and instructions to allow
the customer to construct its storefront without any additional services being
supplied by us. If additional assistance is required, we provide it for a fee
and charge the customer after the services are rendered. The customer may host
the storefront with us or any other provider of Internet hosting services. If
the customer elects to prepay us for hosting, we recognize the revenue as the
service is rendered. Under this new model, we now recognize most of the revenue
generated at our Internet workshops at the time of sale. We anticipate enhanced
revenues and earnings during the first two quarters of fiscal year 2002 since
the amount of revenue deferred from each Internet workshop sale will be greatly
reduced and the revenue from prior period sales will continue to be recognized
during fiscal year 2002. During the year ended June 30, 2001, we recognized
$14,534,542 in revenue from sales made in prior fiscal years and we deferred
revenue from the current fiscal year of $5,057,422 to future years. The net
change increased revenues for fiscal year 2001 by $9,460,686.
We anticipate that the beneficial deferred revenue impact will continue
only during the first two quarters of fiscal year 2002 due to the change in our
product offerings. Thereafter we anticipate that the amount of revenue
recognized from earlier quarters will be approximately equal to that deferred
into future periods. If we enjoy a strong growth rate, it is possible that
during any one quarter the amount of revenue deferred into future periods will
exceed that recognized during the same quarter from sales in prior periods.
Gross Profit
Gross profit is calculated as revenue less the cost of sales, which
consists of the cost to conduct Internet training workshops, to program customer
storefronts, to provide customer support and the cost of tangible products sold.
Gross profit for the fiscal year ended June 30, 2001 increased to $34,574,958
from $13,684,558 in the prior year. The increase in gross profit primarily
reflects the increased sales volume of services provided through our Internet
training workshops and the effect on revenues from the sale of the "Complete
Store-Building Packet" as explained above.
Gross margin percentages increased for the fiscal year ended June 30,
2001 to 80% of revenue from 62% of revenue for the fiscal year ended June 30,
2000. The increase in gross profit as a percentage of revenue is due to several
factors: the additional revenue from prior product offerings recognized from
prior years that will decrease due to the change in our product offerings,
compared to lower costs in providing our customers the services they require to
complete their storefront web sites; new programming tools and stringent cost
controls which increased the productivity of the support group our customers
use; and the cost of conducting our Internet training workshops remaining
relatively constant per workshop, while the number of workshops and the selling
price of the products delivered at the workshops both increased. The percentage
of attendees at the workshops who purchased the Complete Store-Building Packet
remained approximately the same as it had been in the former business model.
We anticipate that gross profit as a percentage of sales will decline
in fiscal year 2002 from the 80% achieved in fiscal year 2001. This decline is
expected because of the effect of the deferred revenue amortization discussed
above. We believe the achievable gross profit percentage, after the second
fiscal quarter of fiscal year 2002, will be similar to what was experienced by
our GalaxyMall subsidiary without regard to the amortization of the deferred
revenue during the fiscal year ended June 30, 2001 to approximately 60% to 70%.
Product Development
Product development expenses consist primarily of payroll and related
expenses for development, editorial, creative and systems personnel as well as
outside contractors. Product development expenses for the fiscal year ended June
30, 2001 decreased to $1,804,986 from $6,462,999 in the prior fiscal year. Most
of the development expenses for the Internet Commerce Center (ICC) were incurred
prior to December 2000. We have completed the basic development of the ICC, as
redefined by us.
We intend to make enhancements to our technology, including the ICC, as
technology and business opportunities present themselves, but our business model
currently contemplates that in most cases we will seek to pass these costs to
our customers. Other product development projects currently in progress are a
Web-builder packet and a shopping mall development tool. We intend to expense
these costs as incurred. We will undertake additional development projects as
the needs are identified and as the funds to undertake the work are available.
Selling and Marketing
Selling and marketing expenses consist of payroll and related expenses
for sales and marketing and the cost of advertising, promotional and public
relations expenditures and related expenses for personnel engaged in sales and
marketing activities. We also contract with telemarketing companies and
commissions earned by them are included. Selling and marketing expenses for the
fiscal year ended June 30, 2001 increased to $20,949,758 from $18,536,486 in the
previous 12-month period. The increase in selling and marketing expenses is
primarily attributable to the increase in the number of workshops held during
the current year and the associated advertising and promotional expenses
necessary to attract attendees. During fiscal year 2001 there were approximately
$1,700,000 in selling and marketing expenses associated with our B2B and Cable
Commerce divisions. These divisions have been reduced in scope as discussed
above. Selling and marketing expenses associated with the B2B and CableCommerce
divisions for the fiscal year ending June 30, 2000 were approximately
$4,500,000. Selling and marketing expenses as a percentage of sales decreased to
49% of revenues for the current fiscal year from 84% in the previous 12-month
period. We expect selling and marketing expenses to increase as a percentage of
revenues in the future due to the effects of the deferred revenue explained
above.
General and Administrative
General and administrative expenses consist of payroll and related
expenses for executive, accounting and administrative personnel, professional
fees, bad debts and other general corporate expenses. General and administrative
expenses for the fiscal year ended June 30, 2001 decreased to $10,558,918 from
$25,676,472 in the previous fiscal year. This decrease is primarily attributable
to the decrease in payroll and related expenses that resulted from the
relocation of our headquarters to Orem, Utah from Long Beach, California, the
resignation of senior management personnel that were not replaced, a reduction
in the salaries of retained management personnel and cutbacks in administrative
staff associated with the reorganization of the B2B and CableCommerce divisions.
During the fiscal year ended June 30, 2000, we incurred certain administrative
expenses that were not repeated in fiscal 2001, consisting of one-time legal,
accounting and other costs associated with the acquisition by us of Galaxy
Enterprises, Inc., and the issuance of common stock for services in the amount
of $3,660,498 and to executive officers in exchange for cancellation of options
in the amount of $8,400,000.
Bad debt expense consists of actual and anticipated losses resulting
from the extension of credit terms to and the acceptance of credit cards from
our customers when they purchase products at our Internet training workshops. We
encourage customers to pay for their purchases by check or credit card since
these are the least expensive methods of payment; but we do offer installment
contracts with payment terms up to 24 months. We offer these contracts to all
workshop attendees not wishing to use a check or credit card regardless of their
credit history, because it is our policy to assist everyone who attends a
workshop and wishes to become a Galaxy Mall merchant to achieve their goal. A
down payment at the time of purchase is required. These installment contracts
are sold to various finance companies if our customer has a credit history that
meets the finance company's criteria. If not sold, we carry the contract and
out-source the collection activity.
Bad debt expense was approximately $3.4 million in the fiscal year
ended June 30, 2001 compared to approximately $1.1 million in the prior fiscal
year. The increase is principally due to the increase in the number of
installment contracts accepted by us as the sales volume grew. At the time of a
contract sale to a finance company 20% of the sales price is placed in a reserve
account held by the finance company. If our customer does not make its payments
on the contract, the finance company may charge the reserve for the unpaid
balance previously funded to the extent there are funds available in the reserve
account. At maturity of the customer contract, the net balance of the reserve is
returned to us. One of the finance companies holding a reserve that will be due
to us when the contracts are collected has experienced financial difficulties
and may not be able to return these reserves. We therefore established a loss
provision of approximately $950,000. This reserve is included in bad debt
expense.
During the first fiscal quarter of the current year, we implemented our
previously announced consolidation strategy to relocate our headquarters
operation from Long Beach, California to Orem, Utah. The headquarters of our
Galaxy Mall, Inc. subsidiary has been in Orem since 1997. We realized
significant improvements in operations and savings in general and administrative
expenses as a result of our relocation. The cost structure is more favorable in
Orem due to lower prevailing wage rates in the local labor market, as well as
lower costs for facilities, outside professional services and other costs of
operations. Beginning in October 2000, we reduced personnel in accounting, the
in-house legal department, and general administrative positions.
Depreciation and Amortization
Depreciation and amortization expenses consist of a systematic charge
to operations for the cost of long-term equipment and a write down of the
goodwill associated with the purchase of other businesses. Depreciation and
amortization expenses for the fiscal year ended June 30, 2001 increased to
$1,296,519 from $1,191,143 in the prior 12-month period. This increase was due
to the purchase of additional equipment and software. Future expense for the
amortization of goodwill will be lower because of the write-off of the goodwill
associated with our StoresOnLine subsidiary, as explained under "Extraordinary
Items" in this Management Discussion.
Writedown of Goodwill and Acquired Technology
At December 31, 2000, we wrote off the goodwill relating to our
StoresOnLine subsidiary in the amount of $834,331 and the acquired technology
and goodwill related to our Digital Genesis operation in the amount of $250,145.
It was determined that the assets and technology were no longer being used and
had no market value.
Interest Expense
Interest expense for the fiscal year ended June 30, 2001 decreased to $
3,287,905 from $4,573,695 in the prior fiscal year. We included in interest
expense in the current fiscal year a one-time charge of $884,000 relating to the
fair value of the beneficial conversion feature of an 8% convertible debenture
issued to King William, LLC, the amortization of the discount relating to the
beneficial conversion feature, warrants issued in connection with the sale by us
of convertible notes in January and April 2001 and the actual interest accrued
on the debenture and notes. (See "Liquidity and Capital Resources.") We repaid
the various debt instruments primarily attributable to the interest expense for
fiscal year ended June 30, 2000.
Discontinued Operations
In January 2001, we sold our subsidiary, IMI, Inc. to a third party as
discussed above. As a result, the gain or loss from discontinued operations is
listed on a separate line item in the statement of operations. The loss from
discontinued operations for the current fiscal year is $285,780, compared to a
loss of $1,318,515 in the prior 12-month period.
Extraordinary Items
In January 2001, we entered into an agreement with an unrelated third
party to negotiate settlement agreements with vendors and other debtors,
relating mainly to the B2B and CableCommerce divisions, in an effort to improve
our balance sheet ratios. It was important to remove some of the debts so we
could attract the outside capital investment necessary to keep us solvent and
provide for future growth. We settled approximately $2.5 million in obligations
in this manner, resulting in an extraordinary gain of $1,688,956.
In December 2000, certain equipment and software related to closed
operations in Long Beach, California and American Fork, Utah were taken out of
service and disposed of resulting in a loss of $1,091,052 Additionally there was
a gain on the disposal of IMI, Inc. in the current fiscal year of $363,656.
The total gain of all extraordinary items for the fiscal year ended
June 30, 2001 was therefore $961,560. There was no extraordinary item in the
fiscal year ended June 30, 2000.
Income Taxes
We have not generated any taxable income to date and, therefore, we
have not paid any federal income taxes. The use of our net operating loss carry
forwards, which begin to expire in 2006, may be subject to certain limitations
due to a change of control under Section 382 of the Internal Revenue Code of
1986, as amended.
Years Ended June 30, 2000 and 1999
Revenue
Total revenues for the year ended June 30, 2000 increased to
$22,149,649 from $10,280,440 in the comparable period of the prior fiscal year.
Revenues include the design and development of Internet web sites and
related consulting projects, revenues from our Internet training workshops
(including attendance at the workshop, rights to activate web sites and
hosting), sales of banner advertising, mentoring and transaction processing. Of
the increase in revenues, approximately $5.5 million can be primarily attributed
to the increase in the number of Internet training workshops and attendance at
such workshops, approximately $2.3 million to increased revenues from banner
advertising, and $5.2 million to the design and development of Internet web
sites and their hosting on our Internet Commerce Center.
Gross profit
Gross profit is calculated as net sales less the cost of sales, which
consists of the cost to program customer storefronts, project development,
customer support expenses and tangible products sold. Gross profit for the
fiscal year ended June 30, 2000 increased to $13,684,558 from $6,441,866 in the
comparable prior period. The increase in gross profit primarily reflected our
increased sales volume of services provided through our Internet training
workshops and the addition of several new customers to the Internet Commerce
Center. Gross margin percentages decreased over the same periods due to the
lower gross profit margin associated with the Internet training workshops. The
decrease was partially offset by the licensing of our technology to one customer
during the year, which has no significant costs to sell the license.
Product development
Product development expenses consist primarily of payroll and related
expenses for development, editorial, creative and systems personnel and outside
contractors. Product development expenses for the fiscal year ended June 30,
2000 increased to $6,462,999 from $1,496,563 in the comparable prior period.
Product development expenses increased as we continued to upgrade the Internet
Commerce Center. No other significant development costs for other projects were
incurred.
Selling and marketing
Selling and marketing expenses consist of payroll and related expenses
for sales and marketing and the cost of advertising, promotional and public
relations expenditures and related expenses for personnel engaged in sales and
marketing activities. Selling and marketing expenses for the fiscal year ended
June 30, 2000 increased to $18,536,486 from $8,716,191 in the comparable prior
period. The increases in selling and marketing expenses were primarily
attributable to increased payroll-related and other infrastructure costs as we
expanded and incurred additional costs related to the growth of our business.
General and administrative
General and administrative expenses consist of payroll and related
expenses for executive, accounting and administrative personnel, professional
fees, bad debts and other general corporate expenses. General and administrative
expenses for the fiscal year ended June 30, 2000 increased to $25,676,472 from
$11,558,135 in the comparable prior period. The increase in general and
administrative expenses was attributable primarily to non-cash compensation
expense from common stock issued to certain executives in December 1999 valued
at $11,775,000. The increase in general and administrative expenses was also
attributable to increased payroll-related and other infrastructure costs as we
expanded and incurred additional costs related to the growth of our business, an
increase in bad debts expense of $1,133,022 and one-time merger related expenses
of $889,757 in the fiscal year ended June 30, 2000.
Interest (income) expense, net
Interest expense consists primarily of amortization of debt issuance
costs and debt discount and interest in connection with our issuance of
$1,000,000 of secured convertible debentures due December 31, 1999 and
$6,633,500 of our series A 12% senior notes. The senior notes were issued in
connection with our May through October 1999 bridge financing private
placements. Interest expense for the fiscal year ended June 30, 2000 increased
to $4,573,695 from $933,097 in the comparable prior period. The increase in
interest expense for the fiscal year was attributable primarily to the
amortization of promissory note discounts incurred in conjunction with the
bridge financing. All of the convertible debentures were converted into common
stock as of December 31, 1999. The senior notes were repaid in full in November
1999.
Income taxes
We have not generated any taxable income to date and, therefore, we
have not paid any federal income taxes. The use of our net operating loss carry
forwards, which begin to expire in 2006, may be subject to certain limitations
under Section 382 of the Internal Revenue Code of 1986, as amended. Please read
the notes to the financial statements for additional information on the net
operating loss carry forward.
Liquidity and Capital Resources
Cash
We have incurred substantial losses in the past and may in the future
incur additional losses. For the year ended June 30, 2001, we had a working
capital deficit of $11,352,352; for the year ended June 30, 2000, we had a
working capital deficit of $14,844,854. Our capital deficit was $9,306,829 and
$10,776,300 at June 30, 2001 and June 30, 2000, respectively. We generated
revenues from continuing operations of $43,000,533 for the year ended June 30,
2001 and $22,149,649 for the year ended June 30, 2000. For the year ended June
30, 2001 and the year ended June 30, 2000, we incurred net losses of $3,638,736
and $44,108,429, respectively. For the year ended June 30, 2001 and the year
ended June 30, 2000, we recorded negative cash flows from continuing operations
of $7,347,123 and $16,439,729, respectively.
At June 30, 2001, we had $149,165 cash on hand, a decrease of
$2,457,826 from June 30, 2000.
Net cash used in operating activities was $8,002,343 for the fiscal
year ended June 30, 2001. Net cash used in operations was primarily attributable
to $4,314,516 in net losses from continuing operations, and a decrease in
deferred revenue of $9,460,686 partially offset by non-cash charges and an
increase in accounts payable, accrued expenses and other liabilities of
$1,506,135. These non-cash charges include: recording interest expense of
$884,000 as the fair value of the beneficial conversion feature of a convertible
debenture issued to King William, LLC and $1,347,480 relative to convertible
notes sold to investors; depreciation and amortization of $1,296,519; and the
write down of goodwill and acquired technology of $1,084,476.
The decrease in deferred revenue is explained in the section of
Revenues, above. The write off of intangibles resulted from a determination that
the acquired technology and goodwill relative to StoresOnLine.com, Ltd. and
Digital Genesis, one of our subsidiaries, was no longer being used and had no
resale value.
Net cash provided by investing activities was $199,235 for the fiscal
year ended June 30, 2001. During January 2001 we sold a wholly owned subsidiary,
IMI, Inc., for $1,631,589, including $1,331,589 owed to us by IMI at the time of
the sale. We received a cash payment of $300,000 and a note for the balance. The
amounts due from IMI, Inc. have been fully reserved.
Net cash provided by financing activities for the fiscal year ended
June 30, 2001 was $5,345,282. We sold a $2,500,000 convertible debenture to King
William, LLC, sold $2,076,500 in convertible notes to investors, and sold
$291,200 in common stock to investors as part of a private placement, and
officers loaned $821,000 to the Company.
As a result of our inability to sell the installment contracts
generated by our GalaxyMall Internet workshop training business at historical
levels and due to operating losses, we do not have sufficient cash from
operating activities to meet our immediate working capital and cash
requirements. We have historically relied upon private placements of our stock
and issuance of debt to generate funds to meet our operating needs. We have
sought and will continue to seek such capital, however, there can be no
assurance that additional financing will be available on acceptable terms, if at
all. If adequate funds are not generated, we may be required to further delay,
reduce the scope of, or eliminate one or more of our products or obtain funds
through arrangements with collaborative partners or others that may require us
to relinquish rights to all or part of the intellectual property of the Internet
Commerce Center or control of one or more of our businesses.
In January and April 2001 we consummated a private placement of
convertible promissory notes in a series of takedowns with proceeds of
$2,076,500 at 8% interest. The notes mature on July 1, 2004 and the holder can
convert at any time after July 1, 2001 at a rate of $.25 per share of common
stock. Alternatively, we may require conversion of these notes at any time after
July 1, 2001 if, for a period of twenty consecutive trading days, the average of
the closing bid and ask prices per share of our common stock is or exceeds $.75
as reported on Nasdaq's OTC Bulletin Board Service. The proceeds from the notes
were used to pay down debt and support operations. As of September 30, 2001,
note holders holding $1,741,506 aggregate principal amount of these notes
including accrued interest had exercised their right to convert both principal
and accrued interest into 7,204,326 shares of common stock.
In May 2001 we began a private placement of unregistered common stock
at $.30 per share in an attempt to raise $2.5 million for the Company. As of the
end of fiscal year 2001, proceeds from the sale were $291,200. As of September
30, 2001, total proceeds from the offering were $2,714,676 of which $240,000
resulted from one of our officers exchanging a loan due him for shares in the
private placement
Accounts Receivable
Accounts receivable, both current and longt-term, net of allowance for
doubtful accounts, was $2,090,051 at June 30, 2001 compared to $2,826,960 at
June 30, 2000. A relatively constant and significant portion of our revenues
have been made on an installment contract basis. We have in the past sold, on a
discounted basis, a portion of these installment contracts to third party
financial institutions for cash. Because these financial institutions are small,
they are limited in the quantities of contracts they can purchase due to
limitations on the amount of receivables they may purchase from one person
imposed on them by their investors. In addition, the institution we worked with
most closely in prior years has experienced financial difficulties and
dramatically reduced its level of purchases. As a result, we are seeking to
develop relationships with other potential purchasers of these installment
contracts. In the interim, our inability to sell our installment contracts at
historic levels has had a material negative impact on our near-term liquidity
and cash position.
Other assets relating to our installment contract sales at June 30,
2001 were $993,992 net of an allowance for doubtful accounts of $1,698,965. When
installment contracts are sold, the purchaser holds approximately 20% of the of
the purchase price in a reserve that will be returned to the Company if the
contracts are paid in full by our customer. If the customer fails to pay, the
purchaser my charge this reserve account for the deficiency. The Company's
obligation to accept such charge backs is limited to the amount in the reserve
account. One of the purchasers holding such a reserve is having financial
difficulties and therefore we have established an allowance for doubtful
accounts of approximately $950,000 to provide for the possibility that the
reserve funds may not be returned to the Company according to the terms of our
contract with them.
Delisting of Common Stock
On January 10, 2001, our common stock was delisted from the Nasdaq
National Market, and began to trade on the National Association of Securities
Dealers OTC Electronic Bulletin Board. The delisting of our common stock has had
an adverse impact on the market price and liquidity of our securities and has
adversely affected our ability to attract additional investors. This has a
material adverse effect on our liquidity because sales of additional shares of
our common stock is currently the principal potential source of additional funds
required to operate our businesses.
Arrangements with King William, LLC
In July 2000, we entered into a securities purchase agreement with King
William, LLC. Under the terms of the agreement, we issued to King William an 8%
convertible debenture due July 31, 2003, in the principal amount of $4.5
million. The debenture was convertible into shares of our common stock at the
lower of $1.79 or a conversion rate of 80% of the average market price of the
common stock during any three non-consecutive trading days during the 20 trading
days prior to conversion. The purchase price for the debenture was payable in
two tranches. The first tranche of $2.5 million was paid at the closing in July
2000. The second tranche of $2.0 million was to be payable three business days
after our satisfaction of certain conditions, which conditions were never
satisfied. Effective as of January 25, 2001, we reached an agreement with King
William LLC to restructure this debenture. Under the terms of the agreement no
second tranche of the debenture would be available, the note was amended so that
it would be repaid in installments with a 15% prepayment premium over the
remainder of calendar year 2001, and a related Private Equity Credit Agreement
was terminated. Under this agreement, King William's right to convert the
debenture into shares of our common stock was modified to permit such conversion
only if the trading price of our common stock was in excess of $3.00 for 20
consecutive trading days or we failed to make a scheduled payment of principal.
We also agreed to reprice the warrants issued to King William in connection with
the issuance of the debenture to $.25 per share and we issued to King William a
warrant for an additional 269,000 shares of common stock at $.25 per share. As
of the date of the restructuring agreement we were in default of our obligations
under the convertible debenture, but King William waived all of these defaults
pursuant to the terms of the restructuring agreement.
We made the initial payment of $250,000 required under the
restructuring agreement but did not make the next two payments totaling
$497,000, and on May 9, 2001 we entered into a waiver agreement with King
William. Pursuant to this agreement King William converted $200,000 principal
balance of the remaining balance of the convertible debenture into 800,000
shares of common stock. The $200,000 was credited toward the payment due
February 28, 2001 and the balance of $50,000 was rescheduled to be paid on March
10, 2002 and the payments originally due April 10, 2001 and May 10, 2001 were
rescheduled to January 10, 2002 and February 10, 2002 respectively. Under the
Agreement, King William waived its right to make further conversions on account
of our failure to make the missed payments.
Effective July 11, 2001, we entered into a second restructuring
agreement with King William pursuant to which we paid in full and final
satisfaction of the Debenture (i) a cash payment of $100,000, (ii) a $400,000
promissory note and (iii) 2,800,000 shares of our common stock which were issued
in September 2001. King William has agreed to forgive the $400,000 promissory
note if we meet certain specific requirements.
We recorded the value of the beneficial conversion feature on the $2.5
million that has been drawn down on the $4.5 million principal amount as
additional paid in capital and interest expense of $884,000 during our first
fiscal quarter ended September 30, 2000 because the convertible debenture was
immediately exercisable.
In connection with the securities purchase agreement, we issued to King
William a warrant to purchase 231,000 shares of common stock. In connection with
the issuance of the debenture, we also issued to Roth Capital Partners, Inc., a
warrant to purchase 90,000 shares of common stock and to Carbon Mesa Partners,
LLC, a warrant to purchase 10,000 shares of common stock. Each of the warrants
is exercisable for five years from the date of issue, at an exercise price of
$1.625 per share and with cashless exercise and piggyback registration rights.
The fair value of the warrants has been recorded at their fair value of
$371,000. Of the $371,000, $259,000 is accounted for as capital and debt
discount and is amortized over the life of the debt. The remaining balance is
accounted for as debt issuance costs classified as other assets and is amortized
over the life of the debt.
Accounts Payable
Accounts payable at June 30, 2001, totaled $2,663,066 as compared to
$2,383,502 at June 30, 2000 and compared to $4,708,716 as of March 31, 2001. The
reduction since March is primarily due to the settlement agreements reached with
vendors as described above funded with proceeds from the sale of convertible
notes, common stock and unsecured loans from certain of our officers. Our
business operations are dependent on the ongoing willingness of our suppliers
and service providers to continue to extend their payment terms until we resolve
our current liquidity problems. A number of suppliers and service providers now
require payment in advance or on delivery.
Although we are now current in our accounts with many of the trade
creditors of our Galaxy Mall business, no assurance can be made that these
suppliers will continue to extend their payment terms or that they will continue
to supply us with the materials and services required to operate the business on
terms that are acceptable to us and will allow us to keep these accounts current
or that we will resolve our current liquidity problems. Any interruption in our
business operations or the imposition of more restrictive payment terms for
payments to additional suppliers and service providers would have a further
negative impact on our liquidity.
Deferred Revenue
Deferred revenue at June 30, 2001 totaled $6,033,592 as compared to
$15,494,278 at June 30, 2000. We recognize deferred revenue as our services are
rendered or when the time period in which customers have the right to receive
the services expires. The decrease from the prior fiscal year end is the result
of a change in the products offered at our Internet training workshops.
We changed the product offered at our Galaxy Mall Internet workshop
training business and since October 1, 2000, have delivered a "Complete
Store-Building Packet" which contains a CD- ROM that includes the necessary
computer software and instructions to allow the customer to construct its
storefront without any additional services being supplied by us. If additional
assistance is required, we will provide it for a fee and charge the customer
after the services are rendered. The customer may host the storefront with us,
or any other provider of Internet hosting services. If the customer elects to
prepay us for hosting, we will recognize the revenue as the service is rendered.
Under this new model, we now recognize most of the revenue generated at
our Internet workshops at the time of sale. We anticipate that revenues and
earnings will be enhanced during the first and second fiscal quarters of fiscal
year 2002 since the amount of revenue deferred from each Internet workshop sale
will be greatly reduced and the revenue from prior period sales will continue to
be recognized during this and future periods.
Capital Deficit
Total capital deficit decreased to $9,306,829 during the current fiscal
year from $10,776,300 at June 30, 2000. This mainly resulted from additions to
paid-in capital partially offset by the net loss for the fiscal year ended June
30, 2001. (See the Statement of Capital Deficit in the financial statements.)
Financing Arrangements
We accept payment for the sales made at our GalaxyMall Internet
training workshops by cash, credit card, installment contract or a third party
leasing option. As part of our cash flow management and in order to generate
liquidity, we have sold on a discounted basis a portion of the installment
contracts generated by our GalaxyMall subsidiary to third party financial
institutions for cash. Because these finance companies are small and have
limited resources they have not been able to purchase all of the contracts we
would like to sell. See "Liquidity and Capital Resources - Accounts Receivable,"
for further information.
On September 13, 2000, we retained the services of National Financial
Communications Corp. for a six-month period as a nonexclusive advisor in
connection with our investor relations, in consideration for which we paid
$10,000 and gave a commitment to issue it 250,000 shares of common stock. In
October 2000, National Financial notified us that it was unwilling to perform
its obligations under its retainer agreement unless the consideration was
substantially increased. This agreement has since been terminated.
On October 18, 2000, we entered into a letter agreement with Glendale
Capital LLC to provide us investor relations services. As consideration for its
services, we issued to Glendale Capital LLC warrants exercisable for 500,000
shares of our common stock with an exercise price of $1.00 per share. The
agreement with Glendale Capital has been terminated.
Impact of Recent Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board issued
Statements of Financial Accounting Standards No. 141, "Business Combinations"
and No. 142 ("SFAS 142"), "Goodwill and Other Intangible Assets", which
establishes new standards for the treatment of goodwill and other intangible
assets. SFAS 142 is effective for fiscal years beginning after December 31, 2001
and permits early adoption for companies with a fiscal year beginning after
March 15, 2001. SFAS 142 prescribes that amortization of goodwill will cease as
of the adoption date. Additionally, we will be required to perform an impairment
test as of the adoption date, annually thereafter, and whenever events and
circumstances occur that might affect the carrying value of these assets. We
have not yet determined what effect, if any, the impairment test of goodwill
will have on our results of operations and financial position. In addition,
subsequent to June 30, 2001, SFAS 143 and 144 have been issued, and we are
evaluating the imact these pronouncements will have on our financial position
and results of operations in future filings.
Item 8. Financial Statements and Supplementary Data
See Item 14(a) for an index to the consolidated financial statements
and supplementary financial information that are attached hereto.
Item 9. Changes In and Disagreements With Accountants on Accounting
and Financial Disclosure
On April 4, 2001, we engaged Richard A. Eisner & Company, LLP as our
independent auditor concurrent with our termination of Grant Thornton, LLP. Our
board of directors approved the engagement of Richard A. Eisner & Company, LLP
as our independent auditors with respect to our fiscal year ending June 30,
2001. Grant Thornton was retained on an interim basis to replace KPMG LLP,
which had served as our independent auditor between June, 1998 and January 12,
2001.
KPMG LLP's independent auditor's report on our consolidated financial
statements for the years ended June 30, 2000 and 1999 contained a separate
paragraph stating that it had substantial doubt as to our ability to continue as
a going concern. Our financial statements do not include any adjustments that
might result from the outcome of this uncertainty. Except as noted above, KPMG
LLP's reports on our consolidated financial statements for the fiscal years
ended June 30, 2000 and 1999 contained no adverse opinions or disclaimer of
opinions, and were not qualified as to audit scope, accounting principles, or
uncertainties.
We notified KPMG LLP that during the two most recent fiscal years and
the interim period from July 1, 2000 through January 12, 2001, we were unaware
of any disputes between us and KPMG LLP as to matters of accounting principles
or practices, financial statement disclosure, or audit scope of procedure, which
disagreements, if not resolved to the satisfaction of KPMG LLP would have caused
them to make a reference to the subject matter of the disagreements in
connection with atheir reports.
We engaged Grant Thornton LLP on January 22, 2001 to review our interim
report on Form 10-Q for the three month period ended March 31, 2001. On April 4,
2001, we terminated their engagement.
During the most recent fiscal year and through April 4, 2001, we had
not consulted with Richard A. Eisner & Company, LLP regarding either the
application of accounting principles to a specified transaction, either
completed or proposed, or the type of audit opinion that might be rendered on
our financial statements, and neither a written report was provided to us nor
oral advice was provided that Richard A. Eisner & Company, LLP concluded was an
important factor considered by us in reaching a decision as to the accounting,
auditing or financial reporting issue, or any matter that was either the subject
of a disagreement.
PART III
Item 10. Directors and Executive Officers of the Registrant
The information required by this Item 12 is hereby incorporated by
reference to the information in our definitive proxy statement to be filed
within 120 days after the close of our fiscal year.
Item 11. Executive Compensation
The information required by this Item 12 is hereby incorporated by
reference to the information in our definitive proxy statement to be filed
within 120 days after the close of our fiscal year. Such incorporation by
reference shall not be deemed to specifically incorporate by reference the
information referred to in Item 402(a)(8) of Regulation S-K.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this Item 12 is hereby incorporated by
reference to the information in our definitive proxy statement to be filed
within 120 days after the close of our fiscal year.
Item 13. Certain Relationships and Related Transactions
The information required by this Item 13 is hereby incorporated by
reference to the information in our definitive proxy statement to be filed
within 120 days after the close of our fiscal year.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) 1. Financial Statements
The following financial statements of Netgateway, Inc., and related
notes thereto and auditors' report thereon are filed as part of this Form 10-K:
Page
Independent Auditor's Report dated August 3, 2001 and
September 30, 2001 36
Independent Auditor's Report dated August 21, 2000 and
January 11, 2001 37
Consolidated Balance Sheets as of June 30, 2001 and 2000 38
Consolidated Statement of Operations for the years
ended June 30, 2001, 2000 and 1999 39
Consolidated Statement of Cash Flows for the years ended
June 30, 2001, 2000 and 1999 40
Consolidated Statement of Capital Deficit for the years ended June 30, 2001,
2000 and 1999 42
Notes to Consolidated Financial Statements 44
2. Financial Statement Schedules
The following financial statement schedule of Netgateway, Inc. is
filed as part of this Form 10-K. All other schedules have been
omitted because they are not applicable, not required, or the
information is included in the consolidated financial statements
or notes thereto.
Page
Schedule II-Valuation and Qualifying Accounts 63
3. Exhibits
The exhibits listed on the accompanying index to exhibits
immediately following the financial statements are filed as part
of, or hereby incorporated by reference into, this Form 10-K.
(b) Reports on Form 8-K During the Last Quarter of Fiscal 2001
We filed one report on Form 8-K during the last quarter of fiscal
2001, on April 4, 2001, in which we reported a change in our
certifying accountant.
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Netgateway, Inc.
We have audited the accompanying consolidated balance sheet of
Netgateway, Inc. and subsidiaries as of June 30, 2001, and the related
consolidated statements of operations, capital deficit, and cash flows for the
year then ended. Our audit also includes the financial statement schedule in so
far as it relates to the year ended June 30, 2001 listed in the Index at Item
14(a). These consolidated financial statements and financial statement schedule
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements and schedule based on our
audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
the significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements enumerated above present
fairly, in all material respects, the consolidated financial position of
Netgateway, Inc. and subsidiaries at June 30, 2001, and the consolidated results
of their operations and their consolidated cash flows for the year then ended,
in conformity with accounting principles generally accepted in the United States
of America. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
The accompanying consolidated financial statements and financial
statement schedule have been prepared assuming that the Company will continue as
a going concern. As discussed in Note 4 to the financial statements, the Company
has suffered recurring net losses and has a capital deficit that raise
substantial doubt about its ability to continue as a going concern. Management's
plans in regard to these matters are also described in Note 4. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
/s/ RICHARD A. EISNER & COMPANY, LLP
New York, New York
August 3, 2001,
With respect to Notes 9, 12, 13, and 22
September 30, 2001
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Netgateway, Inc.:
We have audited the consolidated balance sheet of Netgateway, Inc. and
subsidiaries as of June 30, 2000, and the related consolidated statement of
operations, stockholders' deficit and cash flows for the years ended June 30,
2000 and 1999. In connection with our audits of the consolidated financials
statements, we have audited the financial statement schedule for the years ended
June 30, 2000 and 1999. These consolidated financial statements and financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and financial statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statements presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Netgateway, Inc. and
subsidiaries as of June 30, 2000 and the results of its operations and its cash
flows for the years ended June 30, 2000 and 1999, in conformity with accounting
principles generally accepted in the United States of America. Also in our
opinion, the related financial statement schedule, when considered in relation
to the consolidated financials statements taken as a whole, present fairly, in
all material respects, the information set forth therein.
The accompanying financial statements and financial statement schedule have been
prepared assuming that the Company will continue as a going concern. As
discussed in Note 4 to the financial statements, the Company has suffered
recurring losses from operations and has a net capital deficiency that raise
substantial doubt about its ability to continue as a going concern. Management's
plans in regard to these matters are also described in Note 4. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
/s/ KPMG LLP
Los Angeles, California
August 21, 2000, except as to Note 18,
which is as of January 11, 2001
NETGATEWAY, INC. AND SUBSIDIARIES
Consolidated Balance Sheets June 30, 2001 and 2000
June 30,
------------------------------
ASSETS 2001 2000
------------------------------
Current Assets
Cash $ 149,165 $ 2,606,991
Trade receivables, net of allowance for doubtful accounts of $1,103,603
and $960,601 at June 30, 2001 and 2000, respectively 1,189,853 2,237,782
Related party trade receivables - 2,519
Unbilled receivables - 12,293
Inventories 44,726 62,025
Prepaid expenses 115,935 260,000
Common stock subscriptions receivable 107,000
Credit card reserves, net of allowance for doubtful accounts of $173,000 at June
30, 2001 1,187,502
Other current assets 3,220 726,648
--------------- ---------------
Total current assets 2,797,401 5,908,258
Property and equipment, net 774,862 2,926,406
Intangible assets, net 588,544 1,919,108
Trade receivables, net of allowance for doubtful accounts of $1,011,774 at June
30, 2001 900,198 589,178
Other assets, net of allowance for doubtful accounts of $1,390,640 at June 30,
2001 993,992 300,770
Net assets - discontinued operations 207,179
------------------------------
Total Assets $ 6,054,997 $ 11,850,899
==============================
LIABILITIES AND CAPITAL DEFICIT
Current liabilities
Accounts payable $ 2,663,066 $ 2,383,502
Bank overdraft 666,683 311,676
Accrued wages and benefits 581,400 1,454,819
Past due payroll taxes 497,617
Accrued liabilities 567,916 1,210,422
Current portion of capital lease obligations 37,802 73,022
Notes payable current 97,779 97,779
Notes payable - officers and stockholders 490,000
Loan payable 100,000
Other current liabilities 423,578
Current portion of deferred revenue 5,618,849 14,470,986
Convertible debenture 2,405,062 -
Net current liabilities - discontinued operations - 750,906
------------------------------
Total current liabilities 14,149,752 20,753,112
Deferred revenue, net of current portion 414,743 1,023,292
Convertible long term notes 442,172 -
Other liabilities 321,603
Capital lease obligations, net of current portion - 34,743
------------------------------
Total liabilities 15,006,667 22,132,750
------------------------------
Commitments and contingencies
Minority interest 355,159 494,449
Capital deficit
Capital stock, par value $.001 per share
Preferred stock - authorized 5,000,000 shares; none issued
Common stock - authorized 250,000,000 shares; issued and outstanding
24,460,191 and 21,648,732, at June 30, 2001 and 2000, respectively 24,460 21,649
Additional paid-in capital 62,047,292 58,012,244
Subscribed common stock 398,200 -
Deferred compensation (52,649) (724,994)
Accumulated other comprehensive loss (4,902) (4,267)
Accumulated deficit (71,719,230) (68,080,932)
------------------------------
Total capital deficit (9,306,829) (10,776,300)
------------------------------
Total Liabilities and Capital Deficit $ 6,054,997 $ 11,850,899
==============================
See Notes to Consolidated Financial Statements
NETGATEWAY, INC. AND SUBSIDIARIES
Consolidated Statements of Operation
Years Ended June 30, 2001, 2000 and 1999
-----------------------------------------------------------
June 30, June 30, June 30,
2001 2000 1999
------------------- ----------------- -----------------
Revenue $ 43,000,533 $ 22,149,649 $ 10,280,440
Cost of revenue 8,425,575 8,465,091 3,838,574
------------------- ------------------ ----------------
Gross profit 34,574,958 13,684,558 6,441,866
------------------- ------------------ ----------------
Operating expenses
Product development 1,804,986 6,462,999 1,496,563
Selling and marketing 20,949,758 18,536,486 8,716,191
General and administrative 10,558,918 25,676,472 11,558,135
Depreciation and amortization 1,296,519 1,191,143 494,874
Writedown of goodwill and acquired technology 1,084,476
------------------- ------------------ ---------------
Total operating expenses 35,694,657 51,867,100 22,265,763
------------------- ------------------ ---------------
Operating loss before items shown below (1,119,699) (38,182,542) (15,823,897)
------------------- ------------------ ---------------
Other income (expense):
Other income (expense) 93,088 (33,677) (39,729)
Interest expense (3,287,905) (4,573,695) (933,097)
------------------- ------------------ ----------------
Total other expenses (3,194,817) (4,607,372) (972,826)
------------------- ------------------ ----------------
Loss from continuing operations (4,314,516) (42,789,914) (16,796,723)
------------------- ------------------ ----------------
Discontinued operations:
Income (loss) from discontinued operations (285,780) (1,318,515) 3,013
------------------- ------------------ ----------------
Loss before extraordinary items (4,600,296) (44,108,429) (16,793,710)
Extraordinary items:
Loss on disposal of assets subsequent to merger (1,091,052)
Gain on disposal of segment subsequent to merger 363,656
Gain from settlement of debt 1,688,956 - 1,653,232
------------------- ------------------ ----------------
Gain on extraordinary items 961,560 - 1,653,232
------------------- ------------------ ----------------
Net loss $ (3,638,736) $(44,108,429) $(15,140,478)
=================== ================== ================
Basic and diluted loss per share:
Loss from continuing operations $ (0.19) $ (2.31) $ (1.34)
Loss from discontinued operations (0.01) (0.07) 0.00
Gain from extraordinary items 0.04 - 0.13
------------------- ------------------ ----------------
Net loss $ (0.16) $ (2.38) $ (1.21)
=================== ================== ================
Weighted average common shares outstanding
(Basic and diluted): 22,279,650 18,511,137 12,536,021
See Notes to Consolidated Financial Statements
NETGATEWAY, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years Ended June 30, 2001, 2000 and 1999
-----------------------------------------------------
Year Ended June
30,
-----------------------------------------------------
2001 2000 1999
-----------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Loss from continuing operations $ (4,314,516) $ (42,789,914) $ (16,796,723)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 1,296,519 1,191,143 494,963
Amortization of deferred compensation 258,375 652,825 282,052
Write down of goodwill and acquired technology 1,084,476
Interest expense from beneficial conversion feature 884,000 - -
Inputed Interest expense on notes payable 38,756 -
Common stock issued for services 17,200 3,660,498 1,262,200
Warrants and options issued for services 81,315 263,387 2,820,428
Amortization of debt issue costs 496,530 585,592 144,000
Amortization of debt discount 366,966 4,022,550 -
Loss on sale of equity securities - - 54,729
Stock compensation paid by stockholders - - 400,000
Interest expense on debt converted to equity - - 236,488
Interest expense on warrants issued as debt issue costs - - 535,535
Write-off of note receivable - - 800,000
Stock issued in exchange for cancellation of options - 8,400,000 -
Changes in assets and liabilities:
Trade receivables and unbilled receivables 162,542 (2,049,312) 33,911
Inventories 17,299 (31,024) (31,000)
Prepaid expenses and other current assets 867,494 - -
Credit card reserves (598,324) - -
Other assets (51,204) (871,561) (229,980)
Prepaid offering costs - - (325,887)
Deferred revenue (9,460,686) 8,023,545 1,617,563
Accounts payable, accrued expenses and other liabilities 1,506,135 2,502,544 1,488,339
------------------ ------------------ -----------
Net cash (used in) continuing operating activities (7,347,123) (16,439,729) (7,213,382)
Net cash (used in) provided by discontinued operations (655,220) (200,544) 242,291
------------------ ------------------ -----------
Net cash (used in) operating activities (8,002,343) (16,640,273) (6,971,091)
------------------ ------------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of subsidiary 300,000 - -
Purchase of equity securities - - (100,733)
Proceeds from sale of equity securities - - 46,004
Loan for note receivable - - (830,000)
Cash received in acquisition - - 4,781
Collection of notes receivable - 30,000 50,000
Acquisition of equipment (100,765) (2,946,055) (652,302)
------------------ ------------------ -----------
Net cash provided by (used in) investing activities 199,235 (2,916,055) (1,482,250)
------------------ ------------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from common stock subscribed 291,200 - -
Proceeds from issuance of common stock - 25,313,863 5,782,760
Proceeds from exercise of options and warrants 6,775 1,202,690 272,300
Bank overdraft borrowing 355,007 64,883 (77,557)
Proceeds from issuance of convertible debenture 2,500,000 - -
Proceeds from issuance of convertible long term notes 2,076,500 - -
Proceeds from notes payable - officers 821,000 - -
Proceeds from loan payable 100,000 - -
Repayment of convertible debenture (152,212) - -
Repayment of notes payable - officers (213,000) - -
Payment of capital lease obligations (69,963) - -
Repayment of notes - (6,433,500) -
Repayment of note to related party - (1,799) (990,630)
Cash paid for debt issue costs (370,025) (64,771) (181,018)
Proceeds from issuance of notes payable - 1,114,950 100,000
Proceeds from issuance of notes payable and convertible debt - 1,114,950 2,606,000
------------------ ------------------ -----------
Net cash provided by financing activities 5,345,282 21,196,316 7,411,855
------------------ ------------------ -----------
NET INCREASE (DECREASE) IN CASH (2,457,826) 1,639,988 (1,041,486)
CASH AT THE BEGINNING OF THE YEAR 2,606,991 967,672 279,315
Effect of elimination of duplicate period of pooled companies - - 1,733,441
Effect of exchange rate changes on cash balances (669) (3,598)
------------------ ------------------ -----------
CASH AT THE END OF THE YEAR $ 149,165 $ 2,606,991 $ 967,672
=====================================================
Supplemental disclosures of non-cash transactions:
Conversion of debenture to common stock 200,000 200,000 1,401,000
Conversion of amounts due to officers to common stock 453,950
Conversion of notes payable - officers to common stock 118,000
Value of warrants in connection with the issuance of convertible
debenture 509,935
Value of warrants in connection with the issuance of convertible long
term notes 655,128
Beneficial conversion feature on convertible long term notes 1,347,480
Restructuring premium on convertible debentures 375,000
Issuance of common stock for business acquisition - 138,625 -
Issuance of convertible common stock for business acquisition - - 1,392,858
Warrants issued for debt issue costs 145,876 775,585
Common stock issued for prepaid advertising - 300,000 -
Capital contributed upon extinguishment of debt - - 200,000
Common stock issued for internal-use software - - 175,000
Stock issued for debt issue costs - - 127,500
Supplemental disclosure of cash flow information: -
Cash paid for Interest 109,940 883,139 993,097
See Notes to Consolidated Financial Statements
NETGATEWAY, INC. AND SUBSIDIARIES
Consolidated Statement of Capital Deficit
Years Ended June 30, 2001, 2000 and 1999
Accumulated
Common Stock Additional Subscribed Other Total
---------------------- Paid-in Common Deferred Accumulated Comprehensive Capital
Shares Amount Capital Stock Compensation Deficit loss Deficit
---------------------------------------------------------------------------------------------------
Balance June 30, 1998 10,881,810 $10,882 $ 2,974,721 $ - $ (112,320) $ (10,565,466) $ - $(7,692,183)
Sale of common stock for
cash 1,564,134 1,565 4,199,413 4,200,978
Common stock issued for
services 366,500 366 1,261,834 1,262,200
Exercise of warrants 132,100 132 264,068 264,200
Cashless exercise of
warrants 2,570 2 (2) -
Warrants issued for
services - - 2,340,720 2,340,720
Stock compensation paid by
stockholders 400,000 400,000
Stock option compensation 233,211 (233,211) -
Forfeited stock (48,000) (48) (10,512) 10,560 -
Options issued for legal
services 479,708 479,708
Warrants issued for debt
issue costs 775,585 775,585
Common stock issued for
debt issue costs 30,000 30 127,470 127,500
Common stock issued to
acquire technology 35,000 35 174,965 175,000
Conversion of debt to
capital contribution 200,000 200,000
Conversion of debt to
common stock 320,000 320 950,680 951,000
Amortization of deferred
compensation 282,052 282,052
Exercise of stock options 7,470 7 8,093 8,100
Sale of common stock for
cash 108,017 108 449,892 450,000
Sale of common stock for
cash 159,608 160 999,840 1,000,000
Warrants issued for debt
issue costs 79,400 79,400
Net loss (15,140,478) (15,140,478)
Foreign currency
translation adjustment (3,598) (3,598)
---------------
Comprehensive loss (15,144,076)
Elimination of duplicate
period of pooled companies 1,733,441 1,733,441
------------------------------------------------------------------------------------------------------------------------------
Balance June 30, 1999 13,559,209 13,559 15,909,086 - (52,919) (23,972,503) (3,598) (8,106,375)
Common stock issued for
prepaid advertising 50,000 50 299,950 300,000
Common stock issued for
services 538,598 539 3,659,959 3,660,498
Warrants issued to settle
an obligation 53,534 53,534
Sale of common stock for
cash 4,155,350 4,155 25,309,708 25,313,863
Warrants issued for debt
issue costs 145,876 145,876
Conversion of debt to
common stock 80,000 80 199,920 200,000
Options issued for services 172,853 172,853
Stock option compensation 1,069,900 (1,069,900) -
Amortization of deferred
compensation 615,825 615,825
Exercise of warrants 25,870 26 27,845 27,871
Cashless exercise of
options and warrants 1,188,773 1,188 (1,188) -
Common stock issued for
cancellation of options 1,200,000 1,200 8,398,800 8,400,000
Exercise of stock options 345,724 346 1,174,473 1,174,819
Common stock issued upon
conversion of
subsidiary common stock 239,576 240 898,169 898,409
Sale of common stock for
cash 145,926 146 299,854 300,000
Stock option compensation 255,000 (218,000) 37,000
Common stock issued in
business acquisition 119,706 120 138,505 138,625
Net loss (44,108,429) (44,108,429)
Foreign currency adjustment (669) (669)
---------------
Comprehensive loss (44,109,098)
------------------------------------------------------------------------------------------------------------------------------
Balance June 30, 2000 21,648,732 21,649 58,012,244 - (724,994) (68,080,932) (4,267) (10,776,300)
Common stock issued upon
conversion of subsidiary
common stock 37,144 37 139,253 139,290
Stock options exercised 20,015 20 6,755 6,775
Shares issued for services 47,800 48 17,152 17,200
Amortization of deferred
compensation 258,375 258,375
Forfeiture of stock options (413,970) 413,970 0
Beneficial conversion
feature on convertible
debenture 884,000 884,000
Warrants issued for
convertible debentures 371,000 371,000
Repricing of warrants
issued for convertible
debentures 9,008 9,008
Warrants issued for
restructuring of debenture 129,927 129,927
Debt discount on
convertible note warrants 512,540 512,540
Beneficial conversion
feature on convertible note 1,347,480 1,347,480
Partial conversion of
convertible debenture 800,000 800 199,200 200,000
Conversion of related
party note payable 393,333 393 117,607 118,000
Conversion of officers
accrued liabilities 1,513,167 1,513 452,437 453,950
Warrants issued for
services 223,903 223,903
Inputed interest on notes
payable to officers -
contributed 38,756 38,756
Private placement offering
subscriptions received, net 398,200 398,200
Net loss (3,638,736) (3,638,736)
Foreign currency
translation adjustment 438 (635) (197)
---------------
Comprehensive loss (3,638,933)
---------------------------------------------------------------------------------------------------
Balance June 30, 2001 24,460,191 $ 24,460 $62,047,292 $398,200 $ (52,649) $(71,719,230) $(4,902) $ (9,306,829)
===================================================================================================
See Notes to Consolidated Financial Statements
NETGATEWAY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(1) Description of Business
Netgateway, Inc. and subsidiaries ("Netgateway" or the "Company"), was
formed on March 4, 1998 as a Nevada corporation. Netgateway is an e-Services
company that provides eCommerce training, technology, continuing education and a
variety of other web-based resources to small businesses and entrepreneurs
through informational Preview Training Sessions and Internet training workshops.
Through these workshops and follow up telemarketing the Company sells a license
to use its proprietary StoresOnline software and website development platform
and an integrated package of services including hosting of the customer's
website on the Company's Galaxy Mall Internet shopping mall, eCommerce services
and a program of one on one Internet training services.
During the year ended June 30, 2001 the Company consolidated its
operations into one facility in Utah. During this process certain equipment was
disposed of and the net book value of the equipment was written off. The write
down of these assets are included as an extraordinary item due to the fact that
they were part of previously separate entities in a pooling of interests
combination at June 30, 2000. In addition, in January 2001, the Company sold one
of its subsidiaries that was previously reported as a separate segment, and
accordingly has reported the gain realized on the sale as an extraordinary item
in the accompanying consolidated financial statements. During the year ended
June 30, 2001, the Company settled certain of its liabilities with its vendors
for amounts less than the outstanding balances. The gain realized on these
settlements has been recorded as an extraordinary item in the accompanying
consolidated financial statements.
(2) Summary of Significant Accounting Policies
(a) Principles of Consolidation
The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries. The acquisition of Galaxy Enterprises
("Galaxy") by Netgateway on June 26, 2000 was accounted for under the
pooling-of-interests method and accordingly all periods prior to the acquisition
have been restated to include the accounts and results of operations of Galaxy
Enterprises. All Galaxy common stock and common stock option information has
been adjusted to reflect the exchange ratio. All significant intercompany
balances and transactions have been eliminated in consolidation.
(b) Inventories
Inventories are stated at the lower of cost (first-in, first-out) or
market. Inventory consists mainly of products provided in conjunction with the
Internet training workshops.
(c) Property and Equipment
Property and equipment are stated at cost. Depreciation expense is
computed principally on the straight-line method in amounts sufficient to write
off the cost of depreciable assets, including assets held under capital leases,
over their estimated useful lives ranging from 3 to 5 years. The cost of
leasehold improvements is being depreciated using the straight-line method over
the shorter of the estimated useful life of the asset or the terms of the
related leases. Depreciable lives by asset group are as follows:
Computer and office equipment .................3 to 5 years
Furniture and fixtures.........................4 years
Computer software..............................3 years
Leasehold improvements.........................term of lease
Normal maintenance and repair items are charged to costs and expenses
as incurred. The cost and accumulated depreciation of property and equipment
sold or otherwise retired are removed from the accounts and gain or loss on
disposition is reflected in net income in the period of disposition.
(d) Intangible Assets
Intangible assets are amortized on a straight-line basis over their
estimated useful lives as follows:
Acquired technology......................5 to 7 years
Goodwill................................. 10 years
(e) Product and Development Expenditures
Product and development costs are expensed as incurred.
(f) Impairment of Long-Lived Assets
The Company reviews long-lived assets and certain identifiable
intangibles for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. Recoverability of
assets to be held and used is measured by a comparison of the carrying amount of
an asset to future undiscounted operating cash flows projected to be generated
by the asset. If such assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amount of the assets
exceeds the fair value of the assets. Assets to be disposed of are reported at
the lower of the carrying amount or fair value less costs to sell.
During the fiscal year ended June 30, 2001 the Company wrote off fixed
assets with a book value totaling $1,091,052 as part of the closing of the
American Fork, Long Beach, and Canadian offices included in extraordinary items
(See Note 19). In addition, as a result of corporate restructuring, acquired
technology and goodwill aggregating $1,084,476 was determined to be impaired and
was written off during the fiscal year ended June 30, 2001 (See note 8).
(g) Financial Instruments
The carrying values of cash, accounts receivable, notes receivable,
accounts payable, accrued liabilities, capital lease obligations, current
portion of notes payable and convertible debenture approximated fair value due
to either the short maturity of the instruments or the recent date of the
initial transaction or the restructuring.
(h) Income Taxes
Income taxes are accounted for under the asset and liability method.
The asset and liability method recognizes deferred income taxes for the tax
consequences of "temporary differences" by applying enacted statutory tax rates
applicable to future years to differences between the financial statement
carrying amounts and the tax bases of existing assets and liabilities. The
effect on deferred taxes of a change in tax rates is recognized in income in the
period that includes the enactment date.
Deferred tax assets are to be recognized for temporary differences that
will result in deductible amounts in future years and for tax carryforwards if,
in the opinion of management, it is more likely than not that the deferred tax
assets will be realized.
(i) Accounting for Stock Options
The Company applies the intrinsic value-based method of accounting
prescribed by Accounting Principles Board (APB) Opinion No. 25, "Accounting for
Stock Issued to Employees," and related interpretations, in accounting for its
fixed plan employee stock options. As such, compensation expense would be
recorded on the date of grant only if the current market price of the underlying
stock exceeded the exercise price. Compensation expense related to stock options
granted to non-employees is accounted for under Statement of Financial
Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation,"
whereby compensation expense is recognized over the vesting period based on the
fair value of the options on the date of grant.
(j) .....Revenue Recognition
During the year ended June 30, 2001, the Company changed its products
offered relating to the "Complete Store-Builder Packet" (the "New Packet").
Prior to October 2000 the revenue related to the sales of the original Store
Builder Packet were recognized over the period customers had to activate their
web site which would require the Company to perform additional services and host
the web site. Subsequent to October 1, 2000 the Company is providing customers
with the New Packet that does not require the Company to perform any additional
services. Revenue from the sale of software products is recognized upon the
delivery of the products. Revenue related to the sale of certificates for web
site hosting and banner licenses is recognized over the period representing the
life of the certificate and the length of the prepaid service. Revenue related
to banner advertising services is recognized over the period such advertising is
usable and revenue related to the delivery of mentoring services is recognized
over the estimated service period. The revenue recorded relating to the sale of
merchant account software is reflected net of the cost of the product paid since
the Company does not take title to the product prior to the sale.
Revenues relating to the Company's Internet Commerce Center from the
design and development of Internet Web sites and related consulting projects is
recognized using the percentage-of-completion method. Unbilled receivables
represent time and costs incurred on projects in progress in excess of amounts
billed, and are recorded as assets. Deferred revenue represents amounts billed
in excess of costs incurred, and is recorded as a liability. To the extent costs
incurred and anticipated costs to complete projects in progress exceed
anticipated billings, a loss is recognized in the period such determination is
made for the excess.
(k) Comprehensive Income
Statement of Financial Accounting Standards ("SFAS") No. 130,
"Reporting Comprehensive Income" establishes standards for reporting and
displaying comprehensive income (loss) and its components in a full set of
general-purpose financial statements. This statement requires that an enterprise
classify items of other comprehensive income (loss) by their nature in a
financial statement and display the accumulated balance of other comprehensive
income (loss) separately from retained earnings and additional paid-in capital
in the equity section of a statement of financial position. The Company has
components of other comprehensive income (loss), which are classified in the
accompanying statement of Capital deficit.
(l) Business Segments and Related Information
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information" establishes standards for the way public business enterprises are
to report information about operating segments in annual financial statements
and requires enterprises to report selected information about operating segments
in interim financial reports issued to shareholders. It also establishes
standards for related disclosure about products and services, geographic areas
and major customers. It replaces the "industry segment" concept of SFAS No.14,
"Financial Reporting for Segments of a Business Enterprise," with a "management
approach" concept as the basis for identifying reportable segments.
The Company has operated under two principal business segments
(Internet services and multimedia products). The primary business segment
(Internet services) is engaged in the business of providing its customers the
ability to (i) acquire a presence on the Internet and (ii) to advertise and sell
their products or services on the Internet. A secondary business segment
(multimedia services) had been engaged in providing assistance in the design,
manufacture and marketing of multimedia brochure kits, shaped compact discs and
similar products and services intended to facilitate conducting business over
the Internet. This second segment was sold on January 11, 2001 and the gain on
the sale is reported as an extraordinary item in the accompanying consolidated
financial statements. As a result, the Company currently operates in one
business segment.
(m) Foreign Currency Translation
The financial statements of the Company's Canadian subsidiary,
StoresOnline.com, Ltd. have been translated into U.S. dollars from its
functional currency in the accompanying consolidated financial statements in
accordance with Statement of Financial Accounting Standards No. 52, "Foreign
Currency Translation." Balance sheet accounts of StoresOnline.com, Ltd. are
translated at period-end exchange rates while income and expenses are translated
at the average of the exchange rates in effect during the period. Translation
gains or losses that related to the net assets of StoresOnline.com Ltd. are
shown as a separate component of capital deficit and comprehensive loss. There
were no gains or losses resulting from realized foreign currency transactions
(transactions denominated in a currency other than the entities' functional
currency) during the years ended June 30, 2001, June 30, 2000 and June 30, 1999.
(n) Per Share Data
Basic net loss per share is computed by dividing net loss available to
common shareholders by the weighted average number of common shares outstanding
during the period. Diluted loss per share reflects the potential dilution that
could occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in the issuance of common
stock that then shared in the earnings of the entity. Diluted loss per common
share was the same as basic loss per common share for the years ended June 30,
2001, 2000 and 1999.
Unexercised stock options to purchase 3,740,376, 4,512,647 and
4,089,766 shares of the Company's common stock and unexercised warrants to
purchase 2,107,346, 1,224,904 and 1,941,629 shares of the Company's common stock
at June 30, 2001, 2000 and 1999, respectively, in addition to shares of common
stock from the conversion of subsidiary common stock and convertible debentures
of 14,624,697, 131,853, and 371,429 as of June 30, 2001, 2000 and 1999,
respectively, were not included in the per share computations because their
effect would have been antidilutive as a result of the Company's loss.
(o) Use of Estimates
Management of the Company has made a number of estimates and
assumptions relating to the reporting of assets and liabilities and the
disclosure of contingent assets and liabilities at the balance sheet date, and
the reporting of revenues and expenses during the reporting periods to prepare
these financial statements in conformity with generally accepted accounting
principles. Actual results could differ from those estimates.
(p) Reclassifications
Certain amounts have been reclassified to conform to current year
presentation.
(q) Discontinued Operations
APB Opinion No. 30 states that discontinued operations refers to the operations
of a segment of a business that has been sold, abandoned, spun off, or otherwise
disposed of or, although still operating, is the subject of a formal plan for
disposal. In accordance with APB Opinion No. 30, the results of continuing
operations are reported separately from discontinued operations and any gain or
loss from disposal of a segment is reported in conjunction with the related
results of discontinued operations, except where such effect is classified as an
extraordinary item following a pooling-of-interests combination. In accordance
with APB Opinion No. 16, the difference between the proceeds received from the
sale of the Company's subsidiary and the carrying amount of the Company's
investment sold is reflected as an extraordinary gain on disposal in the
consolidated statements of operations.
(r) Advertising Costs
The Company expenses costs of advertising and promotions as incurred.
Advertising expenses included in selling and marketing expenses for the years
ended June 30, 2001, 2000 and 1999 were approximately $6.0 million, $5.9 million
and $3.6 million, respectively.
(s) Commission Expense
Commission expense relating to third-party telemarketing activity is
recognized as incurred.
(t) Recently Issued Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board ("FASB) issued
Statements of Financial Accounting Standards No. 141, "Business Combinations"
and No. 142 ("SFAS 142"), "Goodwill and Other Intangible Assets", which
establishes new standards for the treatment of goodwill and other intangible
assets. SFAS 142 is effective for fiscal years beginning after December 31, 2001
and permits early adoption for companies with a fiscal year beginning after
March 15, 2001. SFAS 142 prescribes that amortization of goodwill will cease as
of the adoption date. Additionally, the Company will be required to perform an
impairment test as of the adoption date, annually thereafter, and whenever
events and circumstances occur that might affect the carrying value of these
assets. The Company has not yet determined what effect, if any, the impairment
test of goodwill will have on the Company's results of operations and financial
position. In addition, subsequent to June 2001, SFAS 143 and 144 have been
issued and the Company is evaluating the imact of these pronouncements on our
financial position and results of operations in future filings.
(3) Business Combination
On June 26, 2000, Netgateway, Inc. issued 3,929,988 shares of its
common stock in exchange for all of the outstanding common stock of Galaxy
Enterprises. This business combination has been accounted for as a
pooling-of-interests and, accordingly, the consolidated financial statements for
periods prior to the combination have been restated to include the accounts and
results of operations of Galaxy Enterprises.
Prior to the combination, Galaxy Enterprises' fiscal year ended
December 31. In recording the pooling-of-interests combination, Galaxy
Enterprises' financial statements for the twelve months ended June 30, 1999,
were combined with Netgateway's financial statements for the same period. An
adjustment has been made to capital deficit to eliminate the effect of including
Galaxy Enterprises' results of operations for the six months ended December 31,
1998, in both the years ended June 30, 1999 and June 30, 1998. The adjustment
results in the Company eliminating the related net income of $1,733,441 in
fiscal year 1999, which includes $3.7 million in revenue.
The results of operations as previously reported by the separate
enterprises and the combined amounts presented in the accompanying consolidated
financial statements are summarized below:
------------------------ ---------------------
Nine months ended Year ended
March 31, 2000 June 30, 1999
------------------------ ---------------------
Net revenues:
Netgateway $ 2,535,863 $ 157,282
Galaxy Enterprises 12,665,271 10,123,158
------------------------ ---------------------
Combined $ 15,201,134 $ 10,280.440
Discontinued Operations
Income (loss) from
discontinued operations $ (1,028,781) 3,013
--------------------- ----------------------
Extraordinary item:
Netgateway - $ 1,653,232
Galaxy Enterprises $ - -
------------------------ ---------------------
Combined $ 1,653,232
Net (loss) income:
Netgateway $ (28,178,092) $ (10,775,703)
Galaxy Enterprises (6,204,080) (4,367,778)
------------------------ ---------------------
Discontinued
Operations $ (1,028,781) 3,013
Combined $ (35,410,953) $ (15,140,478)
Prior to completion of the combination between Netgateway and Galaxy
Enterprises on January 7, 2000, the Company advanced $300,000 in bridge
financing to Galaxy Enterprises for working capital purposes and for the payment
of certain professional fees incurred by Galaxy Enterprises in connection with
the merger. On February 4, 2000, the Company advanced an additional $150,000 to
Galaxy Enterprises for working capital purposes and for the payment of certain
professional fees incurred by Galaxy Enterprises in connection with the merger.
Each loan was secured by a pledge of Galaxy Enterprises' common stock from John
J. Poelman, the chief executive officer and largest shareholder of Galaxy
Enterprises prior to the merger. The notes bore interest at 9.5% and were due
and payable on the earlier of June 1, 2000 or the consummation date of the
merger. The maturity date of the notes was later extended to the earlier of
September 1, 2000 or the consummation date of the merger.
After completion of the merger, the Company contributed these loans to
the capital of its subsidiary, Galaxy Enterprises and released the pledges
securing those loans. Prior to the consummation of the merger, the Company
entered into certain transactions in the normal course of business with Galaxy
Enterprises. For the year ended June 30, 2000, Netgateway generated revenue of
$470,000 from Galaxy Enterprises. For the year ended June 30, 2000, Galaxy
Enterprises generated revenue of $350,000 from Netgateway. The revenue and
expenses associated with these intercompany transactions have been eliminated in
the consolidation of these entities.
(4) Going Concern
The accompanying financial statements have been prepared on the basis
that the Company will continue as a going concern, which contemplates the
realization of assets and satisfaction of liabilities in the normal course of
business. The Company has incurred substantial losses for the years ended June
30, 2001, 2000 and 1999 and a cumulative net loss of approximately $72 million
through June 30, 2001. At June 30, 2001 the Company had a working capital
deficit of $11,352,352 and a capital deficit of $9,306,829. For the years ended
June 30, 2001, 2000 and 1999 the Company recorded negative cash flows from
operations of $8,002,343 and $16,440,273 and $6,971,091, respectively. The
Company has historically relied upon private placements of its stock and
issuance of debt to generate funds to meet its operating needs. Management's
plans include the raising of additional debt or equity capital however there can
be no assurance that additional financing will be available on acceptable terms,
if at all. The Company continues to work to improve the strength of its balance
sheet and has restructured its ongoing operations in an effort to improve
profitability and operating cash flow. If adequate funds are not generated, the
Company may be required to further delay, reduce the scope of, or eliminate one
or more of its products or obtain funds through arrangements with collaborative
partners or others that may require it to relinquish rights to all or part of
the intellectual property of the Internet Commerce Center or control of one or
more of its businesses. The consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
(5) Acquisitions
In January 1999, the Company acquired 100% of the outstanding stock of
Spartan Multimedia, Inc., a Canadian corporation, in exchange for 185,715 shares
of common stock of StoresOnline.com, Ltd., a wholly-owned Canadian subsidiary
valued at $557,145. The shares are convertible on a one-to-one basis into common
stock of the Company. The issuance of an additional 185,715 shares was
contingent upon the attainment of certain performance standards in future
periods. In April 1999, the Board of Directors approved the issuance of the
contingent shares and waived the performance standards. Accordingly, the
consideration increased to $1,392,858. The acquisition of Spartan Multimedia,
Inc. was recorded using the purchase method of accounting. The consideration was
allocated based on the relative fair values of the tangible and intangible
assets and liabilities acquired. The operations of Spartan Multimedia, Inc. are
included in the consolidated statement of operations of the Company from January
15, 1999. During the year ended June 30, 2001 the Company ceased the operations
of StoresOnline.com, Ltd. and has written off the net book value of the goodwill
related to the acquisition of StoresOnline.com, Ltd. of $834,331 which is
included in operating expenses.
The StoresOnline.com Ltd. shares held by third parties has been
recognized as a minority interest until such time the shares are converted to
the Company's common stock. As of June 30, 2001, 276,489 shares had been
converted and recorded in capital deficit.
Effective May 31, 1999, Galaxy Enterprises acquired substantially all
the net assets of Impact Media, LLC ("Impact") using the purchase method of
accounting by assuming the liabilities of Impact. The purchase of Impact
resulted in the recording of goodwill in the amount of $117,655, which was the
extent to which liabilities assumed exceeded the fair values of the assets
acquired. The terms of the Impact Media acquisition provide for additional
consideration of up to 250,000 shares of common stock to be paid if certain
agreed-upon targets are met during the years ended May 31, 2000 and May 31,
2001. As of June 30, 2000, one of the targets had been met, and as a result
119,706 shares of Netgateway, Inc. common stock were transferred to the former
owners of Impact. The Company recorded additional goodwill of $138,625 for the
fair value of these shares as an additional investment in Galaxy Enterprises
subsidiary, IMI, Inc. IMI, Inc. continued to conduct the business acquired from
Impact. In January 2001, the Company sold its ownership interest in IMI, Inc
(See Note 19).
(6) Change in Method of Accounting for Revenue
Effective October 1, 1999, the Company changed its method of accounting
for certain revenue from the completed contract method to the
percentage-of-completion method. The Company believes the
percentage-of-completion method more accurately reflects the current earnings
process under the Company's contracts. The percentage-of-completion method is
preferable according to Statement of Position 81-1, Accounting for Performance
of Construction-Type and Certain Production-Type Contracts, issued by the
American Institute of Certified Public Accountants. The new method has been
applied retroactively by restating the Company's consolidated financial
statements for prior periods in accordance with Accounting Principles Board
Opinion No. 20.
The impact of the accounting change was a decrease in net loss and loss per
share as follows:
Net Loss Loss per Share
------------ ------------------
Three months ended September 30, 1999 ...... $ 8,294 $0.0
Year ended June 30, 1999 ........... $ 13,858 $0.0
(7) Property and Equipment
Property and equipment balances at June 30, 2001 and 2000 are
summarized as follows:
-----------------------------------
2001 2000
-----------------------------------
Computers and office equipment.. $ 1,488,716 $ 2,579,586
Furniture and fixtures............... 10,406 87,901
Leasehold improvements........... 30,791 96,170
Software............................. 820,472 1,126,140
Less accumulated depreciation..... (1,575,523) (963,391)
----------------------------------
$ 774,862 $ 2,926,406
==================================
Amounts included in property and equipment for assets capitalized under
capital lease obligations as of June 30, 2001 and 2000 are $145,800 and
$172,472, respectively. Accumulated depreciation for the items under capitalized
leases was $109,350 and $40,594 as of June 30, 2001 and 2000, respectively.
(8) Intangible Assets
Intangible asset balances as of June 30, 2001 and 2000 are
summarized as follows:
------------------------------------
2001 2000
------------------------------------
Acquired Technology $ - $ 1,510,548
Goodwill 867,003 1,102,196
------------------------------------
867,003 2,612,744
Less accumulated amortization (278,459) (693,636)
------------------------------------
$ 588,544 $ 1,919,108
======== =========
Net acquired technology and goodwill balances of $910,043 and $174,434
were written off during the second quarter of Fiscal 2001 as part of a
corporate-wide business restructuring (see Note 2(f)).
(9) Loans Payable
In May 2001, the Company borrowed $100,000 from an individual who is
the principal member of the company that purchased IMI from the Company. The
amount was non-interest bearing and due on demand. In September 2001 the loan
was converted into 333,333 shares ($.30 per share) of common stock of the
Company in connection with the company's raising capital in a private placement
of equity securities (See Note 22).
(10) Note Payable - Bank
The note payable of $97,779 to a financial institution bears interest
at the prime rate plus 3% per annum (10% at June 30, 2001 and 11.5% at June
30,2000) and is due on November 1, 2001. The note is secured by certain
equipment of the Company and is guaranteed by the Company's President.
(11) Loans Payable - Officers and Directors
During the year ended June 30, 2001 several officers and members of the
Board of Directors loaned the Company an aggregate of $821,000. The loans were
non-interest bearing exclusive of a note in the amount of $250,000 that bears
interest at 18% per annum (balance at June 30, 2001 is $140,000). The Company
has imputed interest on the non-interest bearing loans at the rate of 18% per
annum and recorded an aggregate of $38,756 as interest expense and as a
contribution to capital during the year ended June 30, 2001. Principal payments
made during the year ended June 30, 2001 aggregated $213,000 and in April 2001
the Company's President exchanged $118,000 of the amount due for 393,333 shares
(market pricing on the date of conversion) of the Company's common stock.
(12) Convertible Debenture
In July 2000, the Company entered into a securities purchase agreement
with King William, LLC ("King William"). Under the terms of the agreement, the
Company issued to King William an 8% convertible debenture due July 31, 2003 in
the principal amount of $4.5 million. The debenture was convertible at King
William's option into the number of shares of our common stock at the lower of
$1.79 or a conversion rate of 80% of the average market price of the common
stock during any three non-consecutive trading days during the 20 trading days
prior to conversion. The purchase price for the debenture was payable in two
tranches. The first tranche of $2.5 million was paid at the closing in July
2000. In connection with the $2.5 million tranche the Company issued King
William a warrant to purchase 231,000 shares of the company's common stock at an
exercise price of $1.625 per share expiring in 5 years. The warrant was valued
using the Black-Scholes pricing model at $259,000 and recorded as a discount to
the debenture and amortized over the life of the debenture. The unamortized
balance of the warrant at June 30, 2001 is $117,727. The value of the beneficial
conversion feature on the $2.5 million that has been drawn down was recorded as
additional paid in capital and interest expense of $884,000 during the quarter
ended September 30, 2000, as the convertible debentures were immediately
exerciseable.
In connection with the issuance of the King William debenture, the
Company also issued to Roth Capital Partners, Inc., a warrant to purchase 90,000
shares of common stock and to Carbon Mesa Partners, LLC, a warrant to purchase
10,000 shares of common stock. Each of the warrants is exercisable for five
years from the date of issuance, at an exercise price of $1.625 per share and
with cashless exercise and piggyback registration rights. The fair value of the
warrants has been determined to equal $112,000 using the Black-Scholes pricing
model using the following assumptions; dividend yield of zero, expected
volatility of 80%, risk-free interest rate of 6.5% and expected life of 5 years,
and is reflected as additional paid in capital and debt issuance costs and is
amortized over the life of the debt. The unamortized balance at June 30, 2001 is
$50,909.
Effective as of January 25, 2001, the Company reached an agreement with
King William to restructure the debenture (the "Restructuring Agreement"). As of
the date of the Restructuring Agreement the Company was in breach and/or
violation of all agreements with King William, however King William has waived
all of these defaults as of the date of the Restructuring Agreement. Under the
terms of the Restructuring Agreement the second tranche of the debenture will
not be available to the Company. The Company agreed to repay the full amount of
the Debenture plus a 15% premium ($375,000) with respect to the original
principal amount in ten payments. As of the date of the Restructuring Agreement
the principal amount including the premium and the accrued and unpaid interest
was $2,972,781. Additionally, the Company has allowed King William to retain the
right to convert any or all portions of the outstanding debt to equity, but only
after the stock has traded at or above $3.00 for twenty consecutive trading
days, or if the Company does not make a required payment of principal. Warrants
already earned by King William were repriced at $.25 per share and King William
was issued a warrant for an additional 269,000 shares of common stock at $.25
per share. The incremental fair value of the repricing of the warrants and the
issuance of the new warrants was valued using the Black-Scholes pricing model
using the following assumptions; dividend yield of zero expected volatility of
170%, risk-free interest rate of 5% and expected life of 5 years, at $9,008 and
$129,927, respectively. The unamortized balance at June 30, 2001 is $75,783.
These costs were classified on the balance sheet as debt financing costs and are
being amortized over the life of the debt. The initial payment of $250,000, as
called for by the Restructuring Agreement, was made during the first week of
February. A second payment to be paid on February 28, 2001 was not made. In May
2001 King William elected to convert $200,000 of the principal and accrued and
unpaid interest of the debenture (Conversion Amount) into 800,000 shares of
common stock of the Company, at a conversion price of $.25 per share. The
Conversion Amount was credited toward the payment of $250,000 previously due on
February 28, 2001, with the balance plus interest accrued to be paid on March
10, 2002. In addition, in May 2001, the Company obtained a Waiver Agreement with
King William to amend certain terms of the Restructuring Agreement and to waive
certain existing defaults under the Restructuring Agreement. The Waiver
Agreement amended the Restructuring Agreement payment schedule to postpone the
remaining April 2001 payment of $247,278 to February 2002 and the May 2001
payment of $247,278 to March 2002. As of the date of the Waiver Agreement King
William has withdrawn and waived all defaults and violations.
On July 11, 2001 the Company and King William entered into a Second
Restructuring Agreement. The Company agreed to pay, and King William agreed to
accept, in full and final satisfaction of the Debenture (i) a cash payment of
$100,000, (ii) a $400,000 promissory note of Netgateway due August 2004 bearing
interest at 8% per annum and (iii) the Final Conversion Shares as defined below.
No accrued interest is payable in connection with these payments. The Final
Conversion Shares insure that King William will receive sufficient shares so
that on the day of the closing King William will beneficially own common shares
equal to 9.99% of the then outstanding shares of Netgateway. In September 2001
the Company issued the final conversion shares equal to 2,800,000. King William
has agreed to certain volume limitations relating to the subsequent sale of the
shares and has also agreed to forgive the promissory note if the Company meets
certain specific requirement including a minimal amount ($2,250,000) of proceeds
King William is to receive from its sale of Company common stock.
(13) Convertible Long Term Notes
Convertible promissory notes consist of the following at June 30,
2001:
Convertible promissory notes issued in January 2001, net of debt $ 223,232
discounts
Convertible promissory notes issued in April 2001,
net of debt discounts 218,940
-----------------
$ 442,172
Less current portion -
-----------------
$ 442,172
=================
In January 2001, the Company issued long term Convertible Promissory
Notes ("Notes") in a private placement offering totaling $1,830,500. The Notes
mature on July 1, 2004 and interest accrues at the rate of eight percent (8%)
per annum. The Notes are convertible prior to the maturity date at the option of
the holder any time after July 1, 2001, or by the Company at any time after July
1, 2001 upon certain conditions as detailed in the Notes into shares of common
stock of the Company at $.25 per share, subject to conversion price adjustments
as defined in the agreement. In connection with the sale of the Notes, the
Company issued warrants to purchase a share of the Company's common stock at an
exercise price of $.50 per share for every two shares of Common Stock into which
the Note is originally convertible. The Company issued a total of 3,661,000
warrants in connection with the sale of the Notes, with an expiration date of
sixty days.
The beneficial conversion feature was initially valued at $2,700,000.
The debt discount related to the warrants was initially valued at $1,200,000
using the Black-Scholes pricing model using the following assumptions; dividend
yield of zero, expected volatility of 283%, risk-free interest rate of 5% and
expected life of 5 years. The debt discount relating to the beneficial
conversion feature and the warrants aggregated $1,830,500, the amount of the net
proceeds of the financing and has been allocated based upon the relative fair
value of the beneficial conversion feature and the warrants of $1,317,960 and
$512,540, respectively. In accordance with Emerging Issues Task Force issue
00-27 effective November 16, 2000 the discount related to the beneficial
conversion feature and the warrants will be amortized over the life of the
related notes. The unamortized balance of the debt discount at June 30, 2001 is
$1,607,268.
In April 2001 the Company issued an additional $246,000 in convertible
8% Notes. The Notes mature on April 4, 2004 and the holder can convert at any
time after July 1, 2001 at a rate of $.25 per share for common stock or the
Company may convert at any time after July 1, 2001 upon certain conditions
detailed in the Notes.
The fair value of the beneficial conversion feature of $29,520 is
recorded as debt discount in the accompanying balance sheet and will be
amortized over the life of the Notes. As of June 30, 2001, the balance of the
note was $218,940, net of the unamortized debt discount of $27,060. In
connection with the issuance of the Notes in January and April 2001, the Company
issued an aggregate of 250,000 warrants to a placement agent to purchase the
Company's common stock at an exercise price of $0.30, and 225,000 warrants at an
exercise price of $0.40. The warrants expire in five years from the issuance
date, and were valued using the Black-Scholes pricing model using the following
assumptions; dividend yield of zero, expected volatility of 227%, risk-free
interest rate of 5% and expected life of 5 years, at $142,588 that was recorded
as debt issuance costs included in other assets in the accompanying financial
statements.
On July 15, 2001 the Company sent a letter to all holders of the Notes
dated in January and April explaining their right to convert their investment
into common stock. The letter included a calculation of the interest the note
holder had earned and offered to convert both the principal balance of the Note
and the accrued interest into common stock at a conversions price of $0.25 per
share. As of September 30, 2001 note holders representing $1,741,500 of
principal balance exercised their right to convert both principal and accrued
interest into common stock. Accordingly, 7,204,326 shares of common stock have
been issued.
(14) Income Taxes
Income tax expense for the year ended June 30, 2001 and 2000 represents
the Utah and California state minimum franchise tax and is included in selling,
general and administrative expenses in the accompanying consolidated statement
of operations.
Income tax expense attributable to loss from operations during the year
ended June 30, 2001 and 2000, differed from the amounts computed by
applying the U.S.federal income tax rate of 34 percent to loss from
operations as a result of the following:
2001 2000 1999
Computed "expected" tax benefit $ (1,237,170) $ (14,996,866) $ (5,709,861)
Decrease (increase) in income tax resulting from:
State and local income tax benefit, net of
federal effect (192,125) (2,114,471) (805,057)
Change in the valuation allowance for deferred
tax assets 1,657,117 14,133,260 6,470,884
Other (including cancellation of debt) (227,822) 122,077 44,034
Non-deductible stock compensation - 2,856,000 -
------------ ------------- -----------------
Income tax expense $ - $ - $ -
==================================================
-------------------------------------------------------------------------------------------------------------------
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
June 30, 2001 and 2000 are presented below:
2001 2000
Deferred tax assets:
Net operating loss carryforwards $ 17,754,865 $ 13,848,761
Stock option expense 2,286,615 2,199,764
Intangible assets, principally due to
differences in amortization 34,778
Deferred compensation 471,501 368,151
Accounts receivable principally due to
allowance for doubtful accounts 998,477 802,120
Accrued expenses 110,306 542,632
Other 112,926 112,926
Deferred revenue 2,413,436 5,977,552
Legal fees 460,524 460,524
Debt issuance costs 1,550,938 407,971
-------------------- ------------------
Total gross deferred tax assets 26,159,588 24,755,179
Less valuation allowance (26,140,222) (24,737,878)
Deferred tax liability:
Property and equipment, principally due to
differences in depreciation (19,366) (17,301)
-------------------- -------------------
Net deferred tax assets $ - $ -
==================== ==================
In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all of the
deferred tax assets will not be realized. The ultimate realization of deferred
tax assets is dependent upon the generation of future taxable income during the
periods in which those temporary differences become deductible. Management
considers the scheduled reversal of deferred tax liabilities, projected future
taxable income, and tax planning strategies in making this assessment. Based on
the projections for future taxable income over the periods which the deferred
tax assets are deductible, management believe it is more likely than not that
the Company will not realize the benefits of these deductible differences. Such
potential future benefits have been fully reserved, and accordingly, there are
no net deferred tax assets.
As of June 30, 2001, the Company has net operating loss ("NOL")
carryforwards of approximately of $44,000,000 available to reduce future taxable
income of which a substantial portion is subject to limitations in accordance
with Section 382 of the Internal Revenue Code. Additionally, the NOL
carryforwards may be subject to further limitations should certain future
ownership changes occur. The NOL carryforwards expire in various amounts from
2006 to 2021.
(15) Commitments and Contingencies
The Company leases certain of its equipment and corporate offices under
long-term operating lease agreements expiring at various dates through 2004.
Future aggregate minimum obligations under operating leases as of June 30, 2001,
exclusive of taxes and insurance, are as follows:
Year ending June 30,
2002 $ 366,655
2003 328,410
2004 291,147
Thereafter 26,510
---------------
Total $1,012,722
===============
Rental expense for the years ended June 30, 2001, 2000 and 1999 was
approximately $582,000, $721,000 and $241,000, respectively.
In connection with the merger in June 2000, the Company entered into
employment agreements with four of its employees expiring June 2002. The
agreements require aggregate salary payments of approximately $358,000, bonus
payments in September 2000 of approximately $69,000 and the granting of 78,000
options to purchase the Company's common stock with an exercise price to be
determined on the date of the grant. As of June 30, 2001 the options have not
been granted.
In January 2001, the Company entered into severance agreements with
three former executives of the Company. The agreements require cash payments
aggregating $97,000 through June 30, 2001, and two of them provide for a
one-half interest in certain licenses and equipment owned by the Company, and a
grant of options to purchase common stock of the Company proportionate to any
options granted to the Chairman of Board of the Company. In August 2001, two of
the individuals issued a demand letter to the Company, claiming that certain
payments stipulated in the agreements had not been made and purporting to
reassert their rights under their respective employment agreements. As of June
30, 2001 no options have been granted to the Chairman of the Board or the former
executives.
The Company is involved in various legal proceedings arising in the
normal course of its business. In the opinion of management, the outcome of
which, if any, resulting from these matters will not have a material adverse
effect on the results of operations, cash flows or financial position of the
Company.
The private placement conducted in January-April 2001 to a group of
accredited investors occurred in part while a dormant but not effective
registration statement was on file with the SEC with respect to a public
offering of the Company's common stock by a third party deemed by current SEC
interpretations to be an offering by the Company. Although the Company believes
that these unregistered securities were issued pursuant to an available
exemption under applicable securities laws, other current interpretations of
securities regulatiors may not be consistent with their view and if in fact the
interpretation is proved incorrect then, among other consequences, the
purchasers of such securities would be entitled to exercise recission rights
with respect to their investment of total proceeds of $2,076,500, plus interest
at rates determined by state statutes from the date of such offering to the date
of payment. If the Company were required to make such an offer and it was
accepted then the required payments would exceed cash resources and require the
Company to seek additional financing, most likely in the form of additional
issues of common stock, to make such payments and would materially and adversely
effect the financial condition of the Company.
From time to time, prior to the acquisition of Galaxy Enterprises,
Galaxy Enterprises received inquiries from attorney general offices and other
regulators about civil and criminal compliance matters with various state and
federal regulations. These inquiries sometimes rose to the level of
investigations and litigation. In the past, Galaxy Enterprises has received
letters of inquiry from and/or has been made aware of investigations by the
attorney generals of Hawaii, Illinois, Kentucky, Nebraska, North Carolina, Utah
and Texas and from a regional office of the Federal Trade Commission. Galaxy
Enterprises has responded to these inquiries and has generally been successful
in addressing the concerns of these persons and entities, although there is
generally no formal closing of the inquiry or investigation and certain of
these, including Illinois and Utah, are believed to be ongoing. Hawaii has taken
the position that Galaxy's marketing efforts, in their current form, must comply
with its "Door-to-Door Sale Law." In the opinion of management, the outcome of
any of these matters should not have a material adverse effect on the results of
operations, cash flows or financial position of the Company.
(16) Stock Option Plan
In June 1998, the Board of Directors approved, for future grants,
500,000 options to acquire an equivalent number of shares of common stock at an
exercise price of $1 per share to certain senior management.
In June 1998, the Board of Directors granted 100,000 options to acquire
an equivalent number of shares of common stock at an exercise price of $6 per
share as consideration for legal fees. The options vest ratably as services are
provided and expire on April 30, 2005. During the year ended June 30, 1999,
under the anti-dilution clause of the agreement, the number of options increased
to 240,000 and the exercise price was decreased to $2.50 per share. As a result,
compensation for the fair value of the options aggregating $479,708 was
recorded. The fair value of the options on the date of repricing was estimated
using the Black-Scholes option-pricing model with the following assumptions:
dividend yield of 0%; risk-free interest rate of 5%; volatility of 100% and an
expected life of 1.5 years.
In July 1998, the Board of Directors adopted the 1998 Stock
Compensation Program ("Program") which consists of, among other things, a
non-qualified stock option plan. An aggregate of 1,000,000 shares were reserved
for issuance under the Program. During the year ended June 30, 1999, the Company
granted 983,348 options under the Program at exercise prices greater than and
below the estimated market price of the Company's common stock on the date of
grant ranging from $2.00 to $13.30 per share. The weighted-average fair value of
options granted during the year ended June 30, 1999 under the Program was $3.44
per share. During the year ended June 30, 2000, the Company granted 126,416
options under the Program at exercise prices greater than and below the
estimated market price of the Company's common stock on the date of grant
ranging from $3.50 to $6.00 per share. The weighted-average fair value of
options granted during the year ended June 30, 2000 under the Program was $3.59
per share. During the year ended June 30, 2001 the Company cancelled 603,256
options granted under the Program. The Company did not grant any options during
the year ended June 30, 2001. As of June 30, 2001, options available for future
grants under the Program totaled 653,632.
In December 1998, the Board of Directors adopted the 1998 Stock Option
Plan for Senior Executives. An aggregate of 5,000,000 shares were reserved for
issuance under the Plan. During the year ended June 30, 1999, the Company
granted 2,546,667 options under the Plan at exercise prices greater than and
below the estimated market price of the Company's common stock on the date of
grant ranging from $2.00 to $6.50 per share. The weighted-average fair value of
the options granted under the Plan during the year ended June 30, 1999 was $2.69
per share. Subsequent to June 30, 1999, 2,246,667 of these options were
cancelled. During the year ended June 30, 2000, the Company granted 550,714
options under the Plan at exercise prices greater than and below the estimated
market price of the Company's common stock on the date of grant ranging from
$3.50 to $9.25 per share. The weighted-average fair value of the options granted
under the Plan during the year ended June 30, 2000 was $6.73 per share. During
the year ended June 30, 2001 the Company granted 1,675,000 options under the
Plan, with a weighted-average fair value of $.71 per share. As of June 30, 2001,
there were 3,518,750 options available for future grants under the Plan.
In July 1999, the Board of Directors adopted the 1998 Stock Option Plan
for Non-Executives. An aggregate of 2,000,000 shares were reserved for issuance
under the Plan; the reserve amount was later increased to 5,000,000 shares.
During the year ended June 30, 2000, the Company granted 2,237,832 options under
the Plan at exercise prices greater than and below the estimated market price of
the Company's common stock on the date of grant ranging from $1.78 to $14.50 per
share. The weighted-average fair value of the options granted under the Plan
during the year ended June 30, 2000 was $7.34 per share. Also during the year
ended June 30, 2000, 279,779 of these options were canceled. During the year
ended June 30, 2001 the Company granted 1,655,500 options under the Plan, with a
weighted-average fair value of $.74 per share. As of June 30, 2001, there were
3,468,268 options available for future grants under the Plan.
Pursuant to the terms of the Company's merger with Galaxy Enterprises
in June 2000, each outstanding option to purchase shares of Galaxy Enterprises'
common stock under Galaxy Enterprises' 1997 Employee Stock Option Plan was
assumed by the Company, whether or not vested and exercisable subject to the per
share equivalent used to issue common shares in the merger accounted for as a
pooling of interests. The Company assumed options exercisable for an aggregate
of 1,063,470 shares of Netgateway common stock.
The following is a summary of stock option activity under the Company's
stock option plans:
Number of Weighted
average
exercise
Options price
-----------------------------
Balance at June 30, 1998 756,711 $ 2.62
Granted............................ 3,827,983 3.80
Exercised.......................... (6,895) 1.17
Canceled or expired............... (488,033) 3.27
-----------------------------
Balance at June 30, 1999 4 ,089,766 $ 3.65
Granted.......................... 3,460,500 6.60
Exercised........................ (345,724) 3.40
Canceled or expired.............. (2,691,901) 3.13
---------------------------
Balance at June 30, 2000 4,512,641 $ 6.24
Granted......................... 3,330,500 0.73
Exercised....................... (20,015) 0.25
Canceled or expired............. (4,082,750) 4.50
---------------------------
Balance at June 30, 2001 3,740,376 $ 2.11
===========================
The following table summarizes information about shares under option as
of June 30, 2001:
----------------------------------------------------------- ------------------------------
Outstanding Exerciseable
----------------------------------------------------------- ------------------------------
Weighted-Averag Weighted-
Remaining Average Weighted-
Range of Number of Contractural Exercise Number of Average
Exercise Prices Options Life Price Options Exercise Price
----------------------------------------------------------- ------------------------------
$0.25 545,150 9.52 $ 0.25 259,652 $ 0.25
$0.50 551,000 9.52 0.50 0 0.50
$0.75 541,000 9.52 0.75 0 0.75
$.76 - $1.00 583,000 9.50 1.00 6,000 0.98
$1.01 - $2.99 830,102 7.57 1.72 355,604 1.80
$3.00 - $5.99 165,215 8.56 3.78 149,741 3.79
$6.00 - $8.99 361,283 8.08 7.57 360,983 7.57
$9.00 - $11.31 163,626 8.20 10.30 141,978 10.46
------------------------------------------ ------------------------------
3,740,376 8.84 $ 2.11 1,273,958 $ 4.24
========================================== ==============================
The Company applies APB Opinion No. 25 in accounting for stock options
granted to employees, under which no compensation cost for stock options is
recognized for stock option awards granted at or above fair market value. The
Company recognized $652,825 and $282,052 of compensation expense for options
granted below fair market value during the years ended June 30, 2000 and 1999,
respectively. The Company granted no employee stock options below market price
during the year ended June 30, 2001.
Had the Company determined compensation cost based on the fair value at
the grant date for its stock options under SFAS No. 123, the Company's net loss
would have been increased to the proforma amounts indicated below for the years
ended June 30, 2001, 2000 and 1999.
Net Loss: 2001 2000 1999
-------------------------------------------------
As reported $ (3,638,736) $ (44,108,429) $ (15,140,478)
Proforma $ (5,396,419) $ (46,776,831) $ (17,728,386)
Net loss per share
(basic and diluted):
As reported $ (0.16) $ (2.38) $ (1.21)
Proforma $ (0.24) $ (2.53) $ (1.41)
The weighted average fair value at date of grant for options granted
during 2001, 2000 and 1999, using the Black-Scholes pricing model is as follows;
dividend yield of zero, respectively, expected volatility of 384%, 80% and 631%,
respectively, risk free interest rate of 5%, 5.5%, and 5.5%, respectively and
expected life of 4 years, respectively.
(17) Stockholder's Equity
During the year ended June 30, 1999, the Company sold 1,564,134 units
in exchange for $4,200,978. Each unit consisted of one share of common stock and
one warrant to purchase an equivalent number of shares of common stock at an
exercise price of $4.00. The warrants were exercisable at anytime prior to
September 1, 1998. The estimated fair value of the warrants on the date of the
grant was estimated to be $.02 using the Black-Scholes option-pricing model with
the following assumptions: dividend yield of 0%; risk free interest rate of
5.16%; volatility of 100%; and an expected life of two months. The warrants were
subsequently repriced at $2.00 per share and the exercise date was extended to
October 1, 1998. The estimated fair value of the warrants on the date of
repricing remained consistent with the fair value on date of grant. In October
1998, 132,100 warrants were exercised to purchase 132,100 shares of common stock
generating proceeds of $264,200.
During the year ended June 30, 1999, the Company issued 366,500 shares
of common stock valued at $1,262,200 as payment of consulting and legal
services.
During the year ended June 30, 1999, the Company issued warrants as
consideration for various consulting fees and debt issue costs associated with
the convertible debentures. The warrants were exercisable within two years from
the dates of issuance. The fair value of the warrants on the dates of issuance
was estimated to be $3,169,839 using the Black-Scholes option-pricing model with
the following assumptions: dividend yield of 0%; risk-free interest rate of 5%;
volatility of 100% and an expected life of 2 years. Accordingly, compensation
expense of $2,340,720 in 1999 and $53,534 in 2000, debt issuance costs of
$240,050 and interest expense of $535,535 was recorded in the accompanying
consolidated financial statements.
In November 1998, the Company entered into a settlement agreement with
Michael Khaled, a stockholder of the Company, whereby four stockholders of the
Company contributed 200,000 shares of common stock valued at $400,000 to Mr.
Khaled. Additionally, the Company granted warrants to purchase 100,000 shares of
common stock to the four stockholders who contributed their stock. The fair
value of the warrants on the issuance date was estimated to be $420,000 using
the Black-Scholes option-pricing model with the following assumptions: dividend
yield of 0%; risk-free interest rate of 5%; volatility of 100% and an expected
life of 2 years. Accordingly, compensation expense of $820,000 was recognized in
the accompanying consolidated financial statements.
During March 1999, the Company issued 30,000 shares of common stock
valued at $127,500 as payment of debt issuance costs associated with the
issuance of $160,000 of notes payable.
In May 1999, the Company issued 35,000 shares of common stock valued at
$175,000 to acquire internal-use software from UnitNetImaging (Shopping Planet).
The value of the technology was capitalized in the accompanying consolidated
financial statements.
In January 1999, Galaxy Enterprises sold a $500,000 convertible
promissory note bearing interest at 7% per annum to an institutional investor.
During 1999, the note was converted into 108,017 shares of common stock for
outstanding debt of $450,000. Along with the convertible promissory note, Galaxy
Enterprises issued the institutional investor warrants to purchase 31,922 shares
of common stock. The warrants are exercisable at $11.04 per share and expire
January 11, 2002.
During February and March 1999, Galaxy Enterprises entered into an
agreement with an institutional investor, whereby the investor invested $1
million in exchange for 159,608 shares of Netgateway common stock. The investor
was also issued warrants to purchase up to 159,608 additional shares of
Netgateway common stock at an exercise price of $4.45 per share. The warrants
expired on March 18, 2001.
In July 1999, the Company entered into a Cable Reseller and Mall
agreement with MediaOne of Colorado, Inc. (MediaOne) whereby the Company also
issued to MediaOne 50,000 shares of common stock and warrants to purchase
200,000 shares of common stock. The exercise price of the warrants is dependent
upon the market price of the Company's common stock on the date that the
warrants are earned under certain performance criteria. As of June 30, 2001, the
performance criteria had not been met.
During the year ended June 30, 2000, the Company issued 538,598 shares
of common stock valued at $3,660,498 for services, of which 500,000 shares were
issued to the chief executive officer of the Company.
In November and December 1999, the Company sold 4,155,350 shares of
common stock in a public offering generating net proceeds of $25,313,863. The
Company also granted 190,250 warrants as stock issuance costs.
In October 1999, the Company issued 1,188,773 shares of common stock
upon the cashless exercise of warrants and 1,200,000 shares of common stock
valued at $8,400,000 to three executives upon the cancellation of 1,980,000
options.
During the period December 1999 through June 2000, the Company issued
239,576 shares of common stock upon the exchange of common stock of its
StoresOnline.com, Ltd. subsidiary, pursuant to the terms of the original
issuance of StoresOnline.com Ltd.'s common stock.
During the year ended June 30, 2000, Galaxy Enterprises, the Company
sold 145,926 shares of common stock in exchange for cash of $300,000.
During the year ended June 30, 2001, the Company issued 37,144 shares
of common stock upon the exchange of common stock of its StoresOnline.com, Ltd.
subsidiary, pursuant to the terms of the original issuance of common stock of
StoresOnline.com Ltd. In addition, the Company issued 20,015 shares upon the
exercise of employee options and issued 7,000 shares at fair market value on the
date of issuance of common stock pursuant to employment contracts during the
year ended June 30, 2001. The Company also issued 1,513,167 shares of common
stock to officers of the Company for payment of past due wages, employment
agreement obligations, and accrued liabilities at fair market value on the date
of issuance. In addition, the Company issued 393,333 shares of common stock to
an officer of the Company as payment in full of a note due to the officer, and
issued 40,800 shares of common stock to an outside party for services at fair
market value on the date of issuance.
In June 2001 pursuant to a private placement agreement, the Company
received subscription agreements aggregating $398,200 for the sale of common
stock at a price of $0.30 per share. As of to June 30, 2001 the Company
collected $291,200 of these subscriptions and recorded a receivable of $107,000
which was subsequently received.
(18) Discontinued Operations
On January 11, 2001, the Company sold all of the outstanding shares of
IMI, Inc. (see Note 19) and accordingly has reported the operations of IMI as
discontinued operations for all of the period presented. Certain information
with respect to discontinued operations of IMI is summarized as follows.
Operating results for the year ended June 30, 2001 include the operating
activity through January 11, 2001.
---------------------------------------------------
Year Ended
---------------------------------------------------
June 30, 2001 June 30, 2000 June 30, 1999
---------------------------------------------------
Revenue $ 1,116,863 $ 5,275,110 $ 288,245
Cost of Revenue 703,831 5,467,840 231,121
---------------------------------------------------
Gross profit (loss) 413,032 (192,730) 57,124
Total operating expenses 698,580 1,124,467 54,111
---------------------------------------------------
Income (loss) from discontinued operations
before other item shown below (285,548) (1,317,197) 3,013
Other income / (expense) (232) (1,318) -
---------------------------------------------------
Net income (loss) from discontinued operations $ (285,780) $(1,318,515) $ 3,013
===================================================
(19) Extraordinary Items
In August 1998, the agreement with ProSoft I-Net Solutions, Inc.
(ProSoft)for notes payable aggregating $2,387,622 was amended whereby the
scheduled principal payments of $2,100,000 and $400,000 due in fiscal years 1999
and 2000, were changed to $1,800,000 and $700,000, respectively. During the year
ended June 30, 1999, the Company repaid $700,000 of the notes payable to
ProSoft. In December 1998, ProSoft released the Company from its remaining
obligation under the notes. As of December 1998, the Company recognized $35,488
of imputed interest as interest expense. The remaining imputed interest balance
was expensed upon extinguishments of the debt in December 1998. Additionally,
Michael Khaled and Scott Beebe, who personally guaranteed repayment of the
Company's obligations to ProSoft, paid ProSoft $200,000 in the aggregate to
terminate their individual personal guarantees of the notes payable which was
recorded as a capital contribution upon extinguishments of debt. Accordingly,
the Company recorded $1,653,232 as a gain on extinguishments of debt during the
year ended June 30, 1999.
During the year ended June 30, 2001, the Company restructured its
operations and combined its California facility with its facility in Utah. In
connection with this decision certain assets of Netgateway, which were owned
prior to the merger in June 2000, were disposed. In accordance with Accounting
Principles Board Opinion No.16 Accounting for Business Combinations relating to
the disposition of assets of the previously separate entities in a pooling of
interests combination, the Company recorded an extraordinary charge of an
aggregate of $1,091,052.
On January 11, 2001, the Company sold all of the outstanding shares of
IMI, Inc., dba Impact Media, a wholly-owned subsidiary, for $1,631,589 to
Capistrano Capital, LLC ("Capistrano"). The principal shareholder of Capistrano
subsequently became a stockholder of the Company. The Company received from
Capistrano a cash payment of $300,000, with the balance owing of $1,331,589 in
the form of a long-term note bearing interest at 8% per annum, payable by
Capistrano. Principal payments under the note are due based on IMI's product
sales, due no later than January 2011. Due to the uncertainty of the ultimate
collectibility of the note, management has recorded a reserve on the entire note
balance at June 30, 2001. The reserve has been netted against the gain on
disposal of IMI. The net gain recorded on the sale of $363,656 has been included
as an extraordinary item as a gain on disposal of assets subsequent to merger in
the accompanying financial statements.
In January 2001 the Company entered into an agreement with an unrelated
third party to negotiate settlement agreements with vendors and other debtors,
relating mainly to the business to business and cable commerce divisions. Prior
to June 30, 2001 approximately $2.5 million in obligations were settled for
approximately $800,000, resulting in an extraordinary gain of $1,688,956.
(20) Related Entity Transactions
The Company utilizes the services of Electronic Commerce International,
Inc. ("ECI"), a Utah corporation, which provides merchant accounts and leasing
services to small businesses. ECI processes the financing of Company merchants'
storefront leases and also sells software to the Company used for on-line,
real-time processing of credit card transactions (merchant accounts). John J.
Poelman, President, Chief Operating Officer, Director and a stockholder of the
Company, is the sole stockholder of ECI. Total amounts for purchased merchant
account software during the year ended June 30, 2001, 2000 and 1999 totaled
$975,257, $1,110,404 and $483,387, respectively. During the years ended June 30,
2001, 2000 and 1999 the Company processed leasing transactions for its customers
through ECI in the amounts of $3,386,231, $2,450,292, and $1,761,731,
respectively. As of June 30, 2001 and 2000 the Company had a receivable from ECI
for leases in process of $90,109 and $152,060, respectively. In addition, the
Company has $516,858 and $103,741 recorded in accounts payable relating to the
amounts owed to ECI for the purchase of the merchant account software.
During the year the Company issued 125,000 warrants to a director for
nondirector services rendered. The warrants were valued using the Black-Scholes
pricing model using the following assumptions; dividend yield of zero, expected
volatility of 227%, risk-free interest rate of 4.6% and expected life of 5 years
at $40,657.
(21) Segment Information
The Company has operated under two principal business segments
(Internet services and multimedia products). The primary business segment
(Internet services) is engaged in the business of providing its customers the
ability to (i) acquire a presence on the Internet and (ii) to advertise and sell
their products or services on the Internet. A secondary business segment
(multimedia services) has been engaged in providing assistance in the design,
manufacture and marketing of multimedia brochure kits, shaped compact discs and
similar products and services intended to facilitate conducting business over
the Internet. This second segment was sold on January 11, 2001 and accordingly
is reported as discontinued operations in the accompanying consolidated
statements of operations. As a result, the Company now operates in one business
segment.
(22) Subsequent Event
During July through September 2001, the Company sold additional shares
of the Company's common stock at $.30 per share through a private placement for
gross proceeds of $ 2.0 million.
(23) Quarterly Financial Information (unaudited)
Quarter Ended Fiscal Year
9/30/1999 12/31/1999 3/31/2000 6/30/2000 Total
----------------------- ------------------- ----------------- ---------------- -----------------
Revenue $ 3,942,509 $ 4,671,502 $ 6,587,123 $ 6,948,515 $ 22,149,649
Gross profit 1,638,160 3,584,244 5,024,566 3,437,588 13,684,558
Loss from continuing operations (5,143,546) (21,687,644) (7,550,983) (8,407,741) (42,782,105)
Loss from discontinued
operations (75,471) (756,644) (196,666) (289,734) (1,318,515)
Net loss $(5,219,017) $ (22,444,288) $ (7,747,649) $ (8,697,475) $ (42,789,914)
Basic and diluted loss per share:
Loss from continuing operations $ (0.37) $ (1.23) $ (0.48) $ (0.23) $ (2.31)
Loss from discontinued
operations $ (0.01) $ (0.04) $ (0.01) $ (0.01) $ (0.07)
Net loss $ (0.38) $ (1.27) $ (0.49) $ (0.24) $ (2.38)
Quarter Ended Fiscal Year
9/30/2000 12/31/2000 3/31/2001 6/30/2001 Total
----------------------- ------------------- ----------------- ---------------- -----------------
Revenue $ 7,425,857 $ 14,179,643 $ 7,886,385 $13,508,648 $ 43,000,533
Gross profit 5,235,950 11,952,131 5,753,014 11,633,863 34,574,958
Income (loss) from continuing
operations (6,478,573) (2,011,994) 1,211,000 2,965,051 (4,314,516)
Income (loss)from
discontinued operations (201,462) (83,190) (1,128) - (285,780)
Income (loss) from
extraordinary items - (1,091,052) 363,656 1,688,956 961,560
Net income (loss) $(6,680,035) $ (3,186,236) $ 1,573,528 $ 4,654,007 $ (3,638,736)
Basic income (loss) per share:
Income (loss) from continuing
operations $ (0.30) $ (0.09) $ 0.06 $ 0.124 $ (0.19)
Income (loss) from
discontinued operations (0.01) (0.01) - - (0.01)
Income (loss) from
extraordinary items - (0.05) 0.02 0.07 0.04
Net income (loss) $ (0.31) $ (0.15) $ 0.08 $ 0.19 $ (0.16)
Diluted income (loss) per share:
Income (loss) from continuing
operations $ (0.30) $ (0.09) $ 0.36 $ 0.09 $ (0.24)
Income (loss) from
discontinued operations (0.01) (0.01) - - (0.02)
Income (loss) from
extraordinary items - (0.05) 0.01 0.04 0.01 $
Net income (loss) $ (0.31) $ (0.15) $ 0.04 $ 0.13 $ (0.25)
Weighted Average Common
Shares Outstanding
Basic 21,691,464 21,691,464 21,694,791 24,044,018
Diluted 21,691,464 21,691,464 41,274,115 39,500,84
*As Recalculated
(1) Includes the dilutive effect of options, warrants and convertible
securities.
Schedule II - Valuation and Qualifying Accounts
NETGATEWAY, INC.
Schedule II- Valuation and Qualifying Accounts
Years ended June 30, 2001, 1999 and 2000
Balance at Charged to Balance at
Beginning Costs and Deductions/ End of
of Period Expenses Write-off Period
Year ended June 30, 2001
Deducted from accounts receivable:
Allowance for doubtful accounts
and sales returns $ 960,621 $ 3,475,492 $ 757,075 $ 3,679,017
Year ended June 30, 2000 ---------------- ---------------- ----------------- ----------------
Deducted from accounts receivable:
Allowance for doubtful accounts
and sales returns 36,925 1,159,022 235,346 960,601
Year ended June 30, 1999 ---------------- ---------------- ----------------- -----------------
Deducted from accounts receivable:
Allowance for doubtful accounts
and sales returns 43,832 3,000 9,907 36,925
----------------- ---------------- ----------------- ----------------
--------------------------------------------------------------------------------
EXHIBIT INDEX
Exhibit No. Description
2.1 Agreement and Plan of Merger dated March 10, 2000 by and among Netgateway, Inc., Galaxy
Acquisition Corp. and Galaxy Enterprises, Inc.(6)
3.1 Certificate of Incorporation, as amended (11)
3.2 Amended and Restated Bylaws(11)
3.3 Certificate of Ownership and Merger (4)
3.4 Articles of Merger (4)
4.1 Form of Representatives' Warrant(1)
4.2 Form of Common Stock Certificate(4)
10.1 Form of Executive Employment Agreement(1)
10.6 1998 Stock Compensation Program(1)
10.7 1998 Stock Option Plan for Senior Executives(1)
10.8 Office Lease dated as of June 26, 1998 between Netgateway, Inc. and Pacific Tower Associates(1)
10.9 Form of Internet Data Center Services Agreement between Netgateway, Inc. and Exodus
Communications, Inc.(1)
10.10 Form of Secured Convertible Debenture due December 31, 1999(1)
10.12 Software Assignment and Grant Back Limited License Agreement dated as of November 16, 1999 between
Netgateway and Shopping Planet(1)
10.13 Stock Purchase Agreement dated as of November 1, 1998 among StoresOnline.com, Ltd., Netgateway,
Inc. and the Selling Stockholders(1)
10.14 Amendment to Stock Purchase Agreement among StoresOnline.com, Ltd., Netgateway, Inc. and the
Selling Stockholders(1)
10.15 Form of Financial Consulting Agreement(1)
10.17 Consulting and Advisory Agreement dated October 20, 1998 between Burchmont Equities Group, Inc.
and Netgateway(2)
10.18 Consulting and Advisory Agreement dated November 1, 1998 between North Coast Securities Corp. and
Netgateway(2)
10.19 Consulting Agreement dated December 24, 1998 between
Netgateway and Glashow Associates(2) 10.20 Consulting
Agreement, dated July 1, 1999, between Netgateway and
Glashow Associates LLC(2) 10.21 Amended and Restated
Subordinated Secured Promissory Note dated August 28, 1998
from Admor Memory
Corp. and Netgateway, including the Security Agreement dated as of August 28, 1998 among Admor
Memory Corp., Admor Memory, Ltd. and Netgateway(2)
10.22 Form of Series A 12% Senior Note due 2000(3)
10.25 Electronic Commerce Services Agreement dated as of March 24, 1999 between Netgateway, Inc. and CB
Richard Ellis(3)
10.26[R] Electronic Commerce Services Agreement dated as of March 24, 1999 between Netgateway, Inc. and CB
Richard Ellis(4)
10.27 Reseller and Mall Agreement dated as of May 20, 1999 among Netgateway, Inc., StoresOnline.com,
Inc. and WirelessOne, Inc.(3)
10.28[R] Reseller and Mall Agreement dated as of May 20, 1999 among Netgateway, Inc., StoresOnline.com,
Inc. and WirelessOne, Inc.(4)
10.31 Cable Reseller and Mall Agreement dated as of July 26, 1999 among StoresOnline.com, Inc.,
Netgateway, Inc. and MediaOne of Colorado, Inc.(3)
10.32[R] Cable Reseller and Mall Agreement dated as of July 26, 1999 among StoresOnline.com, Inc.,
Netgateway, Inc. and MediaOne of Colorado, Inc.(4)
10.33 Stock Purchase Agreement dated as of July 16, 1999 between Netgateway, Inc. and MediaOne of
Colorado, Inc.(3)
10.34[R] Stock Purchase Agreement dated as of July 16, 1999 between Netgateway, Inc. and MediaOne of
Colorado, Inc.(4)
10.35 Distributor Mall/Storefront Agreement dated as of August 25, 1999 between Netgateway, Inc. and
BuySellBid.com, Inc.(3)
10.36[R] Distributor Mall/Storefront Agreement dated as of August 25, 1999 between Netgateway, Inc. and
BuySellBid.com, Inc.(4)
10.37 Joint Marketing and Promotion Agreement dated August 25, 1999 between Netgateway, Inc. and
BuySellBid.com, Inc.(3)
10.38[R] Joint Marketing and Promotion Agreement dated August 25, 1999 between Netgateway, Inc. and
BuySellBid.com, Inc.(4)
10.39 Cable Reseller and Mall Agreement dated as of August 30, 1999 among Netgateway, Inc., StoresOnline
and B2BStores.com, Inc.(3)
10.40[R] Cable Reseller and Mall Agreement dated as of August 30, 1999 among Netgateway, Inc., StoresOnline
and B2BStores.com, Inc.(4)
10.41 Electronic Commerce Services Agreement dated as of July 28, 1999 between Netgateway, Inc. and
B2BStores.com, Inc.(3)
10.42[R] Electronic Commerce Services Agreement dated as of July 28, 1999 between Netgateway, Inc. and
B2BStores.com, Inc.(4)
10.44 Reseller and Mall Agreement dated as of July 27, 1999 among Frontiervision, Netgateway, Inc. and
StoresOnline.com, Inc.(3)
10.45[R] Reseller and Mall Agreement dated as of July 27, 1999 among Frontiervision, Netgateway, Inc. and
StoresOnline.com, Inc.(4)
10.46 1999 Stock Option Plan for Non-Executives.(3)
10.49 Letter, dated December 9, 1998, from Netgateway, Inc. to Jerry Czucha(3)
10.50 Promissory Note dated March 15, 1999 in the principal
amount of $50,000 payable to Joseph Py(3) 10.51 Promissory
Note dated March 15, 1999 in the principal amount of
$30,000 payable to Robert E.
Ciri(3)
10.52 Common Stock Purchase Warrant dated November 20, 1998
issued to Sean Beebe(3) 10.53 Common Stock Purchase Warrant
dated November 20, 1998 issued to Donald Danks(3) 10.54
Common Stock Purchase Warrant dated November 20, 1998
issued to Keith D. Freadhoff(3) 10.55 Common Stock Purchase
Warrant dated November 20, 1998 issued to Michael V.
Vanderhoff(3) 10.56 Master Trust-Oceangate Trust dated as
of December 10, 1998 among Keith Freadhoff as the Trustee
and the Beneficiaries(3)
10.57 Form of Individual Trust-Oceangate Trust between Keith D. Freadhoff as Trustor, and Keith
Freadhoff as Trustee for the benefit of the Beneficiary(3)
10.58 Courseware Reproduction License Agreement dated as of October 29, 1997 between Prosoft I-Net
Solutions, Inc. and S.T.E.P.S., as amended by Amendment No. 1 to the Courseware Reproduction
License Agreement, and as amended by Amendment No. 2 to the Courseware Reproduction License
Agreement(3)
10.59 Assignment of License dated as of April 1, 1998 between S.T.E.P.S. and Netgateway, Inc.(3)
10.60 Courseware Reproduction License Agreement, dated as of January 20, 1997, between Prosoft I-Net
Solutions, Inc. and Training Resources International, Inc., as amended by Amendment No. 1 to the
Courseware Reproduction License Agreement(3)
10.61 Sublicense Agreement dated as of March 27, 1998 between Netgateway and Training Resources
International, Inc.(3)
10.62 Settlement and Release Agreement, entered into April 19, 1999 among Prosoft Training.com (formerly
Prosoft I-Net Solutions, Inc., Training Resources International, Inc., S.T.E.P.S., Netgateway,
Inc., Michael Khaled, Scott Beebe and Donald Danks(3)
10.64 Internet Services Agreement dated as of October 25, 1999 between Netgateway, Inc. and Bergen
Brunswig Drug Company(4)
10.65 Voting Agreement dated as of March 10, 2000, by and among Netgateway, Inc. and John J. Poelman.(6)
10.66 Voting Agreement dated as of March 10, 2000, by and among Netgateway, Inc. and Sue Ann Cochran(6)
10.67 Form of Affiliate Lock-Up Agreement(6)
10.68 Form of Employment Agreement(6)
10.69 Stock Option Agreement dated as of March 10, 2000, by and among Netgateway, Inc. and John J.
Poelman(6)
10.70[R] Electronic Commerce Services Agreement dated as of December 1, 1999 between Netgateway and Leading
Technologies, Inc. d/b/a Mall of Minority America.com, Inc.(7)
10.71[R] Cable Reseller and Mall Agreement, dated as of December 9, 1999 among Netgateway,
StoresOnline.com, Inc. and Intermedia Partners Southeast(7)
10.72 Pledge Agreement dated as of January 7, 2000 between John J. Poelman and Netgateway, Inc.(7)
10.72 Promissory Note in the principal amount of $300,000, dated January 7, 2000 issued to Netgateway,
Inc. (7)
10.73 Pledge Agreement dated as of February 4, 2000 between John J. Poelman and Netgateway, Inc.(7)
10.74 Promissory Note in the principal amount of $150,000, dated February 4, 2000 issued to Netgateway,
Inc.(7)
10.75 Employment Agreement dated as of December 15, 1999 between Jill Padwa and Netgateway, Inc.(7)
10.77 Form of Employment Agreement
10.90 Electronic Commerce Services Agreement dated March 1, 2000 between Netgateway, Inc. and Galaxy
Enterprises, Inc.(9)
10.91 Statement of Work for Galaxy Mall and Store Conversion dated March 1, 2000 between Netgateway,
Inc. and GalaxyMall(9)
10.92[R] Systems Integrator Agreement dated as of March 6, 2000 between Netgateway and Complete Business
Solutions, Inc.(8)
10.93[R] Systems Integrator Agreement dated as of April 4, 2000 between Netgateway and Complete Business
Solutions (India) Ltd.(8)
10.94[R] Reseller and Mall Agreement dated as of April 18, 2000 among CableRep, Inc., Netgateway and
StoresOnline.com, Inc.(8)
10.95 Securities Purchase Agreement dated July 31, 2000 between Netgateway, Inc. and King William,
LLC.(11)
10.96 Form of 8% Convertible Debenture Due July 31, 2003(11)
10.97 Registration Rights Agreement dated July 31, 2000 between Netgateway, Inc. and King William,
LLC(11)
10.98 Form of Common Stock Purchase Warrant(11)
10.99 Private Equity Credit Agreement dated August 2, 2000 between Netgateway, Inc. and King William,
LLC(11)
10.100 Registration Rights Agreement dated August 2, 2000 between Netgateway, Inc. and King William,
LLC(11)
10.105 Stock Purchase Agreement dated January 11, 2001 between Galaxy Enterprises, Inc. and Capistrano
Capital, LLC. (14)
10.106 Note dated January 11, 2001 issued to Galaxy Enterprises, Inc. by IMI, Inc. (14)
10.107 Security Agreement dated January 11, 2001 among Galaxy Enterprises, Inc., Galaxy Mall, Inc.
Netgateway, Inc. and IMI, Inc. (14)
10.105 Restructuring and Amendment Agreement dated January 25, 2001 between Netgateway and King William,
LLC (15)
10.106 Settlement Agreement and Mutual Release dated March 27, 2001 between CONVANSYS, Inc. and
Netgateway, Inc. (16)
10.107 Form of Convertible Promissory Note. (16)
10.108 Form of Note Purchase Agreement. (16)
10.109 Form of Note Purchase Agreement with warrants. (16)
10.110 Form of Common Stock Purchase Warrant. (16)
10.111 Waiver Agreement dated May 9, 2001 between Netgateway and King William, LLC. (16)
10.112 Letter Agreement dated January 10, 2001 between Netgateway and Keith Freadhoff. (16)
10.113 Letter Agreement dated January 10, 2001 between Netgateway and Donald M. Corliss. (16)
10.114 Letter Agreement dated January 10, 2001 between Netgateway and Jill Glashow Padwa (16)
+10.115* Form of Debt Settlement Agreement with Netgateway executive officers dated as of April 5, 2001
10.116* Form of Private Placement Subscription Agreement
10.117* Second Restructuring Agreement dated as of July 11, 2001 between Netgateway, Inc. and King
William, LLC
10.118* Promissory Note from Netgateway, Inc. to King William, LLC
10.119* Finder's Agreement dated as of June 14, 2001 between SBI E2-Capital (USA) Inc. and Netgateway,
Inc.
10.120* Lease dated May 7, 1999 between Novell, Inc. and Galaxy Mall, Inc., along with a first amendment
dated as of September 17, 1999 and a second amendment dated as of September 18, 2000
10.121* Placement Agent Agreement dated as of June 1, 2001 between Netgateway, Inc. and Alpine
Securities, Inc.
18.1 Letter dated February 9, 2000 from KPMG LLP(7)
21.1 Subsidiaries of Netgateway
23.1 Consent of KPMG LLP
23.2 Consent of Richard A. Eisner & Company, LLP
-----------
(1) Incorporated by reference from the Registrant's Registration Statement
on Form S-1 (File No. 333-79751) filed on June 1, 1999.
(2) Incorporated by reference from Amendment No. 1 to the Registrant's
Registration Statement on Form S-1 (File No. 333-79751) filed on
July 21, 1999.
(3) Incorporated by reference from Amendment No. 2 to the Registrant's
Registration Statement on Form S-1 (File No. 333-79751) filed on
October 14, 1999.
(4) Incorporated by reference from Amendment No. 3 to the Registrant's
Registration Statement on Form S-1 (File No. 333-79751) filed on
November 12, 1999.
(5) Incorporated by reference from Amendment No. 4 to the Registrant's
Registration Statement on Form S-1 (File No. 333-79751) filed on
November 18, 1999.
(6) Incorporated by reference from the Registrant's Report on Form 8-K
filed on March 21, 2000.
(7) Incorporated by reference from the Registrant's Quarterly Report on
Form 10-Q filed on February 15, 2000 for the quarter ended
December 31, 1999.
(8) Incorporated by reference from the Registrant's Quarterly Report on
Form 10-Q filed on May 15, 2000 for the period ended March 31, 2000.
(9) Incorporated by reference from Registrant's Registration Statement
Report on Form S-4 (File No. 333-36360) filed on May 5, 2000.
(10) Incorporated by reference from Amendment No. 1 to the Registrant's
Registration Statement on Form S-4 (File No. 333-79751) filed on May
24, 2000.
(11) Incorporated by reference from Registrant's Registration Statement on
Form S-1 (File No. 333-45356).
(12) Incorporated by reference from the Registrant's Annual Report on
Form 10-K filed on September 22, 2000 for the fiscal year ended
June 30, 2000.
(13) Incorporated by reference from the Registrant's Quarterly Report on
Form 10-Q filed on November 21, 2000 for the quarter ended September
30, 2000.
(14) Incorporated by reference from the Registrant's Report on Form 8-K
filed on January 16, 2001.
(15) Incorporated by reference from the Registrant's Quarterly Report on
Form 10-Q filed on February 13, 2001 for the quarter ended December
31, 2000.
(16) Incorporated by reference from the Registrant's Quarterly Report on
Form 10-Q filed on May 15, 2001 for the quarter ended March 31, 2001.
* Filed herewith
Please note that certain confidential technical and commercial
information has been redacted from some of the exhibits attached to
this Form 10-K in order to preserve the confidentiality of such
information. All of the confidential information which has been
redacted is on file with the Securities and Exchange Commission and may
be obtained in accordance with the Freedom of Information Act. Exhibits
to this Form 10-K which have had confidential information redacted are
indicated as follows on the exhibit list above: "[R]." Within the
exhibits to this Form 10-K, redacted material is indicated by the
following sign where such redacted text would have appeared in the
relevant exhibit: "[REDACTED]"
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Netgateway, Inc.
October 15, 2001 By: /s/ Donald L. Danks
Donald L. Danks
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
/s/ Donald L. Danks
October 15, 2001 Donald L. Danks
Chief Executive Officer and Director
October 15, 2001 /s/ Frank Heyman
Frank Heyman
Chief Financial Officer
October 15, 2001 /s/ John J. "Jay" Poelman
John J. "Jay" Poelman
President, Chief Operating Officer &
Director
October 15, 2001 /s/ Shelly Singhal
Shelly Singhal
Director