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, 2003.
[ ] 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
IMERGENT, 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)
(Issuer's former name, if changed since last report)
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. [ ]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Exchange Act Rule 12b-2). Yes [ ] No [X].
Based on the average of the bid and asked price for the registrant's
common stock on the Nasdaq OTC Bulletin Board on September 12, 2003, the
aggregate market value on such date of the registrant's common stock held by
non-affiliates of the registrant was $66,519,426. 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 12, 2003 was 11,267,816.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement for its 2003 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.
TABLE OF CONTENTS
Page
PART I
ITEM 1. BUSINESS....................................................... 3
ITEM 2. PROPERTIES.....................................................17
ITEM 3. LEGAL PROCEEDINGS..............................................18
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............19
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS............................................ 19
ITEM 6. SELECTED FINANCIAL DATA........................................ 21
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.............................22
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK......37
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.....................37
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.............................38
ITEM 9A. CONTROLS AND PROCEDURES.........................................39
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT..............39
ITEM 11. EXECUTIVE COMPENSATION..........................................39
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT......................................................39
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..................39
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K.................................................... 39
SIGNATURES.................................................................. .78
PART I
Throughout this report, we refer to Imergent, Inc., together with its
subsidiaries, as "we," "us," "our company" or "the Company."
Effective July 2, 2002, we effected a 10:1 reverse split of our shares
of common stock. All of our historical share amounts stated herein have been
adjusted to reflect this reverse stock split.
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 offers eCommerce technology, training
and a variety of web-based technology and resources to nearly 150,000 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 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 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 590,000 shares of our 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 40,000 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 which were exchangeable on a one-to-one basis for shares of our
common stock. 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
390,000 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. In December 1996, Galaxy Enterprises acquired all of the
issued and outstanding common stock of Galaxy Mall, Inc., a Wyoming corporation,
in exchange for 3,600,000 shares of Galaxy Enterprises common stock and 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. In January 2001, we sold our IMI subsidiary to Capistrano
Partners LLC. At the time of the original transaction, Capistrano Partners LLC
was an unrelated third party, but the sole member of Capistrano is now an equity
investor in us.
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 engineering, sales and marketing teams.
During fiscal year 2003 our contracts with the last of the business-to-business
customers served by the ICC terminated and we have exited that business. After
the relocation of our operations to Utah, we also restructured our CableCommerce
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
continued for a period of time to provide the underlying technology, hosting and
other services, but all of these services have now been terminated and the then
existing Internet cable malls were shut down during fiscal year 2002 and we have
now exited that business.
Effective July 2, 2002, we changed our corporate name to "Imergent,
Inc." to better reflect the scope and direction of our current business
activities of assisting and providing web-based technology solutions to small
emerging companies and entrepreneurs who are seeking to establish a viable
e-commerce presence on the Internet. Also effective July 2, 2002, we effected a
10:1 reverse split of our shares of common stock and reduced the authorized
number of shares of common stock from 250,000,000 to 100,000,000.
Industry Background
The Internet economy has transformed the way 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 April 2002, Nielsen/NetRatings, Inc. estimated yet another increase
in USA Internet users to over 168.8 million, and the growth trend continues
worldwide as well as reported by Nua Ltd., to over 605.6 million Internet users
worldwide as of January 2003.
The continued 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 existing businesses often must
transform their business to be able to successfully conduct commerce by means of
the Internet. A company seeking to effect such a transformation or launch a
business on the Internet often needs outside technical expertise to assist in
identifying viable Internet tools, and to develop and implement reasonable
strategies all within the budget of the company or entrepreneur, especially if
the company or entrepreneur believes that rapid transformation or launch will
lead to a competitive advantage.
We believe this environment has created a significant and growing
demand for third-party Internet professional services and has resulted in a
proliferation of companies (e-Service companies), each offering specialized
solutions, such as order processing, transaction reporting, helpdesk, training,
consulting, security, Website design and hosting. 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 e-Services providers targeting
small businesses and entrepreneurs have the range of product and service
offerings that focus on the peculiar needs of this market. We believe that this
market requires an easy to adopt platform of product and services offerings that
assists in a coordinated transformation or launch of a business in a way that
embraces the opportunities presented by the Internet. Accordingly, we believe
that these organizations are increasingly searching for a firm such as ours that
offers turn-key business-to-consumer eCommerce solutions focused on their
e-Services requirements, which include training, education, technology, creative
design, transaction processing, data warehousing/hosting, transaction reporting,
help desk support and consulting. Furthermore, we believe that our target market
will increasingly look to Internet solutions providers that leverage industry
and client practices, increase predictability of success of their Internet
initiative and decrease implementation risks by providing low-cost, scalable
solutions with minimal lead-time.
Our Business
Offering services to Small Businesses and Entrepreneurs
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 30-45 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, and explain in
general terms 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 Internet training workshop which provides
Internet eCommerce and website implementation training to a subset of the small
business owners and entrepreneurs that attended the preview session. At the
Internet training workshop, attendees learn more 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 increase sales from traffic to
a website.
At the conclusion of the workshop, the attending small business owner
or 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 an Internet merchant and
client of the company.
The integrated package of services includes:
o The ability to create up to three different, fully eCommerce enabled
websites, with the option to host such on our servers
o Access to our detailed resource center of Internet marketing
information
o Helpdesk technical support via on-line chat, email, and telephone
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 processing
o Testing and marketing tools (auto responders)
The license to our StoresOnline software and website development
platform permits the client to create up to three custom websites.
Alternatively, if the client prefers, as part of their setup and first year
hosting fee, the client can use our development team of employees and
contractors to assist with the design and setup of the website. The client can
choose to create either a static, standalone site hosted by a third party, or a
dynamic website hosted by us for an additional fee. The dynamic websites hosted
by us allow the client to take advantage of the dynamic website updating
capabilities of the StoresOnline platform and other benefits provided by the
hosting service.
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 to enhance
websites with features such as streaming audio and video content, pages powered
by Macromedia(R) Flash and Director programming techniques. We also offer
commitments to deliver page view traffic to clients' websites and a ten week
coaching and mentoring program. The coaching and mentoring program is provided
by a third-party and involves a series of telephone training sessions with a
tutor who provides specific assistance in a variety of areas, including Internet
marketing. We continue to explore ideas, products and services to enhance
ongoing customer training and assistance.
We also continue to seek to increase sales to our existing client base
by more aggressively imposing and collecting set-up and 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 are focusing on
selling Internet training workshop attendees who did not purchase at the
workshop our basic package and on selling additional product and service
offerings (both ours and third parties) to persons who purchased at the
workshop. Through this telemarketing 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 market to
our clients and Preview Training Session 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.
In addition to seeking to grow by increasing the number of Preview
Training Sessions and Workshops in the United States, we intend to continue an
international expansion of our business, initially into selected
English-speaking countries in the Asia Pacific region, South Africa, Canada and
Europe and possibly thereafter to additional countries in Asia. 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 some of these markets. We have been encouraged by our
initial experiences in some of these markets, which have validated our research
and indicated that, in time, we could experience results that are comparable to
those we have historically experienced in the United States market. We are
continuing to refine and test our international market strategies based on these
initial experiences and have initiated the establishment of strategic alliances
with other companies with experience in certain of these countries to assist in
this effort. We will launch in a new international market only if we are
confident that we will be able to operate profitably in that market and will
continue to operate in a market for a sustained period only if we are able to
operate profitably in that market.
Seasonality. Revenues during the year for our workshop business can be
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.
Our Technology
We believe that a key component of our success will be a number of new
technologies we have developed. We believe that these technologies distinguish
our services and products from those of our competitors and help substantially
to reduce our operating costs and expenses. The most important of these are our
StoresOnline software and hosting platform and our Dynamic Image Server
technology.
The StoresOnline platform is a web-based turnkey eCommerce development
platform, which has been continuously improved over the past decade. The current
version of the StoresOnline platform represents the culmination of over ten
years of development effort on a platform that has hosted over 20,000
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 current StoresOnline platform version represents a continued
stage of evolution towards an easier to use and more scalable application. The
most recent additions and enhancements to the software include several new
features, including the support of additional credit card processing companies,
a tracking package which allows both numerical and graphical display of site
traffic statistics, new target market/entry page functions, and an expanded
library of design templates, customer management tools, in addition to
enhancements to existing features.
We have made significant progress in integrating the StoresOnline
platform as our primary tool for custom website design and development by our
internal production group. We believe that these changes, together with
extensive training of our internal production group and the upgrade of our data
center to include redundant power, bandwidth and servers, has allowed us to
become more self-reliant, effective for our customers and efficient in the
programming of customer sites. In addition, our customers are now able to create
and maintain their own sites quickly and easily without having to learn HTML
programming or use other software tools.
Our 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 image
permutations, allowing a customer, for example, 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.
Other Product and Service Offerings
We formerly delivered business-to-business eCommerce solutions to a
limited number of clients for whom we maintained custom eCommerce applications.
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.
Our CableCommerce division originally partnered directly with several
cable operators to create and launch cable-branded electronic malls with leading
cable operators. The concept of Internet malls supported by advertising on cable
television was originally thought to be very promising, but we were unable to
find a cost effective means of attracting merchants to establish storefronts on
such malls and the margins on existing malls were insufficient to absorb the
associated sales and marketing costs. Accordingly, we elected not to pursue this
market or renew our contracts with our cable operator partners and are now no
longer engaged in the cable mall business.
Sales and Marketing
Because most of our products are sold at the end of our workshop
sessions and to persons who have attended these workshop sessions in the past,
we must make a significant investment before any sales are made to get the
customers to workshops. Therefore, the cost of customer acquisition and
sell-through percentages are critical components to the success of our business.
We are continuously testing and implementing changes to our business model which
are intended to further reduce the level of investment necessary to get a
customer to attend our events and to increase our value proposition to that
customer, thereby increasing overall sales.
We advertise our preview sessions in direct mail and e-mail
solicitations targeted to potential customers meeting established demographic
criteria. The mailing lists we use are obtained from list brokers. The direct
mail and e-mail pieces are sent several weeks prior to the date of the preview
session. Announcements of upcoming preview sessions also appear occasionally in
newspaper advertisements and radio spots in scheduled cities. Finally, we
promote our preview and workshop sessions through other third-party training
companies.
We also use outsourced telemarketing programs to sell products and
services to preview and workshop attendees and to our existing client database.
Research and Development
During the years ended June 30, 2003, and June 30, 2002, respectively,
we invested, on a consolidated basis, approximately $348,000 and $345,000,
respectively, in the research and development of our technology almost all of
which relates to our StoresOnline platform. Our research and development costs
in fiscal 2002 and 2003 focused on refinement and enhancement of Version 4.0 of
our StoresOnline product which was released in fiscal 2001. Our specific
accomplishments during fiscal year 2003 were the addition of new features to our
StoresOnline platform, including the support of additional credit card
processing gateways, a tracking package which allows both numerical and
graphical display of site traffic statistics, new target market/entry page
functions, and an expanded library of design templates, customer management
tools and password-protected pages. In general, our research and development
efforts during fiscal years 2002 and 2003 have:
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 developed an internal database that replaced existing incompatible,
standalone systems used in marketing and sales, and that is intended,
with further development, to incorporate storefront production,
customer service and accounting
o completed a new merchant login system providing enhanced security and
management of password access to the Merchant Services section of the
mall,
o reconfigured our computer networks, including hardware and software
upgrades, firewall protection; and
o established a new company-wide data center with redundant power,
bandwidth and servers.
Competition
Our markets are becoming increasingly competitive. Our competitors
include a few companies that sell through a workshop format like ours which have
historically had varying rates of success and longevity, as well as portals,
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 the full range of Internet
professional services that we believe our target market requires, but many are
currently offering some of these services. 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 we do.
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. Our
proprietary technology would not 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 and the flexibility
we have obtained through enhancements to our StoresOnline software. In 1995,
certain of our principals were instrumental in creating an Internet marketing
workshop industry. We believe that this experience with marketing workshops and
our ongoing efforts to improve our offerings and sales and marketing techniques
gives us an important competitive advantage.
Anticipated and expected technology advances associated with the
Internet, increasing use of the Internet and new software products are welcome
advancements and are expected to attract more interest in the Internet and
broaden its potential as a viable marketplace and industry. We anticipate that
we can continue to compete successfully by relying on our infrastructure and
existing marketing strategies and techniques, systems and procedures, by adding
additional products and services in the future, by periodic revision of our
methods of doing business and by continuing our expansion into international
markets where we believe there is an overall lower level of competition.
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 un-patented 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 un-patented 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.
Employees
As of September 15, 2003, we had 97 full-time employees, including 4
executive personnel, 44 in sales and marketing, 5 in the development of our
e-Commerce solutions, 12 in web site production, 15 in customer support and 17
in general administration and finance. We also draw from a pool of 14
independent contractors who speak at our preview and/or workshop training
sessions, as required by our schedule of events.
Governmental Regulation
We are subject to regulations applicable to businesses generally. In
addition, because of our workshop sales format, we are subject to laws and
regulations concerning sales and marketing practices, and particularly those
with regard to business opportunities, franchises and selling practices. We
believe that we do not offer our customers a "business opportunity" or a
"franchise" as those terms are defined in applicable statutes of the states in
which we operate. We believe that we operate in compliance with laws concerning
sales practices, which laws in some jurisdictions require us to offer the
customer a three-day right of rescission (i.e. to cancel the sale) for workshop
purchases. Although we do not believe we are required to offer such a right in
most states, we are evaluating the possibility of offering such a right. If we
determine to offer such a right of rescission, our sales could decrease if a
significant number of customers who purchase at our workshop elected to exercise
that right.
We are also subject to an increasing number of laws and regulations directly
applicable to access to, and commerce on, the Internet. In addition, due to the
increasing popularity and use of the Internet, it is probable that additional
laws and regulations will be adopted with respect to the Internet in the future,
including with respect to issues such as user privacy, pricing and
characteristics and quality of products and services. The adoption of any such
additional laws or regulations 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. In particular, our initial contact with many of
our customers is through e-mail. The use of e-mail for this purpose has become
the subject of a number of recently adopted and proposed laws and regulations.
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
You should carefully consider the following risks before making an
investment in our Company. In addition, you should keep in mind that the risks
described below are not the only risks that we face. The risks described below
are the risks that we currently believe are material to our business. However,
additional risks not presently know to us, or risks that we currently believe
are not material, may also impair our business operations. You should also refer
to the other information set forth in this Annual Report on Form 10-K, including
the discussions set forth in "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business," as well as our financial
statements and the related notes.
Our business, financial condition, or results of operations could be
adversely affected by any of the following risks. If we are adversely affected
by such risks, then the trading of our common stock could decline, and you could
lose all or part of your investment.
Fluctuations in our operating results may affect our stock price and
ability to raise capital.
Our operating results for any given quarter or fiscal year should not
be relied upon 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 and (ii) the emerging nature of the markets in
which we compete. In addition, during the second two fiscal quarters of our
fiscal year ended June 30, 2001 and the first two fiscal quarters of our fiscal
year ended June 30, 2002, we enjoyed a benefit resulting from the recognition of
deferred revenue, which benefit we do not expect to reoccur. Furthermore, our
fiscal year ended June 30, 2002 was our first-ever profitable year. Our 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 should we seek to
do so. Factors that could cause our quarterly results to fluctuate include 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 changes to our business model resulting from regulatory requirements
o our ability to control our costs
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.
Our ability to use our net operating loss carryforwards may be reduced.
This could adversely affect our net income and cash flow.
Our net operating loss carry forward ("NOL"), which is approximately
$43 million, represents the losses reported for income tax purposes from the
inception of the Company through June 30, 2002. FY 2003 was the first year in
our history that generated taxable income. Section 382 of the Internal Revenue
Code ("Section 382") imposes limitations on a corporation's ability to utilize
its NOLs if it experiences an "ownership change". In general terms, an ownership
change results from transactions increasing the ownership of certain
stockholders in the stock of a corporation by more than 50 percentage points
over a three-year period. Since our formation, we have issued a significant
number of shares, and purchasers of those shares have sold some of them, with
the result that two changes of control as defined by Section 382 have occurred.
As a result of the most recent ownership change, utilization of our NOLs is
subject to an annual limitation under Section 382 determined by multiplying the
value of our stock at the time of the ownership change by the applicable
long-term tax-exempt rate resulting in an annual limitation amount of
approximately $127,000. Any unused annual limitation may be carried over to
later years, and the amount of the limitation may under certain circumstances be
increased by the "recognized built-in gains" that occur during the five-year
period after the ownership change (the "recognition period"). We believe that we
will have significant recognized built-in gains and that during the recognition
period the limitation will be increased by approximately $15 million based on an
independent valuation of our company as of April 3, 2002. We also believe that,
based on a valuation of our company as of June 25, 2000, which evaluation is
currently underway, the earlier ownership change will also have significant
recognized built-in gains and that during the recognition period the limitation
will be further increased by approximately $28 million thus allowing us to
utilize our entire NOL. Significant management judgment was required in
estimating the amount of the recognized built in gain. If it is determined that
the actual amount of recognized built in gain is less than our estimate, we may
be required to make a cash payment for taxes due on our income for fiscal year
2003, plus related interest, which could materially adversely impact our
financial position.
In addition, future changes in ownership of more than 50% may further
limit the use of these carryforwards. Our earnings and cash resources will be
materially and adversely affected by this limitation if future earnings exceed
the benefit of the limited net operating loss carryforwards. 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, 2003.
We are the subject of a number of lawsuits and Governmental inquiries
and investigations that could require us to change our sales and marketing
practices or pay damages or fines which could negatively impact our
financial results.
Throughout our history we have received inquiries from and have been
made aware of investigations by the Federal Trade Commission and government
officials in many of the states in which we operate. We have also received
inquiries from counsel representing and been sued by customers who are
dissatisfied with our product. We believe that, to date, we have generally been
successful in addressing the concerns raised by these matters through one or
more of the following: the provision of a more complete explanation of our
business, minor modifications of our sales and marketing practices, and direct
dialogue with customers to resolve the customer's concerns on a mutually
satisfactory basis. Nevertheless, there can be no assurance that the ultimate
resolution of the currently pending or possible future lawsuits, inquiries or
investigations will not have a material adverse effect on our business or
operations.
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
president, chief executive officer, chief financial officer, chief technical
officer and vice-president of operations, as well as the speakers at our
previews and workshops and other key personnel. Each of these individuals has
acquired specialized knowledge and skills with respect to our operations. The
loss of one or more of these executives could negatively impact our performance.
In addition, we expect that we will need to hire additional personnel in all
areas if we are able to continue 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 enter into business combinations or pursue acquisitions of
complementary service or product lines, technologies or business that may
involve financial, integration and transaction completion risks that could
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.
We need to monetize a substantial portion of the customer receivables
generated by our workshop business. If we are unable to do so it may
require us to raise additional working capital.
We offer our customers a choice of payment options at our Internet
training workshops, including an installment payment plan. These installment
contracts are either sold to one of several third parties or serviced by a third
party. Thereafter we sometimes seek to sell the serviced contracts to the
servicer and other third parties. We have in the past experienced difficulties
selling these installment contracts at levels which provide adequate cash flow
for our business. Although we have not recently experienced difficulties selling
our installment contracts at the levels our cash requirements dictate, a
recurrence of those conditions would likely require us to raise additional
working capital to allow us to carry these assets on our balance sheet. All of
our present installment contract sales arrangements are subject to termination
at any time by notice to us.
We are dependent on credit card issuers who provide us with merchant
accounts that are used to receive payments from our customers.
For the fiscal year ended June 30, 2003 approximately $22 million, or
42%, of our total revenue was received from customers through credit card
payments. Each financial institution that issues merchant accounts establishes
limits on the amount of payments which may be received through the account and
requires that we keep reserves on deposit with it to protect the financial
institution against losses it may incur with respect to the account. Although
this had not recently been the case, we have in the past experienced difficulty
in maintaining these merchant accounts in good standing due to changes in the
reserve requirements imposed by the issuing banks with whom we have worked,
changes in the transaction amount permitted and rate of charge-backs, among
other reasons. If we were to experience a significant reduction in or loss of
these accounts our business would be severely and negatively impacted.
We are dependent on arrangements that allow us to sell to our customers
the ability to accept credit card payments for products and services sold
on their websites.
During the fiscal year ended June 30, 2003 we derived approximately
$6.9 million, or 13% of our total revenues, from the sale to our customers of a
product which allows the customer to accept credit card payments for goods and
services sold by them through their website. In the past, we have experienced
difficulty in maintaining the arrangements that allow us to offer this product
to our customers and have experienced difficulty in establishing such a product
for resale at our workshops held outside the United States. In addition, from
time to time, credit card issuing organizations make changes that affect this
product which could negatively impact, or preclude, our offering this product
for sale in the United States in its present form. We presently obtain this
product for resale from an unrelated third party. Prior to October 1, 2002, this
product was obtained from Electronic Commerce International, Inc. ("ECI") which
was owned by John J. Poelman, our former chief executive officer who, effective
that date, sold certain of ECI's assets and liabilities, including the use of
its corporate name and its contractual relationship with us, to the third party.
Our contract with the third party may be terminated by it at any time after
August 1, 2005 on 120 days written notice to us. Were we to lose our access to
this product or if its cost increased our business could be negatively impacted,
and if we are not to be able to obtain a comparable product for resale outside
the United States our ability to successfully execute our international
expansion would be compromised.
We might require additional capital to support business growth, and
such capital might not be available.
We intend to continue to make investments to support business growth
and may require additional funds to respond to business opportunities and
challenges, which include the opportunity to increase our revenue by increasing
the number of customer installment contracts that we retain and carry rather
than sell, the need to develop new products or enhance existing products, the
need to enhance our operating infrastructure and the opportunity to acquire
complementary businesses and technologies. Accordingly, we may elect or need to
engage in equity or debt financing to secure additional funds. Equity and debt
financing, however, might not be available when needed or, if available, might
not be available on terms satisfactory to us. If we are unable to obtain
financing or financing on terms satisfactory to us, our ability to continue to
support our business growth and to respond to business challenges could be
significantly limited.
We are subject to compliance with securities law, which expose us to
potential liabilities, including potential rescission rights.
We have periodically offered and sold our common stock to investors
pursuant to certain exemptions from the registration requirements of the
Securities Act of 1933, as well as those of various state securities laws. The
basis for relying on such exemptions is factual; that is, the applicability of
such exemptions depends upon our conduct and that of those persons contacting
prospective investors and making the offering. We have not received a legal
opinion to the effect that any of our prior offerings were exempt from
registration under any federal or state law. Instead, we have relied upon the
operative facts as the basis for such exemptions, including information provided
by investors themselves.
If any prior offering did not qualify for such exemption, an investor
would have the right to rescind its purchase of the securities if it so desired.
It is possible that if an investor should seek rescission, such investor would
succeed. A similar situation prevails under state law in those states where the
securities may be offered without registration in reliance on the partial
preemption from the registration or qualification provisions of such state
statutes under the National Securities Markets Improvement Act of 1996. If
investors were successful in seeking rescission, we would face severe financial
demands that could adversely affect our business and operations. Additionally,
if we did not in fact qualify for the exemptions upon which we have relied, we
may become subject to significant fines and penalties imposed by the SEC and
state securities agencies.
In particular, 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, i.e., 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
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 would
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 business could be materially and adversely affected as a result of
general economic and market conditions.
We are subject to the effects of general global economic and market
conditions. The U.S. economy is much weaker now than it has been in recent years
and may continue to be weak for the foreseeable future. These economic
conditions may cause businesses to curtail or eliminate spending on eCommerce
services or to reduce demand for our products and services.
Our operations could be hurt by terrorist attacks, fear of disease and
other activity and events that make air travel difficult or reduce the
willingness of 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 potential customers were to become fearful of
attending large public meetings in large hotels.
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
internationally 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 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 stronger brand recognition, longer operating histories, larger
customer bases, longer relationships with clients and significantly greater
financial, technical, marketing and public relations resources than we do. 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 are working to expand our operations into selected international
markets and, based on the results of these operations, we plan to continue to
expand our international operations. Although we intend to expand into these
markets cautiously 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 banking and payment mechanisms that differ from those in the United
States and make it more difficult for us to both accept payments by
credit card and offer to customers a product that allows customers to
accept credit card payments on their websites
o unproven markets for our services and products
o unexpected changes in regulatory requirements
o potentially adverse tax environment
o export restrictions and tariffs and other trade barriers
o burdens of complying with applicable foreign laws and exposures to
different legal standards, particularly with respect to sales and
marketing practices, intellectual property, privacy and distribution
of potentially offensive or unlawful content over the Internet, and
o fluctuations in currency exchange rates.
Management beneficially owns approximately 11% of our common stock and
their interests could conflict with other stockholders.
Our current directors and executive officers beneficially own
approximately 11% 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 eCommerce offerings and marketing efforts.
It remains uncertain whether sustained significant demand for our products and
services as sold through our workshop format will exist and whether our
distribution channel to our target markets will establish itself as the
preferred channel 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.
Evolving regulation of the Internet, including the use of e-mail as a
marketing tool, may harm our business.
As eCommerce continues to evolve it is subject to increasing regulation
by federal, state, or foreign agencies. Areas subject to regulation include the
use of e-mail, user privacy, pricing, content, quality of products and services,
taxation, advertising, intellectual property rights, and information security.
In particular, our initial contact with many of our customers is through e-mail.
The use of e-mail for this purpose has become the subject of a number of
recently adopted and proposed laws and regulations. In addition, laws and
regulations applying to the solicitation, collection, or processing of personal
or consumer information could negatively affect our activities. The perception
of security and privacy concerns, whether or not valid, may indirectly inhibit
market acceptance of our products. In addition, legislative or regulatory
requirements may heighten these concerns if businesses must notify Web site
users that the data captured after visiting Web sites may be used by marketing
entities to unilaterally direct product promotion and advertising to that user.
Moreover, the applicability to the Internet of existing laws governing issues
such as intellectual property ownership and infringement, copyright, trademark,
trade secret, obscenity and libel is uncertain and developing. Furthermore, any
regulation imposing fees or assessing taxes for Internet use could result in a
decline in the use of the Internet and the viability of e-commerce. Any new
legislation or regulation, or the application or interpretation of existing laws
or regulations, may decrease the growth in the use of the Internet, may impose
additional burdens on e-commerce or may require us to alter how we conduct our
business. This could decrease the demand for our products and services, increase
our cost of doing business, increase the costs of products sold through the
Internet or otherwise have a negative effect on our business, results of
operations and financial condition.
Internet security issues pose risks to the development of eCommerce 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 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
currently have any patents or registered trademarks, and effective trademark,
copyright and trade secret protection may not be available in every country in
which our products are distributed or made available through the Internet. In
addition, there can be no assurance that a patent will issue or a trademark will
be referred based on our pending applications.
We may incur substantial expenses in defending against third-party
patent and trademark infringement claims regardless of their merit.
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.
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, eCommerce 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.
There are low barriers to entry into the eCommerce 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.
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 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.
Investors will incur immediate and substantial dilution.
Significant additional dilution will result if outstanding options and
warrants are exercised. As of June 30, 2003, we had outstanding stock options to
purchase approximately 1.2 million shares of common stock and warrants to
purchase approximately 631,000 shares of common stock. To the extent that such
options and warrants 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 five directors.
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.
Some investors view low-priced and Bulletin Board 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. 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 SmallCap Market or the NASDAQ National Market. In addition, the market
for our common stock may not always be an active market. Our common stock now
trades on The NASDAQ Over the Counter Bulletin Board. We have applied for
listing of our common stock on the NASDAQ SmallCap Market and believe that we
meet the requirements for listing thereon. However our application is subject to
review and approval by the NASDAQ and there can be no assurance that our
application will be approved.
Our 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
12, 2003, we had outstanding 11,267,816 shares of common stock, of which
approximately 3,914,588 were freely tradable. Approximately 1,824,988 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.
Our principal office is located at 754 East Technology Avenue, Orem,
Utah 84097. The property consists of approximately 12,500 square feet leased
from an unaffiliated third party. The lease terminates on May 31, 2005. The
annual rent during our fiscal year ending June 30, 2004 will be approximately
$271,250. 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, Canada and other countries throughout the
world 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 previously reported that we were the subject of a nonpublic
investigation by the Federal Trade Commission. The first investigation activity
began nearly five years ago when the FTC had announced what they refer to as a
"sweep" of the industry. We cooperated fully with all requests for information
and details, and after over a year's investigation, no action against us was
taken and the case went dormant. During this same period of time, other
unrelated companies and individuals targeted by the FTC were subject to consent
agreements and injunctions and paid large financial penalties. Some of those
companies are no longer in business.
About two years ago, based on various allegations and customer
complaints, the FTC re-opened its investigation of us, requesting once again
complete details about us and marketing, sales, customer service policies and
other matters. The FTC also obtained details regarding customer complaints from
the Better Business Bureau and various AG offices, and was fully aware of the
"wrong doings" alleged by a nationally broadcast television story. In addition,
FTC representatives attended one or more of our workshops, visited our offices
and were afforded an opportunity to review our customer files. After nearly two
years in this most recent investigation, we received written notice that the FTC
investigation had been officially closed.
In its letter the FTC states that it "... has conducted a nonpublic
investigation to determine whether Galaxy Mall and related entities have
violated the Federal Trade Commission Act through the use of deceptive practices
in connection with the sale of electronic "storefronts" or web sites or
storefront-related products or services." and concludes in part by stating,
"Upon further review of this matter, it now appears that no further action is
warranted by the Commission at this time. Accordingly, the investigation has
been closed." The FTC letter also states that "The Commission reserves the right
to take such further action as the public interest may require."
We certainly regret even one complaint, but can no more accept
responsibility for failure of a business that purchases its products and
services than the telephone company, a computer manufacturer or a business
college, can accept responsibility for the failure of a customer or student to
achieve success using, or not using, their telephone or computer or the
knowledge learned from a college course. Although we are constantly looking for
ways to improve our products and services, because our products and services are
used by entrepreneurs and small businesses with such a broad range of
objectives, backgrounds and skills, we anticipate that we will continue to
receive complaints from some of our customers who are not able to successfully
establish or extend their business on the Internet.
Regardless, we remain committed to work with and assist each of our
customers by providing them information and tools necessary to help them extend
their business to the Internet.
We are pleased that the FTC's investigations over this long period of
time has been closed without any formal action by the agency. We have long
believed that we operate our business with integrity and in compliance with
applicable laws and regulations. We fully support the various federal and state
agencies that we interact with and, as in the past, will continue to cooperate
with them.
From time to time, we receive inquiries from and/or have been made
aware of investigations by government officials in many of the states in which
we operate, as well as by the Federal Trade Commission. These inquiries and
investigations generally concern compliance with various city, county, state
and/or federal regulations involving sales and marketing practices. We have and
do respond to these inquiries and have generally been successful in addressing
the concerns of these persons and entities, although there is often no formal
closing of the inquiry or investigation. The Federal Trade Commission
investigation has been resolved as indicated above. There can be no assurance
that the ultimate resolution of these or other inquiries and investigations will
not have a material adverse effect on our business or operations. We also
receive complaints and inquiries in the ordinary course of our business from
both customers and governmental and non-governmental bodies on behalf of
customers, and in some cases these customer complaints have risen to the level
of litigation. To date we have been able to resolve these matters on a mutually
satisfactory basis and we believe that we will be successful in resolving the
currently pending matters but there can be no assurance that the ultimate
resolution of these matters will not have a material adverse affect on our
business or operations.
On June 3, 2003, the Utah Department of Commerce, Division of Consumer
Protection, issued an Administrative Citation In the Matter Of: Imergent, Inc.
and StoresOnline, Inc., previously known as Galaxy Mall, Inc., UDCP Case No.
CP30320 et al. The Administrative Citation, among other things, alleged that we
have violated the Utah Business Opportunity Disclosure Act, Utah Code Ann. ss.
13-15-1, et seq., and the Utah Consumer Sales Practices Act, 13-11-1 et seq. In
the Administrative Citation, the Division of Consumer Protection is seeking a
maximum potential fine of $1,000 for alleged violation of the Utah Business
Opportunity Disclosure Act registration requirements, $89,000.00 in potential
maximum fines for the alleged violation of the disclosure requirements of the
Utah Business Opportunity Disclosure Act, $89,000.00 in fines for the alleged
violation of the deceptive acts or practices portions of the Utah Consumer Sales
Practices Act, and $83,000.00 in fines for the alleged failure to provide buyers
a three day right of rescission under the Utah Consumer Sales Practices Act. The
Utah Division of Consumer Protection reserved the right to amend the
Administrative Citation and has informed us that it intends to amend the
Administrative Citation. We have denied the allegations in the Administrative
Citation, and a hearing before a hearing officer under the Utah Administrative
Procedures Act has been scheduled. Discussions with the state of Utah to resolve
this matter are in progress. We believe that we have valid defenses to the
Administrative Citation and intend to vigorously defend against the
Administrative Citation.
On April 22, 2003, Maria J. Smith, purportedly on behalf of herself and
the general public as private attorney general, filed a Complaint For Unfair
Competition (California Business & Professions Code ss. 17200 et seq.) against
our subsidiary Galaxy Mall, Inc., and other defendants, including Electronic
Commerce International, Inc. ("ECI"), in Orange County Superior Court, Central
Justice Center, in the State of California, before the Honorable Steven Perk,
Dept. C27 (Case No. 030005871). ECI is owned by John J. Poelman, our former
Chief Executive Officer and a former director. The complaint purportedly
alleges, among other things, that the products and services acquired by the
plaintiff were products and services that she did not need or were otherwise
available to her through other means. Ms. Smith seeks preliminary and permanent
injunctive relief, restitution in an unspecified amount for the benefit of
members of the general public nationwide, and unspecified attorneys' fees and
costs. We filed an answer to the complaint on May 28, 2003 denying the material
allegations in Ms. Smith's Complaint and setting forth various affirmative
defenses. On June 9, 2003, we filed a Motion To Stay Claims Pursuant to CCP
410.30, requesting that the action be stayed in California and requesting that
the plaintiff be required to litigate her claim pursuant to a forum selection
clause "in the courts of the State of Utah in the County of Utah or the United
States District Court for the State of Utah." Defendant Leasecomm has informed
us that they are engaged in negotiations with the plaintiffs to settle this
matter and negotiations to reach a global settlement are anticipated. Both
Leasecomm and the other named defendant in this case, ECI have indicated that
they believe that were they found to be liable that they would be entitled to be
indemnified by us with respect to any such liability. We believe that we have
valid defenses to the Complaint and the claims for indemnification and if a
settlement is not reached we intend to vigorously defend the action.
We are not currently involved in any other material litigation,
however, we are subject to various claims and legal proceedings covering matters
that arise in the ordinary course of business. We believe that the resolution of
these cases will not have a material adverse effect on our business, financial
position, or future results of operations. As previously disclosed, on April 8,
2002 Category 5 Technologies, Inc. ("C5T") caused us to be served with a Summons
and Complaint in the Third Judicial District Court in and for Salt Lake County,
State of Utah, Case No. 020902991, whereby C5T sought judgment against us
seeking reimbursement of $260,000 of their expenses associated with merger
negotiations between our companies. We have resolved this matter and entered
into a First Amendment to Termination Agreement with Cat 5 dated as of March 10,
2003 memorializing that resolution. On April 9, 2003 a Stipulation of Settlement
and Order of Dismissal was entered, dismissing the lawsuit with prejudice.
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
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 July
3, 2002 under the symbol "IMGG." From January 10, 2001 to July 2, 2002, our
common stock traded on the OTC Bulletin Board 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." 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, all of
which reflect the 10:1 reverse stock split effected on July 2, 2002.
High Low
Fiscal 2003
Fourth Quarter..................................... $4.45 $1.55
Third Quarter...................................... 2.31 1.50
Second Quarter..................................... 2.30 1.00
First Quarter...................................... 1.45 1.10
Fiscal 2002
Fourth Quarter..................................... 1.80 0.85
Third Quarter...................................... 3.70 0.90
Second Quarter..................................... 5.50 2.70
First Quarter...................................... 7.20 2.60
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 683 holders of record of our shares of common stock as of
September 12, 2003.
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. Therefore, we do not anticipate paying any cash
dividends on our shares for the foreseeable future.
Equity Compensation Plan Information
The following table and note provide information about shares of our
common stock that were issuable as of June 30, 2003 pursuant to exercise of
options under all of our existing equity compensation plans.
- --------------------------------------------- ------------------------- ----------------------- ----------------------
Number of securities
remaining available
for future issuance
Number of securities Weighted-average under equity
to be issued upon exercise price compensation plans
Plan Category exercise of outstanding of outstanding (excluding securities
options options reflected in column
(a))
- --------------------------------------------- ------------------------- ----------------------- ----------------------
(a) (b) (c)
- --------------------------------------------- ------------------------- ----------------------- ----------------------
Equity compensation plans approved (1), (3) 498,750(1) $ 7.24 -
by security holders 8,432(2) $33.20 65,617
437,551(3) $ 6.85 528,607
- --------------------------------------------- ------------------------- ----------------------- ----------------------
Equity compensation plans not approved 179,375(1) $2.03 320,625
by security holders -(3) - 500,000
69,420(4) $17.66 -
- --------------------------------------------- ------------------------- ----------------------- ----------------------
Total 1,193,528 $ 7.04 914,849
- --------------------------------------------- ------------------------- ----------------------- ----------------------
- --------------------
(1) To be issued under our Amended and Restated 1998 Stock Option Plan for
Senior Executives. This plan provides for the grant of options to
purchase up to 1,000,000 shares of common stock to our senior
executives. Options may be either incentive stock options or
non-qualified stock options under Federal tax laws. This plan formerly
provided for the issuance of up to 500,000 shares and was amended by
our Board of Directors on April 9, 2003 to increase by 500,000 shares
the number of shares of common stock issuable thereunder as
non-qualified stock options. The amendment has not been approved by our
stockholders.
(2) To be issued under our 1998 Stock Compensation Program. This program
provided for the grant of options to purchase up to 100,000 shares of
common to officers, employees, directors and independent contractors
and agents. Options may be either incentive stock options or
non-qualified stock options under Federal tax laws.
(3) To be issued under our 1999 Amended and Restated Stock Option Plan for
Non-Executives. This plan provides for the grant of options to purchase
up to 1,000,000 shares of our common stock. Options granted under this
plan generally become exercisable in increments over a period of up to
four years. This plan formerly provided for the issuance of up to
500,000 shares and was amended by our Board of Directors on April 9,
2003 to increase by 500,000 shares the number of shares of common stock
issuable thereunder as non-qualified stock options. The amendment has
not been approved by our stockholders.
(4) To be issued under the 1997 Employee Stock Option Plan of Galaxy
Enterprises, Inc. This plan was assumed by us pursuant to the terms of
our merger with Galaxy Enterprises in June 2000. No additional shares
of stock are available for grant under this plan.
Recent Sales of Unregistered Securities
None.
Item 6. Selected Financial Data
The following selected 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 three-year period ended June 30, 2003, and the consolidated balance
sheet data at June 30, 2003 and 2002 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. SFAS No. 145
relating to the accounting treatment for extinguishment of debt became effective
for the Company during FY 2003. As a result a change in the reporting of our
operations for FY 2001 became necessary. During the fiscal year ended June 30,
2001 the Company had originally reported an extraordinary item related to gain
on extinguishment of debt in its Statement of Operations of $1,688,956. Based on
SFAS No. 145 the Company has reclassified $1,688,956 to income before
discontinued operations in its statement of operations included in this annual
report. 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, June 30,
2003 2002 2001 2000 1999 1998
---- ---- ---- ---- ---- ----
Consolidated Statement of Operations Data: (in thousands except per share amounts)
Revenue $ 53,225 $ 37,351 $ 43,001 $ 22,150 $10,280 $ 7,268
Income (loss) from continuing operations 5,034 2,199 (2,626) (42,790) (16,797) (8,521)
Income (loss) from discontinued operations --- --- (286) (1,319) 3 -
Extraordinary items --- --- (727) - 1,653 -
Net income (loss) 5,034 2,199 (3,639) (44,109) (15,141) (8,521)
Basic income (loss) per share:
Income (loss) from continuing operations 0.46 0.37 (1.18) (23.12) (13.40) (9.70)
Loss from discontinued operations --- --- (0.12) (0.71) - -
Extraordinary items --- --- (0.33) - 1.32 -
Net income (loss) per common share 0.46 0.37 (1.63) (23.83) (12.08) (9.70)
Diluted income (loss) per share
Income (loss) from continuing operations 0.44 0.37 (1.18) (23.12) (13.40) (9.70)
Loss from discontinued operations --- --- (0.12) (0.71) - -
Extraordinary items --- --- (0.33) - 1.32 -
Net income (loss) per common share 0.44 0.37 (1.63) (23.83) (12.08) (9.70)
Weighted average common shares outstanding
Basic 11,019 5,874 2,228 1,851 1,254 879
Diluted 11,553 5,878 2,228 1,851 1,254 879
Consolidated Balance Sheet Data: As of June 30
-------------------------------------------------------------------------
2003 2002 2001 2000 1999 1998
---- ---- ---- ---- ---- ----
Cash $ 2,320 $ 520 $ 149 $ 2,607 $ 968 $ 279
Working capital (deficit) 5,527 289 (11,352) (14,845) (9,292) (8,733)
Total assets 11,522 7,377 6,055 11,851 5,353 2,041
Short-term debt 121 242 3,759 409 1,535 2,152
Long-term debt 436 421 442 - - 383
Stockholders' equity (capital deficit) 8,103 2,469 (9,307) (10,776) (8,106) (7,692)
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 report 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 report. 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 report.
General
Our fiscal year ended June 30, 2003 ("FY 2003") was only the second
year since the inception of the Company that we were profitable and the first
year that we enjoyed positive cash flow from operating activities. As explained
in previous annual reports we closed our Internet Commerce Center and the Cable
Commerce division in order to concentrate on our StoresOnline business that
services the small business and individual entrepreneur markets. We raised
approximately $7.2 million in equity capital through the sale of our convertible
notes and common stock in three private placements during the fiscal years ended
June 30, 2001 and 2002. Using this cash to retire debt and promote our
Storesonline business has enabled us to increase revenues significantly, remain
profitable and have positive cash flow from operations. The following discussion
further expands on the effects of these changes.
Reverse Stock Split
On June 28, 2002, our stockholders approved amendments to our
Certificate of Incorporation to change our corporate name to "Imergent, Inc."
and to effect a one-for-ten reverse split of the issued and outstanding shares
of our common stock and reduce the authorized number of shares of common stock
from 250,000,000 to 100,000,000. These changes were effected July 2, 2002. As a
result of the reverse stock split, every ten shares of our existing common stock
was converted into one share of our new common stock under our new name,
Imergent, Inc. Fractional shares resulting from the reverse stock split were
settled by cash payment. Throughout this discussion references to numbers of
shares and prices of shares have been adjusted to reflect the reverse stock
split.
Review by the Securities and Exchange Commission
On March 6, 2002, the Securities and Exchange Commission ("SEC")
notified us that they had reviewed our annual report filed on Form 10-K for the
fiscal year ended June 30, 2001 and our quarterly report on Form 10-Q for the
quarter ended September 30, 2001. They sent a letter of comments pointing out
areas of concern and requesting we answer their questions and provide additional
information. We exchanged correspondence with members of the SEC staff and
provided them with additional information. On September 24, 2002 in a telephone
conference call with the SEC staff, we resolved certain of the more material
issues. On October 31, 2002 we responded to other comments from the staff in
their letter dated August 5, 2002. On November 6, 2002 in a telephone
conversation with the SEC staff we resolved the remaining issues without
amending our previously filed financial statements. However, certain
reclassifications of financial information and additional financial statement
disclosures have been reflected in the accompanying financial statements.
Fluctuations in Quarterly Results and Seasonality
In view of the rapidly evolving nature of our business and the market
we serve, we believe that period-to- period comparisons of our operating
results, including our gross profit and operating expenses as a percentage of
revenues and cash flow, are not necessarily meaningful and should not be relied
upon as in indication of future performance. Our fiscal year ends each June 30
and we experience seasonality in our business. Revenues from our core business
during the first and second fiscal quarters tend to be lower than revenues in
our third and fourth quarters. We believe this to be attributable to summer
vacations and the Thanksgiving and December holiday seasons that occur during
our first and second quarters.
Merger of Imergent, 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.
The financial statements for the years ended June 30, 2002 and 2001
have been reclassified to conform to fiscal year 2003 presentation, including
disclosures for discontinued operations.
Critical Accounting Policies and Estimates
Our consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of America
("US GAAP") and form the basis for the following discussion and analysis on
critical accounting policies and estimates. The preparation of these financial
statements requires us to make estimates and assumptions that affect the
reported amounts of assets, liabilities, revenues and expenses, and related
disclosure of contingent assets and liabilities. On a regular basis we evaluate
our estimates and assumptions. We base our estimates on historical experience
and on various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under different
assumptions or conditions. Senior management has discussed the development,
selection and disclosure of these estimates with the Board of Directors and its
Audit Committee. There are currently five members of the Board of Directors,
three of whom make up the Audit Committee. The Board of Directors has determined
that each member of the Audit Committee qualifies as an independent director and
that the chairman of the Audit Committee qualifies as an "audit committee
financial expert" as defined under the rules adopted by the SEC.
A summary of our significant accounting policies is set out in Note 1
to our Financial Statements. We believe the critical accounting policies
described below reflect our more significant estimates and assumptions used in
the preparation of our consolidated financial statements. The impact and any
associated risks on our business that are related to these policies are also
discussed throughout this Management's Discussion and Analysis of Financial
Condition and Results of Operations where such policies affect reported and
expected financial results.
Revenue Recognition
During the fiscal year ended June 30, 2001 the Company changed its
product offering at its Internet training workshops. The date of the change was
October 1, 2000, the beginning of our second fiscal quarter of fiscal year 2001.
Prior to that time, customers were sold a service consisting of the custom
construction of Internet websites for their business, which service was to be
provided at any time during the 12 months following the sale. Included in the
price paid for this service was one year's hosting beginning when the website
was published. Revenue from these transactions was deferred at the time of sale
and recognized as the services were rendered or when the right to receive the
services terminated.
Beginning October 1, 2000, we discontinued selling the service and in
its place sold a license to use a new product called the StoresOnline Software
("SOS"). The SOS is a web-based software product that enables the customer to
develop their Internet website without additional assistance from us. When a
customer purchases a SOS license at one of our Internet training workshops, he
or she receives a CD-ROM containing programs to be used with their computer and
a password and instructions that allow access to our website where all the
necessary tools are present to complete the construction of the customer's
website. If they choose to host with us there is an additional setup and hosting
fee (currently $150) for publishing and 12 months of hosting. This fee is
deferred at the time it is paid and recognized during the subsequent 12 months.
A separate computer file is provided to the purchaser at the time of purchase
and can be used if the customer decides to create their website on their own
completely without access to our website and host their site with another
hosting service.
The revenue from the sale of the SOS license is recognized when the
product is delivered to the customer. We accept cash and credit cards as methods
of payment and we offer 24-month installment contracts to customers who prefer
an extended payment term arrangement. We offer these contracts to all workshop
attendees not wishing to use a check or credit card provided they complete a
credit application, give us permission to independently check their credit and
are willing to make an appropriate down payment. Installment contracts are
carried on our books as a receivable and the revenue generated by these
installment contracts is recognized when the product is delivered to the
customer and the contract is signed. At that same time an allowance for doubtful
accounts is established. This procedure was in effect for all of fiscal year
2002 and 2003.
The American Institute of Certified Public Accountants Statement of
Position 97-2 ("SOP 97-2") states that revenue from the sale of software should
be recognized when the following four specific criteria are met: 1) persuasive
evidence of an arrangement exists, 2) delivery has occurred, 3) the fee is fixed
and determinable and 4) collectibility is probable. All of these criteria are
met when a customer purchases the SOS product. The customer signs an order form
and a receipt acknowledging acceptance of the product. As is noted on the order
and acceptance forms, all sales are final. All fees are fixed and final. Some
states require a three-day right to rescind the transaction and we are currently
evaluating whether to extend that right to customers generally. Sales in those
states where we offer such a right are not recognized until the rescission
period has expired. We offer customers the option to pay for the SOS license
with Extended Payment Term Arrangements ("EPTAs"). The EPTAs generally have a
twenty-four month term. We have offered our customers the payment option of a
long-term installment contract for more than five years and have a history of
successfully collecting under the original payment terms without making
concessions. As of June 30, 2003, the percentage of total EPTAs originated
during FY 2003 that have either been collected or are still active was 74%.
During the previous four fiscal years, we collected approximately 70% of all
EPTAs issued to customers. Not all customers live up to their obligations under
the contracts. We make every effort to collect on the EPTAs, including the
engagement of professional collection services. Despite our collection efforts,
we estimate that approximately 47% of the gross amount of all EPTAs that we
enter into, both sold to finance companies and retained by us, will ultimately
be determined to be uncollectible. The contracts that are sold to finance
companies may under certain circumstances be recoursed back to us. Approximately
2% of the gross amount of sold contracts are returned to us under the buyer's
recourse rights. Uncollectible EPTAs are written off against an allowance for
doubtful accounts. The allowance is established at the time of sale based on our
recent experience with EPTAs.
Allowance for Doubtful Accounts
We record an allowance for doubtful accounts and disclose the
associated expense as a separate line item in operating expenses. The allowance,
which is netted against our current and long term accounts receivable balances
on our consolidated balance sheets, totaled approximately $6.6 million and $3.3
million as of June 30, 2003 and June 30, 2002, respectively. The amounts
represent estimated losses resulting from the inability of our customers to make
required payments. The estimates are based on historical bad debt write-offs,
specific identification of probable bad debts based on collection efforts, aging
of accounts receivable and other known factors. If the financial condition of
our customers were to deteriorate, resulting in an impairment of their ability
to make payments, additional allowances may be required.
Income Taxes
In preparing our consolidated financial statements, we are required to
estimate our income taxes in each of the jurisdictions in which we operate. This
process involves estimating actual current tax liabilities together with
assessing temporary differences resulting from differing treatment of items for
tax and financial reporting purposes. These differences result in deferred tax
assets and liabilities. Our deferred tax assets consist primarily of net
operating losses carried forward. We record a valuation allowance to reduce our
deferred tax assets to the amount that is more likely than not to be realized.
We have considered future market growth, forecasted earnings, future taxable
income, the mix of earnings in the jurisdictions in which we operate and prudent
and feasible tax planning strategies in determining the need for a valuation
allowance. In the event we were to determine that we would not be able to
realize all or part of our net deferred tax assets in the future, an adjustment
to the deferred tax assets would be charged to earnings in the period such
determination is made. Likewise, if we later determine that it is more likely
than not that the net deferred tax assets would be realized, the previously
provided valuation allowance would be reversed. For the fiscal years ended June
30, 2003, 2002, and 2001 we have established a 100% reserve. We intend to
reconsider this reserve requirement during the fiscal year ending June 30, 2004.
Our net operating loss carry forward ("NOL"), which is approximately
$43million, represents the losses reported for income tax purposes from the
inception of the Company through June 30, 2002. FY 2003 was the first year in
our history that generated taxable income. Section 382 of the Internal Revenue
Code ("Section 382") imposes limitations on a corporation's ability to utilize
its NOLs if it experiences an "ownership change". In general terms, an ownership
change results from transactions increasing the ownership of certain
stockholders in the stock of a corporation by more than 50 percentage points
over a three-year period. Since our formation, we have issued a significant
number of shares, and purchasers of those shares have sold some of them, with
the result that two changes of control as defined by Section 382 have occurred.
As a result of the most recent ownership change, utilization of our NOLs is
subject to an annual limitation under Section 382 determined by multiplying the
value of our stock at the time of the ownership change by the applicable
long-term tax-exempt rate resulting in an annual limitation amount of
approximately $127,000. Any unused annual limitation may be carried over to
later years, and the amount of the limitation may under certain circumstances be
increased by the "recognized built-in gains" that occur during the five-year
period after the ownership change (the "recognition period"). We believe that we
will have significant recognized built-in gains and that during the recognition
period the limitation will be increased by approximately $15 million based on an
independent valuation of the Company as of April 2, 2002. We also believe that
based on a valuation of the Company as of June 25, 2000, which is currently
underway, the earlier ownership change will also have significant recognized
built-in gains and that during the recognition period the limitation will be
further increased by approximately $28 million thus allowing the Company to
utilize its entire NOL. Significant management judgment was required in
estimating the amount of the recognized built in gain. If it is determined that
the actual amount of recognized built in gain is less than our estimate, we may
be required to make a cash payment for taxes due on our income for fiscal year
2003, plus related interest, which could materially adversely impact our
financial position.
Related Party Transactions
John J. Poelman, former Chief Executive Officer and a former director
and stockholder of the Company, was the sole owner of Electronic Commerce
International, Inc. ("ECI") during the fiscal years ended June 30, 2002 and 2001
and during the three months ended September 30, 2002. During this period, the
Company purchased a merchant account solutions product from ECI that provided
on-line, real-time processing of credit card transactions and resold this
product to its customers. The Company also formerly utilized the services of ECI
to provide a leasing opportunity to customers who purchased its products at its
Internet training workshops. Effective October 1, 2002, Mr. Poelman sold certain
assets and liabilities of ECI, including ECI's corporate name and its
relationship with the Company, to an unrelated third party. Total revenue
generated by the Company from the sale of ECI's merchant account solutions
product, while ECI's business was owned by Mr. Poelman, was $1,453,612,
$5,106,494 and $6,403,478 for the years ended June 30, 2003, 2002 and 2001,
respectively. The cost to the Company for these products and services totaled
$223,716, $994,043 and $975,257 for the years ended June 30, 2003, 2002 and
2001, respectively. During the years ended June 30, 2003, 2002 and 2001 the
Company processed leasing transactions for its customers through ECI in the
amounts of $0, $1,090,520 and $3,386,231, respectively. As of June 30, 2003 and
2002 the Company had no receivable balance due from ECI for leases in process.
In addition, the Company had $0 and $26,702 as of June 30, 2003 and 2002,
respectively, recorded in accounts payable relating to the amounts owed to ECI
for the purchase of the merchant account software while owned by Mr. Poelman.
The Company offers its customers at its Internet training workshops,
and through telemarketing sales following the workshop certain products intended
to assist its customers to become successful with their business. These products
include a live chat capability for the customer's own website and web traffic
building services. The Company purchases some of these services from Electronic
Marketing Services, LLC ("EMS"). In addition, EMS provides us telemarketing
services, selling some of the Company's products and services to contacts
provided to EMS by us. Ryan Poelman, owner of EMS, is the son of John J. Poelman
our former Chief Executive Officer and a former director who retired effective
July 1, 2003 and, in connection therewith, resigned as an officer and director
of the Company. The Company's revenues generated from the above products and
services were $6,330,343, $4,806,497 and $1,263,793 for the fiscal years ended
June 30, 2003, 2002 and 2001, respectively. The Company paid EMS $994,827,
$479,984 and $78,435 to purchase these services during the fiscal years ended
June 30, 2003, 2002 and 2001, respectively. In addition, the Company had
$92,094, and $53,023 as of June 30, 2003 and 2002, respectively, recorded in
accounts payable relating to the amounts owed to EMS for products and services.
The Company sends complimentary gift packages to its customers who
register for the Company's Workshop training sessions. An additional gift is
sent to Workshop attendees who purchase our products at the conclusion of the
Workshop. The Company utilizes Simply Splendid, LLC ("Simply Splendid") to
provide some of these gift packages to the Company's customers. Aftyn Morrison,
owner of Simply Splendid, is the daughter of John J. Poelman our former Chief
Executive Officer and a former director. We paid Simply Splendid $421,265, $0
and $0 to fulfill these services during the fiscal years ended June 30, 2003,
2002 and 2001, respectively. In addition, the Company had $22,831and $0 as of
June 30, 2003 and 2002, respectively, recorded in accounts payable relating to
the amounts owed to Simply Splendid for gift packages.
We engaged vFinance Investments, Inc. ("vFinance") as a financial
advisor and placement agent for our private placement of unregistered securities
that closed during May 2002. Shelly Singhal, a former member of the our Board of
Directors, was a principal of vFinance at the time of the private placement.
During the year ended June 30, 2002 we paid vFinance $61,500 in fees and
commissions for their services. The offering was successful with adjusted gross
proceeds to us of $2,185,995.
We engaged SBI-E2 Capital USA Ltd. ("SBI") as a financial consultant to
provide us with various financial services. Shelly Singhal a former member of
our Board of Directors is a managing director of SBI. During the year ended June
30, 2002 SBI provided us with a Fairness Opinion relating to our proposed merger
with Category 5 Technologies, for which we paid $67,437.
We also paid SBI $58,679 for expenses and commissions relating to our
private placement of unregistered securities that closed during November 2001.
The offering was successful with adjusted gross proceeds to us of $2,803,466.
Pursuant to an agreement dated February 15, 2002, SBI also rendered
certain financial advisory services to us in connection with our private
placement that closed in May 2002, including delivery of a fairness opinion with
respect to such private placement. Pursuant to this agreement, we paid SBI a
total of $40,000 and issued to SBI and various of its designees an aggregate of
112,500 shares of our common stock.
During the 12 months ended June 30, 2001, we issued 12,500 warrants to
Shelly Singhal for non-director services rendered. The warrants were valued at
$40,657.
In each of the above-described transactions and business relationships,
we believe that the terms under which business is transacted with all related
parties are at least as favorable to us as would be available from an
independent third party providing the same goods or services.
Results of Operations
Fiscal year ended June 30, 2003 compared to fiscal year ended June 30,
2002
Revenue
Our fiscal year ends on June 30 of each year. Revenues for the fiscal
year ended June 30, 2003 ("FY 2003") increased to $53,225,083 from $37,350,850
for the fiscal year ended June 30, 2002 ("FY 2002"), an increase of 43%.
Revenues generated at our Internet training workshops in both fiscal years were
from the sale of the SOS product as described in Critical Accounting Policies
and Estimates above. Revenues also include fees charged to attend the workshop,
web traffic building products, mentoring, consulting services, access to credit
card transaction processing interfaces and sales of banner advertising. We
expect future operating revenues to be generated principally following a
business model similar to the one used in fiscal year 2003. 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.
The increase in revenues from FY 2003 compared to FY 2002 can be
attributed to various factors. There was an increase in the number of Internet
training workshops conducted during the current fiscal years. The number
increased to 336 including 11 that were held outside the United States of
America, for the current fiscal year from 253 in FY 2002, nine of which were
held outside the United States. In addition, the average number of persons
attending each workshop increased and the average number of "buying units" in
attendance at our workshops during the period increased to 84, compared to 80 in
the prior fiscal year. Persons who pay an enrollment fee to attend our workshops
are allowed to bring a guest at no additional charge, and that individual and
his/her guest constitute one buying unit. If the person attends alone that
single person also counts as one buying unit. Approximately 32% of the buying
units made a purchase at the workshop in FY 2003 compared to 29% FY 2002. The
average revenue per workshop purchase also increased in the current fiscal year
ended June 30, 2003 to approximately $4,500 compared to approximately $4,100 in
the fiscal year ended June 30, 2002. We will seek to continue to hold workshops
with a larger number of attendees in future periods and we will seek to increase
the number of these larger workshops as well.
Revenue during FY 2003 compared to FY 2002 was higher in spite of the
loss of a benefit relating to the recognition of revenue deferred from
historical workshop sales at rates greater than the level at which revenue is
required to be deferred from the current period. During FY 2003, we recognized
only $248,150 in net revenue from sales made in prior periods compared to
$5,328,034 recognized from sales made in prior periods during FY 2002. This
benefit experienced during FY 2002 resulted from a change in the business model
and product offering at the workshops as described in Critical Accounting
Policies and Estimates above. This benefit has now been fully realized and we do
not expect it to reoccur. We anticipate that in the future the amount of revenue
recognized from earlier periods will be approximately equal to that deferred
into future periods.
Effective January 1, 2002, we began making our product offerings
through our StoresOnline subsidiary rather than our Galaxy Mall subsidiary. This
culminated an eighteen month long plan to fully incorporate the SOS throughout
the engineering and programming departments, servers and infrastructure and to
move away from a mall-based hosting environment. Our services have been used for
several years by non-mall based merchants, and we believe that the marketing
principles taught by us are equally effective for stand-alone websites and
websites hosted on an Internet "mall." Although Galaxy Mall remains an active
website, all new customers are sold the SOS through our StoresOnline previews
and workshops.
We contact all persons who attend our workshops beginning approximately
two weeks after the event was held in an attempt to sell them a mentoring
program and products that will drive traffic to their web site. These contacts
are made through telemarketing companies that we engage as subcontractors. The
telemarketing companies are our sales agents and are paid a commission from the
revenue they generate. Telemarketing sales, included in total revenue described
above, increased during FY 2003 to approximately $10.5 million from $9.2 million
in FY 2002, an increase of 14%.
Gross Profit
Gross profit is calculated as revenue less the cost of revenue, which
consists of the cost to conduct Internet training workshops, to provide customer
technical support, credit card fees and the cost of tangible products sold.
Gross profit for FY 2003 increased to $42,322,713 from $30,825,050 during FY
2002. The increase in gross profit primarily reflects the increased revenue
during the period.
Gross profit as a percent of revenue for FY 2003 was 80% compared to
83% for FY 2002. The reduction in the gross margin percentage was primarily
attributable to the recognition of $5,328,034 in deferred revenue during the
fiscal year ended June 30, 2002, as compared to only $398,912 in deferred
revenue that was recognized during FY 2003. These deferred revenue amounts had
no costs associated with them because those costs were recognized at the time
the sales were made and the products delivered in the relevant prior periods. We
believe that future gross profit will be in the 75% to 80% of revenue range
because the deferred revenue recognized from prior periods will be approximately
equal to the revenue deferred into future periods.
Cost of revenues includes related party transactions of $1,118,002 in
FY 2003 and $994,043 in the prior fiscal year. These are more fully described in
the notes to the condensed consolidated financial statements as Note 19. We have
determined, based on competitive bidding and experience with independent vendors
offering similar products and services, that the terms under which business is
transacted with these related parties is at least as favorable to us as would be
available from an independent third party.
Selling and Marketing
Selling and marketing expenses consist of payroll and related expenses
for sales and marketing, the cost of advertising, promotional and public
relations expenditures, related expenses for personnel engaged in sales and
marketing activities, and commissions paid to telemarketing companies. Selling
and marketing expenses for FY 2003 increased to $18,736,294 from $14,020,571 in
FY 2002. The increase in selling and marketing expenses is primarily
attributable to the increase in the number of workshops held during FY 2003.
Expenses were higher because of the greater number of attendees at our preview
sessions and the associated expenses including advertising and promotional
expenses necessary to attract the attendees. Advertising expenses for the fiscal
year ended June 30, 2003 were approximately $7.6 million compared to $5.3
million in the prior fiscal year. Total selling and marketing expenses as a
percentage of revenues were 35% for FY 2003 and, including the non-recurring
benefit of deferred revenue mentioned above in total revenue, selling and
marketing expenses were 37% of total revenue for FY 2002.
Selling and marketing expenses include related party transactions of
$521,806 and $479,984 in the fiscal years ended June 30, 2003 and 2002,
respectively. These are more fully described in the notes to the condensed
consolidated financial statements as Note 19. We have determined, based on
competitive bidding and experience with independent vendors offering similar
products and services, that the terms under which business is transacted with
this related party are at least as favorable to us as would be available from an
independent third party.
General and Administrative
General and administrative expenses consist of payroll and related
expenses for executive, accounting and administrative personnel, professional
fees, finance company discounts and other general corporate expenses. We accept
twenty-four month installment contracts from our customers as one of several
methods of payment. Some of these contracts are subsequently sold to finance
companies at a discount. The discounts range between 15% and 25% depending upon
the credit worthiness of our customer. These discounts, which amounted to
approximately $1.6 million in FY 2003 and $1.5 in FY 2002, are included in
general and administrative expenses.
General and administrative expenses in FY 2003 decreased to $4,743,068
from $5,691,434 in FY 2002. This decrease is partially attributable to the fact
that during FY 2002 we incurred $555,201 in debt issuance costs associated with
a convertible debenture owned by King William, LLC. Since King William converted
the debenture into common stock, the debt issuance costs were written off rather
than being amortized over the life of the debenture. Other items contributing to
the reduction were a decrease in the FY 2003 payroll and related expenses that
resulted from reducing the size of our workforce which was partially offset by
increases in compensation to our executive officers, elimination of certain
consulting fees associated with financial public relations firms, and a
reduction in legal and other professional expenses. In addition, during FY 2003
we resolved a lawsuit brought by Category 5 Technologies, Inc. ("Cat 5").
In April 2002 Cat 5 demanded that we reimburse them for $260,000 of
their expenses associated with merger negotiations between our companies. (See
"Legal Proceedings," below, for a more detailed explanation of this matter.) As
a result we accrued that amount as a contingent liability during FY 2002. A
settlement agreement was signed and the lawsuit dismissed eliminating the
contingent liability and therefore the accrual was reversed during FY 2003,
reducing general and administrative expenses for the year. Further reductions in
general and administrative expenses from current revenue levels are unlikely and
we anticipate that general and administrative expenses will increase in future
years as our business grows and as we work to improve the quality and
effectiveness of our customer support and we resolve the litigation and
administrative proceedings brought against us.
Depreciation and Amortization
Depreciation and amortization expenses consist of a systematic charge
to operations for the cost of long-term assets. In FY 2002 it also included
amortization of the goodwill associated with the purchase of other businesses.
During FY 2003 the Financial Accounting Standards Board (FASB) Statements of
Financial Accounting Standards No. 141, "Business Combinations" and No. 142
("SFAS 142"), "Goodwill and Other Intangible Assets" became applicable to us.
These pronouncements established new standards for the treatment of goodwill and
other intangible assets. SFAS 142 prescribes that amortization of goodwill will
cease as of the adoption date. We were required to perform an impairment test no
later than December 31, 2002, and must do so annually thereafter, to determine
if a write-down of the goodwill is appropriate. We engaged an independent
appraisal firm to evaluate our goodwill. Based on our analysis of their report
we determined that no impairment of our goodwill existed. As a result we
discontinued amortizing our goodwill and continue to carry it at the value
remaining on our books as of July 1, 2002.
Depreciation and amortization expenses for the fiscal year ended June
30, 2003 decreased to $338,285 from $668,730 in the prior fiscal year. This
decrease was mainly due to the discontinuance of the amortization of goodwill
described above.
Bad Debt Expense
Bad debt expense consists mostly of actual and anticipated losses
resulting from the extension of credit terms to our customers when they purchase
products from us. We encourage customers to pay for their purchases by check or
credit card since these are the least expensive methods of payment for our
customers, but we also 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 provided they complete a credit application, give us
permission to independently check their credit and are willing to make an
appropriate down payment of from 5% to 10% of the purchase price. These
installment contracts are sometimes sold to finance companies, with partial or
full recourse, 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. Our collection experience with these 24-month contracts is
satisfactory given the low marginal cost associated with theses sales and that
the down payment received by us at the time the contract is entered into exceeds
the cost of the delivered products. Since all other expenses relating to the
sale, such as salaries, advertising, meeting room expense, travel, etc., have
already been incurred, we believe there is a good business reason for extending
credit on these terms.
Bad debt expense was $14,225,877 in FY 2003 compared to $6,675,238 in
the prior fiscal year. The increase is due to an increase in the number of
installment contracts entered into, an increase in the number of contracts
carried by us, and our recent collection experience. During FY 2003 we wrote off
approximately $2.4 million of installment contracts that originated in FY 2002
and 2001. We provided for bad debts as of June 30, 2002 based on the best
information available at the time, including historical write-off patterns. We
have begun to have access to much more detailed information from the finance
companies that service the installment contracts, and we have also had more
historical data with which to estimate the appropriate bad debt reserve. We
believe that bad debt expense in future years will decline as a percentage of
revenues since we have resolved all known contract losses during FY 2003. We
believe the allowance for doubtful accounts of approximately $7.2 million at
June 30, 2003 is adequate to cover all future losses associated with the
contracts in our accounts receivable as of June 30, 2003.
During FY 2003 workshop sales financed by installment contracts were
approximately $22.6 million compared to $12.3 million in the prior fiscal year.
As a percentage of workshop sales, installment contracts were 55% in FY 2003
compared to 47% in FY 2002. During FY 2003 contracts carried by us, before any
adjustment for an allowance for doubtful accounts, increased by approximately
$5.7 million to approximately $12.9 million. The balance carried at June 30,
2002 net of the allowance for doubtful accounts was approximately $7.2 million.
The allowance for doubtful accounts as of June 30, 2003 related to installment
contracts was 45% of gross accounts receivable compared to 46% at June 30, 2002,
reflecting a modest improvement in the credit quality of our customers electing
this method of payment. These factors and other non-installment contract
receivables required us to increase our total allowance for doubtful accounts by
approximately $3.4 million. The table below shows the activity in our total
allowance for doubtful accounts during the fiscal year ended June 30, 2003.
Allowance balance June 30, 2002 $ 3,413,981
Plus provision for doubtful accounts 14,255,877
Less accounts written off (10,769,807)
Plus collections on accounts previously written off 123,804
-------
Allowance balance June 30, 2003 $7,203,855
============
Interest Income
Interest income is derived from the installment contracts carried by
us. Our contracts have an 18% simple interest rate and interest income for FY
2003 was $813,137 compared to $390,371 in FY 2002. In the future as our cash
position strengthens we may be able to carry more installment contracts rather
than selling them at a discount to finance companies. If we were able to carry
more of these contracts it would increase interest income and reduce these
discounts which are recorded as administrative expenses.
Interest Expense
Interest expenses for the fiscal year ended June 30, 2003 decreased to
$40,611 from $1,950,687 in FY 2002. Included in interest expense in FY 2002 are
$212,463 relating to the conversion of an 8% convertible debenture issued to
King William, LLC into common stock and $1,666,957 relating to the conversion
into common stock of convertible long term notes held by investors who
participated in a private placement of the notes in January and April 2001. Upon
conversion of these items the debt discount previously recorded was written off
in FY 2002 instead of being amortized over the life of the notes.
Income Taxes
Fiscal year 2002 was our first profitable year since our inception.
However, differences in generally accepted accounting principals ("US GAAP") and
accounting for tax purposes caused us to have a tax loss for the fiscal year
ended June 30, 2002. For the fiscal year ended June 30, 2003 we have estimated
our taxable income to be approximately $8.2 million.
Our net operating loss carry forward ("NOL"), which is approximately
$43million, represents the losses reported for income tax purposes from our
inception through June 30, 2002. FY 2003 was the first year in our history that
generated taxable income. Section 382 of the Internal Revenue Code ("Section
382") imposes limitations on a corporation's ability to utilize its NOLs if it
experiences an "ownership change". In general terms, an ownership change results
from transactions increasing the ownership of certain stockholders in the stock
of a corporation by more than 50 percentage points over a three-year period.
Since our formation, we have issued a significant number of shares, and
purchasers of those shares have sold some of them, with the result that two
changes of control as defined by Section 382 have occurred. As a result of the
most recent ownership change, utilization of our NOLs is subject to an annual
limitation under Section 382 determined by multiplying the value of our stock at
the time of the ownership change by the applicable long-term tax-exempt rate
resulting in an annual limitation amount of approximately $127,000. Any unused
annual limitation may be carried over to later years, and the amount of the
limitation may under certain circumstances be increased by the "recognized
built-in gains" that occur during the five-year period after the ownership
change (the "recognition period"). We believe that we will have significant
recognized built-in gains and that during the recognition period the limitation
will be increased by approximately $15 million based on an independent valuation
of our company as of April 3, 2002. We also believe that based on a valuation of
our company as of June 25, 2000, which evaluation is currently underway, the
earlier ownership change will also have significant recognized built-in gains
and that during the recognition period the limitation will be further increased
by approximately $28 million thus allowing us to utilize our entire NOL.
Significant management judgment was required in estimating the amount of the
recognized built in gain. If it is determined that the actual amount of
recognized built in gain is less than our estimate, we may be required to make a
cash payment for taxes due on our income for fiscal year 2003, plus related
interest, which could materially adversely impact our financial position.
Fiscal year ended June 30, 2002 compared to fiscal year ended June 30,
2001
Revenue
Revenues for the year ended June 30, 2002 decreased to $37,350,850 from
$43,000,533 in the prior fiscal year, a decrease of 13%. Some revenues generated
at our Internet training workshops for fiscal year 2001 were from the design and
development of Internet web sites and the sale of the SOS product as described
above, while in fiscal year 2002 revenues from the same source were from the SOS
product only. Other revenues include fees charged to attend the workshop, web
traffic building products, mentoring, consulting services, access to credit card
transaction processing interfaces and sales of banner advertising.
Formerly we reported product sales that came from our subsidiary, IMI,
Inc. On January 11, 2001, we sold IMI. Accordingly, IMI operations from this and
prior periods are now reported as discontinued operations in the accompanying
consolidated statement of earnings.
The decrease in revenues from fiscal 2001 to 2002 can be attributed to
various factors some of which increased revenues while others caused the
decline. There was a decrease in the number of Internet training workshops
conducted during the years. The number decreased to 253 workshops for FY 2002
from 337 in the fiscal year ended June 30, 2001, however the average number of
persons attending each workshop increased which partially offset the total
reduction of attendees during the year. This, in addition to an increase in the
sales price of the product, had a net effect of decreasing revenues by
approximately $1,450,000. Due to our lack of cash and because of unfavorable
economic conditions during the first two quarters of FY 2002 it was necessary to
reduce the number of workshops held and use our limited resources to attract the
maximum number of attendees to these fewer workshops. During October and
November 2001, we conducted workshops on a test basis in New Zealand and
Australia for the first time. The workshops were moderately successful and we
returned to these markets to conduct additional workshops during the forth
quarter of fiscal 2002. Revenues from international workshops in fiscal year
2002 were $663,790.
Approximately 29% percent of workshop "buying units" (attendees and
their guest equal one buying unit or an attendee who has no guest also equals
one buying unit ) made purchases at our workshops during fiscal year 2002. This
percentage remained approximately the same as has been our experience
historically.
The principal cause of the reduction in revenue during the fiscal year
ended June 30, 2002 was the loss of a benefit, beginning during the third
quarter of fiscal 2002, of the recognition of revenue deferred from historical
workshop sales at rates greater than the level at which revenue was required to
be deferred from current period. This benefit resulted from a change in the
business model and product offering at these workshops as noted above. This
benefit has now been fully realized and we do not expect it to reoccur. We
anticipate that in future years the amount of revenue recognized from earlier
periods will be approximately equal to that deferred into future periods.
During the year ended June 30, 2002, we recognized $5,789,410 of
revenue from sales made in prior fiscal years and we deferred revenue from
fiscal year 2002 of $461,376 to future years. The net change increased revenues
for fiscal year 2002 by $5,328,034. The beneficial deferred revenue impact on
fiscal year 2002 occurred only during the first two quarters. Thereafter the
amount of revenue recognized from earlier quarters was approximately equal to
that deferred into future periods.
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
fiscal year 2001 of $5,073,856 to future years. The net change increased
revenues for fiscal year 2001 by $9,460,686.
Effective January 1, 2002, we began making our product offerings
through our StoresOnline subsidiary rather than our Galaxy Mall subsidiary. This
culminated an eighteen month long plan to fully incorporate the SOS throughout
the engineering and programming departments, servers and infrastructure and to
move away from a mall-based hosting environment. Our services have been used for
several years by non-mall based merchants, and we believe that the principles
taught by us are equally effective for standalone websites and websites hosted
on an Internet "mall." Although Galaxy Mall remains an active website, all new
customers are sold the SOS through our StoresOnline previews and workshops.
Effective January 1, 2002, the payment options available to customers
at our Internet training workshops were changed to eliminate the lease finance
option. This was done because ECI, the sales agent for Leasecomm Corporation,
was no longer able to provide us the program. Although approximately 25% of our
customers chose the lease finance option during calendar year 2001, we did not
believe that the elimination of the option would materially adversely affect the
number of customers who would purchase at our workshops because we continued to
offer an installment contract payment alternative. Total sales that were
financed by our customers either through leases or installment contracts were
approximately $12.0 million in FY 2002 and $17.4 in FY 2001.
Gross Profit
Gross profit is calculated as revenue less the cost of revenue, which
consists of the cost to conduct Internet training workshops, to program customer
storefronts, to provide customer technical support, credit card fees and the
cost of tangible products sold. Gross profit for the fiscal year ended June 30,
2002 decreased to $30,825,050 from $34,574,958 in the prior year. The decrease
in gross profit primarily reflects the decreased sales volume related to the
decrease in the number of Internet training workshops and the reduced level of
benefit from the recognition of deferred revenue at rates in excess of the rates
at which revenue is deferred from the current period sales to future periods as
noted above.
Gross profit percentages, however, increased for the fiscal year ended
June 30, 2002 to 83% of revenue from 80% of revenue for the fiscal year ended
June 30, 2001. The increase in gross profit as a percentage of revenue is due to
several factors: the new product sold at the workshop, the SOS, transferred much
of the cost of website construction from us to the customer; new programming
tools and stringent cost controls increased the productivity of the support
group our customers use; our cost for the online, real time credit card
processing product delivered to workshop customers decreased; hosting revenues
increased with minimal incremental cost being added to accommodate the new
customers; and the cost of conducting our Internet training workshops remaining
relatively constant per workshop, while the average number of attendees at each
workshop and the selling price of the products delivered at the workshops both
increased.
Cost of revenues includes related party transactions of $994,043 in
fiscal year 2002 and $975,257 in fiscal year 2001. These are more fully
described in the notes to the financial statements as Note 19. We have
determined that the terms under which business is transacted with all related
parties are at least as favorable to us as would be available from an
independent third party providing similar goods or services.
Product Development
Product development expenses consist primarily of payroll and related
expenses. Product development expenses for the fiscal year ended June 30, 2002
decreased to $51,805 from $1,804,986 in the prior fiscal year. Product
development expenses in fiscal year 2001 were mostly the development expenses
for the Internet Commerce Center (ICC) and were largely incurred during the
first two fiscal quarters of that year. We have completed the basic development
of the ICC, as redefined by us. We continue to develop SOS enhancements, but
there are no other major development projects underway at this time.
Selling and Marketing
Selling and marketing expenses consist of payroll and related expenses
for sales and marketing, the cost of advertising, promotional and public
relations expenditures and related expenses for personnel engaged in sales and
marketing activities, and commissions paid to telemarketing companies. Selling
and marketing expenses for the fiscal year ended June 30, 2002 decreased to
$14,020,571 from $20,949,758 in FY 2001. The decrease in selling and marketing
expenses is primarily attributable to the decrease in the number of workshops
held during the current year and the associated expenses including advertising
and promotional expenses necessary to attract attendees. Advertising expenses
for fiscal 2002 were approximately $5.3 million compared to $6.0 million in
fiscal 2001. The decrease is also attributable to the fact that we incurred no
marketing expenses in fiscal year 2002 with respect to our ICC and CableCommerce
products and services, whereas during fiscal year 2001 there were approximately
$1,700,000 in selling and marketing expenses associated with our ICC and
CableCommerce divisions. Selling and marketing expenses as a percentage of sales
decreased to 38% of revenues for FY 2002 from 49% in the previous fiscal year.
Selling and marketing expense includes related party transactions of
$479,984 in fiscal year 2002 and $78,435 in fiscal year 2001. These are more
fully described in the notes to the financial statements as Note 19. We have
determined, based on competitive bidding and experience with independent vendors
offering similar products and services, that the terms under which business is
transacted with related parties are at least as favorable to us as would be
available from an independent third party.
General and Administrative
General and administrative expenses consist of payroll and related
expenses for executive, accounting and administrative personnel, professional
fees and other general corporate expenses. General and administrative expenses
for the fiscal year ended June 30, 2002 decreased to $5,691,434 from $7,083,426
in the previous fiscal year. This decrease is primarily attributable to the
decrease in payroll and related expenses that resulted from a reduction in the
size of our workforce, a reduction in the salaries of retained management
personnel, elimination of certain consulting fees associated with financial
public relations firms, and a reduction in legal expenses.
Depreciation and Amortization
Depreciation and amortization expenses consist of a systematic charge
to operations for the cost of long-term equipment and amortization of the
goodwill associated with the purchase of other businesses. Depreciation and
amortization expenses for the fiscal year ended June 30, 2002 decreased to
$668,730 from $1,296,519 in the prior 12-month period. This decrease was due to
the disposal of some computer equipment and other assets as well as from reduced
amortization due to the write-off of the goodwill associated with our
StoresOnline (Canada) subsidiary. In future periods, goodwill will no longer be
amortized based on SFAS 142 which will further reduce amortization expense.
Bad Debt Expense
Bad debt expense consists mostly of actual and anticipated losses
resulting from the extension of credit terms to our customers when they purchase
products from us. We encourage customers to pay for their purchases by check or
credit card since these are the least expensive methods of payment, but we also
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
provided they complete a credit application, give us permission to independently
check their credit and are willing to make an appropriate down payment. These
installment contracts are sold to various finance companies, with partial or
full recourse, 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. Our collection experience with these 24-month contracts is
satisfactory given the cost structure under which we operate. As of June 30,
2002, the sum of the collected contracts plus the original principal balance of
those currently active as a percent of the original total value of the contracts
in prior fiscal years were: Fiscal year 1999 = 70%, Fiscal year 2000 = 77%,
Fiscal year 2001 = 77%. As of June 30, 2002, all contracts from fiscal years
1999 and 2000 had reached the end of their term, while some contracts from
fiscal year 2001 were still active.
Bad debt expense was $6,675,238 in the fiscal year ended June 30, 2002
compared to $3,475,492 in the prior fiscal year. The increase is principally due
to an increase in the number of installment contracts carried by us. During the
first six months of fiscal year 2002 there were no finance companies willing to
purchase our contracts so we carried them ourselves. In January 2002, we were
once again able to sell contracts to a finance company, but on terms that were
less favorable than we had experienced in the past. The new finance company
agreed to purchase contracts only if they had full recourse on any uncollectable
contracts. We accepted these terms and as a result have incurred increased bad
debts. Based on our recent history it was necessary to increase the allowance
for doubtful accounts to provide for future losses. This increased bad debt
expense for fiscal 2002 by $1,089,798.
Write-down of Goodwill and Acquired Technology
At December 31, 2000, we wrote off the goodwill relating to our
StoresOnline (Canada) 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. This write-off reduced the goodwill
amortization for fiscal year 2002 compared to fiscal 2001.
Interest Income
Interest income is derived from the installment contracts carried by
us. Our contracts have an 18% simple interest rate and interest income for FY
2002 was $390,371 compared to $169,861in FY 2001.
Interest Expense
Interest expenses for the fiscal year ended June 30, 2002 decreased to
$1,950,687 from $3,287,905 in FY 2001. Included in interest expense in fiscal
2002 are $212,463 relating to the conversion of an 8% convertible debenture
issued to King William, LLC into common stock and $1,666,957 relating to the
conversion into common stock of convertible long term notes held by investors
who participated in a private placement of the notes in January and April 2001.
Upon conversion of these items the debt discount previously recorded was written
off in the current fiscal year instead of being amortized over the life of the
notes.
Included in interest expense in the fiscal year ended June 30, 2001 is
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.
Gain from the Settlement of Debt
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 financial condition. 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 a gain of $1,688,956.
SFAS No. 145 relating to the accounting treatment for extinguishment of
debt became effective for the company during FY 2003. As a result a change in
the reporting of our operations for FY 2001 became necessary. During the fiscal
year ended June 30, 2001 the Company had originally reported an extraordinary
item related to gain on extinquishment of debt in its Statement of Operations of
$1,688,956. Based on SFAS No. 145 the Company has reclassified $1,688,956 to
income before discontinued operations in its statement of operations included in
this annual report.
Discontinued Operations
In January 2001, we sold our subsidiary, IMI, Inc. to a third party as
discussed above. As a result, the loss from discontinued operations is listed on
a separate line item in the statement of operations. The loss from discontinued
operations for fiscal year 2001 was $285,780.
Extraordinary Items
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 fiscal year ended June 30, 2001
of $363,656.
Income Taxes
Fiscal year 2002 was our first profitable year since our inception.
However, differences in generally accepted accounting principals ("US GAAP") and
accounting for tax purposes caused us to have a tax loss for the fiscal year
ended June 30, 2002. Therefore, we have not paid or accrued any federal income
taxes in this or prior fiscal years.
Liquidity and Capital Resources
The accompanying financial statements have been prepared on the basis
that we will continue as a going concern, which contemplates the realization of
assets and satisfaction of liabilities in the normal course of business. We
incurred losses since our inception, but became profitable in FY 2002 and
continued our profitability in FY 2003. We have a cumulative net loss of a
$64,486,389 through June 30, 2003. We have historically relied upon private
placements of our stock and issuance of debt to generate funds to meet our
operating needs. However, in FY 2003 we had positive cash flow from operations
of $2,080,778. Our plans include potentially seeking to raise additional debt or
equity capital to further increase our growth potential and take advantage of
strategic opportunities. However, there can be no assurance that additional
financing will be available on acceptable terms, if at all. We continue to work
to improve the strength of our balance sheet and have restructured our ongoing
operations to improve profitability and operating cash flow.
At the close of the year ended June 30, 2003, we had working capital of
$5,526,926 compared to $289,438 at June 30, 2002. Our shareholders equity was
$8,103,047 at June 30, 2003 compared to $2,468,574 at June 30, 2002. We
generated revenues from continuing operations of $53,225,083 for the FY 2003
compared to $37,350,850 for FY 2002 and $43,000,533 for FY 2001. For the year
ended June 30, 2003 we generated net earnings of $5,034,072 compared to
$2,198,769 for the year ended June 30, 2002 and we incurred a net loss of
$3,638,736 during FY 2001. For the year ended June 30, 2003, we recorded
positive cash flows from operating activities of $2,080,778 compared to negative
cash flows from continuing operations of $3,548,931 and $7,347,123 in FY 2002
and 2001, respectively.
Cash
At June 30, 2003, we had $2,319,618 cash on hand, an increase of
$1,799,870 from June 30, 2002.
Net cash provided by operating activities was $2,080,788 for the fiscal
year ended June 30, 2003. Net cash provided by operations was mainly net
earnings of $5,034,072 and a provision for bad debts of $14,255,877, but
partially offset by an increase in accounts receivable of $16,662,707, and a
decrease in accounts payable and accrued liabilities of $957,492.
The increase in accounts receivable occurred because our increase in
revenues generated additional installment contracts. See the discussion of Bad
Debt Expense in the Results of Operations for FY 2003 for a detailed discussion.
The decrease in accounts payable, accrued expenses and other liabilities of
$957,492 is the result of paying vendor invoices using cash generated from
operations and settlement of outstanding liabilities.
Accounts Receivable
Accounts receivable, carried as a current asset, net of allowance for
doubtful accounts, were $4,965,769 at June 30, 2003 compared to $2,247,129 at
June 30, 2002. Accounts receivable, carried as a long-term asset, net of
allowance for doubtful accounts, were $2,254,969 at June 30, 2003 compared to
$1,673,740 at June 30, 2002. We offer our customers a 24-month installment
contract as one of several payment options. The payments that become due more
than 12 months after the end of the fiscal year are carried as long-term trade
receivables. During FY 2003 workshop sales financed by installment contracts
were approximately $22.8 million compared to approximately $13.4 million in FY
2002. We sell, on a discounted basis, a portion of these installment contracts
to third party financial institutions for cash. Currently we sell these
installment contracts to three separate financial institutions with different
recourse rights.
Accounts Payable
Accounts payable at June 30, 2003, totaled $1,436,960, including
amounts payable to a related party, compared to $1,327,102 at June 30, 2002. Our
accounts payable as of June 30, 2003 were mostly within our vendor's terms of
payment.
Stockholders' Equity
Shareholders' equity at June 30, 2003 was $8,103,047 compared to
$2,468,574 at June 30, 2002. The increase was mainly due to profitable
operations for FY 2003. Net earnings during the year were $5,034,072.
Financing Arrangements
We accept payment for the sales made at our Internet training workshops
by cash, credit card, installment contract, or until December 31, 2001, 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 us to third party financial institutions for
cash. See "Liquidity and Capital Resources - Accounts Receivable," for further
information.
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. Due to our
profitable operations during FY 2003 and FY 2002, the sale of common stock in
private placements and the increasing market price for our stock we believe we
now meet the qualification standards for listing on the NASDAQ Small Cap Market.
On June 6, 2003 we filed an application for such a listing. Our application for
listing on the NASDAQ SmallCap Market is subject to review and approval by the
NASDAQ and there can be no assurance that this application will be approved.
Impact of Recent Accounting Pronouncements
In April 2002, the FASB issued SFAS No. 145, Rescission of SFAS Nos. 4,
44, and 64, Amendment of SFAS 13, and Technical Corrections as of April 2002
(SFAS 145). This standard rescinds SFAS No. 4, Reporting Gains and Losses from
Extinguishment of Debt, and an amendment of that Statement, SFAS No. 64,
Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements and excludes
extraordinary item treatment for gains and losses associated with the
extinguishment of debt that do not meet the APB Opinion No. 30, Reporting the
Results of Operations -- Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions (APB 30) criteria. Any gain or loss on extinguishment of debt that
was classified as an extraordinary item in prior periods presented that does not
meet the criteria in APB 30 for classification as an extraordinary item shall be
reclassified. SFAS 145 also amends SFAS 13, Accounting for Leases as well as
other existing authoritative pronouncements to make various technical
corrections, clarify meanings, or describe their applicability under changed
conditions. Certain provisions of SFAS are effective for transactions occurring
after May 15, 2002 while other are effective for fiscal years beginning after
May 15, 2002. During the fiscal year ended June 30, 2001 we had originally
reported an extraordinary item related to gain on extinguishment of debt in its
Statement of Operations of $1,688,956. Based on SFAS No. 145, we have
reclassified $1,688,956 to income before discontinued operations in its
statement of operations included in this annual report.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation--Transition and Disclosure--an amendment of FASB
Statement No. 123". This statement amends FASB Statement No. 123, "Accounting
for Stock-Based Compensation," to provide alternative methods of transition for
a voluntary change to the fair value based method of accounting for stock-based
employee compensation. In addition, this Statement amends the disclosure
requirements of SFAS No. 123 to require prominent disclosures in both annual and
interim financial statements about the method of accounting for stock-based
employee compensation and the effect of the method used on reported results. The
amendments to Statement 123 regarding disclosure are effective for financial
statements for fiscal years ending after December 15, 2002. We have adopted the
annual disclosure provisions of SFAS No. 148 in its financial statements for the
year ended June 30, 2003 and will adopt the interim disclosure provisions for
its financial statements for the quarter ended September 30, 2003 and
thereafter. The adoption of this standard involves additional disclosures. Our
adoption of SFAS No. 148 did not have a material impact on our results of
operations, financial position or cash flows.
In November 2002, the FASB issued FASB Interpretation No. 45
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others" ("FIN 45"). This interpretation
elaborates on the disclosures to be made by a guarantor in its interim and
annual financial statements about its obligations under certain guarantees that
it has been issued and requires that they be recorded at fair value. The initial
recognition and measurement provisions of this interpretation are to be applied
only on a prospective basis to guarantees issued or modified after December 31,
2002, which, for us, is the fiscal year beginning July 1, 2003. The disclosure
requirements of this interpretation are effective for financial statements of
interim or annual periods ending after December 15, 2002. We do not have any
indirect guarantees of indebtedness of others as of June 30, 2003.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation
of Variable Interest Entities." This interpretation addresses the consolidation
of business enterprises (variable interest entities) to which the usual
condition of consolidation does not apply. This interpretation focuses on
financial interests that indicate control. It concludes that in the absence of
clear control through voting interests, a company's exposure (variable interest)
to the economic risks and potential rewards from the variable interest entity's
assets and activities are the best evidence of control. Variable interests are
rights and obligations that convey economic gains or losses from changes in the
values of the variable interest entity's assets and liabilities. Variable
interests may arise from financial instruments, service contracts, nonvoting
ownership interests and other arrangements. If an enterprise holds a majority of
the variable interests of an entity, it would be considered the primary
beneficiary. The primary beneficiary would be required to include assets,
liabilities and the results of operations of the variable interest entity in its
consolidated financial statements. This interpretation applies immediately to
variable interest entities which are created after or for which control is
obtained after January 31, 2003. For variable interest entities created prior to
February 1, 2003, the provisions would be applied effective July 1, 2003. We do
not have an interest in any variable interest entities as of June 30, 2003.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement
133 on Derivative Instruments and Hedging Activities". SFAS No. 149 amends SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities" for
contracts entered into or modified after June 30, 2003; for hedging
relationships designated after June 30, 2003. We do not have any derivative
instruments or hedging activities as of June 30, 2003.
Item 7A. Quantitative and Qualitative Disclosures About Market Risks
We do not believe we have material market risk exposure. We do not
invest in market risk sensitive instruments for trading purposes. Our excess
cash is placed in short-term interest-bearing accounts or instruments that are
based on money market rates.
Although we conduct some business outside of the United States, to date
our exposure to foreign currency rate fluctuations has not been significant. If
we increase our international business, we could be subject to risks typical of
an international business, including but not limited to differing economic
conditions, changes in political climate, differing tax structures, differing
laws, regulations and restrictions, including with respect to sales and
marketing practices and electronic payment mechanisms, and foreign exchange rate
volatility.
Item 8. Financial Statements and Supplementary Data
See Item 15(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 February 4, 2002, we engaged Grant Thornton LLP as our independent
auditor following our dismissal, effective January 31, 2002, of Eisner LLP
(formerly known as Richard A. Eisner & Company, LLP) ("Eisner"). Our board of
directors approved the engagement of Grant Thornton LLP and the dismissal of
Eisner.
Eisner had served as our independent accountants since April 4, 2001.
Eisner's auditors' report on our consolidated financial statements as of and for
the year ended June 30, 2001 contained a separate paragraph stating that it had
substantial doubt about our ability to continue as a going concern. Our
financial statements did not include any adjustments that might result from the
outcome of this uncertainty. Except as noted above, Eisner's report on our
financial statements for the fiscal year ended June 30, 2001 contained no
adverse opinions or disclaimer of opinions, and were not qualified as to audit
scope, accounting principles, or uncertainties.
We notified Eisner that during the year ended June 30, 2001 and the
interim period from July 1, 2001 through January 31, 2002, we were unaware of
any disputes between us and Eisner as to matters of accounting principles or
practices, financial statement disclosure, or audit scope or procedure, which
disagreements, if not resolved to the satisfaction of Eisner, would have caused
it to make a reference to the subject matter of the disagreements in connection
with its reports.
Effective February 4, 2002, we engaged Grant Thornton LLP as our
independent auditors with respect to our fiscal year ending June 30, 2002. We
had previously retained Grant Thornton LLP on an interim basis during our
previous fiscal year, from January 22, 2001 to April 4, 2001. Grant Thornton LLP
had reviewed our interim financial statements for the quarter ended December 31,
2000, but did not issue any reports thereon. Other than this limited engagement,
during our fiscal year ended June 30, 2001 and through February 4, 2002, we
had not consulted with Grant Thornton LLP regarding either: (i) 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 was oral advice
provided that Grant Thornton LLP concluded was an important factor considered by
us in reaching a decision as to the accounting, auditing or reporting issue; or
(ii) any matter that was either the subject of a disagreement, as that term is
defined in Item 304(a)(1)(iv) of Regulation S-K and the related instructions to
Item 304 of Regulation S-K, or a reportable event, as that term is defined in
Item 304 (a)(1)(v) of Regulation S-K.
On April 4, 2001, we engaged Eisner as our independent auditor
concurrent with our termination of Grant Thornton, LLP. Our board of directors
approved the engagement of Eisner 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 fiscal years ended June 30,
1999 and 2000 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 their 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 fiscal year ended June 30, 2000 and through April 4, 2001,
we had not consulted with Eisner 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 Eisner
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.
Item 9A. Controls and Procedures
Our Chief Executive Officer and Chief Financial Officer, after
conducting an evaluation, together with other members of the Company's
management, of the effectiveness of the design and operation of the Company's
disclosure controls and procedures as of the end of the period covered by this
report, have concluded that the Company's disclosure controls and procedures
were effective to ensure that information required to be disclosed by the
Company in its reports filed or submitted under the Securities Exchange Act of
1934 (the "Exchange Act") is recorded, processed, summarized, and reported
within the time periods specified in the rules and forms of the SEC. There were
no significant changes in the Company's internal controls or in other factors
that could significantly affect these controls subsequent to that evaluation,
and there were no significant deficiencies or material weaknesses in such
controls requiring corrective actions.
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 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) 1. Financial Statements
The following financial statements of Imergent, Inc., and
related notes thereto and auditors' report thereon are filed as part of this
Form 10-K:
PAGE
Independent Auditor's Report dated September 9, 2003 41
Independent Auditor's Report dated August 3, 2001 42
Consolidated Balance Sheets as of June 30, 2003 and 2002 43
Consolidated Statements of Operations for the years ended
June 30, 2003, 2002 and 2001 44
Consolidated Statements of Stockholders' Equity /Capital Deficit
for the years ended June 30, 2003, 2002 and 2001 45
Consolidated Statements of Cash Flows for the years ended
June 30, 2003, 2002 and 2001 47
Notes to Consolidated Financial Statements 49
2. Financial Statement Schedules
The following financial statement schedule of Imergent, 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 76
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 2003
On May 7, 2003, we filed a Current Report on Form 8-K with respect to
our earnings release concerning the fiscal quarter ended March 31, 2003.
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Stockholders and Board of Directors
Imergent, Inc. (formerly Netgateway, Inc.):
We have audited the accompanying consolidated balance sheets of
Imergent, Inc. (formerly Netgateway, Inc.) and subsidiaries as of June 30, 2003
and 2002 and the related consolidated statements of operations, stockholders'
equity (capital deficit) and cash flows for the years then ended. In connection
with our audit of the consolidated financial statements, we have audited the
financial statement schedule for the years ended June 30, 2003, and 2002. These
financial statements and 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 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 audits 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 statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Imergent, Inc. (formerly Netgateway, Inc.) and subsidiaries as of June 30, 2003
and 2002, and the consolidated results of their operations and their
consolidated cash flows for the years then ended, in conformity with accounting
principles generally accepted in the United States of America. Also in our
opinion, the financial statement schedule, when considered in relation to the
consolidated financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
/s/ Grant Thornton LLP
Salt Lake City, Utah
September 9, 2003
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Imergent, Inc. (formerly known as Netgateway, Inc.)
We have audited the accompanying consolidated statements of operations, capital
deficit, and cash flows of Imergent, Inc. (formerly known as Netgateway, Inc.)
and subsidiaries for the year ended June 30, 2001. 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 15(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 results of the operations and the
consolidated cash flows of Imergent, Inc. (formerly known as Netgateway, Inc.)
and subsidiaries for the year ended June 30, 2001, 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 3 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 3. The financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.
During the year ended June 30, 2003, the Company adopted a new accounting
standard regarding the classification of gain from extinguishment of debt. Such
item was previously presented as an extraordinary item in the consolidated
statement of operations.
Eisner LLP
New York, New York
August 3, 2001,
With respect to Notes 8, 11 and 12
September 30, 2001
With respect to Note 2(b)
July 3, 2002
With respect to Note 2(z)
September 25, 2003
IMERGENT, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
June 30, 2003 and 2002
2003 2002
-------------------------------
Assets
Current assets
Cash $2,319,618 $519,748
Trade receivables, net of allowance for doubtful accounts of $4,471,667
at June 30,2003 and $1,918,673 at June 30, 2002. 4,965,769 2,247,129
Other receivables 50,000 -
Inventories 34,194 23,416
Prepaid expenses 687,984 607,857
Credit card reserves, net of allowance for doubtful accounts of $319,812
at June 30, 2003 and $137,370 at June 30, 2002. 450,200 1,022,701
-------------------------------
Total current assets 8,507,765 4,420,851
Property and equipment, net 200,174 409,460
Goodwill, net 455,177 455,177
Trade receivables, net of allowance for doubtful accounts of $2,131,593
at June 30, 2003 and $1,357,938 at June 30, 2002. 2,254,969 1,673,740
Other assets, net of allowance for doubtful accounts of $100,783 at
June 30, 2003 and $0 at June 30, 2002. 103,460 417,384
-------------------------------
Total Assets $11,521,545 $7,376,612
===============================
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable $1,413,112 $1,215,400
Accounts payable - related party 114,925 111,702
Bank overdraft 14,685 150,336
Accrued wages and benefits 396,935 681,472
Past due payroll taxes - 26,797
Accrued liabilities 204,137 548,016
Current portion of capital lease obligations 26,536 80,938
Current portion of notes payable 121,206 160,671
Other current liabilities 35,840 450,523
Deferred revenue 653,463 705,558
-------------------------------
Total current liabilities 2,980,839 4,131,413
Capital lease obligations, net of current portion 1,802 27,906
Notes payable, net of current portion 435,857 393,560
-------------------------------
Total liabilities 3,418,498 4,552,879
-------------------------------
Commitments and contingencies
Minority interest - 355,159
-------------------------------
Stockholders' Equity
- --------------------
Capital stock, par value $.001 per share
Preferred stock - authorized 5,000,000 shares; none issued
Common stock - authorized 100,000,000 shares; issued and outstanding
11,062,290 and 10,995,774 shares, at June 30, 2003 and
June 30, 2002, respectively 11,063 10,996
Additional paid-in capital 72,605,749 72,017,928
Deferred compensation (22,474) (34,987)
Accumulated other comprehensive loss (4,902) (4,902)
Accumulated deficit (64,486,389) (69,520,461)
-------------------------------
Total stockholders' equity 8,103,047 2,468,574
-------------------------------
Total Liabilities and Stockholders' Equity $11,521,545 $7,376,612
===============================
The accompanying notes are an integral part of these financial statements
IMERGENT, INC. AND SUBSIDIARIES
Consolidated Statements of Operations for the
Years Ended June 30,
-----------------------------------------------------------
2003 2002 2001
-----------------------------------------------------------
Revenue $53,225,083 $37,350,850 $43,000,533
Cost of revenue 9,784,368 5,531,757 7,450,318
Cost of revenue - related party 1,118,002 994,043 975,257
-----------------------------------------------------------
Total cost of revenue 10,902,370 6,525,800 8,425,575
-----------------------------------------------------------
Gross profit 42,322,713 30,825,050 34,574,958
Operating Expenses
Product development - 51,805 1,804,986
Selling and marketing 18,214,488 13,512,442 20,871,323
Selling and marketing - related party 521,806 479,984 78,435
General and administrative 4,743,068 5,719,579 7,083,426
Depreciation and amortization 338,285 668,730 1,296,519
Bad debt expense 14,255,877 6,675,238 3,475,492
Writedown of goodwill and acquired technology - - 1,084,476
-----------------------------------------------------------
Total operating expenses 38,073,524 27,107,778 35,694,657
Earnings (loss) from operations 4,249,189 3,717,272 (1,119,699)
Other income (expense)
Other income (expense) 12,358 41,813 (76,773)
Interest income 813,136 390,371 169,861
Interest expense (40,611) (1,950,687) (3,287,905)
Gain from settlement of debt - - 1,688,956
-----------------------------------------------------------
Total other income (expense) 784,883 (1,518,503) (1,505,861)
-----------------------------------------------------------
Earnings (loss) before discontinued operations and
extraordinary items 5,034,072 2,198,769 (2,625,560)
Discontinued Operations:
(Loss) from discontinued operations, less applicable tax
expense (benefit) of $0 - - (285,780)
-----------------------------------------------------------
Earnings (loss) before extraordinary items 5,034,072 2,198,769 (2,911,340)
Extraordinary items:
Loss on disposal of assets subsequent to merger (1,091,052)
Gain on disposal of segment subsequent to merger 363,656
-----------------------------------------------------------
Extraordinary items - - (727,396)
-----------------------------------------------------------
-----------------------------------------------------------
Net earnings (loss) $5,034,072 $2,198,769 $(3,638,736)
===========================================================
Basic earnings (loss) per share:
Earnings (loss) from continuing operations $0.46 $0.37 $(1.18)
Income (loss) from discontinued operations - - (0.12)
Extraordinary items - - (0.33)
-----------------------------------------------------------
Net earnings (loss) $0.46 $0.37 $(1.63)
===========================================================
Diluted earnings (loss) per share:
Earnings (loss) from continuing operations $0.44 $0.37 $(1.18)
Income (loss) from discontinued operations - - (0.12)
Extraordinary items - - (0.33)
-----------------------------------------------------------
Net earnings (loss) $0.44 $0.37 $(1.63)
===========================================================
Weighted average shares outstanding:
Basic 11,019,094 5,873,654 2,227,965
Diluted 11,552,621 5,878,404 2,227,965
The accompanying notes are an integral part of these financial statements
IMERGENT, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity / (Capital Deficit)
For the Years Ended June 30, 2003, 2002, and 2001
Common Stock Additional Common
------------------------ Paid-in Stock Deferred
Shares Amount Capital Subscribed Compensation
----------------------------------------------------------------------------
Balance July 1, 2000 2,164,873 $2,165 $58,031,728 $- $(724,994)
Common stock issued upon conversion of subsidiary
common stock 3,714 4 139,286 - -
Stock options exercised 2,001 2 6,773 - -
Shares issued for services 4,780 5 17,195 - -
Amortization of deferred compensation - - - - 258,375
Forfeiture of stock options - - (413,970) - 413,970
Beneficial conversion feature on convertible debenture - - 884,000 - -
Warrants issued for convertible debentures - - 371,000 - -
Repricing of warrants issued for convertible debentures - - 9,008 - -
Warrants issued for restructuring of debenture - - 129,927 - -
Debt discount on convertible note warrants - - 512,540 - -
Beneficial conversion feature on convertible note - - 1,347,480 - -
Partial conversion of convertible debenture 80,000 80 199,920 - -
Conversion of related party note payable 39,333 39 117,961 - -
Conversion of officers accrued liabilities 151,317 151 453,799 - -
Warrants issued for services - - 223,903 - -
Imputed interest on notes payable to officers --
contributed - - 38,756 - -
Private placement offering subscriptions received, net - - - 398,200 -
Comprehensive income (loss)
- ---------------------------
Net income (loss) - - - - -
Foreign currency translation adjustment - - - - -
Comprehensive income (loss)
- -------------------------------------------------------------------------------------------------------------------------------
Balance June 30, 2001 2,446,018 2,446 62,069,306 398,200 (52,649)
=======================================================================
Stock options exercised 691 1 1,726 - -
Amortization of deferred compensation - - - - 16,145
Forfeiture of deferred compensation - - (1,517) - 1,517
Imputed interest on officer/director notes payable - - 12,639 - -
Stock options issued to consultants - - 6,400 - -
Common stock issued for loan restructuring 10,000 10 12,990 - -
Conversion of convertible debenture 280,000 280 2,115,604 - -
Conversion of long term notes 859,279 859 2,146,436 - -
Private placement of common stock 7,164,094 7,164 5,103,748 (398,200) -
Common stock shares issued for outstanding liabilities 83,192 83 449,148 - -
Common stock shares issued for services 132,500 133 15,468 - -
Common stock issued for settlement agreements 20,000 20 85,980 - -
Net earnings - - - - -
- -------------------------------------------------------------------------------------------------------------------------------
Balance June 30, 2002 10,995,774 10,996 72,017,928 - (34,987)
=======================================================================
Amortization of deferred compensation - - - - 12,513
Private placement of common stock 5,000 5 14,995 - -
Reconciliation of common stock following reverse stock
split (1,254) (1) 1 - -
Common stock issued pursuant to finder's agreement 26,675 27 25,315 - -
Conversion of exchangeable shares 9,472 9 355,150 - -
Expense for options and warrants granted to consultants - - 140,200 - -
Common stock issued upon exercise of options and
warrants 26,623 27 52,160 - -
Net earnings - - - - -
- -------------------------------------------------------------------------------------------------------------------------------
Balance June 30, 2003 11,062,290 11,063 $72,605,749 $- $ (22,474)
=======================================================================
(Continued Below)
The accompanying notes are an integral part of these financial statements
IMERGENT, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity / (Capital Deficit)
For the Years Ended June 30, 2003, 2002, and 2001
(Continued from Above)
Accumulated Total
Other Stockholders'
Accumulated Comprehensive Equity /
Deficit loss (Capital Deficit)
---------------------------------------------------
Balance July 1, 2000 $ (68,080,932) $(4,267) $(10,776,300)
Common stock issued upon conversion of subsidiary
common stock - - 139,290
Stock options exercised - - 6,775
Shares issued for services - - 17,200
Amortization of deferred compensation - - 258,375
Forfeture of stock options - - -
Beneficial conversion feature on convertible debenture - - 884,000
Warrants issued for convertible debentures - - 371,000
Repricing of warrants issued for convertible debentures - - 9,008
Warrants issued for restructuring of debenture - - 129,927
Debt discount on convertible note warrants - - 512,540
Beneficial conversion feature on convertible note - - 1,347,480
Partial conversion of convertible debenture - - 200,000
Conversion of related party note payable - - 118,000
Conversion of officers accrued liabilities - - 453,950
Warrants issued for services - - 223,903
Imputed interest on notes payable to officers --
contributed - - 38,756
Private placement offering subscriptions received, net - - 398,200
Comprehensive income (loss)
- ---------------------------
Net income (loss) (3,638,736) - (3,638,736)
Foreign currency translation adjustment 438 (635) (197)
-----------------
Comprehensive income (loss) (3,638,933)
- -------------------------------------------------------- --------------------------------------------------
Balance June 30, 2001 (71,719,230) (4,902) (9,306,829)
==================================================
Stock options exercised - - 1,727
Amortization of deferred compensation - - 16,145
Forfeiture of deferred compensation - - -
Imputed interest on officer/director notes payable - - 12,639
Stock options issued to consultants - - 6,400
Common stock issued for loan restructuring - - 13,000
Conversion of convertible debenture - - 2,115,884
Conversion of long term notes - - 2,147,295
Private placement of common stock - - 4,712,712
Common stock shares issued for outstanding liabilities - - 449,231
Common stock shares issued for services - - 15,601
Common stock issued for settlement agreements - - 86,000
Net earnings 2,198,769 - 2,198,769
- -------------------------------------------------------- --------------------------------------------------
Balance June 30, 2002 (69,520,461) (4,902) 2,468,574
==================================================
Amortization of deferred compensation - - 12,513
Private placement of common stock - - 15,000
Reconciliaton of common stock following reverse stock
split - - -
Common stock issued pursuant to finder's agreement - - 25,342
Conversion of exchangeable shares - - 355,159
Expense for options and warrants granted to consultants - - 140,200
Common stock issued upon exercise of options and warrants - - 52,187
Net earnings 5,034,072 - 5,034,072
- -------------------------------------------------------- --------------------------------------------------
Balance June 30, 2003 $ (64,486,389) $(4,902) $8,103,047
==================================================
The accompanying notes are an integral part of these financial statements
IMERGENT, INC AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Years Ended June 30,
2003 2002 2001
-------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Income (loss) from continuing operations $5,034,072 $2,198,769 $(4,314,516)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 338,285 668,730 1,296,519
Amortization of deferred compensation 12,513 16,145 258,375
Write down of goodwill and acquired technology - - 1,084,476
Expense for stock options issued to consultants 140,200 6,400 -
Provision for bad debts 14,255,877 6,675,238 3,475,492
Interest expense from beneficial conversion feature - - 884,000
Imputed interest expense on notes payable - 12,639 38,756
Loss on issue of common stock below market value - 199,657 -
Common stock issued for loan restructuring - 13,000 -
Common stock issued for services 25,342 15,601 17,200
Warrants and options issued for services - - 81,315
Amortization of debt issue costs - 437,478 496,530
Amortization of beneficial conversion feature & debt discount - 1,956,600 366,966
Changes in assets and liabilities:
Trade receivables and unbilled receivables (16,662,707) (8,250,722) (3,312,950)
Inventories (10,778) 21,310 17,299
Prepaid expenses and other current assets (39,050) (381,702) 867,494
Credit card reserves (320,536) (90,533) (598,324)
Other assets 313,924 (65,415) (51,204)
Deferred revenue (52,095) (5,328,034) (9,460,686)
Accounts payable - related party 3,223 (405,156) 413,117
Accounts payable, accrued expenses and other liabilities (957,492) (1,248,936) 1,093,018
-------------------------------------------------
Net cash provided by (used in) continuing operating activities 2,080,778 (3,548,931) (7,347,123)
Net cash used in discontinued operations - - (655,220)
-------------------------------------------------
Net cash provided by (used in) operating activities 2,080,778 (3,548,931) (8,002,343)
-------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of subsidiary - - 300,000
Acquisition of equipment (129,000) (99,579) (100,765)
Proceeds from disposition of equipment - 660 -
-------------------------------------------------
Net cash provided by (used in) investing activities (129,000) (98,919) 199,235
-------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from common stock subscribed - - 291,200
Proceeds from issuance of common stock 15,000 4,712,712 -
Proceeds from exercise of options and warrants 52,187 1,727 6,775
Bank overdraft borrowings (135,651) (516,347) 355,007
Proceeds from issuance of notes payable - officers - - 821,000
Proceeds from issuance of convertible long-term notes - 273,976 2,076,500
Proceeds from issuance of convertible debenture - - 2,500,000
Proceeds from loan payable - - 100,000
Proceeds from financing of insurance premium 160,930 144,486 -
Repayment of convertible debenture - (100,000) (152,212)
Repayment of notes payable - officers - - (213,000)
Repayment of note payable - bank - (97,779) -
Repayment of capital lease obligations (80,506) - (69,963)
Repayment of note to related party - (380,000) -
Repayment of notes (163,868) (20,342) -
Cash paid for debt issue costs - - (370,025)
-------------------------------------------------
Net cash provided by (used in) financing activities (151,908) 4,018,433 5,345,282
-------------------------------------------------
NET INCREASE (DECREASE) IN CASH 1,799,870 370,583 (2,457,826)
CASH AT THE BEGINNING OF THE YEAR 519,748 149,165 2,606,991
-------------------------------------------------
CASH AT THE END OF THE YEAR $2,319,618 $519,748 $149,165
=================================================
Supplemental disclosures of non-cash transactions:
Subscribed stock issued - 398,200 -
Conversion of debenture to common stock - 2,115,884 200,000
Conversion of notes payable - officers to common stock - - 118,000
Conversion of amounts due to officers to common stock - - 453,950
Conversion of long term notes to common stock - 2,147,295 -
Common stock issued for settlement agreements - 86,000 -
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
Common stock issued for outstanding liabilities - 449,231 -
Convertible debenture settled for note payable - 400,000 -
Accrued interest added to note payable balance - 30,087 -
Fixed assets acquired through capital lease obligations - 71,042 -
Common stock issued for minority interest 355,159 _ _
Supplemental disclosure of cash flow information:
Cash paid for Interest - 3,359 109,940
The accompanying notes are an integral part of these financial statements
IMERGENT, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2003, 2002 and 2001
(1) Description of Business
Imergent, Inc. (the "Company" or "our"), was incorporated as a Nevada
corporation on April 13, 1995. In November 1999, it was reincorporated under the
laws of Delaware. Effective July 3, 2002, a Certificate of Amendment was filed
to its Certificate of Incorporation to change its name to Imergent, Inc. from
Netgateway, Inc. Imergent is an e-Services company that provides eCommerce
technology, training and a variety of web-based technology and resources to
nearly 150,000 small businesses and entrepreneurs annually. The Company's
affordably priced e-Services offerings leverage industry and client practices,
and help increase the predictability of success for Internet merchants. The
Company's 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. The Company's strategic vision is to
remain an eCommerce provider tightly focused on its target market.
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.
In January 2001, the Company sold one of its subsidiaries that was
previously reported as a separate segment, and accordingly has reported the
operations as discontinued operations 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, which include Netgateway, Galaxy
Enterprises, Inc., Galaxy Mall, Inc., StoresOnline Inc., StoresOnline, LTD., and
StoresOnline.com, Inc. All significant intercompany balances and transactions
have been eliminated in consolidation.
(b) Reverse Stock Split
On June 28, 2002 the shareholders of the Company approved a one-for-ten
reverse split of the Company's outstanding common stock shares, which became
effective July 3, 2002. All data for common stock shares, options and warrants
have been adjusted to reflect the one-for-ten reverse split for all periods
presented. In addition, all common stock share prices and per share data for all
periods presented have been adjusted to reflect the one-for-ten reverse stock
split.
(c) Cash and Cash Equivalents
Highly liquid investments with original maturities of three months or
less when purchased are considered cash equivalents. The carrying amounts
reported in the consolidated balance sheets for these instruments approximate
their fair value.
(d) Accounts Receivables and Allowances
The Company offers to its customers the option to finance, through
Extended Payment Term Arrangements (EPTAs), purchases made at the Internet
training workshops. A significant portion of these EPTAs, are then sold, on a
discounted basis, to third party financial institutions for cash. The remainder
of the EPTAs (those not sold to third parties) is retained as short term and
long term Accounts Receivable on the Company's Balance Sheet.
The Company records an allowance for doubtful accounts, at the time the
EPTA contract is perfected, for all EPTA contracts. The allowances represent
estimated losses resulting from the customers' failure to make required
payments. The allowances for EPTAs retained by the Company are netted against
the current and long term accounts receivable balances on the consolidated
balance sheets, and the associated expense is recorded as a bad debt expense
line item in operating expenses.
EPTA's retained by the Company are charged off against the allowance
when the customers involved are no longer making required payments and the
EPTA's are determined to be uncollectible. Interest accrued is discontinued when
an EPTA become delinquent.
EPTAs sold to third party financial institutions are generally subject
to recourse by the purchasing finance company after an EPTA is determined to be
uncollectible. The Company also provides an allowance for EPTAs estimated to be
recoursed back to the Company.
All allowance estimates are based on historical bad debt write-offs,
specific identification of probable bad debts based on collection efforts, aging
of accounts receivable and other known factors. If allowances become inadequate
additional allowances may be required.
(e) Transfers of Financial Assets
Transfers of financial assets are accounted for as having been
transferred, when control over the assets has been surrendered. Control over
transferred assets is deemed to be surrendered when (1) the assets have been
isolated from the Company (2) the transferee obtains the right (free of
conditions that constrain it from taking advantage of the right) to pledge or
exchange the transferred assets, and (3) the Company does not maintain effective
control over the transferred assets through an agreement to repurchase them
before their maturity.
(f) 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.
(g) Property and Equipment
Property and equipment are stated at cost less accumulated depreciation
and amortization. Depreciation expense is computed principally on the
straight-line method in amounts sufficient to allocate 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
amortized 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 any related gain or
loss on disposition is reflected in net income for the period.
(h) Goodwill and Intangible Assets
As required by Statement of Financial Accounting Standards ("SFAS")
142, beginning on July 1, 2002 goodwill is no longer amortized but is tested on
an annual basis for impairment by comparing its fair value to its carrying
value. If the carrying amount of goodwill exceeds its fair value, an impairment
loss will be recognized in an amount equal to that excess.
(i) Product Development Expenditures
Product and development costs are expensed as incurred. Costs related
to internally developed software are expensed until technological feasibility
has been achieved, after which the costs are capitalized.
(j) Impairment of Long-Lived Assets
The Company reviews long-lived assets and intangible assets 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 18). 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 7).
(k) Financial Instruments
The carrying values of cash, trade-receivable, accounts payable,
accrued liabilities, capital lease obligations, and notes payable approximated
fair value due to either the short maturity of the instruments or the recent
date of the initial transaction or the restructuring.
(l) Income Taxes
The Company utilizes the liability method of accounting for income
taxes. Under the liability method, deferred income tax assets and liabilities
are provided based on the difference between the financial statement and tax
bases of assets and liabilities as measured by the currently enacted tax rates
in effect for the years in which these differences are expected to reverse.
Deferred tax expense or benefit is the result of changes in deferred tax assets
and liabilities. An allowance against deferred tax assets is recorded in whole
or in part when it is more likely than not that such tax benefits will not be
realized.
Deferred tax assets are recognized for temporary differences that will
result in tax-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. Deferred tax assets consist primarily of net operating
losses carried forward. The Company has provided a valuation allowance against
all of its net deferred tax assets at June 30, 2003 and against all of its
deferred tax assets at June 30, 2002. Fiscal year 2002 was the first profitable
year for the Company since its inception. However, differences between
accounting principles generally accepted in the United States of America ("US
GAAP") and accounting for tax purposes caused the Company to have a tax loss for
the fiscal year ended June 30, 2002. For the year ended June 30, 2003 the
Company has taxable income of approximately $8.2 million.
The Company's net operating loss carry forward ("NOL"), which is
approximately $43 million, represents the losses reported for income tax
purposes from the inception of the Company through June 30, 2002. FY 2003 was
the first year in the Company's history that generated taxable income. Section
382 of the Internal Revenue Code ("Section 382") imposes limitations on a
corporation's ability to utilize its NOLs if it experiences an "ownership
change". In general terms, an ownership change results from transactions
increasing the ownership of certain stockholders in the stock of a corporation
by more than 50 percentage points over a three-year period. Since our formation,
we have issued a significant number of shares, and purchasers of those shares
have sold some of them, with the result that two changes of control as defined
by Section 382 have occurred. As a result of the most recent ownership change,
utilization of our NOLs is subject to an annual limitation under Section 382
determined by multiplying the value of our stock at the time of the ownership
change by the applicable long-term tax-exempt rate resulting in an annual
limitation amount of approximately $127,000. Any unused annual limitation may be
carried over to later years, and the amount of the limitation may under certain
circumstances be increased by the "recognized built-in gains" that occur during
the five-year period after the ownership change (the "recognition period"). The
Company believes that it will have significant recognized built-in gains and
that during the recognition period the limitation will be increased by
approximately $15 million based on an independent valuation of the Company as of
April 3, 2002. The Company also believes that based on a valuation of the
Company as of June 25, 2000, which is currently underway, the earlier ownership
change will also have significant recognized built-in gains and that during the
recognition period the limitation will be further increased by approximately $28
million thus allowing the Company to utilize its entire NOL. Significant
management judgment was required in estimating the amount of the recognized
built in gain. If it is determined that the actual amount of recognized built in
gain is less than our estimate, the Company may be required to make a cash
payment for taxes due on its income for fiscal year 2003, plus related interest,
which could materially adversely impact the Company's financial position.
(m) Accounting for Stock Options and Warrants
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. The Company had options
outstanding of 1,193,528 and 313,265 as of June 30, 2003 and 2002, respectively,
with varying prices between $1.56 and $113.10. (See note 15)
The Company had 631,460 and 502,313 warrants outstanding as of June 30,
2003 and 2002, respectively, with varying strike prices between $.40 and $115.50
and expiration dates between February 22, 2004 and April 9, 2008.
(n) Stock-Based Compensation
The Company has applied the disclosure provisions of Statement of
Financial Accounting Standards No. 148, "Accounting for Stock-Based Compensation
- -- Transition and Disclosure -- An Amendment of FASB Statement No. 123," for the
years ended 2001, 2002, and 2003. Issued in December 2002, SFAS No. 148 amends
SFAS No. 123, "Accounting for Stock-Based Compensation" to provide alternative
methods of transition for a voluntary change to the fair value based method of
accounting for stock-based compensation. In addition, this Statement amends the
disclosure requirements of SFAS No. 123 to require prominent disclosures in both
annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. As permitted by SFAS No. 148, the Company continues to account for
stock options under APB Opinion No. 25, under which no compensation has been
recognized. The following table illustrates the effect on net earnings and
earnings per share if the Company had applied the fair value recognition
provisions of SFAS No. 123, as amended by SFAS No. 148 to stock-based
compensation:
2003 2002 2001
-------------------------------------------------
Net earnings (loss) as reported $5,034,072 $2,198,769 $(3,638,736)
Net earnings (loss) proforma $4,928,030 $1,839,009 $(5,396,419)
Net earnings (loss) per share as reported:
Basic $ 0.46 $0.37 $(1.63)
Diluted $ 0.44 $0.37 $(1.63)
Net earnings (loss) per share pro forma:
Basic $0.45 $0.31 $(2.42)
Diluted $0.43 $0.31 $(2.42)
The fair value of these options was estimated at the date of grant
using the Black-Scholes option-pricing model with the following weighted-average
assumptions: expected volatility of 181 percent for 2003, 262 percent for 2002,
and 384 percent for 2001; average risk-free interest rate of 4 percent for 2003,
5 percent for 2002, and 5 percent for 2001; and an expected life between 1 and
10 years for 2003, 2002, and 2001. Dividends were assumed as not being paid
during the period of calculation.
Option pricing models require the input of highly subjective
assumptions including the expected stock price volatility. Also, the Company's
employee stock options have characteristics significantly different from those
of traded options including long-vesting schedules and changes in the subjective
input assumptions that can materially affect the fair value estimate. Management
believes the best assumptions available were used to value the options and the
resulting option values were reasonable as of the date of the grant.
Pro Forma information should be read in conjunction with the related
historical information and is not necessarily indicative of the results that
would have been attained had the transaction actually taken place.
(o) Revenue Recognition
During the year ended June 30, 2001, the Company changed its product
offering at its Internet training workshops. The date of the change was October
1, 2000, the beginning of the Company's second fiscal quarter of fiscal year
2001. Prior to that time, customers were sold a service consisting of the
construction of Internet websites for their business, which service was to be
provided at any time during the 12 months following the sale. Included in the
price paid for this service was one year's hosting beginning when the website
was published. Revenue from these transactions was deferred at the time of sale
and recognized as the services were rendered or when the right to receive the
services terminated.
Beginning October 1, 2000, the Company discontinued selling the service
and in its place sold a license to use a new product called the StoresOnline
Software ("SOS"). The SOS is a web based software product that enables the
customer to develop their Internet website without additional assistance from
the Company. When a customer purchases a SOS license at one of the Company's
Internet workshops, he or she receives a CD-ROM containing programs to be used
with their computer and a password and instructions that allow access to the
Company's website where all the necessary tools are present to complete the
construction of the customer's website. When completed, the website can be
hosted with the Company or any other provider of such services. If they choose
to host with the Company there is an additional setup and hosting fee (currently
$150) for publishing and 12 months of hosting. This fee is deferred at the time
it is paid and recognized during the subsequent 12 months. A separate file is
available and can be used if the customer decides to create their website on
their own completely without access to the Company website and host their site
with another hosting service.
The revenue from the sale of the SOS license is recognized when the
product is delivered to the customer. The Company accepts cash and credit cards
as methods of payment and the Company offers 24-month installment contracts to
customers who prefer an extended payment term arrangement. The Company offers
these contracts to all workshop attendees not wishing to use a check or credit
card provided they complete a credit application, give permission for the
Company to independently check their credit and are willing to make an
appropriate down payment. Installment contracts are carried on the Company's
books as a receivable and the revenue generated by these installment contracts
is recognized when the product is delivered to the customer and the contract is
signed. At that same time an allowance for doubtful accounts is established.
This procedure has been in effect for the last three quarters of fiscal year
2001, all of fiscal year 2002 and 2003.
The American Institute of Certified Public Accountants Statement of
Position 97-2 ("SOP 97-2") states that revenue from the sale of software should
be recognized when the following four specific criteria are met: 1) persuasive
evidence of an arrangement exists, 2) delivery has occurred, 3) the fee is fixed
and determinable and 4) collectibility is probable. All of these criteria are
met when a customer purchases the SOS product. The customer signs one of the
Company's order forms and a receipt acknowledging receipt and acceptance of the
product. As is noted on the order and acceptance forms, all sales are final. All
fees are fixed and final. Some states require a three-day right to rescind the
transaction. Sales in these states are not recognized until the rescission
period has expired. The Company offers customers the option to pay for the SOS
license with Extended Payment Term Arrangements ("EPTAs"). The EPTAs generally
have a twenty-four month term. The Company has offered its customers the payment
option of a long-term installment contract for more than five years and has a
history of successfully collecting under the original payment terms without
making concessions. During fiscal years ended June 30, 1999 through 2003, the
Company has collected or is collecting approximately 70% of all EPTAs issued to
customers. Not all customers live up to their obligations under the contracts.
The Company makes every effort to collect on the EPTAs, including the engagement
of professional collection services. Despite our efforts, approximately 47
percent of all EPTAs become uncollectible during the life of the contract. All
uncollectible EPTAs are written off against an allowance for doubtful accounts.
The allowance is established at the time of sale based on our five-year history
of extending EPTAs. As a result, revenue from the sale of the SOS is recognized
upon the delivery of the product. Bad debts are accounted for as an operating
expense.
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. 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 its sale.
The Company also offers its customers, through telemarketing sales
following the workshop, certain products intended to assist the customer in
being successful with their business. These products include a live chat
capability for the customer's own website and web traffic building services.
Revenues from these products are recognized when delivery of the product has
occurred. These products are purchased from independent third party vendors and
resold by the Company to its customers with no continuing obligation on the part
of the Company.
(p) Comprehensive Income (Loss)
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's only
other comprehensive income (loss) were foreign currency translation adjustments
related to its Canadian subsidiary, StoresOnline, Ltd.
(q) 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.
The Company has historically 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) was 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. As a result, the Company currently operates in one business segment.
(r) 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 stockholders' equity (capital deficit) and
comprehensive income (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,
2003, 2002 and 2001.
(s) Per Share Data
Basic earnings (loss) per share is computed by dividing net earnings
(loss) available to common shareholders by the weighted average number of common
shares outstanding during the period. Diluted net earnings (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.
Unexercised stock options to purchase 1,193,528 shares of the Company's
common stock and unexercised warrants to purchase 631,460 shares of the
Company's common stock were outstanding as of June 30, 2003, of which 218,250
stock options and 315,277 warrants were included in the diluted per share
computation. Unexercised stock options to purchase 313,265 shares of the
Company's common stock and unexercised warrants to purchase 502,313 shares of
the Company's common stock were outstanding as of June 30, 2002, of which 1,236
stock options and 2,278 warrants were included in the diluted per share
computation. Unexercised stock options to purchase 374,038 shares of the
Company's common stock and unexercised warrants to purchase 210,735 shares of
the Company's common stock were outstanding at June 30, 2001, in addition to
shares of common stock from the conversion of subsidiary common stock and
convertible debentures of 1,462,470 as of June 30, 2001, were not included in
the per share computations because their effect would have been antidilutive as
a result of the Company's loss.
(t) 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 accounting principles generally
accepted in the United States of America. Actual results could differ from those
estimates. The Company has estimated that allowances for bad debt for Trade
Receivables should be $6,603,260 as of June 30, 2003. In addition, the Company
has recorded an allowance for doubtful accounts of $319,812, for estimated
credit card charge-backs relating to the most recent 180 days of credit card
sales.
(u) Reclassifications
Certain amounts reported in 2001 and 2002 have been reclassified to
conform to the 2003 presentation.
(v) 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.
(w) Advertising Costs
The Company expenses costs of advertising and promotions as incurred,
with the exception of direct-response advertising costs. SOP 97-3 provides that
direct-response advertising costs that meet specified criteria should be
reported as assets and amortized over the estimated benefit period. The
conditions for reporting the direct-response advertising costs as assets include
evidence that customers have responded specifically to the advertising, and that
the advertising results in probable future benefits. The Company uses
direct-response marketing to register customers for its workshops. The Company
is able to document the responses of each customer to the advertising that
elicited the response. Advertising expenses included in selling and marketing
expenses for the years ended June 30, 2003, 2002 and 2001 were approximately
$7.6 million, $5.3 million and $6.0 million, respectively. As of June 30, 2003
the Company recorded $434,886 of direct response advertising related to future
workshops as an asset.
(x) Commission Expense
Commission expense relating to third-party telemarketing activity is
recognized as incurred.
(y) 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, an impairment test is required within six
months as of the adoption date, annually thereafter, and whenever events and
circumstances occur that might affect the carrying value of these assets.
SFAS 142 was applicable to the Company beginning July 1, 2002. As a
result the Company discontinued the amortization of goodwill and arranged for an
independent evaluation to determine if an impairment to goodwill existed. The
Company engaged an independent consulting firm to perform an appraisal. Based on
their report, management found that no impairment existed. The Company is now
responsible to make this review annually if events and circumstances occur that
might affect the carrying value of the Company goodwill.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations" (SFAS 143). Under this standard, asset retirement
obligations will be recognized when incurred at their estimated fair value. In
addition, the cost of the asset retirement obligations will be capitalized as a
part of the asset's carrying value and depreciated over the asset's remaining
useful life. SFAS No. 143 is effective for fiscal years beginning after June 15,
2002. The adoption of SFAS No. 143 did not have a material impact on the
Company's financial condition or results of operations.
In October 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets (SFAS 144). This standard requires
that all long-lived assets (including discontinued operations) that are to be
disposed of by sale be measured at the lower of book value or fair value less
cost to sell. Additionally, SFAS 144 expands the scope of discontinued
operations to include all components of an entity with operations that can be
distinguished from the rest of the entity and will be eliminated from the
ongoing operations of the entity in a disposal transaction. SFAS 144 is
effective for fiscal years beginning after December 15, 2001. The implementation
of SFAS 144 has had no material effect on the Company's financial condition or
results of operations.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" (SFAS 146). This standard addresses
financial accounting and reporting for costs associated with exit or disposal
activities and replaces Emerging Issues Task Force Issue No. 94-3, Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring) (EITF 94-3). SFAS
146 requires that a liability for costs associated with an exit or disposal
activity be recognized when the liability is incurred. Under EITF 94-3, a
liability for exit costs, as defined in EITF No. 94-3 were recognized at the
date of an entity's commitment to an exit plan. The provisions of SFAS 146 are
effective for exit or disposal activities that are initiated by the Company
after December 31, 2002. The Company has had no Exit or Disposal activity since
December 31, 2002, and the Company does not expect the implementation of SFAS
144 to have a material effect on the Company's financial condition or results of
operations.
In October 2002, the FASB issued SFAS No. 147, Acquisitions of Certain
Financial Institutions (SFAS 147). This standard relates to acquisitions of
financial institutions and is not expected to affect the Company's financial
condition or results of operations.
In December 2002, the FASB issued SFAS No. 148 "Accounting for
Stock-Based Compensation--Transition and Disclosure" (SFAS 148). This standard
amends the disclosure and certain transition provisions of SFAS 123, Accounting
for Stock-Based Compensation. Its disclosure provisions are effective for
interim periods beginning after December 15, 2002. The adoption of SFAS 148 has
not had a material impact on the Company's financial condition or results of
operations.
(z) Impact of SFAS 145
In April 2002, the FASB issued SFAS No. 145, Rescission of SFAS Nos. 4,
44, and 64, Amendment of SFAS 13, and Technical Corrections as of April 2002
(SFAS 145). This standard rescinds SFAS No. 4, Reporting Gains and Losses from
Extinguishment of Debt, and an amendment of that Statement, SFAS No. 64,
Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements and excludes
extraordinary item treatment for gains and losses associated with the
extinguishment of debt that do not meet the APB Opinion No. 30, Reporting the
Results of Operations -- Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions (APB 30) criteria. Any gain or loss on extinguishment of debt that
was classified as an extraordinary item in prior periods presented that does not
meet the criteria in APB 30 for classification as an extraordinary item shall be
reclassified. SFAS 145 also amends SFAS 13, Accounting for Leases as well as
other existing authoritative pronouncements to make various technical
corrections, clarify meanings, or describe their applicability under changed
conditions. Certain provisions of SFAS are effective for transactions occurring
after May 15, 2002 while other are effective for fiscal years beginning after
May 15, 2002. During the fiscal year ended June 30, 2001 the Company had
originally reported an extraordinary item related to gain on extinguishment of
debt in its Statement of Operations of $1,688,956. Based on SFAS No. 145 the
Company has reclassified $1,688,956 to income before discontinued operations in
its statement of operations included in this annual report.
We have adopted SFAS No. 145 in the fiscal year ended June 30, 2003.
The following table reflects the earnings per share information as of June 30,
2001 as previously reported and as revised for SFAS No. 145:
As Previously Reported As Revised
---------------------- ----------
(in thousands except per share amounts)
Loss from continuing operations $(4,315) $(2,626)
Extraordinary items 962 (727)
Basic and Diluted loss per share:
Income (loss) from continuing operations (1.94) (1.18)
Extraordinary items 0.43 (0.33)
(3) 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 incurred losses from its inception until fiscal year 2001
and, as of June 30, 2001, had a cumulative net loss of a $71,719,230 and a
capital deficit of 9,306,829. As at the end of FY 2001, management anticipated
future positive cash flows from continuing operations, and in addition had plans
to raise additional debt or equity capital, which capital was raised. At the end
of FY 2001, management believed that through future profitable operations and
the raising of additional equity or debt capital, if necessary, the Company
would be able to continue operating as a going concern. However, there could be
no assurance that if additional capital was required that it would be available.
The consolidated statements of operations, capital deficit and cash flows for FY
2001 did not include any adjustments that might have resulted from the inability
of the Company, at that time, to continue as a going concern.
(4) Acquisitions
In January 1999, the Company acquired 100% of the outstanding stock of
Spartan Multimedia, Inc., a Canadian corporation, in exchange for 18,572 shares
of common stock of StoresOnline.com, Ltd., a wholly-owned Canadian subsidiary
valued at $557,145. The shares were convertible on a one-to-one basis into
common stock of the Company. The issuance of an additional 18,572 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., a total of $834,331 that
is included in operating expenses for the year ended June 30, 2001.
The StoresOnline.com Ltd. shares held by third parties were recognized
as a minority interest until such time as the shares are converted to the
Company's common stock. As of June 30, 2003, all convertible shares had been
converted and recorded in stockholders' equity (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 provided for additional
consideration of up to 25,000 shares of common stock to be paid if certain
agreed-upon targets were 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
11,971 shares of the Company's 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 17).
(5) Selling of Accounts Receivable With Recourse
The Company offers to customers the option to finance, through Extended
Payment Term Arrangements (EPTAs), purchases made at the Internet training
workshops. A significant portion of these EPTAs, are then sold, on a discounted
basis, to third party financial institutions for cash. EPTAs sold to third party
financial institutions are generally subject to recourse by the purchasing
finance company after an EPTA is determined to be uncollectible. The Company
sold contracts totaling $5,024,990, $4,279,724 and $7,610,771 for the fiscal
years ended June 30, 2003, 2002 and 2001, respectively. The Company maintains
approximately a two percent bad debt allowance for doubtful accounts on all
EPTAs that are purchased by finance companies. The Company sells contracts to
three separate finance companies and continues to seek relationships with other
potential purchasers of these EPTAs.
(6) Property and Equipment
Property and equipment balances at June 30, 2003 and 2002 are
summarized as follows:
-----------------------------------
2003 2002
-----------------------------------
Computers and office equipment......... $ 1,281,191 $ 1,384,557
Furniture and fixtures ................ 10,406 10,406
Leasehold improvements ................ 49,316 30,791
Software .............................. 861,783 847,448
Automobiles ........................... 31,000 31,000
Less accumulated depreciation ......... (2,033,522) (1,894,742)
-----------------------------------
$ 200,174 $ 409,460
===================================
Amounts included in property and equipment for assets capitalized under
capital lease obligations as of June 30, 2003 and 2002 are $179,469 and 422,106,
respectively. Capital leases at June 30, 2003 are at interest rates between 7%
and 10%, and mature through July 2003 and October 2004. Accumulated depreciation
for the items under capitalized leases was $156,583 and 303,206 as of June 30,
2003 and 2002, respectively.
(7) Goodwill and Intangible Assets
As required by Statement of Financial Accounting Standards ("SFAS")
142, beginning on July 1, 2002 goodwill is no longer amortized but is tested on
an annual basis for impairment by comparing its fair value to its carrying
value. If the carrying amount of goodwill exceeds its fair value, an impairment
loss will be recognized in an amount equal to that excess. Prior to July 1, 2002
goodwill was being amortized over a ten-year period. During the quarter ended
December 31, 2002 the Company engaged an independent consulting firm to test the
Company's goodwill for impairment. Based on the appraisal made by the
independent consulting firm management has concluded that the fair market value
of the Company's assets exceeded the carrying value at July 1, 2002 and
determined that there is no goodwill impairment as of that date. As a result, no
change to the carrying value of the goodwill is necessary as of July 1, 2002. As
of June 30, 2003 management continues to believe that the fair market value of
the Company's assets exceeded the carrying value and therefore have determined
that there is no goodwill impairment as of that date. Prior to July 1, 2002
Goodwill was amortized on a straight-line basis over the estimated useful lives
as follows:
Acquired technology.......................5 to 7 years
Goodwill.................................. 10 years
Goodwill as of June 30, 2003 and 2002 is summarized as follows:
---------------------------------
2003 2002
---------------------------------
Goodwill $ 867,003 $ 867,003
Less accumulated amortization (411,826) (411,826)
---------------------------------
$ 455,177 $ 455,177
=============== =============
Net acquired technology and goodwill balances of $910,043 and $174,433
were written off during the second quarter of Fiscal 2001 as part of a
corporate-wide business restructuring (see Note 2(g)).
SFAS 142 requires disclosure of what reported income before
extraordinary items and net income would have been exclusive of amortization
expense recognized in periods presented relating to goodwill and intangible
assets that are no longer being amortized. The amortization expense and net
income before extraordinary items for the year ending 2003 (the year of initial
application) and the prior two years follow:
-----------------------------------------------
For the Years Ended June 30,
-----------------------------------------------
2003 2002 2001
-----------------------------------------------
Reported net income before extraordinary items $ 5,034,072 $ 2,198,769 $ (2,911,340)
Add back: goodwill amortization - 133,368 107,032
-----------------------------------------------
Adjusted net income net income before extraordinary items $ 5,034,072 $ 2,332,137 $ (2,804,308)
Basic earnings per share:
Reported net income before extraordinary items $ 0.46 $ 0.37 $ (1.31)
Goodwill amortization - 0.02 0.05
-----------------------------------------------
Adjusted net income before extraordinary items $ 0.46 $ 0.40 $ (1.26)
Diluted earnings per share:
Reported net income before extraordinary items $ 0.44 $ 0.37 $ (1.31)
Goodwill amortization - 0.02 0.05
-----------------------------------------------
Adjusted net income before extraordinary items $ 0.44 $ 0.40 $ (1.26)
(8) 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 33,333 shares ($3.00 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 16).
(9) Notes Payable
A note payable of $97,779 to a financial institution, bearing interest
at the prime rate plus 3% per annum (10% at June 30, 2001) was due on November
1, 2001. The note was secured by certain equipment of the Company and was
guaranteed by the Company's current Chief Executive Officer. The note was paid
in full on September 24, 2001. Notes payable at June 30, 2003 consist of
$435,857 of principal and interest payable to King William (and $121,206 due to
Imperial Premium Finance Company. Interest on the note payable to Imperial
Premium Finance Company is recorded at an annual interest rate of 5.08%.
Interest on the note payable to King William is recorded at an annual interest
rate of 8.0%. Maturities of notes payable are as follows:
Year ending June 30,
2004 $ 121,206
2005 -
2006 -
2007 -
2008 435,857
Thereafter -
------------
$ 557,063
============
(10) Notes Payable - Officers and Stockholders
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. The balance at June 30, 2001 was $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 39,333 shares
(market pricing on the date of conversion) of the Company's common stock. The
total balance of the notes payable to officers and directors at June 30, 2001
was $490,000.
During the year ended June 30, 2002 several officers and members of the
Board of Directors loaned the Company an aggregate additional amount of
$273,976. Principal payments made during the year ended June 30, 2002 totaled
$380,000. In addition, the remaining balance of $383,976 was exchanged for
127,992 shares of common stock of the Company ($3.00 per share) during the year
ended June 30, 2002. As of June 30, 2002 there were no balances owing officers
and directors and no loans were made to the Company by them during the fiscal
year ended June 30, 2003.
(11) 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 a number of shares of our common stock at the lower of
$17.90 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 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 for the year ended June 30, 2001, as the convertible
debentures were immediately exercisable.
In connection with the securities purchase agreement, the Company
issued to King William a warrant to purchase 23,100 shares of the Company's
common stock. In connection with the issuance of the debenture, the Company also
issued to Roth Capital Partners, Inc., a warrant to purchase 9,000 shares of
common stock and to Carbon Mesa Partners, LLC, a warrant to purchase 1,000
shares of common stock. Each of the warrants is exercisable for five years from
the date of issue, at an exercise price of $16.25 per share and with cashless
exercise and piggyback registration rights. The fair value of the warrants has
been determined to equal $371,000 using the Black-Scholes pricing model with the
following assumptions: dividend yield of zero, expected volatility of 80%,
risk-free interest rate of 6.5% and expected life of 5 years. The $371,000 was
accounted for as additional paid in capital and debt discount and was amortized
over the life of the debt. The unamortized balance at June 30, 2003 and 2002 is
$0 and $168,636, respectively.
Effective 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 the Purchase Agreement, the Debenture, the King William Warrant Agreement,
the Registration Rights Agreements and the Equity Agreement. However, pursuant
to the terms of the Restructuring Agreement the holder of the convertible
debenture has waived all of these defaults as of the date of the Restructuring
Agreement. Under the terms of the Restructuring Agreement the agreements were
terminated effective as of the date of the Restructuring Agreement and no
termination payment or additional warrants were issued in connection therewith.
Under the terms of the Restructuring and Amendment 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 and Amendment Agreement the principal amount including 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 $30.00 for
twenty consecutive trading days, or if the Company does not make a required
payment of principal. Warrants already earned by King William were re-priced at
$2.50 per share and King William was issued a warrant for an additional 26,900
shares of common stock at $2.50 per share. The incremental fair value of the
re-pricing of the warrants and the issuance of the new warrants, valued using
the Black-Scholes pricing model with the following assumptions: dividend yield
of zero, expected volatility of 170%, risk-free interest rate of 5% and expected
life of 5 years, was $9,008 and $129,927, respectively. These costs were
classified on the balance sheet as debt financing costs and were being amortized
over the life of the debt. The unamortized balance as of June 30, 2002 and 2001
is $0 and $75,783, respectively. The initial payment of $250,000, as called for
by the Restructuring and Amendment Agreement, was made during the first week of
February 2001. 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 80,000
shares of Common Stock of the Company, at a conversion price of $2.50 per share.
The Conversion Amount was credited toward the payment of $250,000 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 entered into a Waiver Agreement
with King William, LLC to amend certain of the 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.
Effective 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 at a closing
effective September 10, 2001, (i) a cash payment of $100,000, (ii) a $400,000
promissory note of the Company due August 2004 bearing interest at 8% per annum
and (iii) 280,000 shares of the Company's common stock. No accrued interest was
payable in connection with these payments. King William has agreed to certain
volume limitations relating to the subsequent sale of its shares of the
Company's common stock and has also agreed to forgive the promissory note if the
Company meets certain specific requirements including a minimal amount
($2,250,000) of proceeds King William receives from its sale of Company common
stock. 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
the Company. In September 2001 the Company issued the final conversion shares
equal to 280,000. No gain or loss on the exchange of shares for debt was
recorded in the accompanying financial statements. The Company was in default
under the Second Restructuring Agreement for failure to make interest payments
on November 10, 2001 and February 10, 2002, as called for by the agreement. King
William may have accelerated payment of the unpaid balance of the note plus
accrued interest upon written notice to the Company. No written notice of
default had been received.
Effective February 13, 2002 the Company and King William agreed to
amend certain terms of the Second Restructuring Agreement. The New Note is
amended to provide for a final maturity on July 10, 2006 and to provide that
interest shall accrue at the rate stated in the New Note and be added to the
principal balance until August 13, 2002. In addition, interest payable may be
paid in either cash or common stock of the Company, which common stock is to be
valued at an amount equal to the average closing bid price of the Company's
common stock during the five trading days prior to the date the interest payment
is made. Upon the signing of this agreement the Company issued 10,000 shares of
restricted common stock valued at $13,000. The Company is no longer required to
file a registration statement with respect to the common stock of the Company
currently held by King William or acquirable by it upon exercise of the warrants
held by it. King William has waived any default by the Company under the Second
Agreement and the New Note. Finally, the selling limitations in Section 4 of the
Second Agreement are no longer in effect and King William is only bound by the
limitations under Rule 144 relating to the resale of any securities. Interest on
the King William note is being paid in cash.
(12) Convertible Long Term Notes
In January and April 2001, the Company issued long term Convertible
Promissory Notes ("Notes") in a private placement offering totaling $2,076,500.
The terms of Notes required them to be repaid on July 1, 2004 plus accrual of
interest at the rate of eight percent (8%) per annum. The Notes were 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. The Notes were convertible into shares of common stock
of the Company by dividing the Note balance on the date of conversion by $2.50,
subject to Conversion Price Adjustments as defined in the agreement. The
relative fair value of this Beneficial Conversion Feature of the notes was
calculated to be $1,347,480 and was recorded as debt discount on the balance
sheet, and was amortized over the life of the Notes in accordance with Emerging
Issues Task Force issue 00-27 effective November 16, 2000.
In connection with the sale of the Notes, the Company issued a warrant
to purchase a share of the Company's common stock at an exercise price of $5.00
per share for every two shares of Common Stock into which the Note is originally
convertible. The Company issued a total of 366,100 warrants in connection with
the sale of the Notes, with a date of expiration not to exceed sixty calendar
days following the commencement date of the warrants. The relative fair value of
the warrants has been determined to be $512,540 and has been recorded as debt
discount on the balance sheet and is amortized over the life of the Notes in
accordance with Emerging Issues Task Force issue 00-27 effective November 16,
2000. None of the warrants were exercised.
The beneficial conversion feature and debt discounts of $1,347,480 and
$512,540, respectively, have been netted against the $2,076,500 balance of the
Notes on the Balance Sheet and are being amortized over the life of the Notes in
accordance with Emerging Issues Task Force issue 00-27 effective November 16,
2000. The unamortized balance of the beneficial conversion feature and debt
discount at June 30, 2002 and 2001 was $0 and $1,634,328, respectively.
On July 15, 2001 the Company sent a letter to all holders of the Notes
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 $2.50 per share.
As of December 31, 2001, all Note holders, holding $2,147,295 of
aggregate principal and accrued interest, had exercised their right to convert
both principal and accrued interest into 859,279 shares of common stock.
(13) Income Taxes
Income tax expense for the years ended June 30, 2003, 2002 and 2001
represents various state minimum franchise taxes and is included in general and
administrative expenses in the accompanying consolidated statements of earnings.
There are no Federal or state income taxes due for the fiscal year ended June
30, 2003 because of the Company's net operating loss carry forward.
Income tax (benefit) expense attributable to income (loss) from
operations during the years ended June 30, 2003, 2002 and 2001 differed from the
amounts computed by applying the U.S. federal income tax rate of 34 percent as a
result of the following:
2003 2002 2001
-------------- -------------- --------------
Computed "expected" tax (benefit) expense $ 1,711,585 $ 747,580 $ (1,237,170)
Decrease (increase) in income tax resulting from:
State and local income tax benefit, net of
federal effect 163,532 101,583 (192,125)
Change in the valuation allowance for
deferred tax assets (1,236,581) (5,634,171) 1,657,117
Other (including cancellation of debt) (638,536) 4,785,008 (227,822)
Non-deductible stock compensation - - -
---------------- ---------------- --------------
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,
2003 and 2002 are presented below:
2003 2002
----------------------- --------------------
Deferred tax assets:
Net operating loss carryforwards $ 13,434,568 $ 15,430,985
Stock option expense 2,131,625 2,131,625
Deferred compensation 468,406 451,105
Accounts receivable principally due to
allowance for doubtful accounts 2,619,897 1,226,526
Accrued expenses 101,278 346,206
Other 13,801
Deferred revenue 243,742 263,255
Legal fees 429,439 429,439
Property and equipment 52,475 139,085
Debt issuance costs 22,787 74,024
----------------------- --------------------
Total gross deferred tax assets 19,504,217 20,506,051
Less valuation allowance (19,269,470) (20,506,051)
Deferred tax liability:
Capitalized Expenses (234,747) -
----------------------- --------------------
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 includable. 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 cannot be assured that the Company will
realize the benefits of these deductible differences. Such potential future
benefits have therefore been fully reserved, and accordingly, there are no net
deferred tax assets.
The Company's net operating loss carry forward ("NOL"), which is
approximately $43million, represents the losses reported for income tax purposes
from the inception of the Company through June 30, 2002. FY 2003 was the first
year in the Company's history that generated taxable income. Section 382 of the
Internal Revenue Code ("Section 382") imposes limitations on a corporation's
ability to utilize its NOLs if it experiences an "ownership change". In general
terms, an ownership change results from transactions increasing the ownership of
certain stockholders in the stock of a corporation by more than 50 percentage
points over a three-year period. Since our formation, we have issued a
significant number of shares, and purchasers of those shares have sold some of
them, with the result that two changes of control as defined by Section 382 have
occurred. As a result of the most recent ownership change, utilization of our
NOLs is subject to an annual limitation under Section 382 determined by
multiplying the value of our stock at the time of the ownership change by the
applicable long-term tax-exempt rate resulting in an annual limitation amount of
approximately $127,000. Any unused annual limitation may be carried over to
later years, and the amount of the limitation may under certain circumstances be
increased by the "recognized built-in gains" that occur during the five-year
period after the ownership change (the "recognition period"). The Company
believes that it will have significant recognized built-in gains and that during
the recognition period the limitation will be increased by approximately $15
million based on an independent valuation of the Company as of April 3, 2002.
The Company also believes that based on a valuation of the Company as of June
25, 2000, which is currently underway, the earlier ownership change will also
have significant recognized built-in gains and that during the recognition
period the limitation will be further increased by approximately $28 million
thus allowing the Company to utilize its entire NOL. Significant management
judgment was required in estimating the amount of the recognized built in gain.
If it is determined that the actual amount of recognized built in gain is less
than our estimate, the Company may be required to make a cash payment for taxes
due on its income for fiscal year 2003, plus related interest, which could
materially adversely impact the Company's financial position.
The available NOL for the fiscal year ended June 30, 2003 is
approximately $15 million based on the Company's analysis of the provisions of
Section 382. As a result there is no provision for income taxes in the
Consolidated Statement of Earnings for FY 2003. Any unused NOL from FY 2003 can
be carried forward and used to offset future taxable income. The NOL
carryforwards expire in various years through 2022.
(14) Commitments and Contingencies
Operating Leases
The Company leases certain of its equipment and corporate offices under
long-term operating lease agreements expiring at various dates through 2005.
Future aggregate minimum obligations under operating leases as of June 30, 2003,
exclusive of taxes and insurance, are as follows:
Year ending June 30,
2004 $ 306,333
2005 231,396
2006 2,831
Thereafter -
---------------
Total $ 540,560
===============
Rental expense for the years ended June 30, 2003, 2002 and 2001 was
approximately $280,000, $270,000 and $582,000, respectively.
Employment Agreements
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. These
demands were subsequently resolved and withdrawn. As of June 30, 2003 no options
have been granted to the Chairman of the Board or the former executives.
Consulting Agreements
In April 2003, the Company entered into a Consulting Services Agreement
with Richard Wexler for future services for a fee of $15,000, with such
agreement to expire on July 23, 2003. As of June 30, 2003, the Company had a
contingent liability for the final installment of $5,000, due July 1, 2003.
Private Placement of Stock
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 by
securities regulators may not be consistent with their view and if in fact the
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 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 current cash resources of the
Company and would require the Company to seek additional financing, most likely
in the form of additional issuances of common stock, to make such payments and
would materially and adversely affect the financial condition of the Company.
Category 5 Complaint
On April 8, 2002 Category 5 Technologies, Inc. ("C5T") caused the
Company to be served with a Summons and Complaint in the Third Judicial District
Court in and for Salt Lake County, State of Utah, Case No. 020902991, whereby
C5T sought judgment against the Company seeking reimbursement of $260,630 of
their expenses associated with merger negotiations between the two companies.
The Company has resolved this matter and entered into a First Amendment to
Termination Agreement with Cat 5 dated as of March 10, 2003 memorializing that
resolution. On April 9, 2003 a Stipulation of Settlement and Order of Dismissal
was entered, dismissing the lawsuit with prejudice. Due to the uncertainty of
the outcome, the entire $260,630 fee had been accrued by the Company and was
carried as a current liability as of June 30, 2002. As a result of the
settlement and dismissal of this action, the Company reversed the entire
$260,630 current liability during the fiscal year ended June 30, 2003.
Compliance with State and Federal Regulations
The Company previously reported that it was the subject of a nonpublic
investigation by the Federal Trade Commission. The first investigation activity
began nearly five years ago when the FTC had announced what they refer to as a
"sweep" of the industry. The Company cooperated fully with all requests for
information and details, and after over a year's investigation, no action
against the Company was taken and the case went dormant. During this same period
of time, other unrelated companies and individuals targeted by the FTC were
subject to consent agreements and injunctions and paid large financial
penalties. Some of those companies are no longer in business.
About two years ago, based on various allegations and customer
complaints, the FTC re-opened its investigation of the Company, requesting once
again complete details about its marketing, sales, and customer service policies
and other matters. The FTC also obtained details regarding customer complaints
from the Better Business Bureau and various AG offices, and was fully aware of
the "wrong doings" alleged by a nationally broadcast television story. In
addition, FTC representatives attended one or more of the Company's workshops,
visited its offices and were afforded an opportunity to review customer files.
After nearly two years in this most recent investigation, the Company received
written notice that the FTC investigation had been officially closed.
In its letter the FTC states that it "... has conducted a nonpublic
investigation to determine whether Galaxy Mall and related entities have
violated the Federal Trade Commission Act through the use of deceptive practices
in connection with the sale of electronic "storefronts" or web sites or
storefront-related products or services." and concludes in part by stating,
"Upon further review of this matter, it now appears that no further action is
warranted by the Commission at this time. Accordingly, the investigation has
been closed." The FTC letter also states that "The Commission reserves the right
to take such further action as the public interest may require."
The Company certainly regrets even one complaint, but can no more
accept responsibility for failure of a business that purchases its products and
services than the telephone company, a computer manufacturer or a business
college, can accept responsibility for the failure of a customer or student to
achieve success using, or not using, their telephone or computer or the
knowledge learned from a college course. Although the Company is constantly
looking for ways to improve its products and services, because its products and
services are used by entrepreneurs and small businesses with such a broad range
of objectives, backgrounds and skills, the Company anticipates that it will
continue to receive complaints from some customers who are not able to
successfully extend their business on the Internet. Regardless, the Company
remains committed to work with and assist each of its customers by providing
them information and tools necessary to help them establish or extend their
business to the Internet.
From time to time, the Company receives inquiries from and/or has been
made aware of investigations by government officials in many of the states in
which it operates, as well as by the Federal Trade Commission. These inquiries
and investigations generally concern compliance with various city, county, state
and/or federal regulations involving sales and marketing practices. The Company
has and does respond to these inquiries and has generally been successful in
addressing the concerns of these persons and entities, although there is often
no formal closing of the inquiry or investigation. The Federal Trade Commission
investigation has been resolved as indicated above. There can be no assurance
that the ultimate resolution of these or other inquiries and investigations will
not have a material adverse effect on the Company's business or operations. The
Company also receives complaints and inquiries in the ordinary course of
business from both customers and governmental and non-governmental bodies on
behalf of customers, and in some cases these customer complaints have risen to
the level of litigation. To date, the Company has been able to resolve these
matters on a mutually satisfactory basis and believes that it will be successful
in resolving the currently pending matters but there can be no assurance that
the ultimate resolution of these matters will not have a material adverse affect
on the Company's business.
On June 3, 2003, the Utah Department of Commerce, Division of Consumer
Protection, issued an Administrative Citation In the Matter Of: Imergent, Inc.
and StoresOnline, Inc., previously known as Galaxy Mall, Inc., UDCP Case No.
CP30320 et al. The Administrative Citation, among other things, alleged that the
Company has violated the Utah Business Opportunity Disclosure Act, Utah Code
Ann. ss. 13-15-1, et seq., and the Utah Consumer Sales Practices Act, 13-11-1 et
seq. In the Administrative Citation, the Division of Consumer Protection is
seeking a maximum potential fine of $1,000 for alleged violation of the Utah
Business Opportunity Disclosure Act registration requirements, $89,000 in
potential maximum fines for the alleged violation of the disclosure requirements
of the Utah Business Opportunity Disclosure Act, $89,000.00 in fines for the
alleged violation of the deceptive acts or practices portions of the Utah
Consumer Sales Practices Act, and $83,000.00 in fines for the alleged failure to
provide buyers a three day right of rescission under the Utah Consumer Sales
Practices Act. The Utah Division of Consumer Protection reserved the right to
amend the Administrative Citation and has informed the Company that it intends
to amend the Administrative Citation in the next couple of weeks. The Company
has denied the allegations in the Administrative Citation, and requested a
hearing before a hearing officer under the Utah Administrative Procedures Act.
Discussions with the state of Utah to resolve this matter are in progress. The
Company believes that it has valid defenses to the Administrative Citation and
intends to vigorously defend against the Administrative Citation.
On April 22, 2003, Maria J. Smith, purportedly on behalf of herself and
the general public as private attorney general, filed a Complaint For Unfair
Competition (California Business & Professions Code ss. 17200 et seq.) against
the Company's subsidiary Galaxy Mall, Inc., and other defendants, including
Electronic Commerce Internation, Inc. ("ECI"), in Orange County Superior Court,
Central Justice Center, in the State of California, before the Honorable Steven
Perk, Dept. C27 (Case No. 030005871). ECI is owned by John J. Poelman, the
Company's former Chief Executive Officer and a former director. The complaint
purportedly alleges, among other things, that the products and services acquired
by the plaintiff were products and services that she did not need or were
otherwise available to her through other means. Ms. Smith seeks preliminary and
permanent injunctive relief, restitution in an unspecified amount for the
benefit of members of the general public nationwide, and unspecified attorneys'
fees and costs. The Company filed an answer to the complaint on May 28, 2003
denying the material allegations in Ms. Smith's Complaint and setting forth
various affirmative defenses. On June 9, 2003, the Company filed a Motion To
Stay Claims Pursuant to CCP 410.30, requesting that the action be stayed in
California and requesting that the plaintiff be required to litigate her claim
pursuant to a forum selection clause "in the courts of the State of Utah in the
County of Utah or the United States District Court for the State of Utah."
Defendant Leasecomm has informed the Company that they are engaged in
negotiations with the plaintiffs to settle this matter and negotiations to reach
a global settlement are anticipated. Both Leasecomm and the other named
defendant in this case, ECI have indicated that they believe that were they
found to be liable that they would be entitled to be indemnified by the Company
with respect to any such liability. The Company's Motion To Stay presently is
scheduled to be heard on September 26, 2003 at 11:00 a.m. The Company believes
that it has valid defenses to the Complaint and the claims for indemnification
and if a settlement is not reached, it intends to vigorously defend the action.
The Company is not currently involved in any other material litigation;
however, it is subject to various claims and legal proceedings covering matters
that arise in the ordinary course of business. The Company believes that the
resolution of these cases will not have a material adverse effect on its
business, financial position, or future results of operations. As previously
disclosed, on April 8, 2002 Category 5 Technologies, Inc. ("C5T") caused the
Company to be served with a Summons and Complaint in the Third Judicial District
Court in and for Salt Lake County, State of Utah, Case No. 020902991, whereby
C5T sought judgment seeking reimbursement of $260,000 of their expenses
associated with merger negotiations between C5T and the Company. The Company has
resolved this matter and entered into a First Amendment to Termination Agreement
with Cat 5 dated as of March 10, 2003 memorializing that resolution. On April 9,
2003 a Stipulation of Settlement and Order of Dismissal was entered, dismissing
the lawsuit with prejudice.
(15) Stock Option Plan
In July 1998, the Board of Directors adopted the 1998 Stock
Compensation Program (the "Program") which consists of, among other things, a
non-qualified stock option plan. An aggregate of 100,000 shares were reserved
for issuance under the Program. During the year ended June 30, 1999, the Company
granted 98,335 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 $20.00 to $133.00 per share. The weighted-average fair value
of options granted during the year ended June 30, 1999 under the Program was
$34.40 per share. During the year ended June 30, 2001 the Company cancelled
60,326 options granted under the Program. The Company did not grant any options
during the year ended June 30, 2001. During the year ended June 30, 2002, 250
options were cancelled. The Company did not grant any options during the year
ended June 30, 2003 under the Program. As of June 30, 2003 and 2002, options
available for future grants under the Program were 65,617 and 65,613,
respectively.
In December 1998, the Board of Directors adopted the 1998 Stock Option
Plan (the "Plan") for Senior Executives. An aggregate of 500,000 shares were
reserved for issuance under the Plan. During the year ended June 30, 1999, the
Company granted 254,667 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 $20.00 to $65.00 per share. The weighted-average fair
value of the options granted under the Plan during the year ended June 30, 1999
was $26.90 per share. Subsequent to June 30, 1999, 224,667 of these options were
cancelled. During the year ended June 30, 2000, the Company granted 55,071
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
$35.00 to $92.50 per share. The weighted-average fair value of the options
granted under the Plan during the year ended June 30, 2000 was $67.30 per share.
During the year ended June 30, 2001 the Company granted 167,500 options under
the Plan, with a weighted-average fair value of $7.10 per share. During the year
ended June 30, 2002, 18,750 options were cancelled. In April 2003 the Board of
Directors increased the shares available for grant as non-qualified stock
options under the Plan by 500,000 shares so that the maximum number of shares of
stock reserved for the grant of options under the Plan will be 1,000,000. During
the year ended June 30, 2003 the Company granted 550,000 options under the Plan
at exercise prices equal to the market price of the Company's common stock on
the date of grant, ranging from $1.50 to $2.03 per share. There were 320,625 and
370,625 options available for future grants under the Plan as of June 30, 2003
and 2002, respectively.
In July 1999, the Board of Directors adopted the 1999 Stock Option Plan
(the "Option Plan") for Non-Executives. An aggregate of 200,000 shares were
reserved for issuance under the Option Plan; the reserve amount was later
increased to 500,000 shares. During the year ended June 30, 2000, the Company
granted 223,783 options under the Option 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 $17.80 to $145.00 per share. The weighted-average fair
value of the options granted under the Option Plan during the year ended June
30, 2000 was $73.40 per share. Also during the year ended June 30, 2000, 27,978
of these options were canceled. During the year ended June 30, 2001 the Company
granted 165,550 options under the Option Plan, with a weighted-average fair
value of $7.40 per share. During the year ended June 30, 2002, the Company
granted 6,000 options under the Option Plan, with a weighted average fair value
of $5.20, while 691 options were exercised. In April 2003 the Board of Directors
increased the shares available for grant as non-qualified stock options under
the Plan by 500,000 shares so that the maximum number of shares of stock
reserved for the grant of options under the Plan will be 1,000,000. During the
year ended June 30, 2003 the Company granted 363,000 options under the Plan at
exercise prices equal to the market price of the Company's common stock on the
date of grant, ranging from $1.56 to $2.03 per share. Stock options exercised
during the year ended June 30, 2003 totaled 25,375, while 6,077 options were
cancelled. As of June 30, 2003 and 2002, there were 528,607 and 385,530 options,
respectively, available for future grants under the Option 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 106,347 shares of its common stock.
The following is a summary of stock option activity under the Company's
stock option plans:
--------------------------------------
Weighted average
Number of Shares exercise price
--------------------------------------
Balance at July 1, 2000 451,265 $ 62.40
Granted.................. 333,050 7.30
Exercised................ (2,001) 2.50
Canceled or expired...... (408,276) 45.00
-------------------- -----------------
Balance at June 30, 2001 374,038 $ 21.10
Granted................... 6,000 5.20
Exercised................. (691) 2.50
Canceled or expired....... (66,082) 8.70
-------------------- -----------------
Balance at June 30, 2002 313,265 $ 23.30
Granted................... 913,000 1.70
Exercised................. (25,375) 2.04
Canceled or expired....... (7,362) 52.87
-------------------- -----------------
Balance at June 30, 2003 1,193,528 $ 7.04
The following table summarizes information about shares under option as
of June 30, 2003:
--------------------------------------------------------------------- -------------------------------
Outstanding Exercisable
--------------------------------------------------------------------- -------------------------------
Range of Exercise Number of Weighted-AverageWeighted-Average Number of Weighted-Average
Options Remaining
Prices Contractual Life Price Options Price
--------------------------------------------------------------------- -------------------------------
$.00 - $4.99 927,849 8.20 $ 1.72 164,420 $ 1.88
$5.00 - $7.49 46,750 7.42 5.03 43,813 5.03
$7.50 40,750 7.52 7.50 40,750 7.50
$7.51 - $10.00 42,750 7.50 10.00 42,125 10.00
$10.01 - $29.99 73,038 5.43 17.86 60,776 16.56
$30.00 - $59.99 16,329 6.57 37.73 16,254 37.72
$60.00 - $89.99 32,753 6.04 76.55 32,753 76.55
$90.00 - $113.10 13,309 6.14 105.26 13,309 105.26
----------------------------------------------- -------------------------------
1,193,528 7.85 $ 7.04 414,200 $ 16.38
=============================================== ===============================
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 with an exercise price at or above
fair market value. The Company granted no employee stock options with an
exercise price below market price during the years ended June 30, 2003, 2002 or
2001.
(16) Stockholders' Equity
Year ended June 30, 2001
During the year ended June 30, 2001, the Company issued 3,714 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 2,001 shares upon the
exercise of employee options and issued 700 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 151,317 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 39,333 shares of common stock to an
officer of the Company as payment in full of a note due to the officer, and
issued 4,080 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 $3.00 per share. As of June 30, 2001 the Company had
collected $291,200 of these subscriptions and recorded a receivable of $107,000
that was subsequently received.
Year ended June 30, 2002
On August 1, 2001, the Company entered into an agreement with
Electronic Commerce International, Inc. ("ECI"), a company owned by Jay Poelman
who was at that time a director of and the president of the Company, pursuant to
which, among other matters, the Company agreed to issue to them a total of
83,192 shares of common stock of the Company at a price of $3.00 per share in
exchange for the release by ECI of trade claims by them against the Company
totaling $249,575. In connection with the exchange, the Company recorded a
charge of $199,657, representing the difference between the market value and the
exchange rate, which is included in cost of revenue.
During September 2001 the Company issued 280,000 common shares upon
conversion of a long-term convertible debenture (see Note 12).
On November 13, 2001, the Company issued 233,333 shares of the common
stock of the Company, and recorded an amount of $150,000 in its accounts
payable, pursuant to the October 10, 2001 agreement with SBI E-2 Capital (USA)
Ltd., for services as a financial advisor to the Company in connection with the
acquisition of the Company by Category 5 Technologies. A member of the Company's
Board of Directors at that time was a managing director of SBI E-2 Capital (USA)
Ltd. The business combination transaction between the Company and Category Five
Technologies, Inc. was never consummated. On account of the termination of this
proposed transaction, SBI E-2 Capital (USA) Ltd. was not able to complete the
provision of the financial advisory services to the Company. On February 1, 2002
an agreement was entered into between the Company and SBI E-2 Capital (USA) Ltd.
to rescind and nullify the issuance of the common stock pursuant to the October
10 agreement and the related designation by SBI E-2 Capital (USA) Ltd. of
certain persons to whom certain of the shares should be issued. Pursuant to the
Rescission Agreement, the certificates representing all 233,333 shares of the
common stock were returned to the Company, together with all documentation to
transfer legal title in the common stock back to the Company. In addition, SBI
E-2 and the designees disclaimed any interest whatsoever in the common stock.
Upon receipt of the certificates representing the common stock, the Company
directed its transfer agent to cancel the common stock from its books and
records. As a result of the Rescission Agreement, the Company did not record the
issuance of the shares during the three months ending December 31, 2001 and does
not reflect the shares outstanding as of June 30, 2002.
On November 28, 2001 the Company issued 5,000 shares of common stock as
settlement for contractual obligations to National Financial Communications
Corp. (NFCC).
On November 28, 2001 the Company issued 15,000 shares of common stock
as settlement for contractual obligations to Howard Effron.
During the year ended June 30, 2002, the Company converted long-term
convertible notes totaling $2,147,295 of principle and interest into 859,279
shares of common stock ( see Note 14.)
On February 27, 2002 the Company issued 10,000 shares of common stock
pursuant to the amendment of the Second Restructuring Agreement with King
William LLC.
On June 12, 2002 the Company issued an aggregate of 112,500 shares of
common stock to SBI and its designees for services rendered in connection with
the Company's private placement that closed in May 2002 (see Note 21).
On June 20, 2002 the Company issued 20,000 shares of common stock to
Howard Effron for services as a financial advisor.
During the twelve month period ended June 30, 2002, the Company issued
691 shares of common stock upon the exercise of employee stock options.
During the year ended June 30, 2002, the Company closed two private
placements. In the first, which closed in November 2001, the Company issued
1,061,226 shares of common stock at a price of $3.00 per share and recorded
$285,223 of placement agent and finders' fees relating to the private placement
offering against Additional Paid in Capital. In the second private placement,
which closed in May 2002, the Company issued 6,102,868 shares of common stock at
a price of $0.40 per share and recorded $228,691 of placement agent and finders'
fees relating to the private placement offering against Additional Paid in
Capital.
Year ended June 30, 2003
In July 2002, the Company issued 5,000 shares of common stock at a
price of $3.00 a share relating to the private placement of common stock which
closed during November 2001 for which all necessary paperwork had not previously
been received. The Company had held these funds as a current liability pending
the receipt of all proper paperwork.
On December 6, 2002, the Company issued 26,675 shares of common stock
in settlement of a finder's fee earned in connection with our private placement
of common stock that closed in May 2002.
On February 14, 2003 the Company issued 9,472 shares of our common
stock in exchange for 9,472 Exchangeable Shares of StoresOnline.com, Ltd. held
by a former employee. The shares of the Company's common stock were issued
pursuant to the provisions of a Stock Purchase Agreement dated November 1, 1998
that was entered into in connection with the acquisition of StoresOnline.com
Ltd.
During the twelve month period ended June 30, 2003, the Company issued
26,623 shares of common stock upon the exercise of stock options.
(17) Discontinued Operations
On January 11, 2001, the Company sold all of the outstanding shares of
IMI, Inc. (see Note 20) and accordingly has reported the operations of IMI as
discontinued operations for all of the periods 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
---------------
Revenue $ 1,116,863
Cost of revenue 703,831
---------------
Gross profit (loss) 413,032
Total operating expenses 698,580
---------------
Loss from discontinued operations
before other item shown below (285,548)
Other expense (232)
---------------
Net loss from discontinued operations $(285,780)
===============
(18) Extraordinary Items
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 the Company, 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.
(19) Related Entity Transactions
John J. Poelman, former Chief Executive Officer and a former director
and stockholder of the Company, was the sole owner of Electronic Commerce
International, Inc. ("ECI") during the fiscal years ended June 30, 2002 and 2001
and during the three months ended September 30, 2002. During this period, the
Company purchased a merchant account solutions product from ECI that provided
on-line, real-time processing of credit card transactions and resold this
product to its customers. The Company also formerly utilized the services of ECI
to provide a leasing opportunity to customers who purchased its products at its
Internet training workshops. Effective October 1, 2002, Mr. Poelman sold certain
assets and liabilities of ECI, including ECI's corporate name and its
relationship with the Company, to an unrelated third party. Total revenue
generated by the Company from the sale of ECI's merchant account solutions
product, while ECI's business was owned by Mr. Poelman, was $1,453,612,
$5,106,494 and $6,403,478 for the years ended June 30, 2003, 2002 and 2001,
respectively. The cost to the Company for these products and services totaled
$223,716, $994,043 and $975,257 for the years ended June 30, 2003, 2002 and
2001, respectively. During the years ended June 30, 2003, 2002 and 2001 the
Company processed leasing transactions for its customers through ECI in the
amounts of $0, $1,090,520 and $3,386,231, respectively. As of June 30, 2003 and
2002 the Company had no receivable balance due from ECI for leases in process.
In addition, the Company had $0 and $26,702 as of June 30, 2003 and 2002,
respectively, recorded in accounts payable relating to the amounts owed to ECI
for the purchase of the merchant account software while owned by Mr. Poelman.
The Company offers its customers at its Internet training workshops,
and through telemarketing sales following the workshop certain products intended
to assist the customer in being successful with their business. These products
include a live chat capability for the customer's own website and web traffic
building services. The Company utilizes Electronic Marketing Services, LLC.
("EMS") to fulfill these services to the Company's customers. In addition, EMS
provides telemarketing services, selling some of the Company's products and
services. Ryan Poelman, who owns EMS, is the son of John J. Poelman. The
Company's revenues generated from the above products and services were
$6,330,343, 4,806,497 and $1,263,793 for the years ended June 30, 2003, 2002 and
2001, respectively. The cost to the Company for these products and services
totaled $994,827, $479,984 and $78,435 to purchase these services during the
years ended June 30, 2003, 2002 and 2001, respectively. In addition, the Company
had $92,094 and $53,023 as of June 30, 2003 and 2002, respectively, recorded in
accounts payable relating to the amounts owed to EMS for product and services.
The Company sends complimentary gift packages to its customers who
register to attend the Company's Workshop training sessions. An additional gift
is sent to Workshop attendees who purchase products at the conclusion of the
Workshop. The Company utilizes Simply Splendid, LLC ("Simply Splendid") to
provide these gift packages to the Company's customers. Aftyn Morrison, who owns
Simply Splendid, is the daughter of John J. Poelman, our former Chief Executive
Officer, and formerly a director of the Company. The Company paid Simply
Splendid $421,265, 0, and $0 to provide these products during the years ended
June 30, 2003, 2002 and 2001, respectively. In addition, the Company had $22,831
and $0 as of June 30, 2003 and 2002, respectively, recorded in accounts payable
relating to the amounts owed to Simply Splendid for gift packages.
The Company engaged vFinance Investments, Inc. ("vFinance") as a
financial advisor and placement agent for its private placement of unregistered
securities that closed during May 2002. Shelly Singha1, a former member of the
Company's Board of Directors, was a principal of vFinance at the time of private
placement. During the year ended June 30, 2002 the Company paid vFinance $61,500
in fees and commissions for their services. The offering was successful with
adjusted gross proceeds to the Company of $2,185,995.
The Company engaged SBI-E2 Capital USA Ltd. ("SBI") as a financial
consultant to provide various financial services. Shelly Singhal, a former
member of the Company's Board of Directors, is a managing director of SBI. The
Company paid SBI $58,679 for expenses & commissions relating to its private
placement of unregistered securities which closed during November 2001. Adjusted
gross proceeds to the Company from the offering totaled $2,898,455.
During the year ended June 30, 2001 the Company issued 12,500 warrants
to Shelly Singhal, a former member of the Company's Board of Directors, for
non-director services rendered. The warrants were valued using the Black-Scholes
pricing model at $40,657.
In addition, the Company paid SBI a total of $40,000 and issued to it
and various of its designees an aggregate of 112,500 shares of the Company's
common stock in payment for services rendered to the Company in connection with
its private placement of common stock that closed in May 2002 (see note 16).
During the year ended June 30, 2002 SBI provided the Company with a
Fairness Opinion relating to the proposed merger with Category 5 Technologies
(CT5), for which the Company was billed $152,437, of which the Company paid
$67,437. The balance of $85,000 that was payable to SBI as of June 30, 2002 was
conceded by SBI upon the termination of the CT5 merger. As of June 30, 2003 no
balance is owed to SBI.
(20) 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.
(21) Subsequent Event
On July 1, 2003 John J. (Jay) Poelman, retired and in connection
therewith resigned as the Company's CEO and as a Director of the Company.
Effective July 1, 2003 the Company agreed to retain Mr. Poelman as a consultant
for the period of twelve months, for a monthly fee of $11,375 plus incidental
expenses.
(22) Quarterly Financial Information (unaudited)
Year ended June 30, 2003
Quarter Ended
09/30/02 12/31/02 03/31/03 06/30/03
------------------ ----------------- ------------------ ------------------
Revenue $ 11,283,849 $ 10,588,681 $ 15,786,458 $ 15,566,095
Gross profit 8,825,417 8,364,656 12,724,229 12,408,411
Income (loss) from continuing operations 933,501 573,726 1,840,556 901,406
Income (loss) from discontinued operations - - - -
Income (loss) from extraordinary items - - - -
Net income (loss) $ 1,083,150 $ 740,340 $ 1,596,941 $ 1,613,642
Basic income (loss) per share:
Income (loss) from continuing operations $ 0.10 $ 0.07 $ 0.14 $ 0.15
Income (loss) from discontinued operations - - - -
Income (loss) from extraordinary items - - - -
Net income (loss) $ 0.10 $ 0.07 $ 0.14 $ 0.15
Diluted income (loss) per share:
Income (loss) from continuing operations $ 0.11 $ 0.07 $ 0.14 $ 0.14
Income (loss) from discontinued operations - - - -
Income (loss) from extraordinary items - - - -
Net income (loss) $ 0.11 $ 0.07 $ 0.14 $ 0.14
Weighted average Common shares outstanding
Basic 10,999,478 11,007,226 11,030,931 11,043,340
Diluted (1) 10,035,459 11,208,171 11,290,240 11,943,142
Year ended June 30, 2002
Quarter Ended
09/30/01 12/31/01 03/31/02 06/30/02
------------------ ----------------- ------------------ ------------------
Revenue $ 11,634,043 $ 7,455,746 $ 7,296,696 $ 10,964,365
Gross Profit 10,044,474 6,159,180 5,804,382 8,817,014
Income (loss) from continuing operations 2,335,308 (185,688) 377,335 (328,186)
Income (loss) from discontinued operations - - - -
Income (loss) from extraordinary items - - - -
Net income (loss) $ 2,335,308 $ (185,688) $ 337,335 $ (328,186)
Basic income (loss) per share:
Income (loss) from continuing operations $ 0.68 $ (0.04) $ 0.08 $ (0.04)
Income (loss) from discontinued operations - - - -
Income (loss) from extraordinary items - - - -
Net income (loss) $ 0.68 $ (0.04) $ 0.08 $ (0.04)
Diluted income (loss) per share:
Income (loss) from continuing operations $ 0.66 $ (0.04) $ 0.08 $ (0.01)
Income (loss) from discontinued operations - - - -
Income (loss) from extraordinary items - - - -
Net income (loss) $ 0.66 $ (0.04) $ 0.08 $ (0.04)
Weighted average Common shares outstanding
Basic 3,450,711 4,388,230 4,833,462 9,035,396
Diluted (1) 3,539,724 4,388,230 4,833,462 9,035,396
Year ended June 30, 2001
Quarter Ended
09/30/00 12/31/00 03/31/01 06/30/01
------------------ ----------------- ------------------ ------------------
Revenue $ 7,425,857 $ 14,179,643 $ 7,886,385 $ 13,508,648
Gross profit 5,235,950 11,952,131 5,753,014 11,633,863
Income (loss) from continuing operations (6,478,573) (2,011,994) 1,211,000 4,654,007
Income (loss) from discontinued operations (201,462) (83,190) (1,128) -
Income (loss) from extraordinary items - (1,091,052) 363,656
Net income (loss) $ (6,680,035) $ (3,186,236) $ 1,573,528 $ 4,654,007
Basic income (loss) per share:
Income (loss) from continuing operations $ (3.00) $ (0.90) $ 0.60 $ 1.94
Income (loss) from discontinued operations (0.10) (0.10) - -
Income (loss) from extraordinary items - (0.50) 0.20 -
Net income (loss) $ (3.10) $ (1.50) $ 0.80 $ 1.94
Diluted income (loss) per share:
Income (loss) from continuing operations $ (3.00) $ (0.90) $ 0.30* $ 1.18
Income (loss) from discontinued operations (0.10) (0.10) - -
Income (loss) from extraordinary items - (0.50) $ 0.10* -
Net income (loss) $ (3.10) $ (1.50) $ 0.40* $ 1.18
Weighted average Common shares outstanding
Basic 2,169,146 2,169,146 2,169,479 2,404,402
Diluted (1) 2,169,146 2,169,146 4,127,412 3,950,085
* As Recalculated
(1) Includes the dilutive effect of options, warrants and convertible
securities.
Income (loss) per share is computed independently for each of the
quarters presented. Therefore, the sum of quarterly income (loss) per share
amounts do not necessarily equal the total for the year due to rounding.
(25) Earnings (Loss) Per Share
The following data was used in computing earnings (loss) per share:
Year ended June 30,
------------------------------------------------------
2003 2002 2001
--------------- ----------------- -------------------
Net earnings (loss) available to common shareholders $ 5,034,072 $ 2,198,769 $ (3,638,736)
Basic EPS
- --------------------------------------------------------------------------------------------------------------
Shares
Common shares outstanding entire period 10,995,774 2,446,018 2,164,873
Weighted average common shares:
Issued during period 23,320 3,427,636 63,092
Canceled during period - - -
--------------- ----------------- -------------------
Weighted average common shares outstanding
during period 11,019,094 5,873,654 2,227,965
--------------- ----------------- -------------------
Earnings (loss) per common share - basic $ 0.46 $ 0.37 $ (1.63)
=============== ================= ===================
Diluted EPS
- --------------------------------------------------------------------------------------------------------------
Weighted average common shares outstanding
during period - basic 11,019,094 5,873,654 2,227,965
Dilutive effect of stock equivalents 533,527 4,750 -
--------------- ----------------- -------------------
Weighted average common shares outstanding
during period - diluted 11,552,621 5,878,404 2,227,965
--------------- ----------------- -------------------
Earnings (loss) per common share - diluted $ 0.44 $ 0.37 $ (1.63)
=============== ================= ===================
IMERGENT, INC.
Schedule II- Valuation and Qualifying Accounts
Years ended June 30, 2003, 2002 and 2001
Balance at Charged to Deductions/ Balance at
Beginning Costs and Write-offs End of
of Period Expenses Net of Recoveries Period
------------- ---------------- ------------------ ----------------
Year ended June 30, 2003
Deducted from accounts receivable:
Allowance for doubtful accounts
sales returns, credit card
chargebacks, and other assets $ 3,413,981 $ 14,255,877 $ 10,646,003 $ 7,023,855
Year ended June 30, 2002
Deducted from accounts receivable:
Allowance for doubtful accounts
sales returns, credit card
chargebacks, and other assets $ 3,679,017 $ 6,675,238 $ 6,940,274 $ 3,413,981
Year ended June 30, 2001
Deducted from accounts receivable:
Allowance for doubtful accounts
sales returns, credit card $ 960,601 $ 3,475,492 $ 757,076 $ 3,679,017
chargebacks and other assets
EXHIBIT INDEX
Exhibit Incorporated by Reference Filed
No. Exhibit Description Form Date Number Herewith
2.1 Agreement and Plan of Merger dated March 10, 2000 by and among 8-K 3/21/00 10.1
Netgateway, Inc., Galaxy Acquisition Corp. and Galaxy
Enterprises, Inc.
3.1 Certificate of Incorporation S-1 6/1/99 3.1
3.2 Certificate of Amendment to Certificate of Incorporation S-1 9/7/00 3.1
3.3 Certificate of Amendment to Certificate of Incorporation 10-K 10/15/02 3.3
3.4 Amended and Restated Bylaws 10-Q 11/20/01 3.2
3.5 Certificate of Ownership and Merger (4) S-1/A 11/12/99 3.3
3.6 Articles of Merger S-1/A 11/12/99 3.4
4.1 Form of Common Stock Certificate 10-K 10/15/02 4.1
4.2 Form of Representatives' Warrant S-1 6/1/99 4.1
10.1 1998 Stock Compensation Program S-1 6/1/99 10.6
10.2 Amended and Restated 1998 Stock Option Plan for Senior X
Executives
10.3 Amended and Restated 1999 Stock Option Plan for Non-Executives X
10.4 Agreement and Plan of Merger among Netgateway, Inc., Category 5 10-Q 11/20/01 2.1
Technologies, Inc., and C5T Acquisition Corp., dated October
23, 2001
10.5 Engagement Agreement dated October 10, 2001 between Netgateway, 10-Q 11/20/01 10.124
Inc. and SBI E2-Capital (USA) Ltd.
10.6 Termination and Release Agreement dated January 14, 2002 among 8-K 1/18/02 2.1
Netgateway, Inc., Category 5 Technologies, Inc. and C5T
Acquisition Corp.
10.7 Rescission Agreement dated February 1, 2002 between Netgateway, 10-Q 2/14/02 10.125
Inc and SBI-E2 Capital (USA) Ltd. et al.
10.8 Letter Agreement re: Modification of August Restructuring 10-Q 5/8/02 10.126
Agreement as of February 13, 2002 between Netgateway, Inc. and
King William LLC
10.9 Agreement dated February 15, 2002 between SBI E2-Capital (USA) 10-K 10/15/02 10.36
Ltd. and Netgateway, Inc.
10.10 Agreement dated March 22, 2002 between vFinance Investments, 10-K 10/15/02 10.37
Inc. and Netgateway, Inc.
18.1 Letter dated February 9, 2000 from KPMG LLP 10-Q 2/15/00 18.1
21.1 Subsidiaries of Netgateway 10-K 10/15/02 21.1
23.1 Consent of Grant Thornton LLP X
23.2 Consent of Eisner LLP (formerly known as Richard A. Eisner & X
Company, LLP)
31.1 Certification of Chief Executive Officer X
31.2 Certification of Chief Financial Officer X
32.1 Certification of Chief Executive Officer X
32.2 Certification of Chief Financial Officer X
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.
Imergent, Inc.
By: /s/ Donald L. Danks
September 26, 2003 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
September 26, 2003 Donald L. Danks
Chairman of the Board of Directors
and Chief Executive Officer
September 26, 2003 /s/ Frank C. Heyman
Frank C. Heyman
Chief Financial Officer
September 26, 2003 /s/ Brandon Lewis
Brandon Lewis
President, Chief Operating Officer
and Director
September 26, 2003 /s/ Peter Fredericks
Peter Fredericks
Director
September 26, 2003 /s/ Thomas Scheiner
Thomas Scheiner
Director
September 26, 2003 /s/ Gary Gladstein
Gary Gladstein
Director