UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2003.
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ___________ TO ___________.
COMMISSION FILE NUMBER 000-29927
IMPROVENET, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 77-0452868
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
10799 N. 90TH STREET, SUITE 200
SCOTTSDALE, AZ 85260
(Address of principal executive offices)
(480) 346-0000
(Issuer's telephone number)
---------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES [X] NO [ ]
The number of shares outstanding of the registrant's common stock, $.001 par
value, was 39,210,315 as of August 14, 2003.
ImproveNet, Inc.
Form 10-QSB
For the Quarter Ended June 30, 2003
Table of Contents
PART I - FINANCIAL INFORMATION
Item 1 Financial Statements:
Consolidated Balance Sheets as of June 30, 2003 (Unaudited) and
December 31, 2002............................................................ 1
Consolidated Statements of Operations for the three and six months
ended June 30, 2003 and 2002 (Unaudited)..................................... 3
Consolidated Statements of Cash Flows for the six months
ended June 30, 2003 and 2002 (Unaudited)..................................... 4
Notes to Unaudited Consolidated Financial Statements......................... 6
Item 2 Management's Discussion and Analysis or Plan of Operation.................... 8
Item 3 Controls and Procedures...................................................... 15
PART II - OTHER INFORMATION
Item 1 Legal Proceedings............................................................ 15
Item 2 Changes in Securities and Use of Proceeds.................................... 15
Item 3 Defaults Upon Senior Securities.............................................. 15
Item 4 Submission of Matters to a Vote of Security Holders.......................... 16
Item 5 Other Information............................................................ 16
Item 6 Exhibits and Reports on Form 8-K............................................. 16
SIGNATURES............................................................................ 17
i
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
IMPROVENET, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
JUNE 30, 2003 DECEMBER 31, 2002
------------- -----------------
Current Assets: (unaudited)
Cash and cash equivalents $ 252,568 $ 446,833
Accounts receivable, net 348,422 329,657
Receivable from stock transfer agent -- 594,715
Other receivables -- 1,000
Prepaid expenses 83,142 55,054
Costs and estimated earnings in excess of billings
on uncompleted software contracts 39,525 4,100
----------- -----------
Total Current Assets 723,657 1,431,359
----------- -----------
Property and equipment, net 141,442 157,994
----------- -----------
Total Assets $ 865,099 $ 1,589,353
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Notes payable - current portion $ 75,000 $ 12,592
Obligations under capital leases - current portion 10,906 15,843
Line of credit 67,710 77,755
Accounts payable 224,489 221,096
Accrued compensation 10,484 194,082
Accrued customer claims 137,080 137,080
Accrued furniture lease buyout - current portion 60,000 216,376
Accrued merger and tender offer redemption liabilities -- 2,378,029
Deferred revenue 26,333 35,958
Billings in excess of costs and estimated earnings
on uncompleted software contracts 22,500 89,250
Other liabilities and accrued expenses 291,235 23,453
----------- -----------
Total Current Liabilities 925,737 3,401,514
Long-Term Liabilities:
Notes payable - long-term portion -- 605
Obligations under capital leases - long-term portion 24,860 26,275
Accrued furniture lease buyout - long-term portion 37,500 --
----------- -----------
Total Liabilities 988,097 3,428,394
----------- -----------
Common Stock, $.001 par value, 100,000,000 shares authorized,
39,210,315 and 53,124,290 shares outstanding at
June 30, 2003 and December 31, 2002, respectively 53,124 53,124
1
Additional paid-in capital 482,570 482,570
Accumulated deficit (658,692) (412,794)
----------- -----------
Less: Treasury stock subscribed, at cost,
underlying 13,913,975 shares -- (1,961,941)
----------- -----------
Total Stockholders' Deficit (122,998) (1,839,041)
----------- -----------
Total Liabilities and Stockholders' Equity $ 865,099 $ 1,589,353
=========== ===========
See accompanying notes to the unaudited consolidated financial statements.
2
IMPROVENET, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2003 AND 2002
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
------------ ------------ ------------ ------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
Revenues $ 840,897 $ 388,580 $ 1,648,548 $ 583,898
Cost of Revenues 435,863 121,688 966,423 152,155
------------ ------------ ------------ ------------
Gross Profit 405,034 266,892 682,125 431,743
Selling, General and Administrative
Expenses 394,878 322,537 844,015 476,318
Research and Development Expenses 104,399 0 193,488 40,704
Marketing Expenses 0 0 0 6,046
------------ ------------ ------------ ------------
Loss from Operations (94,243) (55,645) (355,378) (91,325)
Other Revenues (Expenses)
Interest income 482 35 3,269 71
Interest expense and financing costs (3,555) (56,311) (6,965) (68,898)
Gain on disposal of property and
equipment -- 76,149 -- 11,907
Relief of Debt -- -- 103,876 --
Miscellaneous income 928 1,205 9,300 1,425
------------ ------------ ------------ ------------
Loss from Operations (96,388) (34,567) (245,898) (146,820)
Benefit for Income Taxes -- -- -- --
------------ ------------ ------------ ------------
Net Loss $ (96,388) $ (34,567) $ (245,898) $ (146,820)
============ ============ ============ ============
LOSS PER SHARE - BASIC AND DILUTED
Net loss per common share $ (0.00) $ (0.01) $ (0.01) $ (0.01)
============ ============ ============ ============
Weighted average common shares; basic
and diluted 39,210,315 20,000,000 39,210,315 20,000,000
============ ============ ============ ============
See the accompanying notes to the unaudited consolidated financial statements.
3
IMPROVENET, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2003 AND 2002
(UNAUDITED)
2003 2002
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (245,898) $ (146,820)
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization 38,656 57,517
Relief of Debt (103,876) --
Treasury stock subscribed 1,961,941 --
Gain on disposal of property and equipment -- (11,907)
Changes in:
Accounts receivable, net (18,765) (153,658)
Accounts receivable - other 1,000 --
Income tax refund receivable -- 134,180
Receivable from stock transfer agent 594,715 --
Costs and estimated earnings in excess of billings
on uncompleted contracts (35,425) --
Prepaid expenses (28,088) (6,590)
Accounts payable 3,393 79,618
Accrued compensation (183,598) (48,000)
Accrued merger and tender offer redemption liabilities (2,378,029) --
Other liabilities and accrued expenses 267,782 48,963
Accrued furniture lease buyout (15,000) --
Billings and estimated earnings in excess of costs
on uncompleted contracts (66,750) --
Deferred revenue (9,625) 7,125
----------- -----------
Net cash used in continuing operations (217,567) (39,572)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property, plant and equipment (22,104) (1,372)
Proceeds from sale of property and equipment -- 65,398
----------- -----------
Net cash provided by (used in) investing activities (22,104) 64,026
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of debt (13,197) (34,170)
Repayment of capital leases (6,352) (6,731)
Proceeds from debt incurred 75,000 18,000
Line of credit, net (10,045) 5,000
----------- -----------
Net cash provided by (used in) financing activities 45,406 (17,901)
----------- -----------
Net increase (decrease) in cash and cash equivalents (194,265) 6,553
Cash and cash equivalents, beginning of period 446,833 31,630
----------- -----------
Cash and cash equivalents, end of period $ 252,568 $ 38,183
=========== ===========
4
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION
Interest paid $ 6,965 $ 34,266
=========== ===========
Income taxes paid $ -- $ --
=========== ===========
Non-Cash Activity:
Conversion of related party note to stock $ -- $ 12,000
=========== ===========
Assumption of notes payable on related party auto $ -- $ 78,246
=========== ===========
See accompanying notes to the unaudited consolidated financial statements
5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD ENDED JUNE 30, 2003
NOTE 1 - NATURE OF BUSINESS AND BASIS OF PRESENTATION
ImproveNet, Inc., a Delaware corporation ("ImproveNet" or "Company"),
operates in two business segments:
SOFTWARE - the Company licenses, installs and maintains its proprietary
e-commerce software products to companies primarily operating in the Building
Materials Industry (BMI). The software segment consists primarily of products
developed by eTechLogix.
During the quarter, the Company acquired ownership of a product it helped
recently develop that is a wireless inventory management application of a
leading BMI representative firm serving Home Depot and other "big box"
retailers. The application was known as "Advantage Software" and has been added
to our portfolio and will be marketed as "Smart Logistics." Smart Logistics is
being used in the BMI industry to streamline operations for manufacturers and
representatives by providing them with innovative business processes, technology
solutions and centralization. The Company worked on the development of Smart
Logistics and has agreed to pay a 15% commission to the seller on licensing fees
from the sales of Smart Logistics and related solutions in connection with the
Company's acquisition of the ownership rights.
INFORMATION SERVICES - under the brand ImproveNet this service provides a
source for home improvement information and services for homeowners, service
providers and suppliers nationwide.
A leading brand since 1996, ImproveNet has the breadth of industry
knowledge, and the credibility within the homeowner and contractor market,
software design expertise and partnerships with industry leaders, to leverage
the opportunity within the $1 Trillion annual BMI (source: Harris Information).
ImproveNet's mission is to automate the BMI and connect the entire Value-Chain
with innovative software and outstanding services.
The unaudited consolidated balance sheet as of June 30, 2003 and the
related unaudited consolidated statements of operations for the three and six
month periods ended June 30, 2003 and 2002, and unaudited cash flows for the six
months ended June 30, 2003 and 2002 presented herein have been prepared in
accordance with accounting principles generally accepted in the United States
for interim financial information and in accordance with the instructions to
Form 10-QSB. Accordingly, certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. In our opinion, the
accompanying consolidated financial statements include all adjustments necessary
for a fair presentation of such condensed consolidated financial statements.
Such necessary adjustments consisted of normal recurring items and the
elimination of all significant inter-company balances, transactions and stock
holdings.
These interim consolidated financial statements should be read in
conjunction with the Company's December 31, 2002, Annual Report on Form 10-KSB,
and the Company's Quarterly Report on Form 10-QSB/A for March 31, 2003. Interim
results are not necessarily indicative of results for a full year.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statement and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from these estimates.
LOSS PER SHARE
Basic loss per share of common stock was computed by dividing net loss by
the weighted average number of shares outstanding of common stock.
THREE MONTHS ENDED, JUNE 30, SIX MONTHS ENDED, JUNE 30,
--------------------------------- ---------------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
Numerator:
Net loss attributable to common stockholders $ (96,388) $ (34,567) $ (245,898) $ (146,820)
------------ ------------ ------------ ------------
Denominator:
Weighted average common shares 39,210,315 20,000,000 39,210,315 20,000,000
------------ ------------ ------------ ------------
6
Denominator for basic and diluted calculation 39,210,315 20,000,000 39,210,315 20,000,000
------------ ------------ ------------ ------------
Basic and diluted net loss per common share $ (0.00) $ (0.00) $ (0.01) $ (0.01)
============ ============ ============ ============
Diluted earnings per share are computed based on the weighted average
number of shares of common stock and dilutive securities outstanding during the
period. Dilutive securities are options and warrants that are freely exercisable
into common stock at less than the prevailing market price. Dilutive securities
are not included in the weighted average number of shares when inclusion would
increase the earnings per share or decrease the loss per share. These dilutive
securities include approximately 1,563,889 issued and outstanding stock options
to prior and current employees with a range of exercise prices. There are
1,500,000 outstanding warrants to purchase stock at $.15 per share issued in
connection with merger financing of eTechLogix which are scheduled to expire
this December 2003 (which may be extended) and another 200,000 warrants to
purchase stock at $.10 per share.
NEW ACCOUNTING PRONOUNCEMENT
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 provides alternative methods of transition
for a voluntary change to the fair value method of accounting for stock-based
compensation. The statement amends the disclosure requirements of FASB Statement
No. 123 to require prominent disclosure in both annual and interim financial
statements about the method of accounting for stock-based compensation and the
effect of the method used on reported results. The Company accounts for
stock-based compensation arrangements in accordance with the provisions of
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," and complies with the disclosure provisions of FASB Statement No.
123. The transition provisions are effective for fiscal years ending after
December 15, 2002. The disclosure provisions are effective for interim periods
beginning after December 15, 2002. The Company implemented the required
disclosure provisions in the three-month period ending March 31, 2003, and
continues to follow these provisions. The adoption of this statement did not
have a material impact on the Company's consolidated financial position, results
of operations or cash flows as the Company is not making the voluntary change to
the fair value method of accounting for stock-based compensation.
RECLASSIFICATIONS
Certain reclassifications have been made to the June 30, 2002 financial
statements to conform to the June 30, 2003 classifications.
NOTE 2 - STOCK OPTIONS
The company has adopted FAS No. 123, "Accounting for Stock-Based
Compensation". Under FAS No. 123, companies can, but are not required to, elect
to recognize compensation expense for all stock-based awards using a fair value
methodology. The company has adopted the disclosure-only provisions, as
permitted by FAS No. 123. The company applies APB Opinion No. 25 and related
interpretations in accounting for its stock-based plans. Accordingly, there is
no related compensation expense recorded in the Company's financial statements
for the periods presented. Had compensation cost for stock-based compensation
been determined based on the fair value of the options at the grant dates
consistent with the method of SFAS 123, the Company's net loss and loss per
share for the three and six months ended June 30, 2003 and 2002 would have been
reduced to the pro forma amounts presented below:
THREE MONTHS ENDED, JUNE 30, SIX MONTHS ENDED, JUNE 30,
---------------------------- --------------------------
2003 2002 2003 2002
--------- --------- ---------- ----------
Net Loss:
As reported $ (96,388) $ (34,567) $ (245,898) $ (146,820)
--------- --------- ---------- ----------
Loss Per Share:
As Reported (0.00) (0.00) (0.01) (0.01)
--------- --------- ---------- ----------
Pro Forma $ (0.01) $ (0.00) $ (0.01) $ (0.01)
========= ========= ========== ==========
The fair value of the 750,000 option grants during the six months ended
June 30, 2003 is estimated as of the date of grant utilizing the Black-Scholes
option-pricing model with the following weighted average assumptions for all
grants, expected life of options of two (2) years, risk-free interest rates of
four percent (4%), volatility at 140%, and a zero percent (0%) dividend yield.
7
NOTE 3 - INDUSTRY SEGMENT DATA
Information concerning revenues by industry segment follows (unaudited):
THREE MONTHS ENDED, JUNE 30, SIX MONTHS ENDED, JUNE 30,
-------------------------------------- -------------------------------------
% %
2003 2002 CHANGE 2003 2002 CHANGE
--------- --------- ------ ----------- --------- ------
Revenues:
eTechLogix software revenues $ 82,350 $ 388,580 (78)% 287,250 583,898 (51)%
ImproveNet service revenues 758,547 -- % 1,361,298 -- %
--------- --------- ----------- ---------
Total revenues $ 840,897 $ 388,580 116% $ 1,648,548 $ 583,898 182%
========= ========= =========== =========
A more detailed description of segment performance follows in the
following sections to these notes.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion and analysis of our financial condition and
results of operations should be read in conjunction with our unaudited condensed
consolidated financial statements and notes included elsewhere in this Report on
Form 10-QSB. The discussion in this Report on Form 10-QSB contains
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended, including statements using terminology such as "can," "may,"
"believe," "designated to," "will," "expect," "plan," "anticipate," "estimate,"
"potential," or "continue," or the negative thereof or other comparable
terminology regarding beliefs, plans, expectations or intentions regarding the
future. Forward-looking statements involve risks and uncertainties and actual
results could differ materially from those discussed in the forward-looking
statements, and no reliance should be placed on any forward-looking statement.
All forward-looking statements and risk factors included in this document are
made as of the date hereof, based on information available to the Company as of
the date thereof, and the Company assumes no obligation to update any
forward-looking statement or risk factors, unless we are required to do so by
law. The cautionary statements made in this Report on Form 10-QSB should be read
as applying to all related forward-looking statements wherever they appear in
this Report on Form 10-QSB. Factors that cause or contribute to such differences
include but are not limited to those discussed elsewhere in this Form 10-QSB, as
well as those in a discussion of risk factors found in our Annual Report on Form
10-KSB beginning on page 17 in the section titled "Factors Affecting Future
Performance, Results of Operation and Financial Condition." Our actual results
could differ materially from those discussed here.
OVERVIEW
BASIS OF PRESENTATION
On December 23, 2002, Etech Acquisition, Inc., (the "Merger") an Arizona
corporation and wholly owned subsidiary of ImproveNet merged with and into
eTech. Through this Merger, the former shareholders of eTech acquired a
controlling interest in ImproveNet and accordingly, the Merger is accounted for
as a reverse merger, with eTech being the accounting acquirer of ImproveNet. The
Company has treated the Merger as being effective December 31, 2002 as
ImproveNet had minimal operations from December 23, 2002 to December 31, 2002.
As such, the pre-merger financial statements present the historic financial
position, operations and cash flows of eTech with the December 31, 2002 balance
sheet adjusted to consolidate and reflect the fair values assigned to the
acquisition balance sheet of ImproveNet.
The Company's financial statements are presented on a going concern basis,
which contemplates the realization of assets and the satisfaction of liabilities
in the normal course of business. The Company has continued to sustain losses
for the past two years and has negative working capital and negative net worth
and is uncertain whether we will succeed in obtaining needed additional working
capital.
The financial statements do not include any adjustments to reflect the
possible future effects of the recoverability and classification of assets or
the amounts and classifications of liabilities that may result from the
uncertainty of the Company's ability to continue as a going concern.
8
ACQUISITION
On December 23, 2002, eTech Acquisition, Inc., an Arizona corporation and
wholly-owned subsidiary of ImproveNet, merged with and into eTech. This Merger
occurred pursuant to an Agreement and Plan of Merger (the "Merger Agreement")
dated July 30, 2002. Under the terms of the Merger Agreement, eTech paid
$500,000 to ImproveNet and incurred $19,000 in costs directly related to the
Merger. At the time of the Merger, each outstanding share of eTech Common Stock,
no par value per share, was converted into the right to receive and became
exchangeable for 5,555.555556 shares of ImproveNet Common Stock, par value $.001
per share. A total of 35,417,750 shares of ImproveNet common stock were issued
in the Merger to eleven (11) different shareholders of eTech. Through the
Merger, the former directors, who were also shareholders, of eTech collectively
received 30,310,740 shares of ImproveNet Common Stock and as a result, acquired
control of the Company.
Un-expired outstanding options to purchase eTech Common Stock were
converted, on the same vesting schedule, into an option to purchase a number of
shares of ImproveNet Common Stock equal to the number of shares of eTech Common
Stock that could have been purchased under such option multiplied by
5,555.555556, at a price per share of ImproveNet Common Stock equal to the per
share exercise price of $.05 per share. Options to acquire 788,889 shares of
ImproveNet Common Stock were issued in the Merger as a result of these
outstanding options, of which, 222,222 had vested as of the date of the Merger.
Warrants to purchase 1,500,000 shares of ImproveNet were issued as a result
of the Merger. These warrants were issued in conjunction with subordinated
convertible notes payable, as discussed below.
TENDER OFFER
Under the terms of the Merger Agreement, the Company agreed to present a
cash tender offer ("Tender Offer") to pre-merger shareholders of ImproveNet. The
price per share was based in part on ImproveNet's available cash balance at the
closing of the Merger. The Tender Offer was available from the time of the
Merger through January 2, 2003.
Prior to the closing of the Merger, ImproveNet deposited approximately
$2,557,000 with its stock transfer agent for payments to be made under the
Tender Offer. In conjunction with the Tender Offer, the Company disbursed a
total of approximately $1,962,000 to various pre-merger ImproveNet shareholders
in January 2003 resulting in the acquisition of 13,913,975 treasury shares in
January 2003 and the acquisition of an additional 105,000 shares from the
exercise and sale of options and warrants. Funds in excess of disbursements of
approximately $518,000 were returned to the Company from the stock transfer
agent in January 2003.
ACCOUNTING FOR THE MERGER
The Company accounted for this Merger in accordance with SFAS No. 141,
"Business Combinations." As discussed above, the former shareholders of eTech
acquired a controlling interest in the Company, and accordingly, the transaction
has been accounted for as a reverse merger and the total consideration given by
eTech of $519,000 has been allocated to the fair values of the pre-merger assets
and liabilities of ImproveNet. At the time of the acquisition, the fair value of
the net assets of ImproveNet was $361,351 in excess of the consideration given
by eTech after all applicable reductions of amounts that otherwise would have
been assigned to the acquired assets were considered. This excess was reported
in the statement of operations as an extraordinary gain.
eTechLogix, Inc. ("eTech"), a wholly-owned subsidiary of ImproveNet,
licenses, installs and maintains its proprietary e-commerce software products to
companies primarily operating in the building material industry. eTech was
formerly known as First Systech International, Inc. and was originally
incorporated in March 1989 in the State of Texas. In July of 1994, eTech
relocated to the State of Arizona and incorporated itself under the laws of the
State of Arizona.
ImproveNet, Inc. ("ImproveNet" or the "Company") was incorporated in
California in January 1996, was reincorporated in Delaware in September 1998 and
is headquartered in Scottsdale, Arizona. The Company is a source for home
improvement information services for homeowners, service providers and suppliers
nationwide.
The following discussion should be read in conjunction with the
consolidated financial statements provided under Part I, Item 1 of this Form
10-QSB. Certain statements contained herein may constitute forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995. These statements involve a number of risks, uncertainties and other
factors that could cause actual results to differ materially.
The forward-looking information set forth in this Form 10-QSB is as of
August 14, 2003, and ImproveNet, Inc. undertakes no duty to update this
information. Should events occur subsequent to August 14, 2003 that make it
necessary to update the forward-looking information contained in this Form
10-QSB, the updated forward-looking information will be filed with the
9
SEC in a Quarterly Report on Form 10-QSB or as an earnings release included as
an exhibit to a Form 8-K, each of which will be available at the SEC's website
at www.sec.gov.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
ImproveNet, Inc.'s discussion and analysis of its financial condition and
results of operations are based upon ImproveNet, Inc. consolidated financial
statements, which have been prepared in accordance with accounting principles
generally accepted in the United States. The preparation of these financial
statements requires ImproveNet to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenues and expenses, and related
disclosure of contingent assets and liabilities. On an on-going basis,
ImproveNet evaluates its estimates, including those related to customer
programs, bad debts, income taxes, contingencies and litigation. ImproveNet
bases its 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.
ImproveNet believes the following critical accounting policies affect its
more significant judgments and estimates used in the preparation of its
consolidated financial statements.
SOFTWARE SEGMENT - ETECHLOGIX
The Company recognizes revenue in accordance with SOP 97-2, "Software
Revenue Recognition." This SOP provides guidance on revenue recognition of
software transactions. The Company recognizes revenue principally from the
development and licensing of its software and from consulting and maintenance
services rendered in connection with such development and licensing activities.
Maintenance contract revenue is recognized on a straight-line basis over the
life of the respective contract. The Company also derives revenue from the sale
of third party hardware and software which is recognized based on the terms of
each contract. Consulting revenue is recognized when the services are rendered.
No revenue is recognized prior to obtaining a binding commitment from the
customer.
Revenue from fixed price software development contracts, which require
significant modification to meet the customer's specifications, is recognized on
the percentage-of-completion method using the units-of-work-performed method to
measure progress towards completion. Revisions in cost estimates and recognition
of losses on these contracts are reflected in the accounting period in which the
facts become known. Revenue from software package license agreements without
significant vendor obligations is recognized upon delivery of the software.
Contract terms may provide for billing schedules that differ from revenue
recognition and give rise to costs and estimated earnings in excess of billings
on uncompleted software contracts, and billings in excess of costs and estimated
earnings on uncompleted software contracts.
Deferred revenue represents revenue billed and collected but not yet
earned.
The cost of maintenance and research and development, which consist
principally of staff payroll and applicable overhead, are expensed as incurred.
INFORMATION SERVICES SEGMENT - IMPROVENET
Revenues in the home improvement services segment are derived from two
sources: Service revenues and marketing revenues.
SERVICE REVENUES:
Service revenues include lead fees and win fees from ImproveNet's
contractor matching service and enrollment fees from new contractors joining the
ImproveNet network. Lead fees are recognized at the time a homeowner and
contractor are matched by the Company and the service provider becomes obligated
to pay such fee. Win fees are recognized at the time the service provider or the
homeowner notifies the Company that a job has been sold and the service provider
becomes obligated to pay such fee. Enrollment fees from service providers are
recognized as revenue ratably over the expected period they participate in our
contractor matching service, which is initially estimated to be between one and
two years. Payments of enrollment fees received in advance of providing services
are deferred until the period the services are provided. The Company establishes
a refund reserve at the time of revenue recognition based on the Company's
historical experience.
MARKETING REVENUES:
Marketing revenues include the sale of banner, SmartLeads and other Web
site advertisements. Currently marketing revenues are comprised of cash
advertising.
10
CASH ADVERTISING
Cash advertising revenues generally are derived from short-term advertising
contracts in which the Company typically guarantees that a minimum number of
impressions will be delivered to its Web site visitors over a specified period
of time for a fixed fee. Cash marketing revenues from banner, button and other
Web site advertisements are recognized at the lesser of the amount recorded
ratably over the period in which the advertising is delivered or the percentage
of guaranteed impressions delivered. SmartLeads revenues are also paid for in
cash and are recognized when the SmartLeads have been delivered to the customer.
Cash marketing is recognized when the Company has delivered the advertising,
evidence of an agreement is in place and fees are fixed, determinable and
collectible.
The Company follows the allowance method of recognizing uncollectible
accounts receivable. The allowance method recognizes bad debt expense as a
percentage of accounts receivable based on a review of the individual accounts
outstanding and the Company's prior history of uncollectible accounts
receivable. If the financial condition of ImproveNet's customers were to
deteriorate, resulting in an impairment of their ability to make payments,
additional allowances may be required.
Deferred income taxes are provided for on an asset and liability method,
whereby deferred tax assets are recognized for deductible temporary differences
and operating loss carryforwards and deferred tax liabilities are recognized for
taxable temporary differences. Temporary differences are the differences between
the reported amounts of assets and liabilities and their tax basis.
Deferred tax assets are reduced by a valuation allowance, when in the
opinion of management, it is more likely than not that some portion or all of
the deferred tax assets will not be realized. Deferred tax assets and
liabilities are adjusted for the effects of changes in tax laws and rates on the
date of enactment.
BUSINESS SEGMENTS
The Company follows SFAS No. 131, "Disclosure about Segments of an
Enterprise and Related Information." SFAS No. 131 requires publicly held
companies to report financial and other information about key revenue segments
of an entity for which this information is available and is utilized by the
chief operating decision maker. The Company limits its segment reporting to
revenues, cost of revenues and gross profit by segment. If in the future working
capital permits, the Company may expand its financial accounting systems and
resources to implement full segment financial reporting. The Company currently
operates in two segments:
Software - the Company licenses, installs and maintains its proprietary
e-commerce software products to companies primarily operating in the building
material industry. The software segment is consists primarily of products
developed by eTechLogix, except during the quarter the Company bought the rights
to a line of software tools known as Advantage Software which greatly expands
the Company's software solutions for the BMI.
Information Services - Under the brand ImproveNet this service provides a
source for home improvement information services for homeowners, service
providers and suppliers nationwide.
The Company's pre-merger consolidated statements of operations and cash
flows do not reflect operations for ImproveNet (information services segment) as
ImproveNet, for accounting purposes, was acquired effective December 31, 2002 in
the Merger.
Our actual future results could differ materially from those discussed
here.
RESULTS OF OPERATION
REVENUES
Our revenues increased to approximately $1,648,548 for the six months ended
June 30, 2003 from approximately $583,898 for the six months ended June 30,
2002, an increase of $1,064,650 or 182%. The increase is primarily due to
revenues from the ImproveNet business reported in the current period but not
included in the prior period. Our revenues increased to $840,897 for the quarter
ending June 30, 2003 compared with $388,580 for the year earlier period and from
$807,651 for the quarter ending March 31, 2003.
11
The following table and discussion highlights our revenues for the three
and six month periods ended June 30, 2003 and 2002:
THREE MONTHS ENDED, JUNE 30, SIX MONTHS ENDED, JUNE 30,
---------------------------- --------------------------
% %
2003 2002 CHANGE 2003 2002 CHANGE
---- ---- ------ ---- ---- ------
Revenues:
eTechLogix software revenues $ 82,350 $ 388,580 (78)% 287,250 583,898 (51)%
ImproveNet service revenues 758,547 - % 1,361,298 - %
--------- --------- ----------- ---------
Total revenues $ 840,897 $ 388,580 116% $ 1,648,548 $ 583,898 182%
========= ========= =========== =========
SOFTWARE (ETECHLOGIX) REVENUES
eTechLogix revenue decreased to approximately $287,250 for the six months
ended June 30, 2003, from approximately $583,898 for the six months ended June
30, 2002, a decrease of over 50%. The decrease in eTechLogix revenue resulted
from a decrease in sales of the company's software products and integration
services.
INFORMATION SERVICES (IMPROVENET) REVENUES
ImproveNet revenue was approximately $1,361,298 for the six months ended
June 30, 2003. No ImproveNet revenue was included in the six months ended June
30, 2002 as the Merger occurred effective December 31, 2002. ImproveNet revenue
consists almost entirely of service revenues from its contractor matching
service. Improvements in managing credits issued against lead and win revenues
during the quarter resulted in a reduction in allowances against revenues in the
second quarter directly impacting the increased revenue reported from the
ImproveNet services segment. These credit management improvements are not
anticipated to have a continuing material impact on revenue recognition in
future periods.
OPERATING EXPENSES
COST OF REVENUES
Cost of revenues increased to $966,423 for the six months ended June 30,
2003 from $152,155 for the six months ended June 30, 2002, an increase of
$814,268. The increase is primarily due to cost of revenues from the newly
acquired ImproveNet business.
The following table and discussion highlights our cost of revenues for the
six months ended June 30, 2003 and 2002:
SIX MONTHS ENDED JUNE 30,
2003 2002 CHANGE
---- ---- ------
Cost of revenues
Software (eTechLogix) $ 57,450 $ 152,155 $ (94,705)
Information Services (ImproveNet) 908,973 - 908,973
--------- --------- ---------
Total $ 966,423 $ 152,155 $ 814,268
========= ========= =========
SOFTWARE (ETECHLOGIX) COST OF REVENUE
eTechLogix cost of revenues decreased to $57,450 for the six months ended
June 30, 2003, from approximately $152,155 for the six months ended June 30,
2002. The decline in eTechLogix's cost of revenue is primarily a result of
decrease in sales in the current year over the prior year reported period. Upon
further evaluation, management has determined that variable costs associated
with software revenue approximates twenty percent (20%) of revenues and has been
applied in the second quarter to the first six months revenues (due to no
allocation being made in the first quarter) as a cost of revenue from selling,
general and administrative expenses, and will re-evaluate on a regular basis
moving forward the allocation of variable costs of revenue.
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INFORMATION SERVICES (IMPROVENET) COST OF REVENUE
ImproveNet cost of revenue was approximately $908,973 for the six months
ended June 30, 2003. No ImproveNet cost of revenue was included in the six
months ended June 30, 2002 as the Merger occurred effective December 31, 2002.
ImproveNet cost of revenue consists primarily of the cost of home improvement
leads and the cost for the outsourced project service group, which is
responsible for all phases of our proprietary matching services and includes our
project advisors. Quarter over quarter cost of revenue declined due primarily to
reductions in the costs of leads from partners such as Microsoft and Homestore.
Improvements in cost of revenue quarter over quarter were achieved primarily
from reducing the cost of lead acquisition in the service segment of our
business and increased allocation of engineering staff to research and
development.
SELLING, GENERAL AND ADMINISTRATIVE
Our selling, general and administrative expenses increased to $844,015 for
the six months ended June 30, 2003 from $476,318 for the six months ended June
30, 2002, an increase of $367,697 due primarily to the Improvenet acquisition.
Our selling, general and administrative ("sg&a") expenses include payroll
and related costs and travel, recruiting, professional and advisory services and
other general expenses for our executive, sales, finance, legal, and human
resource departments. The increase in our sg&a expense was primarily the result
of the Merger effective December 31, 2002. The Merger resulted in increased
headcount and increased costs for insurance, legal and accounting. Approximately
$73,000 of liability to officers relating to pre-merger activity was written off
this quarter directly reducing the total sg&a reported.
RESEARCH AND DEVELOPMENT
Our research and development expenses increased to approximately $193,488
for the six months ended June 30, 2003 from approximately $40,704 for the six
months ended June 30, 2002, an increase of $152,784.
Our research and development costs include the payroll and related costs of
our technology staff, other costs of Web site design and new technologies
required to enhance the performance of our Web sites.
The increase in research and development expenses in 2003 was primarily
attributable to increased payroll and related costs and an increase in the usage
of offshore development contractors improving the functionality and features of
www.improvenet.com and working on integration and improvement of the eTechLogix
products which management believes will benefit the Company.
MARKETING
Upon further review management has determined separating marketing expenses
out of selling, general & administrative is not appropriate. Marketing expenses
will no longer be reported as a separate item and we will discontinue discussing
changes in marketing expenses. Beginning in the third quarter, the Company
anticipates bringing much of its marketing expenses internal as it has recently
hired a vice president of marketing.
Our marketing expense includes online and offline direct marketing and
advertising, public relations and trade show expenses. Marketing expenses also
include payroll and related costs, support staff expenses, travel costs and
other general expenses of our marketing, professional services and partnership
services departments.
Marketing expense increases in the current quarter were primarily
attributable to updating the corporate brochures and marketing material
pertaining to the ImproveNet business and the improved and merged products with
eTechLogix.
OTHER REVENUES (EXPENSES)
During the period, our auditors have advised that the Extraordinary Gain
from Relief of Debt reported separate in the first quarter should now be
included in Other Revenues and Expenses. Including that item, other revenue
increased to $109,480 for the six months ended June 30, 2003 from an expense of
$55,495 for the six months ended June 30, 2002, an increase of $164,975
primarily due to the $103,876 relief of debt and a reduction in interest
expense.
13
SIX MONTHS ENDED JUNE 30,
2003 2002 CHANGE
---- ---- ------
OTHER REVENUES (EXPENSES)
Interest income $ 3,269 $ 71 $ 3,198
Interest expense and financing costs (6,965) (68,898) 61,933
Gain on disposal of property and equipment - 11,907 (11,907)
Gain on Relief of Lease obligation 103,876 103,876
Miscellaneous income 9,300 1,425 7,875
--------- --------- --------
$ 109,480 $ (55,495) $164,975
========= ========= ========
RELIEF OF DEBT
The relief of debt recognized in the first quarter of $103,876 is
attributable to a favorable settlement of a liability under a furniture lease
agreement. While the settlement requires the Company to make installment
payments not benefiting operations, the settlement positively impacted the
reported results for the six month period ending June 30, 2003.
INCOME TAXES
We have recorded a 100% valuation allowance against our net deferred tax
assets, which arose primarily as a result of our aggregate operating losses. The
valuation allowance will remain at this level until such time as we believe that
the realization of the net deferred tax assets is more likely than not.
Accordingly, our results of operations do not reflect any tax benefits for our
reported losses.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents totaled approximately $252,568 at June 30, 2003,
a decrease of $194,265 from $446,833 at December 31, 2002. The decrease was
primarily due to the cash used in reducing finance obligations of the Company
and the balance used in operating activities.
Cash used in operating activities for the six months ended June 30, 2003
was $217,567, compared to cash used of $39,572 for the six months ended June 30,
2002. Cash used in operating activities in the current year first six months
reflects the impact of the Merger and tender offer obligations as well as our
net loss before depreciation, offset by changes in operating assets and
liabilities.
Cash used for investing activities was $22,104 for the six months ended
June 30, 2003, and decreased $86,130 from cash provided of $64,026 for the six
months ended June 30, 2002. In the first six months of 2003, the cash was used
to purchase equipment and furniture, and the cash provided in the first six
months of 2002 was primarily derived by the sale of property and equipment.
Cash provided in financing activities was $45,406 in the six months ended
June 30, 2003 and cash used in financing activities was $17,901 in the six
months ended June 30, 2002, an increase of $63,307 due primarily to incurring
new debt used in operations. The new debt is a $75,000 short-term note due in
September.
The Company anticipates increased year-over-year sales volume of their
primary software products assuming the Company is successful in obtaining
additional working capital to implement its sales and marketing program. The
Company also anticipates increased revenues for the remainder of 2003 from the
addition of the home improvement information services segment as revenues from
this segment are not included in the prior year's results of operations.
Our operating losses have limited our ability to obtain vendor credit or
extended payment terms and bank financing on favorable terms; accordingly, we
depend on our cash and cash equivalent balances to fund our operations.
As a result of the Merger with ImproveNet, both revenue and operating
expenses will increase significantly in 2003. Prior to the Merger, the
ImproveNet business operated at a significant loss. The ImproveNet business has
been moved from California to Arizona. During the first six months of 2003,
significant resources were allocated to integration and improvement projects due
to the merger of the ImproveNet business, negatively affecting results of
eTechLogix's software sales operations. No assurances can be given that this
will not continue in the future.
14
Due to the significant level of current liabilities and the history of
operating losses, there is no assurance that our available cash resources will
be sufficient to meet our anticipated needs for operations and capital
expenditures during the next 12 months. We have decreased sales and other
operating expenditures, pending success in our planned capital offering or other
additions to working capital. We need to raise additional funds in order to
develop new and enhance existing services, to respond to competitive pressures,
or to acquire complementary businesses, services or technologies. No assurances
can be given that additional financing will be available on terms favorable to
us, or at all.
ITEM 3. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Under the supervision and with the participation of our Chief Executive
Officer and Chief Financial Officer, we have, as of a date within 90 days before
the filing date of this six month report (the "Evaluation Date") evaluated the
effectiveness of our "disclosure controls and procedures." Based upon that
evaluation, our Chief Executive Officer and Chief Financial Officer concluded
that our disclosure controls and procedures are effective in timely alerting
them to material information required to be disclosed by us in our periodic
reports to the Securities and Exchange Commission although desired improvements
have been identified for implementation and additional review and analysis is
ongoing. Disclosure controls and procedures are controls and procedures that are
designed to ensure that information required to be disclosed in Company reports
filed or submitted under the Exchange Act of 1934, as amended, is recorded,
processed, summarized and reported within the time periods specified in the
SEC's rules and forms. They include, without limitation, controls and procedures
designed to ensure that information required to be disclosed in such reports is
accumulated and communicated to management, including the Chief Executive
Officer and Chief Financial Officer, as appropriate, to allow timely decisions
regarding required disclosure. We experienced a change in our Chief Financial
Officer (CFO) effective August 1, 2003 due to our prior CFO accepting another
career opportunity out of state and leaving in June 2003. Our new CFO, who was
hired from outside the Company, assumed his position August 1, 2003.
CHANGES IN INTERNAL CONTROLS
There were no significant changes in our internal controls or to our
knowledge, in other factors that could significantly affect these controls,
including any corrective actions with regard to significant deficiencies and
material weaknesses, subsequent to the date of their last evaluation, although
we have begun implementing additional controls aimed to improve the accounting
and financial systems operations and control which include initiatives that will
require additional working capital before they can be effectively implemented
and integrated such as but not limited to priority of accounting integration
tasks, adequacy of our accounting software to accommodate growth, and other
system and process improvements including elimination of duplicate entry tasks,
improvements in the billing and collection processes, and additional staffing
requirements. The impact, positive or negative, of implementing or failure to
implement these planned changes will not be known or realized until future
periods.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, we may be involved in litigation relating to claims arising
out of our operations, and currently we are a party to several routine
litigation matters that are incidental to our business. As of the date of this
filing, we are engaged in legal proceedings that could materially affect our
business should an adverse judgment be entered against us. One pending
arbitration matter in Phoenix, Arizona involves First Systech International,
Inc., a predecessor to Etech. This proceeding concerns the 1998 sale of an ERP
software product to a client who is demanding a refund of the purchase price,
and First Systech International is counterclaiming for the balance due on the
contract plus additional work performed. Discovery is ongoing and the matter is
set for hearing before an arbitration panel in October 2003. Should a third
party in any of the ongoing litigation matters obtain a judgment against the
Company or its subsidiary, it is unlikely the Company or its subsidiary would
have sufficient working capital available to timely pay any such judgment. In
addition, we have received preliminary information regarding possible erroneous
cancellation of health insurance benefits for former employees under COBRA for
which we may have potential liability.
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
15
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------ -----------------------
31.1 Certification of Jeffrey I. Rassas, Chief Executive Officer pursuant to Rule 13a-15 and 15d-15.(5) of the
Securities and Exchange Act of 1934, as amended.
31.2 Certification of Thomas A. Cifelli, Chief Financial Officer pursuant to Rule 13a-15 and 15d-15.(5) of the
Securities Exchange Act of 1934, as amended.
32.1 Certification of Jeffrey I. Rassas, Chief Executive Officer pursuant to section 906 of the Sarbanes Oxley
Act of 2002
32.2 Certification of Thomas A. Cifelli, Chief Financial Officer pursuant to section 906 of the Sarbanes Oxley
Act of 2002
(b) Reports on Form 8-K
- None filed for the quarter ending June 30, 2003.
16
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of
1934, the Registrant has duly caused this report to be signed, August 18, 2003
on its behalf by the undersigned duly authorized.
IMPROVENET, INC.
(Registrant)
By:/s/ Jeffrey I. Rassas
------------------------
Jeffrey I. Rassas
Co-Chairman and CEO
By:/s/ Thomas A. Cifelli
------------------------
Thomas A. Cifelli
Chief Financial Officer
Date: August 18, 2003
17