UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB/A
(Amendment No. 1)
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 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
incorporation or organization) Identification Number)
8930 E. RAINTREE DRIVE, SUITE 300
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 April 30, 2003.
ImproveNet, Inc.
Form 10-QSB
For the Quarter Ended March 31, 2003
Index
PART I FINANCIAL INFORMATION
Item 1 Financial Statements:
Condensed Consolidated Balance Sheets as of March 31, 2003 and
December 31, 2002 (Unaudited)............................................................................. 1
Condensed Consolidated Statements of Operations for the three months
ended March 31, 2003 and 2002 (Unaudited)................................................................. 2
Condensed Consolidated Statements of Cash Flows for the three months
ended March 31, 2003 and 2002 (Unaudited)................................................................. 3
Notes to Unaudited Condensed Consolidated Financial Statements............................................ 4
Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations..................... 7
Item 3 Controls and Procedures................................................................................... 13
PART II OTHER INFORMATION
Item 1 Legal Proceedings......................................................................................... 14
Item 2 Changes in Securities..................................................................................... 14
Item 3 Defaults upon Senior Securities........................................................................... 14
Item 4 Submission of Matters to a Vote of Security Holders....................................................... 14
Item 5 Other Information......................................................................................... 14
Item 6 Exhibits and Reports on Form 8-K.......................................................................... 14
SIGNATURES......................................................................................................... 15
Section 302 Certifications......................................................................................... 16
i
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
IMPROVENET, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH 31, 2003 DECEMBER 31, 2002
-------------- -----------------
Current Assets: (unaudited)
Cash and cash equivalents $ 196,028 $ 446,833
Accounts receivable, net 392,767 329,657
Receivable from stock transfer agent -- 594,715
Other receivables -- 1,000
Prepaid expenses 69,938 55,054
Costs and estimated earnings in excess of billings
on uncompleted software contracts 39,525 4,100
----------- -----------
Total Current Assets 698,258 1,431,359
----------- -----------
Property and equipment, net 145,388 157,994
----------- -----------
Total Assets $ 843,646 $ 1,589,353
=========== ===========
Current Liabilities:
Notes payable - current portion $ -- $ 12,592
Obligations under capital leases - current portion 14,759 15,843
Line of credit 72,255 77,755
Accounts payable 133,536 221,096
Accrued compensation 73,598 194,082
Accrued customer claims 137,080 137,080
Accrued furniture lease buyout - current portion 45,000 216,376
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 252,835 23,453
----------- -----------
Total Current Liabilities 777,896 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 67,500 --
----------- -----------
Total Liabilities 870,256 3,428,394
----------- -----------
Commitments and Contingencies: -- --
Stockholders' Deficit
Common Stock, $.001 par value, 100,000,000 shares
authorized, 53,124,290 shares issued and 39,210,315
and 53,124,290 shares outstanding at March 31, 2003
and December 31, 2002, respectively 53,124 53,124
Additional paid-in capital 482,570 482,570
Accumulated deficit (562,304) (412,794)
----------- -----------
(26,610) 122,900
Less: Treasury stock subscribed, at cost,
underliying 13,913,975 shares -- (1,961,941)
----------- -----------
Total Stockholders' Deficit (26,610) (1,839,041)
----------- -----------
Total Liabilities and Stockholders' Equity $ 843,646 $ 1,589,353
=========== ===========
See accompanying notes to the
unaudited condensed consolidated financial statements
1
IMPROVENET, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31,
(UNAUDITED)
2003 2002
------------ ------------
Revenues $ 807,651 $ 195,318
Cost of Revenues 530,560 30,467
------------ ------------
Gross Profit 277,091 164,851
Selling, General and Administrative Expenses 408,142 152,230
Research and Development Expenses 89,089 42,255
Marketing Expenses 40,995 6,046
------------ ------------
Loss from Operations (261,135) (35,680)
Other Revenues (Expenses)
Interest income 2,787 36
Interest expense and financing costs (3,410) (12,587)
Loss on disposal of property and equipment -- (64,242)
Miscellaneous income 8,372 220
------------ ------------
Loss from Operations before Extraordinary Gain (253,386) (112,253)
Benefit for Income Taxes -- --
------------ ------------
LOSS BEFORE EXTRAORDINARY GAIN (253,386) (112,253)
Extraordinary Gain - Relief of Debt 103,876 --
------------ ------------
Net Loss $ (149,510) $ (112,253)
============ ============
LOSS PER SHARE - BASIC AND DILUTED
- Loss before extraordinary gain $ (0.01) $ (0.01)
============ ============
- Extraordinary gain 0.00 --
============ ============
- Net loss per common share $ (0.00) $ (0.01)
============ ============
Weighted average common shares; basic and diluted 40,107,991 20,000,000
============ ============
See accompanying notes to the
unaudited condensed consolidated financial statements
2
IMPROVENET, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31,
(UNAUDITED)
2003 2002
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (149,510) $ (112,253)
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization 19,000 21,081
Extraordinary gain (103,876) --
Treasury stock subscribed 1,961,941 --
Loss on disposal of property and equipment -- 64,242
Changes in:
Accounts receivable, net (63,110) (13,330)
Accounts receivable - other 1,000 --
Receivable from stock transfer agent 594,715 --
Costs and estimated earnings in excess of billings
on uncompleted contracts (35,425) --
Prepaid expenses (14,884) (6,590)
Accounts payable (87,560) 32,066
Accrued compensation (120,484) 26,500
Accrued merger and tender offer redemption liabilities (2,378,029) --
Other liabilities and accrued expenses 229,382 15,797
Billings and estimated earnings in excess of costs
on uncompleted contracts (66,750) --
Deferred revenue (9,625) (37,500)
----------- -----------
Net cash used in continuing operations (223,215) (9,987)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Note receivable -- --
Collection of notes receivable -- --
Purchase of property, plant and equipment (6,394) (499)
----------- -----------
Net cash provided by (used in) investing activities (6,394) (499)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of debt (13,197) (9,361)
Repayment of capital leases (2,499) (11,783)
Repayment on line of credit (5,500) --
Proceeds from sale of common stock, net -- --
----------- -----------
Net cash provided by (used in) financing activities (21,196) (21,144)
----------- -----------
Net increase (decrease) in cash and cash equivalents (250,805) (31,630)
Cash and cash equivalents, beginning of period 446,833 31,630
----------- -----------
Cash and cash equivalents, end of period $ 196,028 $ --
=========== ===========
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION
Interest paid $ 3,410 $ 12,587
=========== ===========
Income taxes paid $ -- $ --
=========== ===========
See accompanying notes to the
unaudited condensed consolidated financial statements
3
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD ENDED MARCH 31, 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.
Information Services - Under the brand ImproveNet this service provides a
source for home improvement information 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. ImproveNet's mission is to
automate the BMI and connect the entire Value-Chain with innovative software and
outstanding services.
The unaudited condensed consolidated balance sheet as of March 31, 2003 and
the related unaudited condensed consolidated statements of operations for the
three month period ended March 31, 2003 and 2002, and unaudited condensed cash
flows for the three months ended March 31, 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 condensed 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 intercompany
balances, transactions and stock holdings.
These interim condensed consolidated financial statements should be read in
conjunction with the Company's December 31, 2002, Annual Report on Form 10-KSB.
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.
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.
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. The adoption of this
statement did not have a material impact on the Company's consolidated financial
4
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.
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 months ended March 31, 2003 and 2002 would have been reduced
to the pro forma amounts presented below:
THREE MONTHS ENDED MARCH 31,
----------------------------------
2003 2002
------------ ------------
Net loss:
As reported $ (149,510) $ (112,235)
============ ============
Pro forma $ (224,510) $ (112,235)
============ ============
LOSS PER SHARE:
As reported $ (0.00) $ (0.01)
============ ============
Pro forma $ (0.01) $ (0.01)
============ ============
The fair value of the 750,000 option grants during the quarter ended March
31, 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.
5
NOTE 3 - INDUSTRY SEGMENT DATA
Information concerning operations by industry segment follows (unaudited):
THREE MONTHS ENDED MARCH 31,
----------------------------
2003 2002
----------- -----------
Revenue
Software (eTechLogix) $ 204,900 $ 195,318
Information Services (ImproveNet) 602,751 --
----------- -----------
Total 807,651 195,318
----------- -----------
GROSS PROFIT
Software (eTechLogix) 204,900 164,851
Information Services (ImproveNet) 72,191 --
----------- -----------
Total 277,091 164,851
----------- -----------
OPERATING EXPENSES 538,226 200,531
----------- -----------
OPERATING LOSS (261,135) (35,680)
Interest Income 2,787 36
Interest Expense (3,410) (12,587)
Loss on disposal of assets -- (64,242)
Miscellaneous income 8,372 220
----------- -----------
OPERATING LOSS BEFORE EXTRAORDINARY GAIN (253,386) (112,253)
Extraordinary Gain - Relief of debt 103,876 0
----------- -----------
Total $ (149,510) $ (112,253)
=========== ===========
DEPRECIATION AND AMORTIZATION
Software (eTechLogix) $ 19,000 $ 21,081
Information Services (ImproveNet) -- --
----------- -----------
Total $ 19,000 $ 21,081
=========== ===========
IDENTIFIABLE ASSETS
Software (eTechLogix) $ 392,268 $ 1,589,353
Information Services (ImproveNet) 451,378 --
----------- -----------
Total $ 843,646 $ 1,589,353
=========== ===========
6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis of our financial condition and
results of operation should be read 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. 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 de minimus 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.
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.
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 of eTech, who were also shareholders, 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. Funds in excess of disbursements of approximately $595,000 were
returned to the Company from stock transfer agent in January 2003.
7
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 is 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 Deleware 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 May
20, 2003, and ImproveNet, Inc. undertakes no duty to update this information.
Should events occur subsequent to May 20, 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 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
8
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 related revenues,
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.
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 operates in two segments:
9
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.
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.
RESULTS OF OPERATIONS
REVENUES
Our revenues increased to approximately $808,000 for the three months ended
March 31, 2003 from approximately $195,000 for the three months ended March 31,
2002, an increase of approximately $613,000 or 314%. The increase is primarily
due to revenues from the ImproveNet business.
The following table and discussion highlights our revenues for the three
months ended March 31, 2003 and 2002:
THREE MONTHS ENDED MARCH 31,
--------------------------------
2003 2002 CHANGE
--------- -------- ---------
REVENUES
Software (eTechLogix) $ 205,000 $195,000 $ 10,000
Information Services (ImproveNet) 603,000 -- 603,000
--------- -------- ---------
Total $ 808,000 $195,000 $ 613,000
========= ========= =========
SOFTWARE (ETECHLOGIX) REVENUES
eTechLogix revenue increased to approximately $205,000 for the three months
ended March 31, 2003, from approximately $195,000 for the three months ended
March 31, 2002, an increase of approximately $10,000 or 5%. The increase in
eTechLogix revenue is primarily a result of increased sales of the company's
Smart FusionSM software product and associated installation and integration
services.
INFORMATION SERVICES (IMPROVENET) REVENUES
ImproveNet revenue was approximately $603,000 for the three months ended
March 31, 2003. No ImproveNet revenue was included in the three months ended
March 31, 2002 as the Merger occurred effective December 31, 2002. ImproveNet
revenue consists almost entirely of service revenues from its contractor
matching service.
10
OPERATING EXPENSES
COST OF REVENUES
Cost of revenues increased to approximately $531,000 for the three months
ended March 31, 2003 from approximately $30,000 for the three months ended March
31, 2002, an increase of approximately $501,000. 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
three months ended March 31, 2003 and 2002:
THREE MONTHS ENDED MARCH 31,
--------------------------------
2003 2002 CHANGE
--------- -------- ---------
COST OF REVENUES
Software (eTechLogix) $ -- $ 30,000 $ (30,000)
Information Services (ImproveNet) 531,000 -- 531,000
--------- -------- ---------
Total $ 531,000 $ 30,000 $ 501,000
========= ========= =========
SOFTWARE (ETECHLOGIX) COST OF REVENUE
eTechLogix cost of revenues decreased to zero for the three months ended
March 31, 2003, from approximately $30,000 for the three months ended March 31,
2002. The decline eTechLogix cost of revenue is primarily a result of the cost
of revenue related to sales of third party software in the prior year quarter.
There were no sales of third party software in the current year quarter.
INFORMATION SERVICES (IMPROVENET) COST OF REVENUE
ImproveNet cost of revenue was approximately $531,000 for the three months
ended March 31, 2003. No ImproveNet cost of revenue was included in the three
months ended March 31, 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.
SELLING, GENERAL AND ADMINISTRATIVE
Our selling, general and administrative expenses increased to approximately
$408,000 for the three months ended March 31, 2003 from approximately $152,000
for the three months ended March 31 2002, an increase of approximately $256,000
or 168%
Our selling, general and administrative 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 general and administrative expenses
was a result of the Merger effective December 31, 2002. The Merger resulted in
increased headcount and increased costs for insurance, legal and accounting.
RESEARCH AND DEVELOPMENT
Our research and development expenses increased to approximately $89,000
for the three months ended March 31, 2003 from approximately $42,000 for the
three months ended March 31, 2002, an increase of approximately $47,000 or 111%.
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 2002 was primarily
attributable to increased payroll and related costs and an increase in the usage
of offshore development contractors.
MARKETING
Our marketing expense increased to approximately $41,000 for the three
months ended March 31, 2003 from approximately $6,000 for the three months ended
September 30, 2001, an increase of approximately $35,000.
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.
11
The increase in marketing expenses was primarily attributable to the
ImproveNet business.
OTHER REVENUES (EXPENSES)
Other revenue (expenses) increased to revenue of approximately $8,000 for
the three months ended March 31, 2003 from an expense of approximately $77,000
for the three months ended March 31, 2002, an increase of approximately $85,000.
The following table and discussion highlights other revenues (expenses) for
the three months ended March 31, 2003 and 2002:
THREE MONTHS ENDED MARCH 31,
-----------------------------
2003 2002 CHANGE
------- ------- -------
Other Revenues (Expenses)
Interest income $ 3,000 $ -- $ 3,000
Interest expense and financing costs (3,000) (13,000) 10,000
Loss on disposal of property and equipment -- (64,000) 64,000
Miscellaneous income 8,000 -- 8,000
------- -------- -------
$ 8,000 $(77,000) $85,000
======= ======== =======
The improvement in other revenues (expenses) from the prior year quarter is
due to a $64,000 loss on disposal of property and equipment in the prior year
quarter and improved interest income and lower interest expense.
EXTRAORDINARY GAIN - RELIEF OF DEBT
The extraordinary gain in the quarter of approximately $104,000 is
attributable to a favorable settlement of a liability under a furniture lease
agreement.
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 $196,000 at March 31, 2003,
a decrease of approximately $251,000 or 56% from approximately $447,000 at
December 31, 2002. The decrease was primarily due to the $223,000 of cash used
in operating activities.
Cash used in operating activities for the three months ended March 31, 2003
was approximately $223,000, compared to cash used of approximately $10,000 for
the three months ended March 31, 2002. Cash used in operating activities in the
current year quarter reflected 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 in investing activities was approximately $6,000 for the three
months ended March 31, 2003, and decreased approximately $5,500 from cash used
of approximately $500 for the three months ended March 31, 2002. In first three
months of 2003 and 2002 the cash was used to purchase equipment.
Cash used in financing activities was approximately $21,000 in the three
months ended March 31, 2003 and 2002 to repay debt.
The Company anticipates increased year-over-year sales volume of their
primary software products throughout 2003 and thereafter. The Company also
anticipates increased revenues 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. The Company also intends to raise
additional capital either through a public or private offering of securities.
12
The additional funds from continued software sales and capital financing
will be used to finance continued operations and increase the Company's sales
and marketing functions.
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 and has been integrated into the
infrastructure of eTechLogix, leveraging existing technical, marketing and
administrative personnel.
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 will strive to make ongoing
realignments, if required, to achieve positive cash flow with our existing cash
resources. We are additionally decreasing our marketing and other operating
expenditures to assist us in maintaining our available cash resources. We may
need to raise additional funds, however, if results of operations for 2003 do
not meet our expectations, or in order to develop new or enhance existing
services, to respond to competitive pressures or to acquire complementary
businesses, services or technologies. If we raise additional funds by selling
equity securities, the percentage ownership of our stockholders will be reduced.
We cannot be sure that additional financing will be available on terms favorable
to us, or at all. If adequate funds were not available on acceptable terms, our
ability to fund expansion, react to competitive pressures, or take advantage of
unanticipated opportunities would be substantially limited. If this occurred,
our business would be significantly harmed. We will continue to evaluate our
needs for funds based on our assessment of access to public or private capital
markets and the timing of our need for funds. Although we have no present
intention to conduct additional public equity offerings, we may seek to raise
these additional funds through private or public debt or equity financings.
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 quarterly
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. 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.
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.
13
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 not engaged in any material legal proceedings.
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
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
------ -----------------------
99.2 Certification of Jeffrey I. Rassas, Chief Executive Officer pursuant
to section 906 of the Sarbanes Oxley Act of 2002
99.3 Certification of Kenneth S. Cragun, Chief Financial Officer pursuant
to section 906 of the Sarbanes Oxley Act of 2002
(b) Reports on Form 8-K
o Report on Form 8-K filed January 7, 2003 regarding the Merger and
change in control.
o Report on Form 8-K filed January 21, 2003 regarding resignation of
PricewaterhouseCoopers LLP and appointment of Semple & Cooper, LLP as
the Company's principal independent accountant.
o Report on Form 8-K/A filed February 12, 2003 amending the Report on
Form 8-K filed January 7, 2003 to include pro forma financial
information.
14
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the Registrant has duly caused this report to be signed, May 20, 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/ Kenneth S. Cragun
------------------------------------
Kenneth S. Cragun
Chief Financial Officer
Date: May 20, 2003
15
CERTIFICATION PURSUANT TO SECURITIES AND EXCHANGE ACT OF 1934
RULES 13a-15 AND 15d-15. (5)
I, Jeffrey I. Rassas, the Co-Chairman and CEO of ImproveNet, Inc. ("the
Company"), certify that:
1. I have reviewed this quarterly report on Form 10-QSB of ImproveNet,
Inc;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respect the financial condition, results of operations and
cash flows of the registrants as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15 and 15d-15) for the registrant
and have:
a. Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period for which this
quarterly report is being prepared;
b. Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report ("Evaluation Date"); and
c. Presented in this quarterly report our conclusions about he
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers an I have disclosed, abased
on our most recent evaluation, to the registrant's auditors and the
audit committee of the registrant's board of directors (or persons
performing the equivalent functions):
a. All significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b. Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in the
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Dated: May 20, 2003
/s/ Jeffrey I. Rassas
----------------------------------------
Jeffrey I. Rassas
Co-Chairman and CEO
16
CERTIFICATION PURSUANT TO SECURITIES AND EXCHANGE ACT OF 1934
RULES 13a-15 AND 15d-15. (5)
I, Kenneth S. Cragun, the Chief Financial Officer of ImproveNet, Inc. ("the
Company"), certify that:
1. I have reviewed this quarterly report on Form 10-QSB of ImproveNet,
Inc;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respect the financial condition, results of operations and
cash flows of the registrants as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15 and 15d-15) for the registrant
and have:
a. Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period for which this
quarterly report is being prepared;
b. Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report ("Evaluation Date"); and
c. Presented in this quarterly report our conclusions about he
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers an I have disclosed, abased
on our most recent evaluation, to the registrant's auditors and the
audit committee of the registrant's board of directors (or persons
performing the equivalent functions):
a. All significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b. Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in the
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Dated: May 20, 2003
/s/ Kenneth S. Cragun
----------------------------------------
Kenneth S. Cragun
Chief Financial Officer
17