U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-KSB
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934.
For the fiscal year ended December 31, 2001
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[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934.
For the transition period from_________to______________
Commission file number 000-26047
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emailthatpays.com, Inc.
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(Name of Small Business Issuer in Its Charter)
Florida 65-0609891
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(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
428 West Sixth Avenue, Vancouver, BC, Canada V5Y 1L2
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(Address of Principal Executive Offices) (Zip Code)
(604) 801-5566
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(Issuer's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered under Section 12(g) of the Exchange Act: Common Stock
(Title of Class)
Check whether the Issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act 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
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Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ ]
The Issuer's revenues for its most recent fiscal year were $1,358,465
The aggregate market value of the voting and non-voting common equity
held by non-affiliates as of March 7, 2002 was $314,088, based on the average of
the closing bid and asked prices of the Registrant's common stock as reported by
the Nasdaq OTC Bulletin Board.
As of March 7, 2002, the Registrant had outstanding 10,301,759 shares of common
stock.
Transitional Small Business Disclosure Format (check one).
YES NO X
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Page 1
PART I
Cautionary Statement Regarding Forward-Looking Statements
This Report includes forward-looking statements. We have based these
forward-looking statements on our current expectations and projections about
future events. These forward-looking statements are subject to risks,
uncertainties and assumptions about us and about our subsidiary companies,
including, among other things:
o our ability to obtain additional funding;
o our ability to successfully execute our business model;
o development and growth in demand for permission-based email marketing;
and
o adoption of email strategies into integrated advertising plans.
In light of these risks, uncertainties and assumptions, the forward-looking
events discussed in this Report might not occur.
Item 1. Description of Business
Corporate Structure
Emailthatpays.com, Inc. (the "Company"), (formerly tvtravel.com, Inc. and
formerly Realm Production and Entertainment Inc.), was incorporated under the
laws of the State of Florida in May 1995.
On October 22, 1999, pursuant to the terms of an Agreement and Plan of Merger
and Reorganization, (the "Merger Agreement"), dated as of September 17, 1999, by
and among Realm Production and Entertainment, Inc. (the "Company"), Realm
Acquisition Corp., a wholly-owned subsidiary of the Company ("Merger Sub") and
emailthatpays.com, a company incorporated in the state of Nevada ("email
Nevada"), Merger Sub was merged (the "Merger") with and into email Nevada.
Pursuant to the Merger, the Company issued 6,572,000 shares (post reverse split)
of its common stock as consideration in exchange for 100% of the issued and
outstanding shares of email Nevada.
In connection with the Merger, the Company 1) issued an aggregate of 6,930,164
shares (pre reverse split) of its common stock in satisfaction of outstanding
debt and in exchange for a $500,000 note receivable, 2) declared a one-for-ten
reverse stock split whereby each share of common stock issued and outstanding on
September 27, 1999 was reclassified and changed to one-tenth of one share of
common stock, and 3) issued 525,000 shares (post reverse split) as an investment
banking fee.
During September 1999, the Company's Board of Directors also approved as a
dividend the distribution of 100% of the stock held by the Company of its
subsidiary VidKid Distribution Inc. to the shareholders of the Company as of
September 29, 1999 (the "VidKid Spin-off"). In conjunction with the Merger, the
shareholders of email Nevada waived any right to participate in or receive any
interest in VidKid pursuant to the VidKid Spin-off.
The net effect of the above noted transactions was that immediately prior to the
Merger, the Company consisted of a $500,000 note receivable, no outstanding
liabilities, 1,522,759 shares of issued and outstanding common stock and no
operational activities.
For accounting purposes, the Merger has been accounted for as a recapitalization
of email Nevada, effectively as if email Nevada had issued common stock for
consideration equal to the net assets of the Company.
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The Company's historical financial statements reflect the financial position,
results of operations and cash flows of email Nevada since its inception and
include the operations of the Company from the date of the effective
recapitalization, being October 22, 1999. Stockholders' equity gives effect to
the shares issued to the shareholders of email Nevada prior to October 22, 1999
and of the Company thereafter.
Email Nevada (formerly Hotel media Group Inc.) was founded in June 1998. In
August 1999, it acquired 100% of Coastal Media Group Ltd. ("Coastal") - a
full-service advertising agency founded in May 1998. A common group of
shareholders controlled both Coastal and email Nevada. For accounting purposes,
this transaction was considered to be an acquisition by Coastal for
consideration equal to the net assets and liabilities of email Nevada.
Accordingly, the assets and liabilities of email Nevada have been recorded at
their carrying values in the Company's accounts.
Overview of Business
This Overview of Business contains forward-looking statements. See our
Cautionary Statement Regarding Forward-Looking Statements.
General
We are an integrated advertising strategies and electronic direct marketing
company. Combining online direct marketing technology with promotional,
marketing and brand expertise, our infrastructure is set up to deliver a full
slate of innovative marketing solutions to a vast array of products and
organizations.
Our services include the creation, integration and execution of both online and
offline advertising strategies, the design, delivery, tracking and analysis of
targeted "one-to-one" e-mail campaigns, customized loyalty programs, and
comprehensive list management / brokerage packages.
We believe permission-based electronic direct marketing (eDirect marketing)
utilizing the Internet, in particular email marketing, is revolutionizing the
direct marketing industry. We believe electronic direct marketing is a more
effective medium of delivering messages and tracking related activities. We
believe electronic marketing can generate results for marketers at a fraction of
traditional direct marketing costs. Through the integrated approach of our 100%
owned subsidiaries, emailthatpays.com ("EMTP") and Coastal Media Group Ltd.
("Coastal"), we are positioned to help businesses communicate and market more
effectively with their customers.
EMTP utilizes a relational database and custom delivery mechanisms that provide
the technology to deliver, track, and analyze highly targeted online
"one-to-one" marketing campaigns and custom loyalty programs. These
comprehensive email-marketing systems deliver a seamless end-to-end solution
that enables marketers to develop and sustain responsible, two-way relationships
with audiences while avoiding the problems associated with sending untargeted
messages. Our edirect marketing team represents over five years experience in
developing marketing strategies and technology.
Coastal, a full service advertising agency, supplies proven expertise in the
creation, integration and execution of both online and offline advertising
strategies. The Internet affects every company, whether it is competing in the
information arena or locally against international competition. With expertise
in both traditional advertising and e-commerce, we believe Coastal understands
how technology is changing the industry and can position clients to take
advantage of these changes now and in the future. Over the past year we have
strengthened our creative strategic abilities. We intend to continue to be
proactive and think out of the traditional agency box to create results.
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The Market
The Internet has emerged as a global medium, enabling millions of people
worldwide to communicate, share information and conduct business electronically.
This emergence, combined with the rapid growth and complexity of the Internet as
an advertising and marketing vehicle, has greatly expanded the importance being
placed by businesses on the use of the Internet to enhance relationship
management, expand brand development and cultivate new and existing customers.
Electronic Direct Marketing is recognized as an effective way to enhance
customer relationships, expand brand development, and cultivate new and existing
customers. Permission based email marketing in particular is emerging as a
valuable marketing strategy for all types of marketers.
EDirect Marketing represents a number of significant advantages:
o Cost savings of up to 90% over traditional Direct Marketing options
o Rapid customer feedback
o Development and execution of advertising campaigns in 48 hours
compared with up to 6 to 8 weeks offline
o Data mining capabilities that allow messages to be tailored to
customer profiles, thereby generating higher response rates
o Interactive formats that enable a customer to purchase immediately
online
Business Development Strategy
We believe that the rapid growth and complexity of edirect marketing will lead
many companies to outsourced solutions. Therefore, we believe there is a
significant opportunity for a company who can demonstrate their experience and
capabilities in developing cost effective email marketing and integrated
advertising strategies. We intend to continue to implement the following
strategies:
o Build market awareness and recognition as EDirect Marketing experts
o Target industries and businesses that represent the greatest potential
for email marketing adoption and growth
o Develop and present case studies to organizations in other regions and
markets who could benefit from our experience
o Research and utilize emerging relevant technologies primarily from
application service providers (ASP's)
o Leverage our advertising contacts in pursuit of email marketing
opportunities
o Expand our email marketing relationships to include advertising agency
opportunities
o Pursue strategic acquisitions and alliances to access new geographic
markets and to add complimentary services
Our Product
We believe that the future of marketing communications belongs to businesses
that can combine personalized one to one marketing strategies with the decoding
of consumer behavior through better research and profiling. We believe our
eDirect Marketing Approach provides comprehensive behavior tracking that is
valuable in building better strategies and stronger relationships. Our
advertising agency team represents broad experience in working with the leading
brands, retailers, and media.
Our team comes from the agency, client and media worlds. We believe that
together our team can build more powerful integrated marketing communications
with EDirect Marketing strategies.
Our products and services include:
1. Integrated (traditional/offline and online) marketing solutions.
2. Creative direction and production.
3. Innovative delivery technologies.
4. Multiple email deployment formats.
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5. Permission-based email list access.
6. Customer profile and tracking systems.
7. Importing and cleansing email databases.
8. Customized content based on consumer behavior, demographics or
requests.
9. High-speed email delivery.
10. Auto responses and viral forwards.
11. Email surveys and polls.
Competition
The market for Internet advertising and direct marketing is intensely
competitive, rapidly changing and highly fragmented. With no significant
barriers to entry and increasing attention being placed on the Internet as a
means of advertising and direct marketing, we expect that competition will
continue to increase. As we expand the scope of our product and service
offerings, we may compete with a greater number of media companies across a wide
range of advertising and direct marketing services. We may also face competition
from established online portals and community web sites, traditional list
brokers, banner advertising managers, online advertising technology providers,
customer management and retention service companies and traditional advertising
agencies.
EDirect Marketing is in a high growth mode. Large direct marketing firms are
exploring edirect marketing but most are not currently providing sophisticated
capabilities. Some marketers are attempting to develop in-house edirect
marketing strategies and deployment with mixed success. Our ability to compete
and generate revenue from businesses will depend on our skill in utilizing the
expertise we possess and edirect technologies we employ to provide superior
strategies and execution and stay ahead of the pack.
Employees
We currently have 12 employees.
Item 2. Description of Property
Under an operating lease with an expiration dated May 31, 2002 we lease 2,760
square feet of space at 428 West 6th Ave., Vancouver, British Columbia at an
annual cost of $39,717. The lease is non-cancelable through May 31, 2002, with
monthly extensions available thereafter. We are currently investigating
alternative space locations.
Item 3. Legal Proceedings
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
Our common stock is traded through the NASDAQ Over-the-Counter Bulletin Board
Trading System. From April 1998 until October 1999 our common stock was listed
under the symbol "RMPE". In connection with our name change on October 27, 1999,
our trading symbol changed to "TVCM". In connection with or name change on
December 21, 1999, our trading symbol changed to "EMTP".
The following table presents the range of high and low bid prices for our common
stock for the periods indicated. The quotations reflect inter-dealer prices and
do not include retail mark-up, mark-down or commissions, and may not represent
actual transactions.
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High Low
January 1, 2000 - March 31, 2000 12.00 6.62
April 1, 2000 - June 30, 2000 8.63 3.00
July 1, 2000 - September 30, 2000 4.13 1.28
October 1, 2000 - December 31, 2000 1.31 0.34
January 1, 2001 - March 31, 2001 0.31 0.19
April 1, 2001 - June 30, 2001 0.25 0.18
July 1, 2001 - September 30, 2001 0.19 0.08
October 1, 2001 - December 31, 2001 0.70 0.10
As of December 31, 2001 the closing bid price of our common stock was $.24. At
December 31, 2001, there were 71 holders of record of 6,301,103 shares of common
stock. There are approximately 4,000,654 shares held in street name.
No cash dividends have been declared with respect to our common stock since
inception. We are not likely to pay any dividends in the foreseeable future. We
intend to reinvest any earnings in our operations.
The transfer agent for our securities is StockTrans, Inc., 44 West Lancaster
Avenue, Ardmore, Pennsylvania.
Recent Sales of Unregistered Securities
During the nine months period ended September 30, 1999, the Company converted
accrued salaries amounting to $85,500 into 6,951 shares of common stock at per
share prices ranging from $9.50 to $21.25 per share.
During March 1999, the Company issued 500 shares of common stock in exchange for
professional services rendered. These shares were valued at $33.75 per share,
the fair value, and charged to operations.
During March 1999, the Company agreed to exchange 585 shares of its common stock
for 7.5% of BRT Video, Inc.
During April 1999, the Company issued 100 shares of common stock in exchange for
professional services rendered. These shares were valued at $30.00 per share,
the fair value, and charged to operations.
During May 1999, the Company issued 3,235 shares of common stock in exchange for
professional services rendered. These shares were valued at approximately $9.60
to $11.25 per share, the fair values, and charged to operations.
In connection with the signing of the Merger Agreement, the Company declared a
one-for-ten reverse stock split whereby each share of common stock issued and
outstanding on September 27, 1999 was reclassified and changed to one-tenth of
one share of common stock, rounded down to the nearest whole share. All common
shares and per share data have been retroactively adjusted to reflect this stock
split.
On October 22, 1999, pursuant to the Merger, the shareholders of email Nevada
received one share of the Company's common stock in exchange for each share of
email Nevada's common stock, or an aggregate of 6,572,000 shares of the
Company's common stock.
In connection with the Merger, the Company issued 393,016 shares of its common
stock in full satisfaction of certain indebtedness amounting to $432,318 and
issued 300,000 shares of common stock to a third party in exchange for the
assignment to the Company of a $500,000 obligation owed to this third party.
Also in connection with the Merger, the Company issued an aggregate of 525,000
shares of its common stock as an investment banking fee.
In October 1999 the Company issued and sold an aggregate of 333,333 shares of
common stock at an offering price of $1.50 per share to the following accredited
investors pursuant to Rule 506: SPH Equities, Inc., Capital Growth Investment
Trust and Equity Associates Corp. This offering generated gross proceeds of
$500,000.
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On March 5, 2000, the Company issued and sold an aggregate of 275,000 shares of
common stock at $5 per share pursuant to Rule 506 of the Securities Act of 1933,
as amended. After deducting a commission / investment-banking fee of 8% or
$110,000 paid to LCP Capital Corp., the net consideration received for this
share issuance is $1,265,000. In connection with this share issuance, the
Company issued warrants to purchase 100,000 shares of common stock with an
exercise price of $5.00 and an expiry date of March 5, 2003.
On April 26, 2000, pursuant to Section 4(2) of the Securities Act of 1933, as
amended, the Company issued 20,000 shares of common stock in exchange for
promotional goods valued at $45,000.
On June 6, 2000, in connection with the March 5, 2000 share issuance, the
Company issued warrants to purchase a further 325,000 shares of common stock.
These warrants have an exercise price of $3.25 and an expiry date of June 6,
2003.
On June 15, 2001, a terminated employee exercised options, (which had been
granted to him under the terms of the 1999 Equity Compensation Plan), to
purchase 75,000 shares of common stock at a price of $.005 per share. The
issuance of the shares of common stock was made pursuant to the exemption from
registration provided by Section 4(2) of the Securities Act of 1933, as amended.
On July 4, 2001, the Company completed a private placement of five units
pursuant to Regulation S of the Securities Act of 1933, as amended. The five
units were issued for an aggregate purchase price of $333,335 and consisted of
an aggregate of 1,666,665 shares of Common Stock and warrants to purchase an
aggregate of 1,666,665 shares of Common Stock; three units, consisting of an
aggregate of 999,999 shares and an equal number of warrants were issued to
Camino Enterprises Ltd., in exchange for the cancellation of $200,001 of debt
owed to Camino Enterprises Ltd.; one unit, consisting of 333,333 shares and an
equal number of warrants, was issued to a third party and the proceeds received
by the Company were used to repay $66,667 of debt owed to Camino Enterprises and
Mr. Hunter; one unit, consisting of 333,333 shares and an equal number of
warrants, was issued to another third party partially in exchange for the
cancellation of $52,000 of debt owed to such third party and partially upon
receipt of $14,667; the $14,667 was used to repay $14,667 of debt owed to Camino
Enterprises and Mr. Hunter. The warrants had a term of six months, expired on
January 4, 2002 and were not exercised.
Item 6. Management's Discussion and Analysis
The following Management's Discussion and Analysis of Financial Condition and
Results of Operations contains forward-looking statements. See Cautionary
Statement Regarding Forward-Looking Statements.
The following discussion should be read in conjunction with our audited
Consolidated Financial Statements and related Notes thereto included elsewhere
in this Report.
Overview
We are an integrated advertising strategies and permission-based edirect
marketing company. Combining online direct marketing technology with
promotional, marketing and brand expertise, our infrastructure is set up to
deliver a full slate of innovative marketing solutions to a vast array of
products and organizations.
Our services include the creation, integration and execution of both online and
offline advertising strategies, the design, delivery, tracking and analysis of
targeted "one-to-one" e-mail campaigns, customized loyalty programs, and
comprehensive list management / brokerage packages.
As described in Item 1, on October 22, 1999, pursuant to the terms of an
Agreement and Plan of Merger and Reorganization, (the "Merger Agreement"), dated
as of September 17, 1999, by and among Realm Production and Entertainment, Inc.
("the Company"), Realm Acquisition Corp., a wholly-owned subsidiary of the
Company ("Merger Sub") and emailthatpays.com, a company incorporated in the
state of Nevada ("email Nevada"), Merger Sub was merged (the "Merger") with and
into email Nevada. Pursuant to the Merger, the Company issued 6,572,000 shares
(post reverse split) as consideration in exchange for 100% of the issued and
outstanding shares of email Nevada.
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For accounting purposes, this transaction has been accounted for as a
recapitalization of email Nevada, effectively as if email Nevada had issued
common stock for consideration equal to the net assets of the Company.
The Company's historical financial statements reflect the financial position,
results of operations and cash flows of email Nevada since its inception and
include the operations of the Company from the date of the effective
recapitalization, being October 22, 1999. Stockholders' equity gives effect to
the shares issued to the stockholders of email Nevada prior to October 22, 1999
and of the Company thereafter.
RESULTS FROM OPERATIONS
Revenue
We earn revenues by developing and implementing integrated marketing and
advertising strategies and by delivering online direct marketing, promotional,
and informational offers. We charge our advertisers based on a number of
criteria including marketing services performed - strategic and creative
development, advertising production, media planning and buying; emails deployed,
qualified leads generated and database management.
Revenue consists of the gross value of our billings to clients and includes the
price of the advertising that we purchase from offline and online suppliers.
Under marketing services contracts, we recognize the cost of the advertising we
purchase for our clients as an expense and the payments we receive from our
clients for this advertising as revenue. Under these arrangements, we are
ultimately responsible for payment to suppliers for the cost of the advertising
that we purchase.
We believe that our revenues will be subject to seasonal fluctuations as a
result of general patterns of retail advertising, which are typically higher
during the second and fourth calendar quarters. In addition, expenditures by
advertisers tend to be cyclical, reflecting overall economic conditions and
consumer buying patterns.
Revenues for the year ending December 31, 2001 were $1,358,000, an increase of
36% over the year ending December 31, 2000. This increase results almost
entirely from the addition of one major client. This new client and one
recurring client account for over 60% of our revenues.
Cost of Revenue
Cost of revenue represents the cost of advertising purchased for clients and
directly corresponds to our revenue levels. Additionally, during fiscal 2001 we
strengthened our creative strategic capabilities and consequently generated
appreciably more billings for these services than in the previous year. As these
services do not involve the purchase of advertising, our cost of revenues is
also proportionately less than in 2000.
Operating Expenses
Operating expenses for the year ending December 31, 2001 totaled $1,779,000, a
decrease of $8,000 from the year ending December 31, 2000. Excluding stock-based
compensation, the decrease from last year is $413,000 (27%). This decrease
reflects the substantive steps we have taken to reduce our ongoing operating
costs. These steps include the completion of the initial development of our
relational database and email delivery system programs, consolidation of our two
western Canada offices into one location, closure of our eastern Canada sales
office, controlled use of professional services, cutbacks in administrative and
marketing positions and the reduction of our internal technological staff
through the outsourcing of the maintenance and storage of our technological
facilities, implementation of certain application service provider (ASP)
technologies and the utilization of IT professionals on a project-by-project
contract basis.
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For the year ending December 31, 2001 we have recorded non-cash stock
compensation expenses of $634,000, an increase of $405,000 over the year ending
December 31, 2000. This increase is the result of changes to the estimated
service life of the individuals holding the options. As the individuals holding
the options are no longer employees of the Company, the unamortized deferred
compensation applicable to their vested options has been fully amortized and
recognized as an expense in 2001. The unamortized deferred compensation
applicable to the unvested options has been written off to additional paid-in
capital.
Liquidity and Capital Resources
We have sustained net losses and negative cash flows from operations since our
inception. As of December 31, 2001 we have negative working capital of $450,000.
Advances from Daniel Hunter, our Chief Executive Officer and a company
controlled by Mr. Hunter are funding our current operations. Our ability to meet
our current obligations is dependent upon these advances.
Our ability to meet our obligations in the ordinary course of business is
dependent upon our ability to establish profitable operations or to obtain
additional funding through public or private equity financing, collaborative or
other arrangements with corporate sources, or other sources. We are seeking to
increase revenues through continued marketing of our services; nonetheless
additional funding will be required.
We are working to obtain sufficient working capital from external sources in
order to continue operations. There is however, no assurance that the
aforementioned events, including the receipt of additional funding, will occur
and be successful.
Net cash used in operating activities was $450,000 and $1,296,000 for the years
ending December 31, 2001 and 2000, respectively. Cash used in operations was
primarily the result of net losses.
Net cash used in investing activities was $16,000 and $30,000 for the years
ending December 31, 2001 and 2000, respectively and relates to purchases of
property and equipment.
Net cash provided by financing activities was $490,000 and $1,205,000 for the
years ending December 31, 2001 and 2000, respectively. Cash provided by
financing activities for the year ending December 31, 2001 consists of $718,000
in advances from related parties and $28,000 from a note payable. A total of
$248,000 of the advances from related parties was utilized to repay in entirety
our existing bank term loan and line of credit. Additionally, as described in
Items 5 and 12, the company issued five units for an aggregate purchase price of
$333,335, consisting of an aggregate of 1,666,665 shares of Common Stock and
warrants to purchase an aggregate of 1,666,665 shares of Common Stock; three
units, consisting of an aggregate of 999,999 shares and an equal number of
warrants, were issued to Camino Enterprises Ltd., a company owned and controlled
by Mr. Hunter, our Chief Executive Officer, in exchange for the cancellation of
$200,001 of debt owed to Camino Enterprises Ltd.; one unit, consisting of
333,333 shares and an equal number of warrants, was issued to a third party and
the proceeds received by the Company were used to repay $66,667 of debt owed to
Mr. Hunter and Camino Enterprises Ltd.; one unit, consisting of 333,333 shares
and an equal number of warrants, was issued to another third party partially in
exchange for the cancellation of $52,000 of debt owed to such third party and
partially upon receipt of $14,667; the $14,667 was used to repay $14,667 of debt
owed to Mr. Hunter and Camino Enterprises Ltd. Cash provided by financing
activities for the year ending December 31, 2000 consists of $1,265,000 from the
issuance of capital stock and $50,000 from the issuance of a note payable; less
repayments of loans totaling $31,000 and a reduction in advances from related
parties of $87,000.
At December 31, 2001, we have no material capital commitments that will impact
expenditures in 2002.
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FACTORS AFFECTING OPERATING RESULTS
OUR PROSPECTS FOR OBTAINING ADDITIONAL FINANCING ARE UNCERTAIN AND FAILURE TO
OBTAIN NEEDED FINANCING COULD AFFECT OUR ABILITY TO CONTINUE OPERATIONS AND
PURSUE FUTURE GROWTH
Advances from Daniel Hunter, our Chief Executive Officer and a company
controlled by Mr. Hunter are funding our current operations. Our ability to meet
our current obligations is dependent upon these advances. We need to raise funds
in order to continue operations and implement our strategies of client
realization and servicing, expansion and maintenance of products, brand
awareness, technological advancement and infrastructure development. We cannot
assure you that additional financing will be available on terms favorable to us,
or at all. If adequate funds are not available on acceptable terms, our ability
to continue operations, implement our strategies, take advantage of
unanticipated opportunities, or otherwise respond to competitive pressures will
be significantly limited. If additional funds are raised through the issuance of
equity or convertible debt securities, the percentage ownership of our
stockholders will be reduced and these securities might have rights, preferences
or privileges senior to those of our current stockholders.
WE HAVE A HISTORY OF OPERATING LOSSES AND FUTURE LOSSES ARE LIKELY
We incurred a net loss of $1,534,000 during the year ended December 31, 2001 and
$1,635,000 during the year ended December 31, 2000. We require further spending
and financing to implement our strategies of client realization and servicing,
expansion and maintenance of products, brand awareness, technological
advancement and infrastructure development. As a result, we may experience net
losses and negative cash flows for the next few quarters.
The auditors' report on our December 31, 2001 consolidated financial statements
includes an additional explanatory paragraph that states that due to the
Company's need to generate cash from operations and obtain additional financing,
substantial doubt exists about our ability to continue as a going concern. The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
OUR LIMITED OPERATING HISTORY MAKES IT DIFFICULT TO EVALUATE OUR BUSINESS AND
PROSPECTS
You have limited information about us with which to evaluate our business
strategies and performance and an investment in our common stock. Our limited
operating history makes it difficult to forecast future operating results. We
cannot be certain that revenues will increase at a rate sufficient to achieve
and maintain profitability. Even if we were to achieve profitability in any
period, we might fail to sustain or increase that profitability on a quarterly
or annual basis.
OUR EXISTING CLIENT BASE IS CONCENTRATED AND THE LOSS OF A MAJOR CLIENT WOULD BE
DIFFICULT TO REPLACE
Two clients currently account for over 60% of our revenues. The loss of either
of these clients would significantly damage our revenue base and opportunities
for growth. We cannot guarantee that these clients will remain with us or that
we will be able to access new clients to replace them.
OUR SUCCESS DEPENDS UPON BROAD MARKET ACCEPTANCE OF PERMISSION EMAIL MARKETING
SERVICES AND WE ARE UNCERTAIN IF OR WHEN SUCH MARKET ACCEPTANCE WILL OCCUR.
We expect to derive an increasing portion of our revenues from electronic direct
marketing services. If these services do not continue to achieve market
acceptance, we cannot assure you that we will generate business at a sufficient
level to support our continued operations. The Internet has not existed long
enough as an advertising medium to demonstrate its effectiveness relative to
traditional advertising media. The market for permission email marketing
services is in its infancy, and we are not certain whether our target customers
will widely adopt and deploy this technology. Even if they do so, they may not
choose our products for technical, cost, support or other reasons. Adoption of
permission email marketing services, particularly by those entities that have
historically relied upon traditional means of direct marketing, such as
telemarketing and direct mail, requires the broad acceptance of a new and
substantially different approach to direct marketing. Enterprises that have
already invested substantial resources in other advertising methods may be
reluctant or slow to adopt our new approach.
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COMPETITION FOR INTERNET ADVERTISING AND DIRECT MARKETING IS INTENSE AND COULD
ADVERSELY AFFECT OUR BUSINESS.
The market for Internet advertising and direct marketing is intensely
competitive, rapidly changing and highly fragmented. With no significant
barriers to entry and increasing attention being placed on the Internet as a
means of advertising and direct marketing, we expect that competition will
continue to increase in the near term. Our ability to compete and generate
revenue from businesses will depend on our skill in utilizing the expertise and
EDM technology we have to provide superior strategies and execution.
As we expand the scope of our product and service offerings, we may compete with
a greater number of media companies across a wide range of advertising and
direct marketing services. Many of these companies have greater name
recognition, longer operating histories, larger customer bases and significantly
greater financial, technical, marketing, public relations, sales, distribution
and other resources than we do. In addition, current and potential competitors
have established or may establish cooperative relationships among themselves or
with third parties to increase the ability of their products or services to
address the needs of our prospective advertisers and advertising agency
customers. As a result, we may not be able to compete effectively and
competitive pressures may result in price reductions, reduced gross margins and
an inability to gain market share.
OUR OFFICERS AND DIRECTORS AND THEIR AFFILIATES EXERCISE SIGNIFICANT CONTROL
OVER OUR COMPANY.
Some of our directors and executive officers, and certain of their affiliates,
individually and as a group, effectively control us and direct our affairs and
business, including any determination with respect to the acquisition or
disposition of assets by us, future issuance's of common stock or other
securities by us, declaration of dividends on our common stock and the election
of directors. This concentration of ownership also may have the effect of
delaying, deferring or preventing a change in control of our company.
FAILURE TO SAFEGUARD MEMBER PRIVACY COULD AFFECT OUR REPUTATION AMONG CONSUMERS.
An important feature of our strategy is our ability to capture list member
profiles on behalf of our clients. Security and privacy concerns may cause
consumers to resist providing the personal data necessary to support this
profiling capability. Usage of the emailthatpays.com program could decline if
any well-publicized compromise of security occurred. As a result of these
security and privacy concerns, we may incur significant costs to protect against
the threat of security breaches or to alleviate problems caused by such
breaches.
IF WE ARE UNABLE TO MANAGE OUR EXPECTED GROWTH, OUR BUSINESS WILL SUFFER.
In the rapidly evolving market for permission edirect marketing services, our
ability to implement our business plan and successfully develop and offer our
products and services requires an effective planning and management process. We
anticipate that our future operations will place a significant strain on our
management systems and resources. We expect that we will need to continue to
improve our operational, financial and managerial controls and our reporting
systems and procedures. We also will need to continue to expand, train and
manage our work force.
TO REMAIN COMPETITIVE, WE MUST KEEP PACE WITH TECHNOLOGICAL CHANGES IN OUR
INDUSTRY
The Internet and our market are characterized by rapidly changing technologies,
frequent new product and service introductions, short development cycles,
evolving industry standards and intense competition. We must adapt to rapidly
changing technologies by maintaining and improving the performance features and
reliability of our services. We may experience technical difficulties that could
impact the operation of existing systems or delay the successful development,
introduction or marketing of new products and services.
--------------------------------------------------------------------------------
Page 11
CONTINUED DEVELOPMENT AND USE OF THE INTERNET INFRASTRUCTURE IS CRITICAL TO OUR
ABILITY TO OFFER OUR SERVICES
We depend heavily on third-party providers of Internet and related
telecommunication services to operate our online direct marketing service.
Internet service providers have experienced significant outages in the past, and
could experience outages, delays and other difficulties due to system failures
unrelated to our systems. If outages or delays occur frequently in the future,
Internet usage and the usage of our products and services, could grow more
slowly or decline. If Internet usage grows, the Internet infrastructure may not
be able to support the demands placed on it by this growth and its performance
and reliability may decline.
GOVERNMENT REGULATION AND THE LEGAL UNCERTAINTIES OF DOING BUSINESS ON THE
INTERNET COULD NEGATIVELY IMPACT OUR BUSINESS.
Laws and regulations that apply to Internet communications, commerce and
advertising are becoming more prevalent. These regulations could affect the cost
of communicating on the Internet and negatively affect the demand for our direct
marketing solutions or otherwise harm our business. Laws and regulations may be
adopted covering issues such as user privacy, pricing, libel, acceptable
content, taxation and quality of products and services. This legislation could
hinder growth in the use of the Internet generally and decrease the acceptance
of the Internet as a communications, commercial and direct marketing medium.
The laws governing the Internet remain largely unsettled, even in areas where
there has been some legislative action. It may take years to determine whether
and how existing laws apply to the Internet and Internet advertising. In
addition, the growth and development of the market for Internet commerce may
prompt calls for more stringent consumer protection laws, both in the United
States and abroad. This may impose additional burdens on companies conducting
business over the Internet.
WE FACE RISKS ASSOCIATED WITH THIRD PARTY CLAIMS AND LITIGATION RELATING TO
INTELLECTUAL PROPERTY RIGHTS
Our business activities may infringe upon the proprietary rights of others, and
other parties may assert infringement claims against us. A successful claim of
product infringement against us and our failure or inability to license the
infringed or similar technology could harm our business. From time to time,
third parties may assert exclusive patent, copyright, trademark and other
intellectual property rights to technologies and related standards that are
important to us. Any claims, with or without merit, could be time consuming to
defend, result in costly litigation, divert management's attention and
resources, result in an injunction which would prohibit us from offering a
particular product or service or require the payment of monetary damages.
Item 7. Financial Statements
Audited Consolidated Financial Reports for Years ended December 31, 2001 and
2000.
o Independent Auditors Report
o Consolidated Balance Sheets
o Consolidated Statements of Operations and Deficit
o Consolidated Statement of Stockholders' Equity
o Consolidated Statement of Cash Flows
o Notes to Consolidated Financial Statements
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
--------------------------------------------------------------------------------
Page 12
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
with 16(a) of the Exchange Act.
Our directors and executive officers, their ages and positions are set
forth below:
Name Age Title
------------------------- --- ------------------------------------
Daniel Hunter 42 Chief Executive Officer, Director
Donald James MacKenzie 45 President and Secretary, Director
Brian Cobbe 46 Vice-President, Director
Mr. Hunter was appointed our Chief Executive Officer and a Director in October
1999. Mr. Hunter was appointed Chief Executive Officer and a Director of email
Nevada in July 1999. Since September 1998, Mr. Hunter has been the Chief
Executive Officer and a Director of Coastal Media Group Ltd. From 1993 to 1998,
Mr. Hunter was an account executive and Partner at Canaccord Capital and has
participated in the financing of numerous private and public companies.
Mr. MacKenzie was appointed our President, Secretary, and a Director in October
1999. Mr. MacKenzie has been the Secretary, Treasurer, and a Director of email
Nevada since its inception in June 1998. From 1990 to 1998, Mr. MacKenzie was a
senior account executive at BCTV, a major local television station in Vancouver.
Mr. Cobbe was appointed the Company's Vice-President and a Director on December
17, 2001. Since August 2001, Mr. Cobbe has been President of Coastal Media Group
Ltd. Mr. Cobbe has over 20 years experience as an advertising executive, the
last 12 years with Palmer Jarvis DDB.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires our directors, certain of
our officers and persons who own more than ten percent of our common stock
(collectively the "Reporting Persons") to file reports of ownership and changes
in ownership with the Securities and Exchange Commission and to furnish us with
copies of these reports.
Based on representations received from Reporting Persons and upon
review of Form 3 and 4 filings, all filings required to be made by the Reporting
Persons for the year 2001 were made in a timely manner, except for one filing by
Mr. Cobbe with respect to him becoming a Reporting Person and one filing by Mr.
Hunter with respect to one transaction which were filed late.
Item 10. Executive Compensation
The following Summary Compensation Table sets forth the cash compensation and
certain other components of the compensation received by (i) Daniel Hunter and
(ii) Donald James MacKenzie
Summary Compensation Table
Annual Compensation Long-Term Compensation
-------------------------------------------------------------------------------------------------
Awards Payouts
----------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------
Securities
Other Restricted Underlying All
Annual Stock Options/ LTIP Other
Year Salary Bonus Compensation Award SAR Payouts Compensation
--------------- -------- ----------- ------ -------------- -------------- -------------- ---------- --------------
Daniel Hunter 2001 $145,311 (2) - - - - - -
Chief 2000 $146,455 - - - 35,000 - -
Executive 1999 $89,584 - - - 70,000 - -
Officer
--------------- -------- ----------- ------ -------------- -------------- -------------- ---------- --------------
Donald James 2001 $134,045 (2) - - - - $2,342 (1)
MacKenzie 2000 $122,700 - - - 35,000 - $2,448
President 1999 $103,684 - - - 70,000 - $776 (1)
-------------------------------------------------------------------------------------------------------------------
(1) Term life insurance premiums paid by us.
(2) Mr. Hunter and Mr. MacKenzie have each voluntarily deferred payment of
$16,146 of salary pending receipt of additional funding from external
sources.
--------------------------------------------------------------------------------
Page 13
The following Option / SAR Grants Table shows information regarding grants of
stock options in this last completed fiscal year to the executive officers named
in the Summary Compensation Table.
There were no stock options granted in this last completed fiscal year to the
executive officers named in the Summary Compensation Table.
The following Aggregate Options / SAR Exercises in and Fiscal Year-End Option /
SAR Value Table provides information concerning each exercise of stock options
(or tandem SARs) and freestanding SARs during the last completed fiscal year by
the executive officers named in the Summary Compensation Table and the fiscal
year-end value of unexercised options and SARs.
Aggregate Options / SAR Exercises in and Fiscal Year-End Option /
SAR Value Table
------------------------------------------------------------------------------------------------------
Number of
Securities
Underlying Value of
Unexercised Unexercised
Options/SARs At In-the-Money Options/
Share FY-End (#) SARs at FY-End ($)
Acquired On Value Exercisable/ Exercisable/
Exercise Realized Unexercisable Unexercisable
------------------------------------------------------------------------------------------------------
Daniel Hunter - - 62,223 / 42,777 0/0 (1)
Donald James MacKenzie - - 62,223 / 42,777 0/0 (1)
------------------------------------------------------------------------------------------------------
(1) FY-End Option/SAR Values based on exercise prices of $5.75 per share for
70,000 options and $1.35 per share for 35,000 options and 12-31-01 closing
price of $0.24 per share.
Item 11. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth, as of the latest fiscal year end, the stock
ownership of each named executive officer, directors, all executive officers and
directors as a group, and of each person known by us to be a beneficial owner of
5% or more of our common stock. Except as otherwise noted, each person listed
below is the sole beneficial owner of the shares and has sole investment and
voting power of such shares. No person listed below has any option, warrant or
other right to acquire additional securities of us except as otherwise noted.
--------------------------------------------------------------------------------
Page 14
Security Ownership Table
Name and Address of Amount and Nature of
Beneficial Owner (1) Beneficial Owner Percent of Class
-------------------- ---------------- ----------------
Daniel Hunter (2) 2,568,055 (3) 24.8
Brian Cobbe 20,000 0.2
Donald James MacKenzie 1,568,056 (3) 15.1
All executive officers and 4,156,111 39.8
directors as a group (4)
(1) Unless otherwise indicated, the business address of all beneficial owners
is 428 West 6th Avenue, Vancouver, BC V5Y 1L2.
(2) Includes 1,749,999 shares held by Camino Enterprises Ltd. Mr. Hunter is the
sole shareholder of Camino Enterprises Ltd.
(3) Includes 68,056 shares which the holder has the right to acquire within 60
days upon the exercise of stock options.
(4) Includes shares held by Messrs. Hunter, Cobbe, and MacKenzie. Also includes
136,112 shares which the holders have the right to acquire within 60 days
upon the exercise of stock options.
Item 12. Certain Relationships and Related Transactions
As presented in the following table, Mr. Hunter, our Chief Executive Officer,
has advanced funds to us for working capital purposes both personally and
through Camino Enterprises Ltd., a company of which he is the sole shareholder.
------------------------------------------------------------------------------
December 31, December 31,
2001 2000
------------------------------------------------------------------------------
Controlled company $ 129,549 $ 60,020
Stockholder $ 368,873 -
----------- -----------
$ 498,422 $ 60,020
------------------------------------------------------------------------------
The advance from the stockholder and the controlled company are unsecured, bear
interest at an annual rate of 7%, have no set terms of repayment and are not
callable during 2002.
On July 4, 2001, the Company completed a private placement of five units. The
five units were issued for an aggregate purchase price of $333,335 and
consisted of an aggregate of 1,666,665 shares of Common Stock and warrants to
purchase an aggregate of 1,666,665 shares of Common Stock; three units,
consisting of an aggregate of 999,999 shares and an equal number of warrants
were issued to Camino Enterprises Ltd., in exchange for the cancellation of
$200,001 of debt owed to Camino Enterprises Ltd.; one unit, consisting of
333,333 shares and an equal number of warrants, was issued to a third party and
the proceeds received by the Company were used to repay $66,667 of debt owed to
Camino Enterprises and Mr. Hunter; one unit, consisting of 333,333 shares and
an equal number of warrants, was issued to another third party partially in
exchange for the cancellation of $52,000 of debt owed to such third party and
partially upon receipt of $14,667; the $14,667 was used to repay $14,667 of
debt owed to Camino Enterprises and Mr. Hunter. The warrants had a term of six
months, expired on January 4, 2002 and were not exercised.
--------------------------------------------------------------------------------
Page 15
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act of 1934, the
registrant has caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
emailthatpays.com, Inc.
By: /s/ Daniel Hunter
--------------------------------------
Daniel Hunter, Chief Executive Officer,
Principal Accounting and Financial
Officer, Director
By: /s/ Donald James MacKenzie
--------------------------------------
Donald James MacKenzie, President
and Secretary, Director
By: /s/ Brian Cobbe
--------------------------------------
Brian Cobbe, Vice President, Director
In accordance with the Securities Exchange Act of 1934, this Report has
been duly signed below by the following persons on behalf of the Registrant in
the capacities and on March 29, 2002.
By: /s/ Daniel Hunter
-----------------------------------------------
Daniel Hunter, Chief Executive Officer, Principal Accounting and
Financial Officer, Director
By: /s/ Donald James MacKenzie
-----------------------------------------------
Donald James MacKenzie, President and Secretary, Director
By: /s/ Brian Cobbe
-----------------------------------------------
Brian Cobbe, Vice President, Director
Item 13. Exhibits and Reports on Form 8K
(a) Exhibits
2.1 Agreement and Plan of Merger and Reorganization, dated as
of September 17, 1999, by and among Realm Production and
Entertainment, Inc., Realm Acquisition Corp., and
emailthatpays.com (Previously filed)
3.1 Articles of Amendment to the Articles of Incorporation of
Realm Production and Entertainment, Inc. (Previously filed)
3.2 Articles of Amendment to the Articles of Incorporation of
tvtravel.com, Inc. (Previously filed)
4.1 1999 Equity Compensation Plan (Previously filed)
21 Subsidiaries. (Previously filed)
(b) Reports on Form 8-K
None.
--------------------------------------------------------------------------------
Page 16
emailthatpays.com, Inc.
Index to Audited Consolidated Financial Statements
Years ended December 31, 2001 and 2000
With Independent Auditors' Report
Page
----
Independent Auditors' Report................................................F-1
Consolidated Balance Sheets.................................................F-2
Consolidated Statements of Operations and Deficit...........................F-3
Consolidated Statement of Stockholders' Equity..............................F-4
Consolidated Statements of Cash Flows.......................................F-5
Notes to Consolidated Financial Statements...........................F-6 - F-18
Audited Consolidated Financial Statements of
emailthatpays.com, Inc.
Years ended December 31, 2001 and 2000
Independent auditors' report
The Board of Directors and Stockholders
emailthatpays.com, Inc.
We have audited the accompanying consolidated balance sheets of
emailthatpays.com, Inc. as of December 31, 2001 and 2000 and the related
consolidated statements of operations, stockholders' deficit and comprehensive
income (loss) and cash flows for the years ended December 31, 2001 and 2000.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of emailthatpays.com,
Inc. as of December 31, 2001 and 2000, and the results of its operations and its
cash flows for the years ended December 31, 2001 and 2000 in conformity with
accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming
emailthatpays.com, Inc. will continue as a going concern. As discussed in note 2
to the consolidated financial statements, the Company's need to generate cash
from operations and obtain additional financing raises substantial doubt about
its ability to continue as a going concern. Management plans as to these matters
are also described in note 2. The consolidated financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
/s/ KPMG LLP
Chartered Accountants
Victoria, Canada
February 8, 2002
F-1
emailthatpays.com, Inc.
Consolidated Balance Sheets
(expressed in United States dollars)
December 31, 2001 and 2000
===================================================================================================================
2001 2000
-------------------------------------------------------------------------------------------------------------------
Assets
Current assets:
Cash $ 24,387 $ -
Accounts receivable 87,195 74,932
Prepaid expenses 52,144 55,224
-------------------------------------------------------------------------------------------------------------------
163,726 130,156
Property and equipment, less accumulated depreciation (note 5) 97,335 150,951
-------------------------------------------------------------------------------------------------------------------
$ 261,061 $ 281,107
===================================================================================================================
Liabilities and Stockholders' Deficit
Current liabilities:
Bank indebtedness $ - $ 8,479
Accounts payable and accrued liabilities 269,990 229,106
Accrued salaries 79,041 19,285
Unearned revenue 259,369 -
Loans payable - current portion - 139,741
Lease obligation - current portion 5,375 5,242
-------------------------------------------------------------------------------------------------------------------
613,775 401,853
Due to related parties (note 6) 498,322 60,020
Loans payable (note 7) - 102,508
Note payable (note 8) 25,578 50,000
Lease obligation (note 9) 10,041 16,373
-------------------------------------------------------------------------------------------------------------------
Total liabilities 1,147,716 630,754
Stockholders' deficit (notes 10 and 11):
Common stock 52,184 44,615
Additional paid-in capital 3,593,222 3,532,957
Deferred stock-based compensation - (900,200)
Deficit (4,542,324) (3,008,038)
Accumulated other comprehensive income (loss) 10,263 (18,981)
-------------------------------------------------------------------------------------------------------------------
Total stockholders' deficit (886,655) (349,647)
Commitment (note 14)
-------------------------------------------------------------------------------------------------------------------
$ 261,061 $ 281,107
===================================================================================================================
See accompanying notes to consolidated financial statements.
F-2
emailthatpays.com, Inc.
Consolidated Statements of Operations
(expressed in United States dollars)
Years ended December 31, 2001 and 2000
===================================================================================================================
2001 2000
-------------------------------------------------------------------------------------------------------------------
Revenue $ 1,358,465 $ 1,000,435
Cost of revenue 1,058,630 823,515
-------------------------------------------------------------------------------------------------------------------
Gross profit 299,835 176,920
Operating expenses:
Depreciation 69,643 67,695
Remuneration stock-based compensation
of $634,324 (2000 - $229,800) 1,379,522 1,153,622
Legal and accounting 71,883 100,414
Consulting fees and computer services 125,619 123,925
Phones and utilities 19,465 31,737
Rent 36,751 77,968
Advertising and promotion 20,824 73,264
Other selling, general and administrative 55,835 158,752
-------------------------------------------------------------------------------------------------------------------
1,779,542 1,787,377
-------------------------------------------------------------------------------------------------------------------
Loss from operations (1,479,707) (1,610,457)
Other income (expense):
Interest income - 4,755
Interest expense (54,579) (29,543)
-------------------------------------------------------------------------------------------------------------------
(54,579) (24,788)
-------------------------------------------------------------------------------------------------------------------
Net loss $ (1,534,286) $ (1,635,245)
===================================================================================================================
Net loss per common share, basic and diluted $ (0.16) $ (0.19)
Weighted average common shares outstanding,
basic and diluted (note 3(k)) 9,500,463 8,667,914
===================================================================================================================
See accompanying notes to consolidated financial statements.
F-3
emailthatpays.com, Inc.
Consolidated Statements of Stockholders' Deficit and Comprehensive Income (Loss)
(expressed in United States dollars)
Year ended December 31, 2001
=================================================================================================================================
Accumulated
Additional Deferred other
Common paid in stock comprehensive Stockholders'
stock capital Deficit compensation income (loss) deficit
---------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 $ - 3,914 (252,792) - 2,623 (246,255)
Shares issued in connection with:
Issuance of common stock
(8,428,092 shares) 42,140 1,072,518 - - - 1,114,658
Deferred stock-based
compensation 1,000 1,148,000 - (1,149,000) - -
Amortization of deferred compensation - - - 19,000 - 19,000
Net loss - - (1,120,001) - - (1,120,001)
Comprehensive loss:
Foreign exchange translation
adjustment - - - - (14,004) (14,004)
---------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1999 43,140 2,224,432 (1,372,793) (1,130,000) (11,381) (246,602)
Shares issued in connection with:
Private placement for cash
(275,000 shares) 1,375 1,263,625 - - - 1,265,000
Acquisition of promotional
goods (20,000 shares) 100 44,900 - - - 45,000
Amortization of deferred compensation - - - 229,800 - 229,800
Net loss - - (1,635,245) - - (1,635,245)
Comprehensive loss:
Foreign exchange translation
adjustment - - - - (7,600) (7,600)
---------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2000 44,615 3,532,957 (3,008,038) (900,200) (18,981) (349,647)
Shares issued in connection with:
Exercise of stock options (75,000
shares) - 375 - - - 375
Private placement for cash/reduction
of debt (1,333,333 shares) 6,667 260,001 - - - 266,668
Private placement for cash/reduction
of debt (333,333 shares) 1,667 65,000 - - - 66,667
Cancellation or change in option status (250) (287,000) - 287,250 - -
Share options issued for services 300 21,074 - - - 21,374
Cancellation of shares (815) 815 - - -
Amortization of deferred compensation - - - 612,950 - 612,950
Net loss - - (1,534,286) - - (1,534,286)
Foreign exchange translation
adjustment - - - - 29,244 29,244
---------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2001 $ 52,184 3,593,222 (4,542,324) - 10,263 (886,655)
=================================================================================================================================
See accompanying notes to consolidated financial statements.
F-4
emailthatpays.com, Inc.
Consolidated Statements of Cash Flows
(expressed in United States dollars)
Years ended December 31, 2001 and 2000
===================================================================================================================
2001 2000
-------------------------------------------------------------------------------------------------------------------
Cash provided by (used in):
Operations:
Net loss $ (1,534,286) $ (1,635,245)
Items not involving cash:
Depreciation 69,643 67,695
Stock-based compensation 634,324 229,800
Foreign exchange on subsidiary operations 29,244 (7,600)
Loss on disposal of equipment - 2,914
Changes in operating assets and liabilities:
Change in accounts receivable (12,263) 116,048
Change in prepaid expenses 3,080 286
Change in accounts payable and accrued liabilities 40,884 (66,004)
Increase in unearned revenue 259,369 -
Increase in accrued salaries 59,756 (4,280)
-------------------------------------------------------------------------------------------------------------------
Net cash used in operating activities (450,249) (1,296,386)
Cash flows used in investing activities:
Purchase of property and equipment (16,027) (41,336)
Proceeds from disposal of equipment - 10,891
-------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (16,027) (30,445)
Cash flows from financing activities:
Repayment of loans payable and lease obligation (248,448) (31,473)
Proceeds from (repayment of) bank indebtedness (8,479) 8,479
Proceeds from notes payable 28,358 50,000
Proceeds from (repayment of) advances
from related parties 718,857 (86,784)
Issue of common shares for cash 375 1,375,000
Share issue costs - (110,000)
-------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 490,663 1,205,222
-------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash 24,387 (121,609)
Cash, beginning of year - 121,609
-------------------------------------------------------------------------------------------------------------------
Cash, end of year $ 24,387 $ -
===================================================================================================================
Supplementary information:
Interest paid $ 54,579 $ 29,543
Income taxes paid - -
Non-cash transactions:
Issue of common shares for repayment
of debt 333,335 -
Cancellation of options 287,250 -
===================================================================================================================
See accompanying notes to consolidated financial statements.
F-5
emailthatpays.com, Inc.
Notes to Consolidated Financial Statements
(expressed in United States dollars)
Years ended December 31, 2001 and 2000
================================================================================
1. The Company and description of business:
emailthatpays.com, Inc. (the "Company") is incorporated in the state of
Florida and is an integrated advertising strategies and electronic direct
marketing service. The Company's services include the creation, integration
and execution of both online and offline advertising strategies, the
design, delivery, tracking and analysis of targeted "one-to-one" e-mail
campaigns, customized loyalty programs and comprehensive list
management/brokerage packages.
On October 22, 1999, the Company, then named Realm Production and
Entertainment, Inc. ("Realm"), a public company listed on the
over-the-counter bulletin board in the United States, issued 6,572,000
shares of its common stock in connection with the merger of a wholly-owned
subsidiary of Realm with and into emailthatpays.com ("email Nevada"), a
private company incorporated in the State of Nevada. This transaction was
accounted for as a recapitalization of email Nevada, effectively as if
email Nevada had issued common shares for consideration equal to the net
monetary assets of Realm. On October 27, 1999, Realm changed its name to
tvtravel.com Inc. and, subsequently, on December 21, 1999, to
emailthatpays.com, Inc.
The Company's historical financial statements reflect the financial
position, results of operations and cash flows of email Nevada since its
inception and include the operations of Realm from the date of the
effective recapitalization, being October 22, 1999. Stockholders' equity
gives effect to the shares issued to the stockholders of email Nevada prior
to October 22, 1999 and of the Company thereafter.
email Nevada (formerly Hotel Media Group Inc.) was incorporated on June 26,
1998. In August 1999, it acquired 100% of Coastal Media Group Ltd.
("Coastal"), a full-service advertising agency founded in May 1998. A
common group of shareholders controlled both Coastal and email Nevada. For
accounting purposes, the transaction was considered to be an acquisition by
Coastal for consideration equal to the net assets and liabilities of email
Nevada. Accordingly, the assets and liabilities of email Nevada have been
recorded at their carrying values in the Company's accounts.
2. Liquidity and future operations:
The Company has sustained net losses and negative cash flows from
operations since its inception. At December 31, 2001, the Company has
negative working capital of $450,049. For the year ended December 31, 2001,
the Company has used $450,249 cash in operating activities. The Company's
ability to meet its obligations in the ordinary course of business is
dependent upon its ability to establish profitable operations and positive
cash flows from operating activities or to obtain additional funding
through public or private equity financing, collaborative or other
arrangements with corporate sources, or other sources. Management is
seeking to increase revenues through continued marketing of its services;
however additional funding will be required.
F-6
emailthatpays.com, Inc.
Notes to Consolidated Financial Statements
(expressed in United States dollars)
Years ended December 31, 2001 and 2000
================================================================================
2. Liquidity and future operations (continued):
Management is working to obtain sufficient working capital from external
sources in order to continue operations at current levels for a reasonable
period of time into the future. There is however no assurance that the
aforementioned events, including the receipt of additional funding, will
occur and be successful. Failure to generate sufficient cash flow, will
require the Company to amend or reduce operations.
3. Significant accounting policies:
(a) Basis of presentation:
These consolidated financial statements have been prepared in
accordance with generally accepted accounting principles in the United
States and are presented in United States dollars. The consolidated
financial statements include the accounts of the Company and its
subsidiaries, all of which are wholly-owned. All significant
inter-company balances and transactions have been eliminated in the
consolidation process.
(b) Use of estimates:
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles in the United States requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and the disclosure of contingent
assets and liabilities at the date of the consolidated financial
statements, and the reported amounts of expenses during the period. The
valuation of stock compensation is a significant area requiring the use
of estimates. Actual results could differ from the estimates used in
the preparation of consolidated financial statements.
(c) Revenue recognition:
The Company earns revenue by charging fees for sending targeted e-mail
and for providing integrated marketing and advertising solutions.
Revenue is recognized in accordance with contractual arrangements which
generally is when e-mail is transmitted and services are performed.
Amounts received prior to services being performed are recorded as
unearned revenue.
F-7
emailthatpays.com, Inc.
Notes to Consolidated Financial Statements
(expressed in United States dollars)
Years ended December 31, 2001 and 2000
================================================================================
3. Significant accounting policies (continued):
(d) Foreign currency:
The functional currency of the operations of the Company's wholly-owned
Canadian operating subsidiaries is the Canadian dollar. Assets and
liabilities measured in Canadian dollars are translated into United
States dollars using exchange rates in effect at the consolidated
balance sheet dates with revenue and expense transactions translated
using average exchange rates prevailing during the period. Exchange
gains and losses arising on this translation are excluded from the
determination of income and reported as foreign currency translation
adjustment (which is included in the other comprehensive income (loss))
in stockholders' equity.
(e) Property and equipment:
Property and equipment are recorded at cost and are depreciated at
rates which will reduce original cost to estimated residual value over
the useful life of each asset. Maintenance and repairs are charged to
expense as incurred, and improvements and betterments are capitalized.
When assets are retired or otherwise disposed of, the cost and
accumulated depreciation and amortization are removed from the accounts
and any resulting gain or loss is reflected in the consolidated
statements of operations and deficit for the period in which it is
realized.
The annual rates used to compute depreciation on a declining balance
basis are as follows:
=======================================================================
Asset Rate
-----------------------------------------------------------------------
Office furniture and fixtures 20%
Computer hardware 30%
Computer software 100%
=======================================================================
Leasehold improvements are amortized over the term of the lease.
(f) Capital leases and obligations:
The asset value and amount of the capital lease obligations recorded at
the beginning of the lease term are calculated based upon the present
value of the minimum lease payments. Assets under a capital lease are
depreciated at the same rates as property and equipment.
(g) Computer development software:
Programming, application development and enhancement costs associated
with the Company's relational database program and Web site products
are expensed as incurred.
F-8
emailthatpays.com, Inc.
Notes to Consolidated Financial Statements
(expressed in United States dollars)
Years ended December 31, 2001 and 2000
================================================================================
3. Significant accounting policies (continued):
(h) Financial instruments and concentration of risk:
Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of cash, accounts
receivable, accounts payable and accrued liabilities, accrued salaries
and obligations under capital leases. At December 31, 2001 and 2000,
the fair market value of these instruments approximated their financial
statement carrying amount due to the short term maturity of these
instruments. The Company does not require collateral for accounts
receivable, but does evaluate customer creditworthiness and establishes
allowances as necessary based on management estimates of
collectibility.
Amounts owing to related parties are stated at their exchange values
which approximates fair value due to their short term maturity and
market rates of interest.
(i) Income taxes:
The Company has adopted Statement of Financial Accounting Standards No.
109, "Accounting for Income Taxes" (SFAS 109). This standard requires
the use of the asset and liability approach for accounting and
reporting on income taxes. Deferred tax assets and liabilities are
recognized for the future consequences attributable to differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases and operating loss and tax
credit carry forwards. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered
or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes
the enactment date. To the extent that it is not more likely than not
that a deferred tax asset will be realized, a valuation allowance is
provided.
(j) Stock-based compensation:
The Company accounts for stock-based employee and director compensation
arrangements in accordance with provisions of Accounting Principles
Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees", and related interpretations and complies with the
disclosure provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation". Under APB No. 25, compensation expense is based on the
difference, if any, on the date the number of shares receivable is
determined, between the estimated fair value of the Company's stock and
the exercise price of options to purchase that stock. The Company
accounts for stock-based compensation arrangements for non-employees in
accordance with provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation". Under SFAS No. 123, compensation expense for services
received from non-employees is based upon the fair value of equity
instruments issued as the services are performed and the stock award is
earned.
F-9
emailthatpays.com, Inc.
Notes to Consolidated Financial Statements
(expressed in United States dollars)
Years ended December 31, 2001 and 2000
================================================================================
3. Significant accounting policies (continued):
(k) Net loss per share:
The Company computes net loss per share in accordance with SFAS No.
128, "Earnings per Share". Under the provisions of SFAS No. 128, basic
loss per share is computed using the weighted average number of common
stock outstanding during the periods, and gives retroactive effect to
the shares issued on the recapitalization described in note 1. Diluted
loss per share is computed using the weighted average number of common
and potentially dilutive common stock outstanding during the period. As
the Company generated net losses in each of the periods presented,
basic and diluted net loss per share is the same as any exercise of
options would be anti-dilutive.
(l) Impairment of long-lived assets and long-lived assets to be disposed
of:
The Company accounts for long-lived assets in accordance with the
provisions of SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of". This
statement requires that long-lived assets and certain identifiable
recorded intangibles be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. Recoverability of assets to be held and used is
measured by a comparison of the carrying amount of an asset to
undiscounted future net cash flows expected to be generated by the
asset. If such assets are considered to be impaired, the impairment to
be recognized is measured by the amount by which the carrying amount of
the assets exceed the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying amount of fair value less
costs to sell. At December 31, 2001, the only long-lived assets
reported on the Company's consolidated balance sheets are property and
equipment.
(m) Comprehensive income (loss):
Effective January 1, 1999, the Company adopted the provisions of SFAS
No. 130, "Reporting Comprehensive Income" SFAS No. 130 which
establishes standards for reporting comprehensive income (loss) and its
components in financial statements. Other comprehensive income (loss),
as defined, includes all changes in equity (net assets) during a period
from non-owner sources. Comprehensive loss for each of the periods
presented is as follows:
=======================================================================
2001 2000
-----------------------------------------------------------------------
Net loss $ 1,534,286 $ 1,635,245
Other comprehensive (income) loss:
Foreign currency translation adjustment (29,244) 7,600
-----------------------------------------------------------------------
Comprehensive loss $ 1,505,042 $ 1,642,845
=======================================================================
F-10
emailthatpays.com, Inc.
Notes to Consolidated Financial Statements
(expressed in United States dollars)
Years ended December 31, 2001 and 2000
================================================================================
4. Economic dependence:
During the year, the Company generated 60% of total revenue (approximately
$800,000) from two customers.
5. Property and equipment:
==============================================================================================================
Accumulated Net book
2001 Cost depreciation value
--------------------------------------------------------------------------------------------------------------
Office furniture and fixtures $ 82,058 $ 37,286 $ 44,772
Computer hardware 106,318 56,534 49,784
Computer software 26,307 26,307 -
Leasehold improvements 40,904 38,125 2,779
--------------------------------------------------------------------------------------------------------------
$ 255,587 $ 158,252 $ 97,335
==============================================================================================================
==============================================================================================================
Accumulated Net book
2000 Cost depreciation value
--------------------------------------------------------------------------------------------------------------
Office furniture and fixtures $ 69,872 $ 18,316 $ 51,556
Computer hardware 119,232 41,729 77,503
Computer software 12,197 12,197 -
Leasehold improvements 42,844 20,952 21,892
--------------------------------------------------------------------------------------------------------------
$ 244,145 $ 93,194 $ 150,951
==============================================================================================================
Assets under capital lease are included in office furniture and fixtures of
$7,280 (2000 - $10,324) and computer hardware $5,706 (2000 - $8,348).
6. Due to related parties:
===========================================================================
2001 2000
---------------------------------------------------------------------------
Stockholder-controlled company $ 129,449 $ 60,020
Stockholder 368,873 -
---------------------------------------------------------------------------
$ 498,322 $ 60,020
===========================================================================
The advances from the stockholder-controlled company and the stockholder
are unsecured, bear interest at an annual rate of 7% and are not callable
within 2002. Interest of $20,500 is payable on these loans at December 31,
2001 (2000 - nil).
F-11
emailthatpays.com, Inc.
Notes to Consolidated Financial Statements
(expressed in United States dollars)
Years ended December 31, 2001 and 2000
================================================================================
7. Loans payable:
===========================================================================
2001 2000
---------------------------------------------------------------------------
Bank demand operating loan $ - $ 100,034
Bank instalment loan - 142,215
---------------------------------------------------------------------------
- 242,249
Less current portion - 139,741
---------------------------------------------------------------------------
$ - $ 102,508
===========================================================================
All loans were designated in Canadian dollars and were secured by a general
security agreement covering all assets of the Company and a general
assignment of book debts.
8. Note payable:
The note payable is unsecured, bears interest at an annual rate of 7% and
is not callable until January 1, 2003.
9. Capital leases:
The Company leases equipment under capital lease arrangements which expire
in 2004. Future obligations under these leases are as follows:
===========================================================================
2002 $ 6,485
2003 6,485
2004 4,324
---------------------------------------------------------------------------
Total minimum lease payments 17,294
Less interest component 1,878
---------------------------------------------------------------------------
Present value of capital lease obligations 15,416
Less current portion 5,375
---------------------------------------------------------------------------
$ 10,041
===========================================================================
F-12
emailthatpays.com, Inc.
Notes to Consolidated Financial Statements
(expressed in United States dollars)
Years ended December 31, 2001 and 2000
================================================================================
10. Capital structure:
The transaction described in note 1 between Realm and email Nevada was
accounted for as a recapitalization of email Nevada, effectively as if
email Nevada had issued common shares for consideration equal to the net
monetary assets of Realm. Stockholders' equity gives effect to the shares
issued to the stockholders of email Nevada prior to October 22, 1999 and
the Company thereafter. The following table presents the issued and
outstanding common stock:
==============================================================================================================
Company email Nevada Additional
common common paid in
shares shares Par value capital
--------------------------------------------------------------------------------------------------------------
December 31, 1999 8,428,093 - 43,140 2,224,432
Private placement, March 5, 2000,
net of $110,000 issuance costs 275,000 - 1,375 1,263,625
Acquisition of promotional goods 20,000 - 100 44,900
--------------------------------------------------------------------------------------------------------------
December 31, 2000 8,723,093 - 44,615 3,532,957
Stock options exercised - June 2001 75,000 - - 375
Write off of options due to
cancellation or change
in status - - (250) (287,000)
Options issued for services - - 300 21,074
Private placement - July 2001 1,333,333 - 6,667 260,001
Private placement - July 2001 333,333 - 1,667 65,000
Settlement with former employee (163,000) - (815) 815
--------------------------------------------------------------------------------------------------------------
December 31, 2001 10,301,759 - 52,184 3,593,222
==============================================================================================================
The Company has authorized 100,000,000 $0.005 par value common shares and
2,000,000 $0.01 par value preferred shares (no preferred shares issued and
outstanding).
11. Common stock options:
On December 21, 1999, the Company adopted the 1999 Equity Compensation Plan
(the "Plan"). On May 5, 2000, the Company amended the Plan to increase the
maximum number of aggregate shares reserved for issuance under the Plan.
The Plan provides for the grant of up to 2,000,000 incentive or
non-qualified stock options or shares of restricted stock to employees and
key advisors (an "Optionee") of the Company. Options granted under the Plan
generally vest ratably over a period of three years and expire ten years
from the date of grant. If an Optionee ceases employment with or service to
the Company (a "Termination"), the Optionee may exercise any vested option
at the time of Termination within such period of time specified in the
option agreement. In the absence of a specified time in the option
agreement, the option remains exercisable for three months following the
Optionee's Termination. Unvested options revert to the Plan at the date of
the Termination. If, after Termination, the Optionee does not exercise the
options within the time specified, the option shall terminate and the
shares revert to the Plan.
F-13
emailthatpays.com, Inc.
Notes to Consolidated Financial Statements
(expressed in United States dollars)
Years ended December 31, 2001 and 2000
================================================================================
11. Common stock options (continued):
During 1999, the Company granted a total of 930,000 non-qualified stock
options. 730,000 options with a three-year vesting period and an exercise
price of $5.75 (an amount that approximated or exceeded the market value of
the Company stock on the date of grant) were granted to certain employees
and directors. A further 200,000 options were granted with a two-year
vesting period and an exercise price of $.005 (an amount below the market
value of the Company stock on the date of grant) to certain employees of
the Company. The Company recorded a non-cash compensation expense in fiscal
2001 of $612,950 (2000 - $229,800) relating to these options, representing
an implicit benefit derived from the exercise price being less than market
value. As the individuals holding the options are no longer employees of
the Company, the deferred compensation applicable to their vested options
has been fully amortized and recognized as an expense in 2001. The
unamortized deferred compensation applicable to the unvested options has
been written off to additional paid-in capital.
During 2000, the Company granted a total of 403,000 non-qualified stock
options. The options have a three-year vesting period and exercise prices
ranging from $1.35 to $6.63 (amounts that approximate or exceed the market
value of the Company stock on the date of the grant). Also, during 2000,
399,000 options reverted back to the Plan due to changes in the employment
and contractual status of certain employees and key advisors.
During 2001, a terminated employee exercised options to purchase 75,000
shares of common stock at an exercise price of $.005 per share. Further,
due to changes in the employment status of certain employees, options to
purchase 25,000 shares of common stock at an exercise price $.005 and
options to purchase 135,000 shares at exercise prices ranging from $1.35 to
$5.75 reverted back to the Plan.
F-14
emailthatpays.com, Inc.
Notes to Consolidated Financial Statements
(expressed in United States dollars)
Years ended December 31, 2001 and 2000
================================================================================
11. Common stock options (continued):
Following is a summary of stock option activity for the year ended December
31, 2001.
==============================================================================================================
Weighted
average
Outstanding exercise
shares price
--------------------------------------------------------------------------------------------------------------
Outstanding as of December 31, 1998 - $ -
Granted 930,000 4.51
Exercised - -
--------------------------------------------------------------------------------------------------------------
Outstanding as of December 31, 1999 930,000 4.51
Granted 403,000 2.27
Exercised - -
Forfeited (399,000) 5.52
--------------------------------------------------------------------------------------------------------------
Outstanding as of December 31, 2000 934,000 3.12
Granted - -
Exercised (75,000) 0.005
Forfeited (160,000) 3.06
--------------------------------------------------------------------------------------------------------------
Outstanding as of December 31, 2001 699,000 $ 3.46
==============================================================================================================
Options vested as of December 31, 2001 447,556 $ 3.45
==============================================================================================================
The following table summarizes information about stock options outstanding
at December 31, 2001:
==============================================================================================================
Options outstanding Options exercisable
--------------------------------------------------- ---------------------------------
Average Weighted Weighted
Range of remaining average average
exercise Number contractual exercise Number exercise
prices outstanding life (years) price exercisable price
--------------------------------------------------------------------------------------------------------------
$ 0.005 100,000 8 $ 0.005 100,000 $ 0.005
$ 1.35 233,000 9 $ 1.35 103,556 $ 1.35
$ 5.75 366,000 8 $ 5.75 244,000 $ 5.75
--------------------------------------------------------------------------------------------------------------
699,000 $ 3.46 447,556 $ 3.45
==============================================================================================================
At December 31, 2000, the weighted average exercise prices for options
outstanding and options exercisable were $3.12 and $2.68, respectively.
F-15
emailthatpays.com, Inc.
Notes to Consolidated Financial Statements
(expressed in United States dollars)
Years ended December 31, 2001 and 2000
================================================================================
11. Common stock options (continued):
The following table disaggregates stock compensation expense by employees
and non-employees.
==============================================================================================================
2001 2000
--------------------------------------------------------------------------------------------------------------
Pursuant to stock option grants to employees $ 612,950 $ 229,800
Pursuant to stock option grants to non-employees 21,374 -
--------------------------------------------------------------------------------------------------------------
$ 634,324 $ 229,800
==============================================================================================================
The Company has adopted the disclosure requirements of SFAS No. 123 ("FAS
123"), "Accounting for Stock-Based Compensation", to account for grants to
employees under the Company's existing stock-based compensation plan. Had
compensation cost for the Company's stock option plan been determined,
based on the fair value at the grant date for awards under those plans
consistent with the measurement provisions of FAS 123, the Company's net
loss and basic loss per share would have been adjusted as follows:
==============================================================================================================
2001 2000
--------------------------------------------------------------------------------------------------------------
Loss for the year $ 1,534,286 $ 1,635,245
Loss for the year - pro-forma 1,589,190 2,413,494
Basic loss per share 0.16 0.19
Basic loss per share - pro-forma 0.17 0.28
==============================================================================================================
The fair value of each option grant has been estimated on the date of the
grant using the Black-Scholes option-pricing model with the following
assumptions:
==============================================================================================================
2001 2000
--------------------------------------------------------------------------------------------------------------
Expected dividend yield 0.0% 0.0%
Expected stock price volatility 75% 75%
Risk-free interest rate 6.0% 6.0%
Expected life of options 3 years 3 years
==============================================================================================================
F-16
emailthatpays.com, Inc.
Notes to Consolidated Financial Statements
(expressed in United States dollars)
Years ended December 31, 2001 and 2000
================================================================================
12. Share purchase warrants:
Immediately prior to the share exchange between email Nevada and Realm,
65,190 stock purchase warrants were outstanding. The warrants allow the
holder to purchase one common share at prices between $12.50 and $50.00.
The exercise price of the warrants exceeded the market price of the
Company's common stock on the date of issuance.
In conjunction with the March 5, 2000 private placement of common shares,
the Company issued warrants to purchase 100,000 shares of common stock with
an exercise price of $5.00 and an expiry date of March 5, 2003. On June 6,
2000, the Company issued warrants to purchase 325,000 shares of common
stock with an exercise price of $3.25 and an expiry date of June 6, 2003.
In conjunction with the July 4, 2001 private placement of common shares,
the Company issued warrants to purchase 1,666,666 shares of common stock
with an exercise price of $0.20 and an expiry date of January 4, 2002.
The warrants have the following price and expiration dates:
===========================================================================
Number of warrants Exercise price Expiration date
---------------------------------------------------------------------------
1,666,666 $ 0.20 January 4, 2002
325,000 $ 3.25 June 6, 2003
100,000 $ 5.00 March 5, 2003
30,000 $ 12.50 December 31, 2005
15,000 $ 20.00 December 31, 2005
15,000 $ 23.00 December 31, 2005
===========================================================================
To December 31, 2001 no warrants have been exercised. On January 4, 2002,
all warrants exercisable at $0.20 expired.
F-17
emailthatpays.com, Inc.
Notes to Consolidated Financial Statements
(expressed in United States dollars)
Years ended December 31, 2001 and 2000
================================================================================
13. Income taxes:
Current income taxes are computed at statutory rates on pre-tax income.
Deferred taxes would be recorded based on differences in the carrying
values of assets and liabilities for financial statement and income tax
purposes. At December 31, 2001, the Company has elected to carry forward
net operating losses for international, federal and state income tax
purposes of approximately $3.6 million that maybe available to reduce
future taxable income to 2015. As utilization of such operating losses for
tax purposes is not considered to be more likely than not, the deferred tax
asset has been fully reserved through the recording of a 100% valuation
allowance. These operating losses may be limited to the extent an
"ownership change" occurs.
The components of the deferred tax asset as of December 31, 2001 are as
follows:
===========================================================================
2001 2000
---------------------------------------------------------------------------
Deferred tax asset:
Net operating loss carry forward $ 1,305,000 $ 1,068,000
Less valuation allowance (1,305,000) (1,068,000)
---------------------------------------------------------------------------
Net deferred tax $ - $ -
===========================================================================
At December 31, 2001, the Company has net operating loss carryforwards for
federal income tax purposes of $3,567,000, which are available to offset
future federal taxable income, if any, through 2021.
14. Commitment:
The Company leases office space under an operating lease of $19,858, which
expires in 2002.
F-18