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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM 10-Q
(Mark One)
[X] Quarterly Report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934 for the quarterly period ended March 31, 2001,
Or
[ ] Transition Report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934 for the transition period from ______ to ______
Commission File Number: 000-29037
EMERGE INTERACTIVE, INC.
------------------------
(Exact name of registrant as specified in its charter)
Delaware 65-0534535
-------- ----------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
10305 102nd Terrace Sebastian, Florida 32958
--------------------------------------------
(Address of principal executive offices)
(561) 589-5310
--------------
Registrant's telephone number, including area code:
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days: YES [X] NO [ ]
The number of shares of the registrant's common stock, $0.008 par value,
outstanding as of May 9, 2001, was 35,569,671. There were 29,875,226 shares
of Class A common stock outstanding and 5,694,445 shares of Class B common
outstanding as of this date.
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EMERGE INTERACTIVE, INC.
FORM 10-Q QUARTERLY REPORT
(For Three Months Ended March 31, 2001)
TABLE OF CONTENTS
Page
----
Part I FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets as of December 31, 2000 and March 31, 2001....................... 3
Condensed Consolidated Statements of Operations for the three months ended March 31,
2000 and 2001.......................................................................................... 5
Condensed Consolidated Statement of Stockholders' Equity for the three months ended March 31, 2001.... 6
Condensed Consolidated Statements of Cash Flows for the three months ended March 31,
2000 and 2001.......................................................................................... 7
Notes to Condensed Consolidated Financial Statements................................................... 9
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................................................. 16
Item 3. Quantitative and Qualitative Disclosures about Market Risk............................................. 25
Part II OTHER INFORMATION
Item 1. Legal Proceedings...................................................................................... 25
Item 2. Changes in Securities and Use of Proceeds.............................................................. 25
Item 4. Submission of Matters to a Vote of Security Holders.................................................... 25
Item 6. Exhibits and Reports on Form 8-K....................................................................... 25
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
EMERGE INTERACTIVE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS DECEMBER 31, MARCH 31,
2000 2001
------------ ------------
Current assets:
Cash and cash equivalents $ 42,811,572 $ 10,281,068
Trade accounts receivable, less allowance for doubtful accounts of
$167,937 in 2000 and $231,005 in 2001 12,141,867 17,501,887
Inventories (note 3) 3,704,250 8,648,521
Cattle deposits 2,185,670 4,949,898
Prepaid expenses 1,070,674 1,038,436
Other current assets 697,536 212,384
Due from related parties (note 4) 3,479,492 4,815,675
------------ ------------
Total current assets 66,091,061 47,447,869
Property, plant and equipment, net 20,567,939 24,490,638
Investment in Turnkey Computer Systems, Inc. 3,010,603 2,972,341
Intangible assets, net of accumulated amortization of $8,131,310
in 2000 and $11,610,085 in 2001 57,377,620 57,481,296
Restricted cash 1,505,000 1,505,000
------------ ------------
Total assets $148,552,223 $133,897,144
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current installments of capital lease obligation $ 216,516 $ 169,728
Accounts payable 9,509,316 5,628,802
Accrued liabilities:
Purchase consideration 4,800,000 2,550,000
Salaries and benefits 850,533 635,328
Other 1,124,649 1,154,524
Advance payments from customers 663,850 1,143,230
Due to related parties (note 4) 1,219,417 1,719,055
------------ ------------
Total current liabilities 18,384,281 13,000,667
Capital lease obligation, excluding current installments 90,820 24,259
------------ ------------
Total liabilities 18,475,101 13,024,926
------------ ------------
See accompanying notes to condensed consolidated financial statements.
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Common stock, $.008 par value, authorized 100,000,000 shares:
Class A common stock, designated 92,711,110 shares, issued and
outstanding 29,445,228 shares in 2000 and 29,846,300 shares in 2001 235,561 238,770
Class B common stock, designated 7,288,890 shares, 5,694,445 shares issued
and outstanding in 2000 and 2001 45,556 45,556
Additional paid-in capital 195,347,598 196,377,082
Accumulated deficit (65,511,023) (75,732,562)
Unearned compensation (40,570) (56,628)
------------- -------------
Total stockholders' equity 130,077,122 120,872,218
------------- -------------
Total liabilities and stockholders' equity $ 148,552,223 $ 133,897,144
============= =============
See accompanying notes to condensed consolidated financial statements.
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EMERGE INTERACTIVE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 2001
(UNAUDITED)
THREE MONTHS
ENDED
MARCH 31,
2000 2001
------------- -------------
Revenue (including sales to related parties of approximately $0 in 2000 and $ 38,552,899 $ 325,208,240
$100,052,000 in 2001, note 4)
Cost of revenue (including purchases from related parties of approximately
$0 in 2000 and $32,922,000 in 2001, note 4) 38,200,924 321,490,538
------------- -------------
Gross profit 351,975 3,717,702
Operating expenses:
Selling, general and administrative 5,191,760 7,772,999
Technology and development 1,286,063 1,430,067
Depreciation and amortization of intangibles 567,488 4,784,942
------------- -------------
Total operating expenses 7,045,311 13,988,008
------------- -------------
Operating loss (6,693,336) (10,270,306)
Equity income (loss) in unconsolidated investee -- (38,262)
Interest and other income, net 1,141,551 319,717
------------- -------------
Loss from continuing operations before cumulative effect of a change
in accounting principle (5,551,785) (9,988,851)
Income from operations of discontinued segment 43,028 --
Cumulative effect of a change in accounting principle -- (232,688)
------------- -------------
Net loss $ (5,508,757) $ (10,221,539)
============= =============
Net loss per common share - basic and diluted:
Net loss before income from operations of discontinued segment and accounting
change $ (0.24) $ (0.28)
Income from operations of discontinued segment -- --
Accounting change -- (0.01)
------------- -------------
Net loss per common share $ (0.24) $ (0.29)
============= =============
Weighted average number of common shares outstanding - basic and diluted 23,248,271 35,428,501
============= =============
See accompanying notes to condensed consolidated financial statements.
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EMERGE INTERACTIVE, INC. AND SUBSIDIARIES
Condensed Consolidated Statement of Stockholders' Equity
For the Three Months Ended March 31, 2001
(Unaudited)
COMMON STOCK COMMON STOCK
Class A Class B ADDITIONAL
------------------------ ----------------------- PAID-IN
Shares Amount Shares Amount CAPITAL
------------ ---------- ----------- ---------- -------------
Balances at December 31, 2000 29,445,228 $235,561 5,694,445 $45,556 $195,347,598
Issuance of 188,356 shares of Class A common stock in
connection with business combinations (note 7) 188,356 1,507 -- -- 685,993
Exercise of stock options for cash (note 6) 212,716 1,702 -- -- 239,769
Net loss -- -- -- -- --
Unearned compensation -- -- -- -- 103,722
Amortization of unearned compensation (note 6) -- -- -- -- --
---------- -------- ---------- ------- ------------
Balances at March 31, 2001 29,846,300 $238,770 5,694,445 $45,556 $196,377,082
========== ======== ========== ======= ============
Accumulated Unearned
deficit compensation Total
------------- ------------ -------------
Balances at December 31, 2000 $ (65,511,023) $(40,570) $ 130,077,122
Issuance of 188,356 shares of Class A common stock in
connection with business combinations (note 7) -- -- 687,500
Exercise of stock options for cash (note 6) -- -- 241,471
Net loss (10,221,539) -- (10,221,539)
Unearned compensation -- (103,722) --
Amortization of unearned compensation (note 6) -- 87,664 87,664
------------- --------- ------------
Balances at March 31, 2001 $ (75,732,562) $(56,628) $120,872,218
============= ========= ============
See accompanying notes to consolidated financial statements.
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EMERGE INTERACTIVE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 2001
(UNAUDITED)
2000 2001
------------- -------------
Cash flows from operating activities:
Net loss $ (5,508,757) $ (10,221,539)
Adjustments to reconcile net loss to net cash used in
operating activities:
Cumulative effect of a change in accounting principle -- 232,688
Depreciation and amortization 579,393 4,859,629
Accretion to redemption value of note receivable (527,984) --
Equity loss (income) in unconsolidated investee (29,880)
Non-cash compensation -- 75,518
Amortization of unearned compensation 4,508 12,146
Fair value of financial instruments -- (397,751)
Changes in operating assets and liabilities:
Trade accounts receivable, net (6,539,525) (5,360,021)
Inventories (501,070) (4,670,606)
Cattle deposits (906,855) (2,030,847)
Prepaid expenses and other assets (466,009) 182,453
Net assets of discontinued operations (84,585) --
Due from related parties, net -- (836,545)
Accounts payable and accrued liabilities 329,804 (4,090,517)
Advance payments from customers 528,880 479,380
------------- -------------
Net cash used in operating activities (13,092,200) (21,795,892)
------------- -------------
Cash flows from investing activities:
Business combinations, net of cash acquired -- (7,048,720)
Purchase of short term investments (215,348) --
Purchase of property, plant and equipment (1,270,855) (3,814,014)
------------- -------------
Net cash used in investing activities (1,486,203) (10,862,734)
------------- -------------
Cash flows from financing activities:
Net payments to related parties (11,528,836) --
Payment on note payable (900,000) --
Payments on capital lease obligations (306,388) (113,349)
Offering costs (447,644) --
Net proceeds from issuance of common stock 108,188,269 241,471
------------- -------------
Net cash provided by financing activities 95,005,401 128,122
------------- -------------
Net change in cash and cash equivalents 80,426,998 (32,530,504)
Cash and cash equivalents, beginning of period 12,316,497 42,811,572
------------- -------------
Cash and cash equivalents, end of period $ 92,743,495 $ 10,281,068
============= =============
See accompanying notes to condensed consolidated financial statements.
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EMERGE INTERACTIVE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 2001
(UNAUDITED)
2000 2001
------------- -------------
Supplemental disclosures:
Cash paid for interest $ 431,526 $ 30,155
Issuance of Class A common stock in connection with
business combinations (note 7) -- 687,500
Conversion of Series A, B, and C preferred stock and
redeemable Class A common stock into Class A common
stock 513,775 --
Conversion of Series D preferred stock into Class B
common stock 45,556 --
See accompanying notes to condensed consolidated financial statements.
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EMERGE INTERACTIVE, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(1) ORGANIZATION
(a) Basis of Presentation
The condensed consolidated financial statements include the
accounts of eMerge Interactive, Inc. and its wholly-owned
subsidiaries, Cyberstockyard, Inc. ("Cyberstockyard"), a
Mississippi corporation, eMerge San Saba, Inc., eMerge
Okolona, Inc., eMerge Gaffney, Inc. and eMerge Bluegrass,
Inc., all Delaware corporations. All significant intercompany
accounts and transactions have been eliminated in
consolidation.
The Company's investment in Turnkey Computer Systems, Inc.
("Turnkey") is included in the accompanying condensed
consolidated financial statements using the equity method of
accounting. Accordingly, the Company's share of Turnkey's
earnings and losses is reflected in the caption "equity income
(loss) in unconsolidated investee" in the condensed
consolidated statements of operations. The Company's carrying
value of Turnkey includes the unamortized excess of the cost
of the Company's interest in Turnkey over its equity in the
underlying net assets determined at the date of acquisition.
This excess is amortized on a straight-line basis over 10
years and the related amortization is also included in "equity
income (loss) in unconsolidated investee' in the condensed
consolidated statements of operations.
The Company's condensed consolidated balance sheet as of
December 31, 2000, has been derived from the Company's audited
balance sheet as of that date. The Company's condensed
consolidated financial statements as of and for the three
months ended March 31, 2001 and 2000, have not been audited.
In the opinion of management, the unaudited condensed
consolidated financial statements include all adjustments and
accruals (consisting of normal recurring adjustments)
necessary to present fairly the Company's financial position
as of March 31, 2001, and the results of its operations and
cash flows for the periods ended March 31, 2001 and 2000.
Results of interim periods are not necessarily indicative of
the results to be expected during the remainder of the current
year or for any future period. Certain information and
footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting
principles have been omitted or condensed. The accounting
policies used in preparing these consolidated financial
statements are the same as those described in our Form 10-K
and the consolidated financial statements incorporated by
reference therein.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Cash and Cash Equivalents
Cash and cash equivalents include amounts on deposit with
financial institutions and investments with maturities of 90
days or less. For the purposes of the statement of cash flows,
the Company considers all highly liquid debt instruments with
maturities of 90 days or less to be cash equivalents.
(b) Inventories
Inventories are stated at the lower of cost or market and
consist primarily of stocker cattle awaiting immediate resale.
All cattle are acquired in groups and the costs of cattle are
accumulated by groups rather than
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individual animal. Actual market prices could be materially
different from the carrying cost at the time the cattle are
sold.
(c) Property, Plant and Equipment
Property, plant and equipment are stated at cost and
depreciated using the straight-line method over the estimated
useful lives of the assets. Equipment under capital leases is
stated at the present value of future minimum lease payments.
Estimated useful lives range from 15 to 20 years for buildings
and improvements, 3 to 5 years for computer equipment and
software, 2 to 7 years for furniture, fixtures, and equipment,
and 5 years for vehicles. Leasehold improvements and equipment
under capital leases are amortized on a straight-line basis
over the shorter of the lease term or the estimated useful
life of the assets.
(d) Capitalized Software Costs
The Company accounts for the software components of its
websites in accordance with the American Institute of
Certified Public Accountants' Statement of Position ("SOP")
98-1, "Accounting for the Costs of Computer Software Developed
or Obtained for Internal Use". Accordingly, certain costs to
develop internal-use computer software are capitalized after
the Company has completed a preliminary project assessment and
management, with relevant authority, commits to funding the
related software project and it is probable that the project
will be completed and the software will be used to perform the
function intended. The costs capitalized by the Company relate
principally to the Company's internet site development and
will be amortized to operations over the assets' estimated
useful life of 3 years upon completion of the application
development stage.
(e) Intangibles
Intangibles consist principally of goodwill, which is the
excess of the purchase price over the net tangible assets of
businesses acquired. Intangibles are stated at amortized cost
and are amortized on a straight-line basis over the estimated
useful lives of the assets, which range from 3 to 5 years.
(f) Impairment of Long-Lived Assets
The Company accounts for long-lived assets in accordance with
the provisions of Statement of Financial Accounting Standards
No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed of" (SFAS No. 121).
In the event that facts and circumstances indicate that the
carrying amount of long-lived assets may be impaired, the
recoverability of the assets to be held and used is measured
by comparing the carrying amount of the assets to the future
net cash flows expected to be generated by those assets. If
this review indicates that the assets will not be recoverable,
the carrying value of the Company's assets would be reduced to
their estimated fair value.
(g) Investment Securities
As of March 31, 2001, the Company held approximately $3.3
million of highly liquid debt instruments with maturities of
90 days or less included in cash equivalents and $1.5 million
in certificates of deposit with maturities of 180 days or less
included in restricted cash. The Company accounts for all of
these investments in accordance with SFAS No. 115, "Accounting
for Certain Investments in Debt and Equity Securities". As of
March 31, 2001, all of the Company's debt instruments and
investments were classified as held-to-maturity and their
amortized cost approximated fair value due to their short-term
nature.
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(h) Fair Value of Financial Instruments
The carrying value of cash and cash equivalents, trade
accounts receivable, restricted cash, amounts due to and from
related parties, accounts and notes payable, and accrued
liabilities approximates their fair value at December 31, 2000
and March 31, 2001, due to the short-term maturity of these
instruments.
(i) Revenue Recognition
The Company generates the majority of its revenue from cattle
sales transactions where it acts as either a principal or
agent in the purchase and sale of cattle. For cattle sales
transactions where the Company is the principal in the
arrangement, the Company purchases cattle from the seller,
records the cattle as inventory until delivered to an accepted
buyer and is exposed to both the inventory and credit risk
that results from the transaction. In these types of
transactions, the Company records the gross revenue earned and
related product costs incurred. For cattle sales transactions
in which the Company acts as an agent, the Company sells
cattle consigned to it on a commission basis, where it is
subject to inventory and credit risk, or the Company sells
cattle on a fee basis. In these types of transactions revenue
is recorded on a net basis. For all other products and
services offered by the Company, the Company acts as a
principal to the transaction and gross revenue and related
product cost are recognized as products are shipped or
services are provided.
In December 1999, the Securities and Exchange Commission (the
"SEC") issued Staff Accounting Bulletin No. 101 ("SAB 101"),
"Revenue Recognition in Financial Statements." SAB 101 was
followed by Staff Accounting Bulletin No. 101A,
"Implementation Issues Related to SAB 101," in March 2000 and
by Staff Accounting Bulletin No. 101B, "Second Amendment:
Revenue Recognition in Financial Statements" ("SAB 101B"), in
June 2000. In October 2000, the SEC issued a Frequently Asked
Questions and Answers document to provide additional guidance.
These documents summarize certain views of the SEC regarding
applying generally accepted accounting principles to revenue
recognition in financial statements. The SEC has provided this
guidance due, in part, to the large number of revenue
recognition issues that registrants encounter. Management
believes that its current revenue recognition principles
comply with SAB 101.
(j) Income Taxes
The asset and liability method is used in accounting for
income taxes. Under this method, deferred tax assets and
liabilities are recognized for operating losses and tax credit
carryforwards and for the future tax consequences attributable
to differences between the financial statement carrying
amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to the
taxable income in 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 the results of operations in the period that
includes the enactment date. A valuation allowance is recorded
to reduce the carrying amounts of deferred tax assets unless
it appears more likely than not that such assets will be
realized.
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(k) Stock-Based Compensation
The Company has adopted SFAS No. 123, "Accounting for
Stock-Based Compensation". As permitted by SFAS No. 123, the
Company measures compensation cost in accordance with
Accounting Principles Board Opinion No. 25 (APB 25),
"Accounting for Stock Issued to Employees" and related
interpretations and elects to provide the pro-forma net income
and earnings per share disclosures required by the standard.
Accordingly, no accounting recognition is given to stock
options issued to employees that are granted at or above fair
market value. Stock options issued to non-employees are
recorded at fair value at the date of grant. Fair value is
determined using the Black-Scholes method and the expense is
amortized over the vesting period.
(l) Net Loss Per Share
Net loss per share is computed in accordance with SFAS No.
128, "Earnings Per Share," by dividing the net loss allocable
to common stockholders by the weighted average number of
shares of common stock outstanding. The Company's stock
options (4,167,127 shares at December 31, 2000 and 4,643,499
shares at March 31, 2001) have not been used in the
calculation of diluted net loss per share because to do so
would be anti-dilutive. As such, the numerator and the
denominator used in computing both basic and diluted net loss
per share allocable to common stockholders are equal.
Pursuant to SEC Staff Accounting Bulletin No. 98 and SEC staff
policy, all common stock and common stock equivalents issued
for nominal consideration during the periods presented herein,
and through the anticipated effective date of an IPO, are
required to be reflected in a manner similar to a stock split
or stock dividend for which retroactive treatment is required
in the calculation of net income (loss) per share. The Company
had no such issuances for the periods presented.
(m) Hedging Activities
In June 1998, the Financial Accounting Standards Board
("FASB") issued SFAS No. 133, "Accounting for Derivatives
Instruments and Hedging Activities", which establishes
accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other
contracts (collectively referred to as derivatives), and for
hedging activities. SFAS No. 133 was amended by SFAS No. 137
in June 1999 to require implementation of the standard
beginning January 1, 2001. SFAS No. 133 was amended further by
SFAS No. 138 in June 2000. The Company adopted the provisions
of SFAS No. 133, as amended, on January 1, 2001, and recorded
a cumulative effect of change in accounting principle of
$232,688. As of March 31, 2001, the Company has cattle future
contracts with purchase commitments of $73 million and sales
commitments of $16 million. These futures contracts have
unrealized net gains of $21,420 included in other current
assets. The change in fair value of all derivatives contracts
amounted to $397,751 for the quarter ended March 31, 2001 and
is included in cost of cattle revenues. The contract lives are
generally less than six months.
In the ordinary course of business, the Company enters into
purchase and sale contracts for cattle that require delivery
at a future date. Management believes that these transactions
fall under the "normal purchases and normal sales" exception
described within SFAS No. 133, as amended. The Company also
enters into a limited number of cattle futures transactions.
Currently, the Company does not maintain the documentation
required by the standard to qualify for hedge accounting with
respect to cattle futures transactions.
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(n) Comprehensive Income (Loss)
Comprehensive income (loss) is the change in equity of a
business enterprise during a period from transactions and
other events and circumstances from non-owner sources. The
Company has no such transactions, events or circumstances
during the three months ended March 31, 2000 and 2001. Thus,
comprehensive loss is the same as its net loss for each of the
three months ended March 31, 2000 and 2001.
(o) Use of Estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States
of America requires management to make certain estimates and
assumptions that affect the reported results of operations,
financial position, and various disclosures. Actual results
could differ from those estimates.
(p) Reclassifications
Certain reclassifications have been made to the 2000 condensed
consolidated financial statements in order to conform to 2001
classifications. The changes had no effect on previously
reported operations.
(3) INVENTORIES
Inventories consist of:
2000 2001
-------------- --------------
Raw materials $ 121,219 $ 79,199
Work-in-process -- --
Cattle 3,315,407 8,342,911
Other 267,624 226,411
-------------- --------------
$ 3,704,250 $ 8,648,521
============== ==============
(4) RELATED PARTY TRANSACTIONS
Amounts due from related parties consist of:
2000 2001
---------------- ---------------
Eastern Livestock, Inc. $ 2,424,264 $ 2,537,418
Employees and shareholders 1,055,228 2,278,257
---------------- ---------------
$ 3,479,492 $ 4,815,675
================ ===============
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Amounts due to related parties consist of:
2000 2001
---------------- ---------------
XL Vision $ 313,009 $ --
Safeguard Scientifics, Inc. and Safeguard Delaware, Inc. 12,115 12,115
Eastern Livestock, Inc. 321,362 370,311
Employees and shareholders 572,931 1,336,629
---------------- ---------------
$ 1,219,417 $ 1,719,055
================ ===============
The Company has both cattle sales and purchase transactions with Eastern
Livestock, Inc., certain employees and shareholders' related businesses
in the ordinary course of business. These sales and purchases are made on
trade accounts with the same credit terms of the Company's other
customers and suppliers. Cattle sales to related parties amounted to $0
and $100,052,000 for the three months ended March 31, 2000 and 2001,
respectively. Cattle purchases from related parties amounted to $0 and
$32,922,000 for the three months ended March 31, 2000 and 2001,
respectively.
(5) SEGMENT INFORMATION
The Company's reportable segments consist of cattle sales and other
products and services. The gross profit (loss) associated with cattle
sales and the related prospects for this portion of the Company's
business differs from the rest of the Company's products and service
offerings.
The following summarizes revenue, cost of revenue and gross profit (loss)
information related to the Company's two operating segments:
THREE MONTHS ENDED
MARCH 31, MARCH 31,
----------------------------------
2000 2001
------------- -------------
Revenue:
Cattle $ 38,011,084 $ 324,528,919
Other 541,815 679,321
------------- -------------
Total $ 38,552,899 $ 325,208,240
============= =============
Cost of revenue:
Cattle $ 37,811,902 $ 320,543,421
Other 389,022 947,117
------------- -------------
Total $ 38,200,924 $ 321,490,538
============= =============
Gross profit (loss):
Cattle $ 199,182 $ 3,985,498
Other 152,793 (267,796)
------------- -------------
Total $ 351,975 $ 3,717,702
============= =============
The Company's assets and other statement of operations data are not
allocated to a segment.
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(6) STOCK PLAN
A summary of stock option transactions for the three months ended March
31, 2001, follows:
WEIGHTED
RANGE OF WEIGHTED AVERAGE
EXERCISE AVERAGE REMAINING
PRICE PER EXERCISE CONTRACTUAL
SHARES SHARE PRICE LIFE (IN YEARS)
------------- ----------------- ------------- ----------------
Balance outstanding, December 31,
2000 4,167,127 $ 0.80-62.38 $ 8.73 8.60
========= ============= ========= =========
Granted 845,000 3.98- 5.73 4.43
Exercised (212,716) 0.80- 2.40 1.14
Cancelled (155,912) 0.80-47.31 10.64
--------- ------------- ---------
Balance outstanding, March 31,
2001 4,643,499 $ 0.80-62.38 $ 8.24 8.65
========= ============= ========= =========
For the three months ended March 31, 2001, the Company recognized
$87,664 of unearned compensation expense resulting from the accelerated
vesting of stock options. This amount is included in selling, general
and administrative expenses within the condensed consolidated
statements of operations.
(7) ACQUISITIONS
On January 2, 2001, the Company closed on an Agreement for the Purchase
and Sale of Assets with Bluegrass Stockyards ("Bluegrass") and its
shareholders. In connection with this purchase, the Company acquired
all of the tangible and intangible property of Bluegrass relating to
its business of purchasing and reselling cattle through its auction
facility. The purchase price for these assets was $1,500,000 in cash.
Concurrent with the purchase and sale of assets, the Company also
closed on a Contract for Sale and Purchase of Real Estate with the
shareholders of Bluegrass. The Company purchased land and buildings
used in the above-described business for a purchase price of $2,000,000
in cash. The acquisition was accounted for as a purchase and the
estimated excess of the purchase price over the fair value of net
assets acquired of approximately $2,164,800 was recorded as intangibles
and is being amortized over five years.
On January 2, 2001, the Company closed on an Agreement for the Purchase
and Sale of Assets with Runnells-Peters Cattle Company
("Runnells-Peters") and its shareholders for the purchase of certain
tangible and intangible assets. Runnells-Peters engages in the buying
of cattle for immediate or short-term resale. The purchase price for
these assets consisted of (i) $500,000 in cash and (ii) 136,986 shares
of eMerge's common stock valued at $500,000. The acquisition was
accounted for as a purchase and the estimated excess of the purchase
price over the fair value of net assets acquired of approximately
$1,018,400 was recorded as intangibles and is being amortized over five
years.
On January 2, 2001, the Company closed on an Agreement for the Purchase
and Sale of Assets with Pennell Cattle Company ("Pennell") and its sole
shareholder for the purchase of certain tangible and intangible assets.
Pennell engages in the buying of cattle for immediate or short-term
resale. The purchase price for these assets consisted of (i) $187,500
in cash and (ii) 51,370 shares of eMerge's common stock valued at
$187,500. The acquisition was
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accounted for as a purchase and the estimated excess of the purchase
price over the fair value of net assets acquired of approximately
$395,200 was recorded as intangibles and is being amortized over five
years.
In addition to the above payments, the Company paid $2,861,220 of
additional purchase price related to previous acquisitions.
Management is primarily responsible for estimating the fair value of
the assets acquired, and has conducted due diligence in determining the
fair value. Management has made estimates and assumptions that affect
the reported amounts of assets, liabilities, and expenses resulting
from such acquisitions. Actual results could differ from those amounts.
The results of operations of the acquired companies are included in the
condensed consolidated statements of operations since the respective
dates of acquisition.
The following unaudited proforma financial information presents the
combined results of operations of eMerge, Bluegrass, Runnells-Peters
and Pennell, as if the acquisitions occurred on January 1, 2000, after
giving effect to certain adjustments, including amortization of
goodwill. The unaudited pro forma financial information does not
necessarily reflect the results of operations that would have occurred
had these entities constituted a single entity during such periods.
Three Months Ended
March 31,
-----------------------------
2000 2001
-------- ------------
Revenue $46,917,206 $325,208,240
Net loss (5,634,666) (3,717,702)
Net loss per share $ (0.24) $ (0.29)
(8) RESTRUCTURING AND RELATED CHARGES
On January 18, 2001, the Company announced plans to realign its
corporate operations in connection with the decision to discontinue
support of its Nutricharge and Infrared Imaging products. The Company
recorded restructuring and related charges of approximately $658,300
primarily to reflect employee severance and related benefit costs.
Approximately $457,400 of these charges is included in selling,
general, and administrative expenses, while approximately $200,900 is
included in technology and development expenses within the accompanying
condensed consolidated financial statements.
(9) SUBSEQUENT EVENT
On May 15, 2001 we completed an operational review of our business and
announced plans to increase our focus on businesses with the most
growth and gross margin opportunity, such as marketing cattle and
animal health/beef safety technologies and discontinue our online
storefront. Additionally, we announced plans to further reduce our cost
structure and streamline corporate operations.
As a result, we will record a charge of approximately $8 million, or
$0.23 per share, in the second quarter of 2001. Approximately $7
million of the charge will be non-cash related to the write-down of
non-strategic assets to their fair values, including the product
storefront and approximately $1 million will be cash related to
operating efficiency initiatives, including the consolidation of the
technology development and support operations as well as severance and
employee-related costs. The consolidations affected approximately 60
corporate and service support associates, or 15 percent of the total
work force. The majority of the cash portion of the charge is expected
to be paid over the next 90 days.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion of our financial condition and results of
operations should be read together with the condensed consolidated financial
statements and the related notes included elsewhere in this report.
FORWARD LOOKING STATEMENTS
In addition to historical information, this report contains statements
that constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. These statements can be identified by
the use of predictive, future tense or forward-looking terminology, such as
"anticipates," "believes," "estimates," "expects," "intends," "may," "will" and
words of similar meaning. These statements include statements regarding, among
other things, our electronic commerce strategy, acquisition and expansion
strategy, product and service development, projected capital expenditures,
liquidity and capital, development of additional revenue sources, expansion into
new market segments,
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technological advancement, ability to develop "brand" awareness and the market
acceptance of the Internet as a medium of commerce. These statements are based
on management's current expectations and are subject to a number of
uncertainties and risks that could cause actual results to differ significantly
from those described in the forward-looking statements, including the acceptance
by our customers of electronic commerce as a means of conducting business, our
ability to grow revenue, our ability to increase margins, our ability to
implement our acquisition and expansion strategy, the impact of competition on
pricing, general economic conditions, employee turnover, the impact of
litigation and other factors. Other factors that may cause such a difference
include, but are not limited to, those discussed in this "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and in
"Factors Affecting Our Business, Financial Condition and Results of Operation,"
as well as those discussed elsewhere in this report and as set forth from time
to time in our other public filings and public statements. Readers of this
report are cautioned to consider these risks and uncertainties and to not place
undue reliance on these forward-looking statements.
OVERVIEW
We are a technology company providing supply-chain management and
marketing solutions for the $40 billion U.S. beef-production industry. Our goal
is to improve the nation's beef-production process by adding previously
unrealized value to the supply chain via an information-management
infrastructure, an e-marketplace, and value-enhancing technologies. We believe
that by accomplishing our goal, we can improve the industry's productivity and
profitability and help its participants enhance beef quality, safety and market
share. We offer our products and services to cattle industry participants
through our web-based business network, our proprietary information management
applications and our direct sales force. Our current products and services
include:
- Livestock procurement services consisting of on-site and
on-line cattle sales and auctions;
- Daily performance analyses of a customer's
feedlot operations;
- Comparative cattle industry analysis and feedlot operations
benchmarking studies; and
- Cattle inventory management tools.
Our business strategy is to utilize our information management,
electronic commerce and technology resources to develop and offer complementary
products and services that reduce inefficiencies throughout the cattle
production chain, improve cattle quality and improve overall productivity in the
cattle industry.
Through this strategy, we intend to improve meat quality, meat safety
and to positively affect the manufacturing process in the cattle industry by
adding previously unrealized value to the nation's beef supply system. We intend
to implement this strategy through our existing CattleinfoNet business network,
which is comprised of our information-management infrastructure, an electronic
commerce platform and value enhancing technologies. As an integral part of our
strategy, we intend to enhance the effectiveness and scope of our CattleinfoNet
business network by acquiring and developing a network of Interactive Marketing
Facilities.
We believe that a network of Interactive Marketing Facilities will
allow us to more accurately gather, track and analyze information through our
information management infrastructure, more productively operate our electronic
commerce platform and more uniformly implement and monitor our technologies. As
a result, we believe that by combining our CattleinfoNet business network with a
network of Interactive Marketing Facilities we will be able to more effectively
and rapidly reduce the inefficiencies in the cattle industry and provide
ranchers and producers with increased product quality, consistency, yield and
safety.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2001 AND MARCH 31, 2000
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Revenue increased from $38.6 million for the quarter ended March 31, 2000
to $325.2 million for the quarter ended March 31, 2001. Revenue from cattle
sales increased from $38.0 million for the quarter ended March 31, 2000 to
$324.5 million for the quarter ended March 31, 2001. This increase reflects a
higher volume of cattle sales transactions brought about primarily through our
acquisition activities. During the quarter ended March 31, 2001, we sold
approximately 659,000 head of cattle versus 66,000 head sold in the comparable
prior year period. Revenue from other products and services increased by 25%
from approximately $541,800 for the quarter ended March 31, 2000 to $679,300 for
the quarter ended March 31, 2001. This increase is due primarily to incremental
revenues of approximately $500,000 derived from sales of cattle-related products
and services, such as feed and veterinary services offered through our
assimilation facilities, and also included approximately $300,000 in revenue
generated from a pre-conditioning program that was discontinued during the
subsequent quarter. The increased revenue derived from other products and
services was partially offset by a decline of approximately $290,000 in sales
of our equine imaging systems and Nutricharge products. The decline in
Nutricharge and equine imaging systems sales coincided with our announcement in
January 2001 to discontinue support of these cattle-related products. We expect
that cattle revenue will continue to account for the majority of our revenue
base for the foreseeable future.
Cost of revenue consists primarily of the direct cost to acquire cattle
and cattle-related products. In addition, cost of revenue also includes the
indirect overhead costs, such as support personnel, facilities costs,
telecommunication charges and material purchases, that are primarily associated
with supporting our expanding base of on-line products and services. Cost of
revenue attributed to cattle sales increased from $37.8 million for the quarter
ended March 31, 2000 to $320.5 million for the quarter ended March 31, 2001.
Cost of revenue attributed to other products and services increased by 143% from
$389,000 for the quarter ended March 31, 2000 to $947,100 for the quarter ended
March 31, 2001. This increase is due principally to higher costs for
cattle-related products and services, such as feed and veterinary services, and
also included approximately $400,000 in costs associated with a pre-conditioning
program that was discontinued during the subsequent quarter. We generated a
gross profit of $352,000 and $3.7 million for the quarters ended March 31, 2000
and 2001, respectively. The increase in gross profit is due primarily to the
increase in cattle revenue as cost of goods did not increase in proportion to
the increase in revenue.
Selling, general and administrative expenses increased 50% from $5.2
million for the quarter ended March 31, 2000 to $7.8 million for the quarter
ended March 31, 2001.
Our selling expenses consist primarily of salaries and related benefit
costs for sales and marketing personnel, consulting fees, travel, telephone, and
advertising and trade shows. Selling expenses increased 46% from $3.7 million
for the quarter ended March 31, 2000 to $5.4 million for the quarter ended March
31, 2001, and included restructuring and related charges of approximately
$370,500. These charges, primarily employee severance and related benefit costs,
were associated with a realignment of our corporate operations in connection
with our decision to discontinue support of Nutricharge and infrared imaging
products. The increase in selling expenses was primarily associated with the
businesses acquired during 2000, which expanded the number of personnel within
the organization causing a corresponding rise in salaries and related benefit
costs, as well as higher telephone costs. These expenses were partially offset
by reductions in bonus, travel and advertising expenses. We anticipate selling
expenses will remain unchanged or decline for the foreseeable future (see
related discussion at note 9 to the condensed consolidated financial statements
in Item 1 of Part I of this report).
Our general and administrative expenses consist primarily of salaries
and related benefit costs for executive, administrative, and finance personnel,
insurance program charges, travel and professional service fees. General and
administrative expenses increased 285% from $1.5 million for the quarter ended
March 31, 2000 to $2.4 million for the quarter ended March 31, 2001, and
included restructuring and related charges of approximately $86,900. As
previously noted, these charges, primarily employee severance and related
benefit costs, were associated with a realignment of our corporate operations in
connection with our decision to discontinue support of Nutricharge and infrared
imaging products. The increase in general and administrative expenses was
primarily associated with the businesses acquired during 2000, which expanded
the number of personnel within the organization and caused a corresponding
increase in salaries and related
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benefits costs. We expect these expenses will remain unchanged or decline for
the foreseeable future (see related discussion at note 9 to the condensed
consolidated financial statements in Item 1 of Part I of this report).
Our technology and development expenses consist primarily of salaries and
related benefit costs, facility expense, payments to outside consultants,
software maintenance charges and project material costs. Our expenses increased
8% from $1.3 million for the quarter ended March 31, 2000 to $1.4 million for
the quarter ended March 31, 2001, and included restructuring and related charges
of approximately $200,900. These charges, primarily related to employee
severance and related benefit costs, were also associated with a realignment of
our corporate operations in connection with our decision to discontinue support
of Nutricharge and infrared imaging products. In the absence of restructuring
and related charges, our technology and development expenses were relatively
flat versus the comparable prior year period. Increases in facility expenses and
payments to outside consultants were offset by reductions in salaries and
related benefit costs and lower travel expenses. We expect to continue to incur
costs to develop and commercialize new products, expand our offerings and adapt
our technologies to new markets.
Depreciation and amortization expense increased 763% from $567,500 for
the quarter ended March 31, 2000 to $4.9 million for the quarter ended March 31,
2001. The increase was primarily related to higher amortization charges
resulting from business acquisitions completed throughout 2000 and during the
current quarter. Increases in capital spending to support our infrastructure
build-up also drove depreciation higher during the quarter ended March 31, 2001.
We expect both depreciation and amortization will continue to increase for the
foreseeable future as new projects are placed into service and the newly
acquired businesses begin their first full year of operation under our
ownership.
Interest and other income, net decreased from $1.1 million for the
quarter ended March 31, 2000 to $319,700 for the quarter ended March 31, 2001.
This decrease was primarily due to a reduction in interest income generated by
short-term investments and the collection of a related party note receivable in
November 2000, which generated interest income of approximately $528,000 during
the quarter ended March 31, 2000. Currently, we invest the majority of our cash
balances in debt instruments of high-quality corporate issuers.
On January 1, 2001, we adopted the provisions of SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities", as amended, and
recorded a charge to operations of $232,688, which is included as a cumulative
effect of a change in accounting principle in the condensed consolidated
financial statements.
Due to the losses incurred, we did not recognize income tax expense for
the quarter ended March 31, 2000 or the quarter ended March 31, 2001.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2001, our primary source of liquidity consisted of cash
and highly liquid, high quality debt instruments. Our intent is to make such
funds, which have maturities of less than one year, readily available for
operating purposes. At March 31, 2001, we had cash and cash equivalents totaling
$10.3 million compared to $42.8 million at December 31, 2000.
We have had significant negative cash flows from operating activities for
each fiscal and quarterly period to date. For the three months ended March 31,
2001, net cash used in operating activities was $21.8 million and primarily
consisted of net operating losses, increases in trade accounts receivable,
inventories, cattle deposits and prepaid expenses and a decline in accounts
payable. The increase in working capital requirements corresponded with a rise
in cattle sales activity during the quarter following the seasonal slowdown at
fiscal year end.
Net cash used in investing activities was $10.9 million for the three
months ended March 31, 2001. Our investing activities included the acquisitions
of Bluegrass, Runnells-Peters, and Pennell for a combined $4.8 million of cash
and capital expenditures of $3.8 million. In addition, we also paid the former
shareholders of Eastern Livestock, Inc.
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("Eastern") $2.3 million in cash during February 2001 pursuant to an asset
purchase agreement dated May 1, 2000. We expect continued capital expenditures
for the foreseeable future as we continue to effect our business strategy.
However, we expect future spending on capital expenditures to be at a lower rate
than experienced during 2000.
Net cash provided by financing activities was $128,000 for the three
months ended March 31, 2001. Cash provided by financing activities was
principally the result of stock option exercises offset in part by payments made
on a capital lease obligation.
Our working capital requirements for the foreseeable future will depend
on a variety of factors including our ability to implement our business plan,
to reduce our net cash outflow and the working capital required by seasonal
fluctuations in cattle sales.
On May 15, 2001 we completed an operational review of our business and
announced plans to focus on product lines with the most growth and gross margin
opportunity, such as marketing cattle and animal health/beef safety
technologies. As a result we decided to increase our focus on addressing growing
beef-safety concerns, reduce the level of funding supporting non-strategic
product lines including discontinuing our online storefront and improve our
expense structure to better position the Company to meet our profitability goal
within the cash flows generated from our on-site and online cattle marketing
operations.
As a result, we will record a charge of approximately $8 million, or
$0.23 per share, in the second quarter of 2001. Approximately $7 million of the
charge will be non-cash related to the write-down of non-strategic assets to
their fair values, including the product storefront and approximately $1 million
will be cash related to operating efficiency initiatives, including the
consolidation of the technology development and support operations as well as
severance and employee-related costs. The majority of the cash portion of the
charge is expected to be paid over the next 90 days. The consolidations will
affect approximately 60 corporate and service support associates, or 15 percent
of the total work force. We expect these work force reductions to reduce
personnel and personnel related costs by approximately $5.4 million annually as
compared to the quarter ended March 31, 2001. Additionally, over the next 90
days, we expect to reduce other cash operating costs by approximately $5.5
million annually as compared to the quarter ended March 31, 2001.
We believe we will be able to fund our continuing operations with
existing cash, cash expected to be generated by continuing operations and other
sources for at least the next twelve months provided we are able to successfully
implement our current business plan, which includes these reduced operating
expenses, and we are able to reduce working capital requirements through
improved working capital management or reduced cattle sales. However, in order
to fund our current growth projections, we will require additional debt or
equity financing prior to the end of 2001.
As previously announced, the Company is attempting to secure a line of
credit with a lending institution to supplement its working capital
requirements, and expects this process to be completed within the next 60 days.
As of May 14, 2001, the Company had approximately $30 million of working
capital. Additionally, the Company has reached an informal arrangement with a
related party order-buyer to provide the Company up to $10 million of working
capital support should the need arise before it secures its own line of credit.
The working capital support will be in the form of accelerated payments of
amounts due to the Company and the purchase of inventory from the Company.
If additional funds are raised through the issuance of equity securities,
our stockholders may experience significant dilution. Furthermore, there can be
no assurance that any additional financing will be available when needed, or
that if available, such financing will include favorable terms. If financing is
not available when required or is not available on acceptable terms, we will be
unable to meet our current growth projections. See also "Factors Affecting our
Business, Financial Condition, and Results of Operations" below.
FACTORS AFFECTING OUR BUSINESS, FINANCIAL CONDITION, AND RESULTS OF OPERATIONS
In addition to the other information included in this report and our
other public filings and releases, the following factors should be considered
while evaluating our business, financial condition, results of operations and
prospects:
We have a limited operating history and unproven business model. As a
result, we may not be able to accurately predict future results and our business
strategy may not be successful.
We commenced operations in 1994 and commercially released our initial
product in November 1997. Accordingly, we have only a limited operating history
upon which to evaluate our business. In addition, our business strategy and
revenue model has changed significantly during the past 24 months. Our limited
operating history, combined with our shift in business strategy, makes
predicting our future results of operations difficult. Our new business model
has been tested over a limited period of time and, accordingly, we cannot be
certain that our business strategy will be successful.
Specific uncertainties relating to our new business model include our
ability to:
- achieve acceptance of our Web site as a marketplace for
electronic commerce;
- expand the number of cattle producers, feedlots and packers
that utilize our services;
- develop and upgrade our products and technologies more
effectively and rapidly than our competitors; and
- successfully implement our acquisition, sales and marketing
strategies.
We have a history of net losses and expect to continue to incur net
losses for the foreseeable future. If we continue to incur net losses, our
business may not ultimately be financially viable.
We have incurred significant net losses since inception. We reported a
net loss of approximately $33.1 million for the year ended December 31, 2000, or
4% of total revenue, and a net loss of approximately $10.2 million for the
quarter ended March 31, 2001, or 3% of total revenue. As of March 31, 2001, we
had accumulated net losses totaling approximately $75.7 million. Our operating
expenses have increased significantly in each year of our operation, and we
anticipate that such expenses may continue to increase over the next several
years, albeit at a lesser rate than previously experienced, as we expand our
operations and execute on our business strategies. Our revenue may not grow or
may not even continue at its current level and, as a result, our financial
condition and results of our operations may be harmed and our business may not
be financially viable in the future.
To achieve profitability, we must successfully address the following
risks:
- lack of wide-scale commercial acceptance of our Internet
cattle sales and services;
- failure to expand the number of livestock industry
participants currently using our network;
- failure to obtain access to data from feedlots to adequately
address the information needs of our customers;
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- inability to respond promptly to competitive and industry
developments;
- failure to achieve brand recognition;
- failure to introduce new products and services; and
- failure to upgrade and enhance our technologies to accommodate
expanded product and service offerings and increased customer
traffic.
If we are unable to successfully address any of these risks, our business
may be harmed.
The Internet livestock products and services market, including, in
particular, the cattle sales market, is new and uncertain and our business may
not develop as we anticipate.
The Internet market for livestock products and services, including, in
particular, the cattle sales market, has only recently developed, and its
continued development is subject to substantial uncertainty. To date, we have
not realized adequate revenues and gross margins from this market to achieve
profitability. We cannot be assured that this market will continue to develop as
we expect, if at all. Our revenue model depends on the commercial acceptance of
our Internet-based products and services. We do not know if our target customers
will use the Internet as a regular means of purchasing products and services.
Even if potential customers choose to purchase livestock products and services
over the Internet, they may not choose our online services to do so. If the
market for livestock products and services over the Internet does not develop as
we anticipate, our business and the results of our operations will be harmed.
For the quarter ended March 31, 2001, we relied on cattle sales for over
99% of our revenue and we expect to rely on the success of our cattle sales and
auction services for a significant majority of our revenue for the foreseeable
future. As a result, our ability to achieve commercial acceptance of our cattle
sales is critical to our ability to obtain future revenue. To date, we have not
achieved enough revenues from internet-based cattle sales that are sufficient
for us to determine whether these services will achieve commercial acceptance.
Any failure to successfully gain commercial acceptance of these services would
harm our business and the results of our operations. In addition, as the result
of our dependence on cattle sales, if the demand for beef declines, the demand
for our products and services would likely decline, and our results of
operations would be harmed.
We recently completed significant acquisitions of businesses and
technologies and we may make other business acquisitions in the future, which
may be difficult to integrate into our business and may disrupt or negatively
impact our business.
We recently made, and may continue to make, investments in and
acquisitions of complementary companies, technologies and assets that constitute
critical aspects of our current and future business operations. If we fail to
successfully integrate the operations of these companies, technologies or assets
into our business, we may not be able to successfully execute our business
strategy. In connection with a number of our acquisitions we hire key employees.
The businesses we have acquired generally are critical to our current business
operations and growth strategy.
Our acquisitions may result in:
- difficulties in assimilating technologies, products, personnel
and operations;
- diversion of our management's attention;
- entering markets in which we have no or limited prior
experience;
- loss of key employees of acquired organizations; and capital
requirements in excess of what we anticipate.
In the future, acquiring companies, assets or technologies may also
require us to make cash payments, assume debt, incur large write-offs related to
intangible assets and issue equity, which will dilute ownership interest.
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If we are unable to manage our growth effectively, our business may be
harmed.
We cannot assure that we will be able to effectively or successfully
manage our growth. If we are unable to manage our growth effectively, our
business operations would suffer. We seek to grow by increasing transaction and
subscription volume, adding new products and services and by hiring additional
employees. Our growth is likely to place a significant strain on our resources
and systems. As we continue to increase the scope of our operations, we will
need an effective planning and management process to implement our business
strategy successfully and we will need to implement new and improve existing
systems, procedures and controls. We will also need to expand, train and manage
our workforce.
If we are unable to protect our intellectual property rights, our
business and competitive position will be harmed.
Proprietary rights are important to our success and our competitive
position. We protect our intellectual property through a combination of patent,
copyright, trade secret and trademark law and confidentiality agreements with
third parties. We cannot guarantee that any of our pending patent or trademark
applications will be approved. Even if they are approved, the patents or
trademarks may be challenged by other parties or invalidated. Because brand
recognition is an important component of our business strategy, the protection
of our trademarks is critical to our success. In addition, we depend upon our
proprietary database of industry and client information to provide our clients
with our information services. Despite our efforts to protect our proprietary
rights, unauthorized parties may copy aspects of our products and technology or
obtain access to our confidential proprietary database. Other parties may also
breach confidentiality agreements and other protective contracts. We may not
become aware of these breaches or have adequate remedies available. In addition,
effective copyright, patent and trademark protection may be unavailable in
certain countries to which we might expand our operations.
In technology markets, there is generally frequent and substantial
intellectual property litigation. We may be subject to legal proceedings and
claims, including claims that we infringe third-party proprietary rights. While
we are not aware of any patents, copyrights or other rights that would prevent
us from manufacturing and commercializing our products or services in the United
States and abroad, there can be no assurance that other parties will not assert
infringement claims against us. There also can be no assurance that former
employers of our present and future employees will not claim that our employees
have improperly disclosed confidential or proprietary information to us. Any of
these claims, with or without merit, could subject us to costly litigation and
divert the attention of our personnel.
We typically assume the ownership of cattle sold through our Internet
cattle marketplace and are subject to the risk of loss while we hold title and
market risk.
In the sales transactions conducted through our Internet cattle sales and
auction services network, we typically contract to purchase cattle from a
seller, identify a buyer for the cattle, take title to the cattle from the
seller and then resell the cattle to the buyer. In this process, we enter into a
contract to purchase cattle in advance of entering into a contract to sell the
cattle. Therefore, until we actually complete a sale transaction, we are subject
to the risk that we may be unable to sell cattle that we are contractually
obligated to purchase. In addition, once we purchase the cattle, we assume title
to the cattle for generally up to 48 hours. As a result, we assume the risk of
liability, loss and deterioration in value of the cattle during that period. As
a result, our business may be harmed.
We depend on our key employees for our success. The loss of any of these
persons could harm our ability to compete.
The loss of the services of any key person could harm our business,
including our ability to compete effectively. Our performance also depends on
our ability to attract, retain and motivate additional key officers and
employees. We may be unable to retain our employees or to attract, assimilate
and retain other qualified employees with relevant livestock and electronic
commerce industry skills in the future. If we fail to attract, retain and
motivate qualified employees, our business will be harmed.
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We expect our quarterly operating results to fluctuate. If we fail to
meet the expectations of public market analysts and investors, the market price
of our common stock could decline.
We expect that our revenue and operating results will vary in the future
as a result of a number of factors. Our quarterly results of operations may not
meet the expectations of securities analysts and investors, which could cause
the price of our common stock to decline. Our operating results in the future
may not follow any prior trends and should not be relied upon as an indication
of future results. The factors that affect our quarterly operating results
include:
- our ability to retain existing customers and attract new
customers;
- our ability to develop and market new and enhanced products
and services on a timely basis;
- the introduction of new or enhanced Web sites, products and
services by us; and
- continued purchases by our existing customers.
In addition, a number of factors that are beyond our control will also
affect our quarterly operating results, such as:
- demand for our products and services;
- product and price competition;
- the introduction of new or enhanced Web sites, products and
services by our competitors; and
- significant downturns in our targeted markets.
Our quarterly results could fluctuate as a result of seasonal
fluctuations in the cattle industry.
The cattle industry has historically experienced, and continues to
experience, seasonal fluctuations. These seasonal patterns may cause quarterly
fluctuations in our operating results. Generally, a higher number of cattle are
sold to feedlots during the third and fourth quarters as compared to the first
and second quarters of each calendar year. Therefore, a greater number of sales
transactions occur during these two calendar quarters. Due to our limited
operating history and the recent changes in our business as a result of
acquisitions, it is difficult to predict the effect that this seasonal pattern
will have on our revenue and quarterly operating results.
Our back-up mechanisms are unproven, and therefore are vulnerable to
damage or interruption which would harm our ability to reliably service our
customers.
Our network server, satellites, computers and facilities are vulnerable
to damage or interruption from a number of sources, including fire, flood, power
loss, earthquakes, telecommunications failures, system failures, Internet
brownouts, computer viruses, electronic break-ins and similar disruptions. We
depend on these systems to provide our customers with online cattle sales and
auction services, feedlot and cattle industry analyses, and cattle inventory
management tools. Any substantial interruptions could result in the loss of data
and could impair our ability to provide our products and services to customers
and to generate revenues. Presently, we do not have a formal disaster recovery
plan in effect. Moreover, our business interruption insurance may not be
sufficient to compensate us for losses that may occur if any of our
Internet-based services are interrupted.
Risks associated with the security of transactions and transmitting
confidential information over the Internet may negatively impact our electronic
commerce business.
We believe that concern regarding the security of confidential
information transmitted over the Internet, such as credit card numbers and
proprietary data, may prevent many potential customers from engaging in online
transactions and may harm our business. Despite the measures we intend to take
to enhance our Internet security, our infrastructure is potentially vulnerable
to physical or electronic break-ins, viruses or similar problems. If our
security measures are circumvented, proprietary information could be
misappropriated or our operations could be interrupted. Security breaches
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that result in access to confidential information could expose us to a risk of
loss or liability. If we do not adequately address these concerns or face any
claims in connection with a breach of security, our business, financial
condition and operating results could be harmed.
We could face liability for information retrieved from or transmitted
through our Web sites, which could result in high litigation or insurance costs.
As a publisher and distributor of online content, we face potential
liability for defamation, negligence, copyright, patent or trademark
infringement and other claims based on the nature and content of the materials
that we publish or distribute on our Web sites. Any imposition of liability
could negatively impact our reputation and result in increased insurance costs.
Claims have been successfully brought against online services. Although we carry
general liability insurance, our insurance may not cover claims of these types
or may not be adequate to cover us for all liability that may be imposed.
Government regulation and legal uncertainties could result in additional
burdens to doing business on the Internet.
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 including those governing intellectual property,
privacy, libel and taxation apply to the Internet. Our business, results of
operations and financial condition could be harmed by the adoption or
modification of laws or regulations relating to the Internet that result in the
imposition of additional costs on conducting business over the Internet or
impose additional restrictions on our ability to conduct our business
operations. In 1998, the Internet Tax Freedom Act placed a three-year moratorium
on state and local taxes on Internet access, except for taxes imposed prior to
October 1, 1998, and on taxes that discriminate against online commerce.
However, Congress may not renew this legislation in 2001 and state and local
governments would be able to impose Internet-specific taxes on goods purchased
electronically, in addition to taxes that are otherwise imposed on sales
transactions.
Internet Capital Group and Safeguard will be able to control matters
requiring stockholder approval.
The concentration of ownership of our common stock may delay, deter or
prevent acts that would result in a change of control, which could reduce the
market price of our common stock. Internet Capital Group and Safeguard are
affiliated entities. Internet Capital Group and Safeguard together have the
power to vote approximately 57% (as of March 31, 2001) of the aggregate number
of votes to which the holders of our common stock are entitled. As a result,
these stockholders will be able to control all matters requiring stockholder
approval.
In addition, currently five of the eight members of our board of
directors also serve as directors and/or officers of Internet Capital Group and
Safeguard. Internet Capital Group has the right to elect two directors to our
board. Under the joint venture agreement, Safeguard and Internet Capital Group
have agreed to vote for two designees of Safeguard and two designees of Internet
Capital Group in all future elections of directors. Internet Capital Group and
Safeguard will therefore have the ability to significantly influence our
management.
Our common stock price is likely to be highly volatile.
The market price of our common stock, like the market for
Internet-related and technology companies in general, has been and will likely
continue to be highly volatile. Any significant fluctuations in the future might
result in a material decline in the market price of our common stock. These
fluctuations may be caused by factors such as:
- actual or anticipated variations in quarterly operating
results;
- announcements of technological innovations; conditions or
trends in the cattle industry;
- new sales formats of new products or services;
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- changes in or failure by us to meet financial estimates of
securities analysts;
- conditions or trends in the Internet industry;
- announcements by us or our competitors of significant
acquisitions, strategic partnerships or joint ventures;
- capital commitments;
- additions or departures of key personnel; and
- sales of common stock.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As of March 31, 2001, we had cattle futures contracts with purchase
commitments of $73 million and sales commitments of $16 million. The contract
lives are generally less than six months. Any changes in the value of the
futures contracts is generally balanced by an offsetting position in the cash
market prices of the delivered livestock.
Our exposure to market risk relates to changes in interest rates and
their potential impact on our investment portfolio. We invest in marketable debt
securities that meet high credit quality standards and limit our credit exposure
to any one issue, issuer and type of investment. As of March 31, 2001, our
investments consisted of $3.3 million in cash equivalents with maturities of
less than three months and $1.5 million in certificates of deposit with a
maturity of less than six months. Due to the short-term nature of our investment
portfolio, a 10 percent increase or decrease in interest rates would not have a
material effect on our results of operations or the fair value of our portfolio.
The impact on our future results of operations and the future value of our
portfolio will depend largely on the gross amount of our investments.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There have been no material developments in the legal proceedings
previously reported.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
RECENT SALES OF UNREGISTERED SECURITIES
On January 2, 2001, we purchased certain tangible and intangible assets
in connection with the acquisition of Runnells-Peters. As part of the exchange,
we issued 136,986 shares of our Class A common stock with an aggregate value of
$500,000.
Also on January 2, 2001, we purchased certain tangible and intangible
assets in connection with the acquisition of Pennell. As part of the exchange,
we issued 51,370 shares of our Class A common stock with an aggregate value of
$187,500.
All of the above referenced shares were issued pursuant to an exemption
by reason of Section 4(2) of the Securities Act of 1933. The sales were made
without general solicitation or advertising. Each purchaser represented that he,
she, or it was acquiring the shares without a view to distribute and was
afforded an opportunity to review all documents and ask questions of our
officers pertaining to matters they deemed material to an investment in our
Class A common stock.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the first quarter of 2001.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
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(a) Exhibits
There were no exhibits required to be filed for the quarter ended March 31,
2001.
* Filed herewith.
(b) Reports on Form 8-K
There were no reports filed on Form 8-K for the quarter ended March 31,
2001.
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Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Dated: May 15, 2001 eMerge Interactive. Inc.
By:
President, Chief Executive
/s/ Charles L. Abraham Officer and Director (Principal
----------------------- Executive Officer)
Charles L. Abraham
Vice President and Chief Financial
/s/ T. Michael Janney Officer (Principal Financial and
----------------------- Accounting Officer)
T. Michael Janney
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