================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ______________________ FORM 10-QSB (Mark One) [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2004. OR [_] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ___________ TO ___________. COMMISSION FILE NUMBER 000-29927 IMPROVENET, INC. -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) DELAWARE 77-0452868 -------------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 10799 N. 90TH STREET, SUITE 200 SCOTTSDALE, AZ 85260 -------------------------------------------------------------------------------- (Address of principal executive offices) (480) 346-0000 -------------------------------------------------------------------------------- (Issuer's telephone number) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [_] The number of shares outstanding of the registrant's common stock, $.001 par value, was 53,707,715 as of August 14, 2004. ================================================================================ ImproveNet, Inc. Form 10-QSB For the Quarter Ended June 30, 2004 Index PART I FINANCIAL INFORMATION Item 1 Financial Statements: Condensed Consolidated Balance Sheets as of June 30, 2004 (Unaudited) and December 31, 2003................................... 1 Condensed Consolidated Statements of Operations for the three months and six months ended June 30, 2004 and 2003 (Unaudited)...... 2 Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2004 and 2003 (Unaudited)..................... 3 Notes to Unaudited Condensed Consolidated Financial Statements...... 4 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations........................................... 6 Item 3 Controls and Procedures............................................. 14 PART II OTHER INFORMATION Item 1 Legal Proceedings................................................... 15 Item 2 Changes in Securities............................................... 15 Item 3 Defaults upon Senior Securities..................................... 16 Item 4 Submission of Matters to a Vote of Security Holders................. 16 Item 5 Other Information................................................... 16 Item 6 Exhibits and Reports on Form 8-K.................................... 16 SIGNATURES................................................................... 17 Rule 13a-14(a)/15d-14(a) Certifications Exhibits 31.1 and 31.2 Section 1350 Certifications Exhibits 32.1 and 32.2 i PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS IMPROVENET, INC. CONDENSED CONSOLIDATED BALANCE SHEETS ASSETS JUNE 30, DECEMBER 31, 2004 2003 ------------ ------------ (unaudited) Current Assets: Cash and cash equivalents $ 1,072,627 $ 382,415 Accounts receivable, net 494,189 330,472 Prepaid expenses 48,298 7,833 ------------ ------------ Total Current Assets 1,615,114 720,720 ------------ ------------ Property and equipment, net 68,707 99,800 ------------ ------------ Total Assets $ 1,683,821 $ 820,520 ============ ============ Current Liabilities: Obligations under capital leases - current portion 17,824 17,824 Line of credit 61,532 65,619 Accounts payable 363,227 378,679 Accrued compensation -- 1,329 Accrued customer claims 248,005 305,588 Accrued furniture lease buyout - current portion 37,500 60,000 Deferred revenue 37,642 49,292 Other liabilities and accrued expenses 124,869 129,877 ------------ ------------ Total Current Liabilities 890,599 1,008,208 Long-Term Liabilities: Notes payable - long-term portion -- 400,000 Obligations under capital leases - long-term portion 2,122 10,900 Accrued furniture lease buyout - long-term portion -- 7,500 ------------ ------------ Total Liabilities 892,721 1,426,608 ------------ ------------ Commitments and Contingencies: -- -- Stockholders' Equity (Deficit) Common Stock, $.001 par value, 100,000,000 shares authorized, 53,767,715 and 39,210,315 shares issued and outstanding at June 30, 2004 and December 31, 2003, respectively 53,768 53,124 Additional paid-in capital 2,700,428 539,770 Accumulated deficit (1,963,096) (1,198,982) ------------ ------------ Total Stockholders' Equity (Deficit) 791,100 (606,088) ------------ ------------ Total Liabilities and Stockholders' Equity $ 1,683,821 $ 820,520 ============ ============ See accompanying notes to the unaudited condensed consolidated financial statements 1 IMPROVENET, INC. CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, (UNAUDITED) THREE MONTHS ENDED SIX MONTHS ENDED ------------------------------ ------------------------------ JUNE 30, JUNE 30, JUNE 30, JUNE 30, ------------ ------------ ------------ ------------ 2004 2003 2004 2003 ------------------------------------------------------------------ Revenues $ 1,000,240 $ 840,897 $ 1,880,247 $ 1,648,548 Cost of Revenues 389,680 435,863 845,043 966,423 ------------------------------------------------------------------ Gross Profit 610,560 405,034 1,035,204 682,125 Selling, General and Administrative Expenses 582,458 394,878 899,081 844,015 Research and Development Expenses 96,908 104,399 198,378 193,488 ------------------------------------------------------------------ Loss from Operations (68,806) (94,243) (62,255) (355,378) Other Revenues (Expenses) Interest income -- 482 607 3,269 Interest expense and financing costs (706,313) (3,555) (719,946) (6,965) Relief of Debt -- -- -- 103,876 Miscellaneous income 7,421 928 17,480 9,300 ------------------------------------------------------------------ Loss from Operations before Income Taxes (767,698) (96,388) (764,114) (245,898) Benefit for Income Taxes -- -- -- -- ------------------------------------------------------------------ Net Loss ($ 767,698) ($ 96,388) ($ 764,114) ($ 245,898) ================================================================== LOSS PER SHARE - BASIC AND DILUTED Net loss per common share - basic ($ 0.02) $ 0.00 ($ 0.02) ($ 0.01) ================================================================== Weighted average common shares - basic and diluted 40,422,152 39,210,315 39,778,895 39,210,315 ================================================================== See accompanying notes to the unaudited condensed consolidated financial statements 2 IMPROVENET, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, (UNAUDITED) 2004 2003 ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES Net loss $ (764,114) $ (245,898) Adjustments to reconcile net income to net cash used in operating activities: Depreciation and amortization 42,623 38,656 Interest converted to equity 740 Issuance of bonus stock to directors 11,000 Issuance of common stock for consulting services 35,000 Debt Conversion Expense 694,562 Relief of Debt -- (103,876) Treasury stock subscribed -- 1,961,941 Changes in: Accounts receivable, net (163,717) (18,765) Accounts receivable - other -- 1,000 Receivable from stock transfer agent -- 594,715 Costs and estimated earnings in excess of billings on uncompleted contracts -- (35,425) Prepaid expenses (40,465) (28,088) Accounts payable (15,452) 3,393 Accrued compensation (1,329) (183,598) Accrued customer claims (57,583) -- Accrued furniture lease buyout (30,000) (15,000) Accrued merger and tender offer redemption liabilities -- (2,378,029) Other liabilities and accrued expenses (5,008) 267,782 Billings and estimated earnings in excess of costs on uncompleted contracts -- (66,750) Deferred revenue (11,650) (9,625) ------------ ------------ Net cash used in operations (305,393) (217,567) ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES Purchase of property, plant and equipment (11,530) (22,104) ------------ ------------ Net cash used in investing activities (11,530) (22,104) ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES Repayment of debt (30,000) (13,197) Repayment of capital leases (8,778) (6,352) Proceeds from issuance of common stock 1,050,000 -- Proceeds from debt incurred -- 75,000 Repayment on line of credit (4,087) (10,045) ------------ ------------ Net cash provided by financing activities 1,007,135 45,406 ------------ ------------ Net increase (decrease) in cash and cash equivalents 690,212 (194,265) Cash and cash equivalents, beginning of period 382,415 446,833 ------------ ------------ Cash and cash equivalents, end of period $ 1,072,627 $ 252,568 ============ ============ SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION Interest paid $ 20,326 $ 6,965 ============ ============ Income taxes paid $ -- $ -- ============ ============ Non-Cash Activity Investing and Finance Activities: Conversion of convertible notes payable into Common Stock $ 370,000 $ -- ============ ============ Issuance of common stock for consulting services $ 35,000 $ -- ============ ============ See accompanying notes to the unaudited condensed consolidated financial statements 3 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE PERIOD ENDED JUNE 30, 2004 NOTE 1 - NATURE OF BUSINESS AND BASIS OF PRESENTATION ImproveNet, Inc., a Delaware corporation ("ImproveNet" or "Company"), operates in two business segments: Software - the Company licenses, installs and maintains its proprietary e-commerce software products to companies primarily operating in the Building Materials Industry (BMI). The software segment consists primarily of products developed by eTechLogix. Information Services - under the brand ImproveNet this service provides a source for home improvement information services for homeowners, service providers and suppliers nationwide. A leading brand since 1996, ImproveNet has the breadth of industry knowledge, and the credibility within the homeowner and contractor market, software design expertise and partnerships with industry leaders, to leverage the opportunity within the $1 Trillion annual BMI. ImproveNet's mission is to automate the BMI and connect the entire Value-Chain with innovative software and outstanding services. The unaudited condensed consolidated balance sheet as of June 30, 2004 and the related unaudited condensed consolidated statements of operations for the three and six month periods ended June 30, 2004 and 2003, and unaudited condensed cash flows for the six months ended June 30, 2004 and 2003 presented herein have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and in accordance with the instructions to Form 10-QSB. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. In our opinion, the accompanying condensed consolidated financial statements include all adjustments necessary for a fair presentation of such condensed consolidated financial statements. Such necessary adjustments consisted of normal recurring items and the elimination of all significant intercompany balances, transactions and stock holdings. These interim condensed consolidated financial statements should be read in conjunction with the Company's December 31, 2003, Annual Report on Form 10-KSB. Interim results are not necessarily indicative of results for a full year. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statement and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. LOSS PER SHARE Basic loss per share of common stock was computed by dividing net loss by the weighted average number of shares outstanding of common stock. Diluted earnings per share are computed based on the weighted average number of shares of common stock and dilutive securities outstanding during the period. Dilutive securities are options and warrants that are freely exercisable into common stock at less than the prevailing market price. Dilutive securities are not included in the weighted average number of shares when inclusion would increase the earnings per share or decrease the loss per share. 4 NEW ACCOUNTING PRONOUNCEMENT In May 2003, the FASB issued Statement of Financial Accounting Standards No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity" (SFAS 150). This statement affects the classification, measurement and disclosure requirements of the following three types of freestanding financial instruments: 1) mandatory redeemable shares, which the issuing company is obligated to buy back with cash or other assets; 2) instruments that do or may require the issuer to buy back some of its shares in exchange for cash or other assets, which includes put options and forward purchase contracts; and 3) obligations that can be settled with shares, the monetary value of which is fixed, tied solely or predominantly to a variable such as a market index, or varies inversely with the value of the issuers' shares. In general, SFAS 150 is effective for all financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of SFAS 150 did not have an impact on the Company's consolidated financial position or disclosures. NOTE 2 - STOCK OPTIONS The company has adopted FAS No. 123, "Accounting for Stock-Based Compensation". Under FAS No. 123, companies can, but are not required to, elect to recognize compensation expense for all stock-based awards using a fair value methodology. The company has adopted the disclosure-only provisions, as permitted by FAS No. 123. The company applies APB Opinion No. 25 and related interpretations in accounting for its stock-based plans. Accordingly, there is no related compensation expense recorded in the Company's financial statements for the periods presented. Had compensation cost for stock-based compensation been determined based on the fair value of the options at the grant dates consistent with the method of SFAS 123, the Company's net loss and loss per share for the three months ended June 30, 2004 and 2003 would have been reduced to the pro forma amounts presented below: THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, -------------------------- ------------------------- 2004 2003 2004 2003 ---- ---- ---- ---- Net loss: As reported $ (767,698) $ (96,388) $ (764,114) $ (245,898) ========== ========== ========== =========== Pro forma $ (885,700) $ (96,388) $ (980,116) $ (320,898) ========== ========== ========== =========== Loss per share: Basic - As reported $ (0.02) $ (0.00) $ (0.02) $ (0.01) ========== ========== ========= =========== Basic - Pro forma $ (0.02) $ (0.00) $ (0.02) $ (0.01) ========== ========== ========= =========== The fair value of the 1,900,016 option grants during the six months ended June 30, 2004 (inclusive of 1,200,016 issued in the quarter ending June 30, 2004) is estimated as of the date of grant utilizing the Black-Scholes option-pricing model with the following weighted average assumptions for all grants, expected life of options of ten (10) years, risk-free interest rates of four percent (4%), volatility varies from 140% to 177%, and a zero percent (0%) dividend yield. NOTE 3 - INDUSTRY SEGMENT DATA Information concerning operations by industry segment follows (unaudited): 5 THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, 2004 2003 2004 2003 ----------- ----------- ----------- ----------- Revenue Software (eTechLogix) $ 113,301 $ 82,350 $ 281,926 $ 287,250 Information Services (ImproveNet) 886,939 758,547 1,598,321 1,361,298 ----------- ----------- ----------- ----------- Total 1,000,240 840,897 1,880,247 1,648,548 ----------- ----------- ----------- ----------- Gross profit Software (eTechLogix) 90,640 68,833 225,540 229,818 Information Services (ImproveNet) 519,920 336,201 809,664 452,307 ----------- ----------- ----------- ----------- Total 610,560 405,034 1,035,204 682,125 ----------- ----------- ----------- ----------- Operating Expenses 679,366 499,277 1,097,459 1,037,503 ----------- ----------- ----------- ----------- Operating Loss (68,806) (94,243) (62,255) (355,378) Interest Income 482 607 3,269 Interest Expense (706,313) (3,555) (719,946) (6,965) Relief of Debt -- -- -- 103,876 Miscellaneous income 7,421 928 17,480 9,300 ----------- ----------- ----------- ----------- Net Loss $ (767,698) $ (96,388) $ (764,114) $ (245,898) =========== =========== =========== =========== Depreciation and Amortization Software (eTechLogix) $ 22,048 $ 19,656 $ 42,623 $ 38,656 Information Services (ImproveNet) -- -- -- -- ----------- ----------- ----------- ----------- Total $ 22,048 $ 19,656 $ 42,623 $ 38,656 =========== =========== =========== =========== ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis of our financial condition and results of operation should be read with our unaudited condensed consolidated financial statements and notes included elsewhere in this Report on Form 10-QSB. The discussion in this Report on Form 10-QSB contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, including statements using terminology such as "can," "may," "believe," "designated to," "will," "expect," "plan," "anticipate," "estimate," "potential," or "continue," or the negative thereof or other comparable terminology regarding beliefs, plans, expectations or intentions regarding the future. Forward-looking statements involve risks and uncertainties and actual results could differ materially from those discussed in the forward-looking statements. All forward-looking statements and risk factors included in this document are made as of the date hereof, based on information available to the Company as of the date thereof, and the Company assumes no obligation to update any forward-looking statement or risk factors, unless we are required to do so by law. The cautionary statements made in this Report on Form 10-QSB should be read as applying to all related forward-looking statements wherever they appear in this Report on Form 10-QSB. Factors that cause or contribute to such differences include but are not limited to those discussed elsewhere in this Form 10-QSB, as well as those in a discussion of risk factors found in our Annual Report on Form 10-KSB beginning on page 17 in the section titled "Factors Affecting Future Performance, Results of Operation and Financial Condition." Our actual results could differ materially from those discussed here. OVERVIEW BASIS OF PRESENTATION The Company's financial statements are presented on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company has sustained losses for the past two years but with a recent private placement now has positive working capital and positive net worth. The financial statements do not include any adjustments to reflect the possible future effects of the recoverability and classification of assets or the amounts and classifications of liabilities that may result from the uncertainty of the Company's ability to continue as a going concern. 6 ACQUISITION On December 23, 2002, eTech Acquisition, Inc., an Arizona corporation and wholly-owned subsidiary of ImproveNet, merged with and into eTechLogix, Inc. ("Etech"). This Merger occurred pursuant to an Agreement and Plan of Merger (the "Merger Agreement") dated July 30, 2002. Under the terms of the Merger Agreement, eTech paid $500,000 to ImproveNet and incurred $19,000 in costs directly related to the Merger. At the time of the Merger, each outstanding share of eTech Common Stock, no par value per share, was converted into the right to receive and became exchangeable for 5,555.555556 shares of ImproveNet Common Stock, par value $.001 per share. A total of 35,417,750 shares of ImproveNet common stock were issued in the Merger to eleven (11) different shareholders of eTech. Through the Merger, the former directors, who were also shareholders, of eTech collectively received 30,310,740 shares of ImproveNet Common Stock and as a result, acquired control of the Company. Un-expired outstanding options to purchase eTech Common Stock were converted, on the same vesting schedule, into an option to purchase a number of shares of ImproveNet Common Stock equal to the number of shares of eTech Common Stock that could have been purchased under such option multiplied by 5,555.555556, at a price per share of ImproveNet Common Stock equal to the per share exercise price of $.05 per share. Options to acquire 788,889 shares of ImproveNet Common Stock were issued in the Merger as a result of these outstanding options, of which, 222,222 had vested as of the date of the Merger. Warrants to purchase 1,500,000 shares of ImproveNet were issued as a result of the Merger. These warrants were issued in conjunction with subordinated convertible notes payable, as discussed below. TENDER OFFER Under the terms of the Merger Agreement, the Company agreed to present a cash tender offer ("Tender Offer") to pre-merger shareholders of ImproveNet. The price per share was based in part on ImproveNet's available cash balance at the closing of the Merger. The Tender Offer was available from the time of the Merger through January 2, 2003. Prior to the closing of the Merger, ImproveNet deposited approximately $2,557,000 with its stock transfer agent for payments to be made under the Tender Offer. In conjunction with the Tender Offer, the Company disbursed a total of approximately $1,962,000 to various pre-merger ImproveNet shareholders in January 2003 resulting in the acquisition of 13,913,975 treasury shares in January 2003. Funds in excess of disbursements of approximately $595,000 were returned to the Company from the stock transfer agent in January 2003. CONVERSION OF SUBORDINATED CONVERTIBLE NOTES PAYABLE During July 2002, eTech issued an aggregate of $150,000 of subordinated convertible notes payable to two accredited investors. The notes are secured by substantially all of the Company's assets and are subordinated to the eTech's 9.00% note payable to a bank . In conjunction with the issuance of these subordinated convertible notes payable, eTech also issued one-year warrants to purchase an aggregate of 1,500,000 shares of ImproveNet at a purchase price of $0.15 per share. The subscription of the warrants was expressly conditioned upon the closing of the Merger. The Company expensed approximately $81,000 in connection with these warrants to recognize the fair value of the warrants. During August 2002, eTech issued an aggregate of $100,000 of subordinated convertible notes payable to accredited investors and officers of eTech . The notes are secured by substantially all of eTech's assets and are subordinated to the $150,000 of aggregate subordinated notes payable discussed above and to the 9.00% note payable to a bank. All of the subordinated convertible notes payable described above bear interest at a rate of 10.00% per annum and are due two years after the date of issue, provided they are not converted prior to this date. The notes are convertible into common shares of eTech in whole, or in part, at the option of the lender at any time during the term of the note at a rate of one share for every $555.5555556 of debt converted. The notes will automatically be converted if there is a transfer of more than 50% of the voting control of the Company, in one transaction or a series of transactions with ImproveNet directly or by merger or consolidation in which the existing shareholders of eTech do not directly retain more than 50% of the voting control of eTech, or a sale of all or substantially all assets of eTech to ImproveNet or one of ImproveNet's subsidiaries. The shares of eTech that will be received by the note holders if automatic conversion occurs will be converted to shares of ImproveNet using the same conversion rate as all other eTech shares converted in the merger transaction. Immediately prior to the closing of the Merger, all of the subordinated convertible notes payable were converted into shares of Etech common stock and upon closing of the Merger were exchanged into shares of ImproveNet common stock. 7 The proceeds of the subordinated notes payable of $250,000 were to be used for a portion of a $500,000 deposit by Etech with ImproveNet. This deposit was made prior to the Merger and in accordance with the Merger Agreement. SHORT TERM PROMISSORYNOTE In June 2003 following the closing of the Merger, we borrowed $75,000 for a 90-day period represented by a promissory note that we issued to an accredited investor. Warrants to purchase 200,000 shares of our common stock were also issued in that transaction. The promissory note was renewed in September 2003 for $80,000 including accrued but unpaid interest, and a warrant to purchase an additional 150,000 shares of our common stock was issued at that time. The promissory note was paid in full in December 2003. ISSUANCE OF UNSECURED CONVERTIBLE PROMISSORY NOTES In December 2003, we completed a private placement of $400,000 of 8% unsecured convertible promissory notes, each with a maturity of December 15, 2005, issued to a limited group of accredited investors. The notes will accrue 8% interest per year payable quarterly commencing March 15, 2004. The first quarterly payment was made on March 15, 2004. The principal of each note and all accrued but unpaid interest is convertible into shares of our common stock at the rate of five (5) shares for each one dollar of debt represented by each note. Proceeds received from the issuance of the notes are being used for working capital and general corporate purposes. In addition, approved finders of the participating accredited investors were collectively issued warrants to purchase 520,000 shares of our common stock. PRIVATE PLACEMENT AND CONVERSION OF CONVERTIBLE PROMISSORY NOTES On June 24, 2004, we completed a sale of 10,500,000 shares of our common stock, par value $0.001 per share, for $0.10 per share to several accredited investors (collectively, the "Investors"), for an aggregate purchase price of $1,050,000 in a private placement transaction pursuant to provisions of a Common Stock Subscription Agreement dated June 23, 2004 (the "Agreement"). We also granted the Investors 3-year warrants to purchase a total of 8,000,000 shares of our common stock at an exercise price of $0.15 per share. The right to designate a nominee to our Board of Directors was also granted to one of the accredited investors. The funds received will be used for general corporate purposes and to increase our financial flexibility. As part of the transaction, the Investors also purchased 1,500,000 shares of common stock from affiliates of three of our officers and directors for an aggregate purchase price $150,000. Each of these three selling parties entered into a lock-up agreement restricting future sales of their common stock for a specified period as well as a voting agreement regarding the accredited investor's designated nominee to our Board of Directors. In addition, the principal balance and all accrued interest on $370,000 of the $400,000 outstanding convertible promissory notes we issued to accredited investors in December 2003 were converted into common stock and warrants on similar terms to the private placement (the "Converting Investors") on June 24, 2004 as more specifically set forth in each respective Second Amendment to ImproveNet, Inc. Unsecured Convertible Promissory Note Subscription Agreement and 8% Unsecured Convertible Promissory Note (the "Second Amendments"). A total of 3,707,400 shares of common stock were issued along with 3-year warrants to purchase an additional 2,466,666 shares of common stock at an exercise price of $0.15 per share. We have paid in full the remaining $30,000 of convertible promissory notes in lieu of conversion. We have agreed to file a registration statement with the Securities Exchange Commission within sixty days of the closing of the Agreement covering the resale of the common stock by the Investors and the Converting Investors. ACCOUNTING FOR THE MERGER We accounted for this Merger in accordance with SFAS No. 141, "Business Combinations." As discussed above, the former shareholders of eTech acquired a controlling interest in the Company, and accordingly, the transaction has been accounted for as a reverse merger and the total consideration given by eTech of $519,000 has been allocated to the fair values of the pre-merger assets and liabilities of ImproveNet. At the time of the acquisition, the fair value of the net assets of ImproveNet was $361,351 in excess of the consideration given by eTech after all applicable reductions of amounts that otherwise would have been assigned to the acquired assets were considered. This excess is reported in the statement of operations as an extraordinary gain. eTech, a wholly-owned subsidiary of ImproveNet, licenses, installs and maintains its proprietary e-commerce software products to companies primarily operating in the building material industry. eTech was formerly known as First Systech 8 International, Inc. and was originally incorporated in March 1989 in the State of Texas. In July of 1994, eTech relocated to the State of Arizona and incorporated itself under the laws of the State of Arizona. ImproveNet was incorporated in California in January 1996, was reincorporated in Deleware in September 1998 and is headquartered in Scottsdale, Arizona. The Company is a source for home improvement information services for homeowners, service providers and suppliers nationwide. The following discussion should be read in conjunction with the consolidated financial statements provided under Part I, Item 1 of this Form 10-QSB. Certain statements contained herein may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements involve a number of risks, uncertainties and other factors that could cause actual results to differ materially. The forward-looking information set forth in this Form 10-QSB is as of August 17, 2004, and ImproveNet, Inc. undertakes no duty to update this information. Should events occur subsequent to August 17, 2004 that make it necessary to update the forward-looking information contained in this Form 10-QSB, the updated forward-looking information will be filed with the SEC in a Quarterly Report on Form 10-QSB or as an earnings release included as an exhibit to a Form 8-K, each of which will be available at the SEC's website at www.sec.gov. CRITICAL ACCOUNTING POLICIES AND ESTIMATES ImproveNet, Inc.'s discussion and analysis of its financial condition and results of operations are based upon ImproveNet, Inc. consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires ImproveNet to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, ImproveNet evaluates its estimates, including those related to customer programs, bad debts, income taxes, contingencies and litigation. ImproveNet bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. ImproveNet believes the following critical accounting policies affect its more significant judgments and estimates used in the preparation of its consolidated financial statements. SOFTWARE DEVELOPMENT AND SALES FOR THE BUILDING MATERIALS INDUSTRY SEGMENT The Company recognizes revenue in accordance with SOP 97-2, "Software Revenue Recognition." This SOP provides guidance on revenue recognition of software transactions. The Company recognizes revenue principally from the development and licensing of its software and from consulting and maintenance services rendered in connection with such development and licensing activities. Maintenance contract revenue is recognized on a straight-line basis over the life of the respective contract. The Company also derives revenue from the sale of third party hardware and software which is recognized based on the terms of each contract. Consulting revenue is recognized when the services are rendered. No revenue is recognized prior to obtaining a binding commitment from the customer. Revenue from fixed price software development contracts, which require significant modification to meet the customer's specifications, is recognized on the percentage-of-completion method using the units-of-work-performed method to measure progress towards completion. Revisions in cost estimates and recognition of losses on these contracts are reflected in the accounting period in which the facts become known. Revenue from software package license agreements without significant vendor obligations is recognized upon delivery of the software. Contract terms may provide for billing schedules that differ from revenue recognition and give rise to costs and estimated earnings in excess of billings on uncompleted software contracts, and billings in excess of costs and estimated earnings on uncompleted software contracts. Deferred revenue represents revenue billed and collected but not yet earned. The cost of maintenance and research and development related revenues, which consist principally of staff payroll and applicable overhead, are expensed as incurred. HOME IMPROVEMENT SERVICES SEGMENT Revenues in the home improvement services segment are derived from two sources: Service revenues and marketing revenues. 9 Service revenues: ----------------- Our service provider matching service is the process by which homeowners are matched to our network of pre-screened ImproveNet contractors. This was the core business model upon which the Company was founded and has been the primary source of our revenue. Since its inception, we have invested quite heavily in establishing a pool of national remodeling contractors. We consider this to be the core of our business and we anticipate the major portion of the Company's resources and efforts in the foreseeable future will be devoted to further this service. Service revenues include lead fees and win fees from ImproveNet's contractor matching service. Lead fees are recognized at the time a homeowner and contractor are matched by the Company and the service provider becomes obligated to pay such fee. Win fees are recognized at the time the service provider or the homeowner notifies the Company that a job has been sold and the service provider becomes obligated to pay such fee. Refunds and credits against the lead fees and win fees are recognized when actually made. Marketing revenues: ------------------- Marketing revenues include co-branding programs surrounding content and site integration. Currently marketing revenues are comprised of cash co-branding programs. CASH ADVERTISING Cash co-branding revenues generally are derived from flat rate co-branding engagements in which all impressions delivered to our Web site in a particular home improvement category will be delivered to the co-branding participant over a specified period of time for a fixed monthly fee. Cash co-branding revenues are recognized on a monthly basis. Allowance for Uncollectible Accounts Receivable ----------------------------------------------- We follow the allowance method of recognizing uncollectible accounts receivable. The allowance method recognizes bad debt expense as a percentage of accounts receivable based on a review of the individual accounts outstanding and our prior history of uncollectible accounts receivable. In the first quarter of 2004, we began utilizing the percentage of sales method to account for bad debt in lieu of our recent practice of utilizing the aging of accounts receivable method for implementing the allowance method of recognizing uncollectible accounts receivable. Both methods are acceptable under Generally Accepted Accounting Principles, and we believe this method fairly estimates uncollectible accounts receivable. The use of the percentage of sales method favorably impacted our results of operation for the first quarter ended March 31, 2004. We continued to utilize the percentage of sales method in the second quarter of 2004. We have determined that additional allowances should be made for uncollectible accounts receivable in the second quarter ended June 30, 2004 as follows: (i) an additional adjustment to the calculation of the percentage of sales method so that it reconciles with the calculation of the aging of receivables method over the six month period ended June 30, 2004, (ii) an additional adjustment to accounts receivable over 60 days to reflect the transition of our Customer Care Center from Canada to Scottsdale, Arizona, and (iii) an additional allowance to reflect the change in our credit policy with our service providers (i.e. the changed policy reduced the amount of credits given as a percentage of sales during the second quarter of 2004 and the additional allowance was therefore made). The total amount of these additional allowances are reflected in our selling, general and administrative expenses on our consolidated statement of operations for the period ended June 30, 2004. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. Taxes ----- Deferred income taxes are provided for on an asset and liability method, whereby deferred tax assets are recognized for deductible temporary differences and operating loss carryforwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax basis. Deferred tax assets are reduced by a valuation allowance, when in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. 10 BUSINESS SEGMENTS We follow SFAS No. 131, "Disclosure about Segments of an Enterprise and Related Information." SFAS No. 131 requires publicly held companies to report financial and other information about key revenue segments of an entity for which this information is available and is utilized by the chief operating decision maker. We operate in two segments: Software development and sales for the building materials industry through eTechLogix and home improvement information services through ImproveNet. RESULTS OF OPERATIONS REVENUES Our revenues increased to approximately $1,880,000 for the six months ended June 30, 2004 from approximately $1,648,000 for the six months ended June 30, 2003, an increase of approximately $232,000 or 14%. The increase is primarily due to increased revenues from the Home Improvement Services Segment. Our revenues increased to approximately $1,000,000 for the quarter ending June 30, 2004 compared with $841,000 for the year earlier period and from $880,000 for the quarter ending March 31, 2004. The increase is primarily due to the increased revenues from the Home Improvement Services Segment. The following table and discussion highlights our approximate revenues for the three and six month periods ended June 30, 2004 and 2003: THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, 2004 2003 Change 2004 2003 Change ---------- ---------- ---------- ----------- ----------- ---------- REVENUES Software Sales (eTechLogix) $ 113,000 $ 82,000 $ 31,000 $ 282,000 $ 287,000 $ (5,000) Home Improvement Services (ImproveNet) 887,000 759,000 1,598,000 1,361,000 237,000 ---------- ---------- ---------- ---------- ----------- ---------- Total $1,000,000 $ 841,000 $ 159,000 $1,880,000 $ 1,648,000 $ 232,000 ========== ========== ========== ========== =========== ========== SOFTWARE SALES (ETECHLOGIX) REVENUES eTechLogix revenue decreased to approximately $282,000 for the six months ended June 30, 2004, from approximately $287,000 for the six months ended June 30, 2003, a decrease of approximately $5,000 or 2%. The decrease in eTechLogix's revenue resulted from a decrease in sales of the company's products and consulting services. eTechLogix relies on eight primary customers for its revenue. HOME IMPROVEMENT SERVICES (IMPROVENET) REVENUES ImproveNet revenue increased to approximately $1,598,000 for the six months ended June 30, 2004, from approximately $1,361,000 for the six months ended June 30, 2003, an increase of approximately $237,000 or 17%. The increase in ImproveNet's revenue resulted from the continued building of a network of service providers and an increased number of home improvement projects which were matched to those service providers. ImproveNet revenue consists almost entirely of service revenues from its contractor matching service. Our home improvement services revenues are reported net of credits provided to our service provider customers. OPERATING EXPENSES COST OF REVENUES Cost of revenues decreased to approximately $845,000 for the six months ended June 30, 2004 from approximately $966,000 for the six months ended June 30, 2003, a decrease of approximately $121,000 or 13%. The decrease is primarily due to our improvement of website optimization, ROI analysis of home improvement leads sources, and locating new home improvement lead providers, all of which has increased efficiencies in our acquisition of home improvement leads. 11 The following table and discussion highlights our approximate cost of revenues for the six months ended June 30, 2004 and 2003: SIX MONTHS ENDED JUNE 30, 2004 2003 Change ---------- ---------- ---------- Cost of revenues Software Sales (eTechLogix) $ 56,000 $ 57,000 $ (1,000) Home Improvement Services (ImproveNet) 789,000 909,000 (120,000) ---------- ---------- ---------- Total $ 845,000 $ 966,000 $ (121,000) ========== ========== ========== SOFTWARE SALES (ETECHLOGIX) COST OF REVENUE eTechLogix cost of revenues decreased to approximately $56,000 for the six months ended June 30, 2004, from approximately $57,000 for the six months ended June 30, 2003. The decline in eTechLogix's cost of revenue is primarily a result of a decrease in sales in the current year over the prior year reported period. After evaluating the method of accounting for cost of software sales, management has determined that variable costs associated with software sales revenue is approximately twenty percent (20%) of revenues and therefore has been applied as a cost of revenue and reallocated from selling, general, and administrative expenses. This method was originally implemented in the first quarter of 2004 and will be re-evaluated periodically for application as a cost of revenue. HOME IMPROVEMENT SERVICES (IMPROVENET) COST OF REVENUE ImproveNet cost of revenue decreased to approximately $789,000 for the six months ended June 30, 2004, from approximately $909,000 for the six months ended June 30, 2003, a decrease of approximately $120,000 or 13%. The decrease is primarily due to our improvement of website optimization, ROI analysis of home improvement leads sources, and locating new home improvement lead providers, all of which has increased efficiencies in our acquisition of home improvement leads. The move of our Customer Care Center from Canada to our Scottsdale, Arizona offices for the customer service and operations for the service provider matching service in March 2004 has also contributed to a minor extent to the decrease in the cost of revenues. ImproveNet's cost of revenue consists primarily of the acquisition and processing costs of home improvement leads and the costs of our Customer Care Center, which is responsible for management, staffing and processing of our proprietary matching services. During all of year 2003 and up to late March 2004, our Customer Care Center was outsourced. SELLING, GENERAL AND ADMINISTRATIVE Our selling, general and administrative expenses increased to approximately $899,000 for the six months ended June 30, 2004 from approximately $844,000 for the six months ended June 30, 2003, an increase of approximately $55,000 or 7%. Our selling, general and administrative expenses include payroll and related costs and travel, recruiting, professional and advisory services and other general expenses for our executive, sales, finance, legal, and human resource departments. The decrease in our general and administrative expenses is primarily the result of a decrease in payroll cost. The total amount of the additional allowances made for uncollectible accounts receivable are included in our selling, general and administrative expenses for the six months ended June 30, 2004. RESEARCH AND DEVELOPMENT Our research and development expenses increased to approximately $198,000 for the six months ended June 30, 2004 from approximately $193,000 for the six months ended June 30, 2003, an increase of approximately $5,000 or 3%. Our research and development costs include the payroll and related costs of our technology staff, other costs of Web site design and new technologies required to enhance the performance of our Web site. The increase in research and development expenses in 2004 was primarily attributable to increased payroll and related costs associated with improving the functionality and features of www.improvenet.com and work on the integration and improvement of the eTechLogix software products which management believes will benefit us long-term if we are successful in implementing our sales and marketing strategy. 12 MARKETING Upon review management has determined separating marketing expenses out of selling, general & administrative was not appropriate. Marketing expenses are no longer being reported and discussed as a separate item as of the second quarter 2003. OTHER REVENUES (EXPENSES) Other revenue (expenses) decreased to an expense of approximately $702,000 for the six months ended June 30, 2004 from revenue of approximately $109,000 for the six months ended June 30, 2003, a decrease of approximately $811,000. The following table and discussion highlights our approximate other revenues (expenses) for the three months ended June 30, 2004 and 2003: SIX MONTHS ENDED JUNE 30, 2004 2003 Change ---------- ---------- ---------- Other Revenues (Expenses) Interest income $ 1,000 $ 3,000 $ (2,000) Interest expense and financing costs (720,000) (7,000) (713,000) Relief of debt -- 104,000 (104,000) Miscellaneous income 17,000 9,000 8,000 ---------- ---------- ---------- $ (702,000) $ 109,000 $ (811,000) ========== ========== ========== The decrease in other revenues (expenses) from the prior year quarter is primarily due to financing costs related to the conversion of $370,000 of the convertible promissory notes during the quarter and the issuance of warrants related thereto. INCOME TAXES We have recorded a 100% valuation allowance against our net deferred tax assets, which arose primarily as a result of our aggregate operating losses. The valuation allowance will remain at this level until such time that we believe that the realization of the net deferred tax assets is more likely than not. Accordingly, our results of operations do not reflect any tax benefits for our reported losses. LIQUIDITY AND CAPITAL RESOURCES During our recent history we have funded our operations and investments in property and equipment through cash from operations, short term borrowing from private lending sources, and proceeds from private placements of convertible debt. Since inception funding sources have also included private placement and public offerings of equity. The funds raised through the private placement at the end of the second quarter of 2004 are expected to provide sufficient liquidity for the operation of our business and investments in property and equipment for the next 12 months and possibly for additional periods thereafter.. Cash and cash equivalents totaled approximately $1,073,000 at June 30, 2004, an increase of approximately $690,000 or 180% from approximately $383,000 at December 31, 2003. The increase was primarily due to the $1,050,000 proceeds from the recent private placement. Cash used in operating activities for the six months ended June 30, 2004 was approximately $305,000, compared to cash used of approximately $218,000 for the six months ended June 30, 2003. We continue to experience slowed collection activity which is partly reflected in our increased accounts receivable balance. The cash used in operating activities in the current quarter reflects the changes in the operating assets and liabilities. Cash used in operating activities in the prior year first six months period reflected the impact of the Merger and tender offer obligations as well as our net loss before depreciation, offset by changes in operating assets and liabilities. Cash used in investing activities was approximately $12,000 for the six months ended June 30, 2004, a decrease of approximately $10,000 above cash used of approximately $22,000 for the six months ended June 30, 2003. In the first six months of both 2004 and 2003 the cash was used to purchase equipment. Cash provided by financing activities was approximately $1,007,000 for the six months ended June 30, 2004, an increase of approximately $962,000 from cash provided of approximately $45,000 for the six months ended June 30, 2003. The increase was primarily due to the proceeds from the recent private placement, offset by cash used to repay $30,000 of the convertible promissory notes that did not convert. 13 We anticipate increased revenues from the expansion of the home improvement information services segment throughout 2004 and thereafter. Expansion of the home improvement services segment will require us to add additional personnel to our Customer Care Center as well as necessitate new investments in additional property and equipment. We continue to research and develop more innovative ways of pricing our services, expanding our core service offerings, and identifying more efficient ways of operating our business. We continue to experience challenges in expanding sales volume of our primary software products due to a market which is slow to adapt new technologies and increasing competition. The additional funds from the expected increase in sales of our home improvement information services segment, continued software sales and the completed private placement will be used to finance continued operations and increase the Company's sales and marketing functions. Our operating losses have limited our ability to obtain vendor credit or extended payment terms and bank financing on favorable terms; accordingly, we depend on our cash and cash equivalent balances to fund our operations. With funds received from the private placement completed in June 2004, we expect that our available cash resources will be sufficient to meet our anticipated needs for operations and capital expenditures during the next 12 months and possibly for additional periods thereafter. We will strive to make ongoing realignments, if required, to achieve positive cash flow with our existing cash resources. We are additionally decreasing our marketing and other operating expenditures to assist us in maintaining our available cash resources. We may need to raise additional funds in order to develop new or enhance existing services, to respond to competitive pressures or to acquire complementary businesses, services or technologies. No assurances can be made that the funds received from the recent private placement will be adequate or sufficient to fund expansion, react to competitive pressures, or take advantage of unanticipated opportunities that we may identify. As a result of the above factors, our auditors have removed the qualification in their opinion to our financial statements doubting our ability to continue as a going concern. ITEM 3. CONTROLS AND PROCEDURES EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. Under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, we have, as of a date within 90 days before the filing date of this quarterly report (the "Evaluation Date") evaluated the effectiveness of our "disclosure controls and procedures." Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective in timely alerting them to material information required to be disclosed by us in our periodic reports to the Securities and Exchange Commission. Disclosure controls and procedures are controls and procedures that are designed to ensure that information required to be disclosed in Company reports filed or submitted under the Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. They include, without limitation, controls and procedures designed to ensure that information required to be disclosed in such reports is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING. There were no significant changes in our internal controls or to our knowledge, in other factors that could significantly affect these controls, including any corrective actions with regard to significant deficiencies and material weaknesses, subsequent to the date of their last evaluation. 14 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS From time to time, we may be involved in routine litigation relating to claims arising out of or incidental to our operations. As of the date of this filing, we are engaged in various legal proceedings that are incidental to our business. As of the date of this filing, we are engaged in legal proceedings that could materially affect our business should an adverse judgment be entered against us. In addition, we have received preliminary information regarding possible erroneous cancellation of health insurance benefits for former employees under COBRA for which we may have potential liability. One arbitration matter in Phoenix, Arizona involved First Systech International, Inc., a predecessor to Etech, our wholly-owned subsidiary. This proceeding concerns the 1998 sale of an ERP software product to a client who is demanding a refund of the purchase price, and First Systech International counterclaimed for the balance due on the contract plus additional work performed and professional expenses of the litigation. The matter was before an arbitrator who recently entered an award against First Systech for $116,886 plus simple interest at 10% per year. Recently, First Systech International reached agreement with Friedman Corporation ("friedman") pursuant to terms and conditions of a Repayment and Security Agreement effective May 25, 2004 (the "Agreement") which finalizes a payment plan for First Systech International's obligations for the arbitration award that Friedman has paid. The amount owing is approximately $182,000 with interest accruing at 8% per annum from April 2, 2004 and attorney's fees incurred by Friedman in the minimum amount of $4,500 and not to exceed $10,000 as set forth therein. Payments of $5,000 per month commencing June 20, 2004 are to be made with annual increases of a minimum of $5,000 per month until the outstanding balance is paid in full. The payments due June 20 and July 20, 2004 were made timely. Pursuant to provisions of the Agreement, First Systech International has granted a security interest and lien on all of its assets to secure performance of its obligations under the Agreement. First Systech International continues to maintain ownership of all of the assets that it has pledged. The Agreement allows First Systech International to quantify its specific payment obligations for the arbitration award. In late March 2004, we initiated litigation in Nova Scotia, Canada against the Canadian corporation that had been performing our Customer Care Center and operations for the service provider matching service to enforce and protect our rights under the services agreement regarding our proprietary material. On March 26, 2004, the Canadian court entered an order prohibiting the Canadian corporation from utilizing in any way ImproveNet's proprietary materials and from soliciting or contacting any ImproveNet contractor. At a court hearing in Canada on March 31, 2004, the order entered by the court provided very specific limitations on the Canadian corporation's ability to contact contractors that are participating in our membership program for a specified period of time. The provisions of that agreement were set forth in a writing filed with the Canadian court. Although no further matters are pending before the Canadian court, we are prepared to pursue additional litigation in the Canadian court or by arbitration in Arizona, if necessary, to protect our proprietary material. ITEM 2. CHANGES IN SECURITIES AND SMALL BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES. On June 24, 2004, we completed a sale of 10,500,000 shares of our common stock, par value $0.001 per share, for $0.10 per share to several accredited investors (collectively, the "Investors"), for an aggregate purchase price of $1,050,000 in a private placement transaction pursuant to provisions of a Common Stock Subscription Agreement dated June 23, 2004 (the "Agreement"). We also granted the Investors warrants to purchase a total of 8,000,000 shares of our common stock at an exercise price of $0.15 per share. In addition, the principal balance and all accrued interest on $370,000 of the $400,000 outstanding convertible promissory notes issued to accredited investors by the Company in December 2003 were converted into common stock and warrants on similar terms to the private placement (the "Converting Investors") on June 24, 2004 as more specifically set forth in each respective Second Amendment to ImproveNet, Inc. Unsecured Convertible Promissory Note Subscription Agreement and 8% Unsecured Convertible Promissory Note (the "Second Amendments"). A total of 3,707,400 shares of common stock were issued along with 3-year warrants to purchase an additional 2,466,666 shares of common stock at an exercise price of $0.15 per share. There were no underwriters involved in these transactions, and no underwriting discounts or commissions paid. 15 The securities were issued on the basis of the statutory exemption provided by Section 4(2) of the Securities Act of 1933, as amended (the "Act"), or Regulation D promulgated thereunder or another exemption under the Act, or both, relating to transactions by an issuer not involving any public offering and under similar exemptions under certain state securities laws. ITEM 3. DEFAULTS UPON SENIOR SECURITIES There were no defaults upon senior securities. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the second quarter of 2004. ITEM 5. OTHER INFORMATION None. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits EXHIBIT NUMBER DESCRIPTION OF DOCUMENT ------ ----------------------- 10.36 Commercial Office Lease by and between Phil and Brenda Frandsen and the Registrant 31.1 Certification of Jeffrey I. Rassas, Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) 31.2 Certification of Homayoon J. Farsi, Acting Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) 32.1 Certification of Jeffrey I. Rassas, Chief Executive Officer pursuant to section 906 of the Sarbanes Oxley Act of 2002 32.2 Certification of Homayoon J. Farsi, Acting Chief Financial Officer pursuant to section 906 of the Sarbanes Oxley Act of 2002 (b) Reports on Form 8-K Report on Form 8-K filed May 24, 2004 regarding the press release announcing results of operations for the quarter ended March 31, 2004. Report on Form 8-K filed June 7, 2004 regarding the payment plan and security therefore of eTechLogix, Inc. to Friedman Corporation. Report on Form 8-K filed June 28, 2004 regarding the private placement with accredited investors and conversion of the convertible promissory notes. 16 SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed, August 18, 2004 on its behalf by the undersigned duly authorized. IMPROVENET, INC. (Registrant) By: /s/ Jeffrey I. Rassas ----------------------------- Jeffrey I. Rassas Co-Chairman and CEO By: /s/ Homayoon J. Farsi ----------------------------- Homayoon J. Farsi, Co-Chairman, President and Acting Chief Financial Officer Date: August 18, 2004 17