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 SEPTEMBER 30, 2003.
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ___________ TO ___________.
COMMISSION FILE NUMBER 000-29927
IMPROVENET, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 77-0452868
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
10799 N. 90TH STREET, SUITE 200
SCOTTSDALE, AZ 85260
(Address of principal executive offices)
(480) 346-0000
(Issuer's telephone number)
-----------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES [x] NO [ ]
The number of shares outstanding of the registrant's common stock, $.001 par
value, was 39,210,315 as of November 13, 2003.
ImproveNet, Inc.
Form 10-QSB
For the Quarter Ended September 30, 2003
Table of Contents
PART I - FINANCIAL INFORMATION
Item 1 Financial Statements:
Consolidated Balance Sheets as of September 30, 2003 (Unaudited) and
December 31, 2002....................................................... 1
Consolidated Statements of Operations for the three and nine months
ended September 30, 2003 and 2002 (Unaudited)........................... 2
Consolidated Statements of Cash Flows for the nine months
ended September 30, 2003 and 2002 (Unaudited)........................... 3
Notes to Unaudited Consolidated Financial Statements.................... 5
Item 2 Management's Discussion and Analysis or Plan of Operation............... 7
Item 3 Controls and Procedures................................................. 13
PART II - OTHER INFORMATION
Item 1 Legal Proceedings....................................................... 14
Item 2 Changes in Securities and Use of Proceeds............................... 14
Item 3 Defaults Upon Senior Securities......................................... 14
Item 4 Submission of Matters to a Vote of Security Holders..................... 14
Item 5 Other Information....................................................... 14
Item 6 Exhibits and Reports on Form 8-K........................................ 14
SIGNATURES...................................................................... 15
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
IMPROVENET, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
SEPTEMBER 30, 2003 DECEMBER 31, 2002
------------------ -----------------
Current Assets: (unaudited)
Cash and cash equivalents $ 115,224 $ 446,833
Accounts receivable, net 401,193 329,657
Receivable from stock transfer agent -- 594,715
Other receivables -- 1,000
Prepaid expenses 74,438 55,054
Costs and estimated earnings in excess of billings
on uncompleted software contracts -- 4,100
----------- -----------
Total Current Assets 590,855 1,431,359
----------- -----------
Property and equipment, net 120,342 157,994
----------- -----------
Total Assets $ 711,197 $ 1,589,353
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Notes payable - current portion $ 80,000 $ 12,592
Obligations under capital leases - current portion 6,925 15,843
Line of credit 66,370 77,755
Accounts payable 324,207 221,096
Accrued compensation 5,155 194,082
Accrued customer claims 137,080 137,080
Accrued furniture lease buyout - current portion 60,000 216,376
Accrued merger and tender offer redemption liabilities -- 2,378,029
Deferred revenue 18,200 35,958
Billings in excess of costs on uncompleted software contracts -- 89,250
Other liabilities and accrued expenses 195,520 23,453
----------- -----------
Total Current Liabilities 893,457 3,401,514
Long-Term Liabilities:
Notes payable - long-term portion -- 605
Obligations under capital leases - long-term portion 24,860 26,275
Accrued furniture lease buyout - long-term portion 22,500 --
----------- -----------
Total Liabilities 940,817 3,428,394
----------- -----------
Common Stock, $.001 par value, 100,000,000 shares authorized,
39,210,315 and 53,124,290 shares outstanding at
September 30, 2003 and December 31, 2002, respectively 53,124 53,124
Additional paid-in capital 482,570 482,570
Accumulated deficit (765,314) (412,794)
----------- -----------
(229,620) 122,900
Less: Treasury stock subscribed, at cost, underlying 13,913,975 shares -- (1,961,941)
----------- -----------
Total Stockholders' Deficit (229,620) (1,839,041)
----------- -----------
Total Liabilities and Stockholders' Equity $ 711,197 $ 1,589,353
=========== ===========
See accompanying notes to the unaudited consolidated financial statements.
1
IMPROVENET, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
------------- ------------- ------------- -------------
2003 2002 2003 2002
---- ---- ---- ----
Revenues $ 877,276 $ 147,487 $ 2,525,823 $ 731,385
Cost of Revenues 466,506 42,516 1,432,929 194,671
------------ ------------ ------------ ------------
Gross Profit 410,770 104,971 1,092,894 536,714
Selling, General and Administrative Expenses 419,365 151,204 1,263,380 627,522
Research and Development Expenses 92,928 22,226 286,416 68,976
Loss from Operations (101,523) (68,459) (456,902) (159,784)
Other Revenues (Expenses)
Interest income 278 36 3,548 107
Interest expense and financing costs (2,798) (5,235) (9,763) (74,133)
Gain (loss) on disposal of property and equipment -- (63,202) -- (51,295)
Relief of Debt -- -- 103,876 --
Miscellaneous income (2,579) 16,466 6,721 17,891
------------ ------------ ------------ ------------
Loss from Operations (106,622) (120,394) (352,520) (267,214)
Benefit for Income Taxes -- -- -- --
------------ ------------ ------------ ------------
Net Loss $ (106,622) $ (120,394) $ (352,520) $ (267,214)
============ ============ ============ ============
LOSS PER SHARE - BASIC AND DILUTED
Net loss per common share $ (0.00) $ (0.01) $ (0.01) $ (0.01)
============ ============ ============ ============
Weighted average common shares; basic and diluted 39,210,315 20,000,000 39,210,315 20,000,000
============ ============ ============ ============
See the accompanying notes to the unaudited consolidated financial statements.
2
IMPROVENET, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
(UNAUDITED)
2003 2002
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (352,520) $ (267,214)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 59,756 70,653
Relief of Debt (103,876) --
Treasury stock subscribed 1,961,941 --
Loss on disposal of property and equipment -- 51,295
Accrued interest added to note payable 5,000 --
Changes in:
Accounts receivable, net (71,536) (48,122)
Other receivables 1,000 --
Income tax refund receivable -- 134,180
Receivable from stock transfer agent 594,715 --
Other current assets (302,090)
Costs and estimated earnings in excess of billings
on uncompleted contracts 4,100 --
Prepaid expenses (19,384)
Accounts payable 103,111 83,444
Accrued compensation (188,927) 1,000
Accrued merger and tender offer redemption liabilities (2,378,029) --
Other liabilities and accrued expenses 172,067 36,121
Accrued furniture lease buyout (30,000) --
Billings and estimated earnings in excess of costs
on uncompleted contracts (89,250) --
Deferred revenue (17,758) (20,500)
----------- -----------
Net cash used in continuing operations (349,590) (261,233)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property, plant and equipment (22,104) (1,372)
----------- -----------
Net cash used in investing activities (22,104) (1,372)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of debt (13,197) (10,651)
Repayment of capital leases (10,333) (10,264)
Proceeds from debt incurred 75,000 250,000
Line of credit, net (11,385) 5,000
----------- -----------
Net cash provided by financing activities 40,085 234,085
----------- -----------
Net increase (decrease) in cash and cash equivalents (331,609) (28,520)
Cash and cash equivalents, beginning of period 446,833 31,630
----------- -----------
Cash and cash equivalents, end of period $ 115,224 $ 3,110
=========== ===========
3
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION
Interest paid $ 9,913 $ 51,703
=========== ===========
Income taxes paid $ -- $ --
=========== ===========
Non-Cash Activity:
Conversion of related party note to stock $ -- $ 12,000
=========== ===========
Assumption of notes payable on related party auto $ -- $ 78,246
=========== ===========
Reclassification of capital lease liability $ -- $ 181,262
=========== ===========
See accompanying notes to the unaudited consolidated financial statements
4
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD ENDED SEPTEMBER 30, 2003
NOTE 1 - NATURE OF BUSINESS AND BASIS OF PRESENTATION
ImproveNet, Inc., a Delaware corporation ("ImproveNet" or "Company"),
operates in two business segments:
SOFTWARE - the Company licenses, installs and maintains its proprietary
e-commerce software products to companies primarily operating in the Building
Materials Industry (BMI). The software segment consists primarily of products
developed by eTechLogix, and custom development projects for third parties.
INFORMATION SERVICES - under the brand "ImproveNet" through its website
www.improvenet.com this service provides a source of contractor matching for
homeowners doing home remodeling nationwide. It also provides design and
information resources for homeowners, contractors and suppliers.
COMBINED DIVISIONS OPERATIONAL MISSION
A leading brand since 1996, ImproveNet has the breadth of industry
knowledge, and the credibility within the homeowner and contractor market,
software design expertise and partnerships with industry leaders, to leverage
the opportunity within the $1 Trillion annual BMI (source: Harris Information).
ImproveNet's mission is to automate the BMI and connect the entire Value-Chain
with innovative software and outstanding services.
FINANCIAL REPORTING
The unaudited consolidated balance sheet as of September 30, 2003 and
the related unaudited consolidated statements of operations for the three and
nine month periods ended September 30, 2003 and 2002, and unaudited cash flows
for the nine months ended September 30, 2003 and 2002 presented herein have been
prepared in accordance with accounting principles generally accepted in the
United States for interim financial information and in accordance with the
instructions to Form 10-QSB. Accordingly, certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted. In
our opinion, the accompanying consolidated financial statements include all
adjustments necessary for a fair presentation of such condensed consolidated
financial statements. Such necessary adjustments consisted of normal recurring
items and the elimination of all significant inter-company balances,
transactions and stock holdings.
These interim consolidated financial statements should be read in
conjunction with the Company's December 31, 2002, Annual Report on Form 10-KSB,
and the Company's Quarterly Reports on Form 10-QSB/A for March 31, 2003 and June
30, 2003. Interim results are not necessarily indicative of results for a full
year.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statement and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from these estimates.
LOSS PER SHARE
Basic loss per share of common stock was computed by dividing net loss
by the weighted average number of shares outstanding of common stock.
THREE MONTHS ENDED, SEPTEMBER 30, NINE MONTHS ENDED, SEPTEMBER 30,
--------------------------------- --------------------------------
2003 2002 2003 2002
---- ---- ---- ----
Numerator:
Net loss attributable to common stockholders $ (106,622) $ (120,394) $ (352,520) $ (267,214)
------------ ------------ ------------ ------------
Denominator:
Weighted average common shares 39,210,315 20,000,000 39,210,315 20,000,000
Denominator for basic and diluted calculation 39,210,315 20,000,000 39,210,315 20,000,000
------------ ------------ ------------ ------------
Basic and diluted net loss per common share $ (0.00) $ (0.01) $ (0.01) $ (0.01)
============ ============ ============ ============
5
Diluted earnings per share are computed based on the weighted average
number of shares of common stock and dilutive securities outstanding during the
period. Dilutive securities are options and warrants that are freely exercisable
into common stock at less than the prevailing market price. Dilutive securities
are not included in the weighted average number of shares when inclusion would
increase the earnings per share or decrease the loss per share. These dilutive
securities include approximately 1,768,889 issued and outstanding stock options
to prior and current employees and directors with exercise prices ranging from
$.05 to $.25, of which 481,114 are vested. There are also 1,850,000 outstanding
warrants to purchase stock at from $.10 to $.25 per share issued, with 1,500,000
at $.15 scheduled to expire December 23, 2004 , another 200,000 at $.10 per
share scheduled to expire June 27, 2005, and the remaining 150,000 at $.25
scheduled to expire September 25, 2005.
RECENT ACCOUNTING PRONOUNCEMENTS:
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.
RECLASSIFICATIONS
Certain reclassifications were made in the September 30, 2002 financial
statements to conform to the September 30, 2003 classifications.
NOTE 2 - STOCK OPTIONS
The company has adopted FAS No. 123, "Accounting for Stock-Based
Compensation". Under FAS No. 123, companies can, but are not required to, elect
to recognize compensation expense for all stock-based awards using a fair value
methodology. The company has adopted the disclosure-only provisions, as
permitted by FAS No. 123. The company applies APB Opinion No. 25 and related
interpretations in accounting for its stock-based plans. Accordingly, there is
no related compensation expense recorded in the Company's financial statements
for the periods presented. Had compensation cost for stock-based compensation
been determined based on the fair value of the options at the grant dates
consistent with the method of SFAS 123, the Company's net loss and loss per
share for the three and nine months ended September 30, 2003 and 2002 would have
been reduced to the pro forma amounts presented below:
THREE MONTHS ENDED, SEPTEMBER 30, NINE MONTHS ENDED, SEPTEMBER 30,
--------------------------------- --------------------------------
2003 2002 2003 2002
---- ---- ---- ----
Net Loss:
As reported $ (106,622) $ (120,394) $ (352,520) $ (267,214)
----------- ----------- ----------- -----------
Pro Forma (106,622) (120,394) (352,520) (267,214)
Loss Per Share:
As Reported (0.00) (0.01) (0.01) (0.01)
----------- ----------- ----------- -----------
Pro Forma $ (0.00) $ (0.01) $ (0.01) $ (0.01)
=========== =========== =========== ===========
The fair value of the 1,030,000 option grants during the nine months
ended September 30, 2003 (inclusive of the 430,000 issued in the quarter ending
September 30, 2003) is estimated as of the date of grant utilizing the
Black-Scholes option-pricing model with the following weighted average
assumptions for all grants, expected life of options of two (2) years, risk-free
interest rates of four percent (4%), volatility at 139%, and a zero percent (0%)
dividend yield. The option and warrant issuance during the periods are not
reflected in the pro forma computation as deemed immaterial to reported
performance due to vesting, pricing and other factors. Also see the "Recent
Developments" footnote below.
6
NOTE 3 - INDUSTRY SEGMENT DATA
Information concerning revenues by industry segment follows (unaudited):
THREE MONTHS ENDED, SEPTEMBER 30, NINE MONTHS ENDED, SEPTEMBER 30,
--------------------------------- --------------------------------
% %
2003 2002 CHANGE 2003 2002 CHANGE
---- ---- ------ ---- ---- ------
Revenues:
eTechLogix software revenues $ 142,919 $ 147,487 (3)% 430,186 731,385 (41)%
ImproveNet service revenues 734,357 -- % 2,095,637 -- %
---------- ---------- ---------- ----------
Total revenues $ 877,276 $ 147,487 495% $2,525,823 $ 731,385 245%
========== ========== ========== ==========
A more detailed description of segment performance follows in the
following sections to these notes.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion and analysis of our financial condition and
results of operations should be read in conjunction with our unaudited condensed
consolidated financial statements and notes included elsewhere in this Report on
Form 10-QSB. The discussion in this Report on Form 10-QSB contains
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended, including statements using terminology such as "can," "may,"
"believe," "designated to," "will," "expect," "plan," "anticipate," "estimate,"
"potential," or "continue," or the negative thereof or other comparable
terminology regarding beliefs, plans, expectations or intentions regarding the
future. Forward-looking statements involve risks and uncertainties and actual
results could differ materially from those discussed in the forward-looking
statements, and no reliance should be placed on any forward-looking statement.
All forward-looking statements and risk factors included in this document are
made as of the date hereof, based on information available to the Company as of
the date thereof, and the Company assumes no obligation to update any
forward-looking statement or risk factors, unless we are required to do so by
law. The cautionary statements made in this Report on Form 10-QSB should be read
as applying to all related forward-looking statements wherever they appear in
this Report on Form 10-QSB. Factors that cause or contribute to such differences
include but are not limited to those discussed elsewhere in this Form 10-QSB, as
well as those in a discussion of risk factors found in our Annual Report on Form
10-KSB beginning on page 17 in the section titled "Factors Affecting Future
Performance, Results of Operation and Financial Condition." Our actual results
could differ materially from those discussed here.
RECENT DEVELOPMENTS
UNSECURED CONVERTIBLE PROMISSORY NOTES
Subsequent to September 30, 2003, the Company terminated its offering
of convertible preferred stock, commenced on September 22, 2003, and approved
subscriptions received from accredited investors for the issuance of $300,000 of
the planned $500,000 of 8% unsecured convertible promissory notes, each with a
maturity of December 15, 2005. Proceeds of $300,000 are currently held in
escrow, subject to completion of remaining contingencies. The notes will accrue
8% interest per year payable quarterly. The principal of each note and all
accrued but unpaid interest is convertible into shares of our common stock at
the rate of 4 shares of common stock for each 1 dollar of debt represented by
the notes. In addition, in connection with the $300,000 currently held in
escrow, two-year warrants exercisable for the purchase collectively of 450,000
shares of our common stock at $.25 per share will be issued. Additional warrants
may be issued in connection with additional subscriptions received and approved
in meeting remaining contingencies. The notes and warrants will be issued
pursuant to applicable exemptions from registration under state and federal
securities laws, upon satisfaction of the remaining closing contingencies, which
may not be met. There are no assurances given that the remaining contingencies
will be satisfied to complete closing on any of the notes. Even with the
transactions described above closing as anticipated, we have need for additional
capital and are continuing our efforts to locate and raise additional capital.
7
OVERVIEW
BASIS OF PRESENTATION
On December 23, 2002, Etech Acquisition, Inc., (the "Merger") an
Arizona corporation and wholly owned subsidiary of ImproveNet merged with and
into eTech. Through this Merger, the former shareholders of eTech acquired a
controlling interest in ImproveNet and accordingly, the Merger is accounted for
as a reverse merger, with eTech being the accounting acquirer of ImproveNet. The
Company has treated the Merger as being effective December 31, 2002 as
ImproveNet had minimal operations from December 23, 2002 to December 31, 2002.
As such, the pre-merger financial statements present the historic financial
position, operations and cash flows of eTech with the December 31, 2002 balance
sheet adjusted to consolidate and reflect the fair values assigned to the
acquisition balance sheet of ImproveNet.
The Company's financial statements are presented on a going concern
basis, which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. The Company has continued to
sustain losses for the past two years and has negative working capital and
negative net worth and is uncertain whether we will obtain needed additional
working capital.
The financial statements do not include any adjustments to reflect the
possible future effects of the recoverability and classification of assets or
the amounts and classifications of liabilities that may result from the
uncertainty of the Company's ability to continue as a going concern.
ACQUISITION
On December 23, 2002, eTech Acquisition, Inc., an Arizona corporation
and wholly owned subsidiary of ImproveNet, merged with eTech. This Merger
occurred pursuant to an Agreement and Plan of Merger (the "Merger Agreement")
dated July 30, 2002. Under the terms of the Merger Agreement, eTech paid
$500,000 to ImproveNet and incurred $19,000 in costs directly related to the
Merger. At the time of the Merger, each outstanding share of eTech Common Stock,
no par value per share, was converted into the right to receive and became
exchangeable for 5,555.555556 shares of ImproveNet Common Stock, par value $.001
per share. A total of 35,417,750 shares of ImproveNet common stock were issued
in the Merger to eleven (11) different shareholders of eTech. Through the
Merger, the former directors, who were also shareholders, of eTech collectively
received 30,310,740 shares of ImproveNet Common Stock and as a result, acquired
control of the Company.
Un-expired outstanding options to purchase eTech Common Stock were
converted, on the same vesting schedule, into an option to purchase a number of
shares of ImproveNet Common Stock equal to the number of shares of eTech Common
Stock that could have been purchased under such option multiplied by
5,555.555556, at a price per share of ImproveNet Common Stock equal to the per
share exercise price of $.05 per share. Options to acquire 788,889 shares of
ImproveNet Common Stock were issued in the Merger as a result of these
outstanding options, of which, 222,222 had vested as of the date of the Merger.
Warrants to purchase 1,500,000 shares of ImproveNet were issued as a
result of the Merger. These warrants were issued in conjunction with
subordinated convertible notes payable, as discussed below.
TENDER OFFER
Under the terms of the Merger Agreement, the Company agreed to present
a cash tender offer ("Tender Offer") to pre-merger shareholders of ImproveNet.
The price per share was based in part on ImproveNet's available cash balance at
the closing of the Merger. The Tender Offer was available from the time of the
Merger through January 2, 2003.
Prior to the closing of the Merger, ImproveNet deposited approximately
$2,557,000 with its stock transfer agent for payments to be made under the
Tender Offer. In conjunction with the Tender Offer, the Company disbursed a
total of approximately $1,962,000 to various pre-merger ImproveNet shareholders
in January 2003 resulting in the acquisition of 13,913,975 treasury shares in
January 2003 and the acquisition of an additional 105,000 shares from the
exercise and sale of options and warrants. Funds in excess of disbursements of
approximately $518,000 were returned to the Company from the stock transfer
agent in January 2003.
ACCOUNTING FOR THE MERGER
The Company accounted for this Merger in accordance with SFAS No. 141,
"Business Combinations." As discussed above, the former shareholders of eTech
acquired a controlling interest in the Company, and accordingly, the transaction
has been accounted for as a reverse merger and the total consideration given by
eTech of $519,000 has been allocated to the fair values of the pre-merger assets
and liabilities of ImproveNet. At the time of the acquisition, the fair value of
the net assets of
8
ImproveNet was $361,351 in excess of the consideration given by eTech after all
applicable reductions of amounts that otherwise would have been assigned to the
acquired assets were considered. This excess was reported in the statement of
operations as an extraordinary gain.
eTechLogix, Inc. ("eTech"), a wholly-owned subsidiary of ImproveNet,
licenses, installs and maintains its proprietary e-commerce software products to
companies primarily operating in the building material industry. eTech was
formerly known as First Systech International, Inc. and was originally
incorporated in March 1989 in the State of Texas. In July of 1994, eTech
relocated to the State of Arizona and incorporated itself under the laws of the
State of Arizona.
ImproveNet, Inc. ("ImproveNet" or the "Company") was incorporated in
California in January 1996, was reincorporated in Delaware in September 1998 and
is headquartered in Scottsdale, Arizona. The Company is a source for home
improvement information services for homeowners, service providers and suppliers
nationwide.
The following discussion should be read in conjunction with the
consolidated financial statements provided under Part I, Item 1 of this Form
10-QSB. Certain statements contained herein may constitute forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995. These statements involve a number of risks, uncertainties and other
factors that could cause actual results to differ materially.
The forward-looking information set forth in this Form 10-QSB is as of
November 14, 2003, and ImproveNet, Inc. undertakes no duty to update this
information. Should events occur subsequent to November 14, 2003 that make it
necessary to update the forward-looking information contained in this Form
10-QSB, the updated forward-looking information will be filed with the SEC in a
Quarterly Report on Form 10-QSB or as an earnings release included as an exhibit
to a Form 8-K, each of which will be available at the SEC's website at
www.sec.gov.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
ImproveNet, Inc.'s discussion and analysis of its financial condition
and results of operations are based upon ImproveNet, Inc. consolidated financial
statements, which have been prepared in accordance with accounting principles
generally accepted in the United States. The preparation of these financial
statements requires ImproveNet to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenues and expenses, and related
disclosure of contingent assets and liabilities. On an on-going basis,
ImproveNet evaluates its estimates, including those related to customer
programs, bad debts, income taxes, contingencies and litigation. ImproveNet
bases its estimates on historical experience and on various other assumptions
that are believed to be reasonable under the circumstances, the results of which
form the basis for making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources. Actual results may
differ from these estimates under different assumptions or conditions.
ImproveNet believes the following critical accounting policies affect
its more significant judgments and estimates used in the preparation of its
consolidated financial statements.
SOFTWARE SEGMENT - ETECHLOGIX
The Company recognizes revenue in accordance with SOP 97-2, "Software
Revenue Recognition." This SOP provides guidance on revenue recognition of
software transactions. The Company recognizes revenue principally from the
development and licensing of its software and from consulting and maintenance
services rendered in connection with such development and licensing activities.
Maintenance contract revenue is recognized on a straight-line basis over the
life of the respective contract. The Company also derives revenue from the sale
of third party hardware and software 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.
9
The cost of maintenance and research and development, which consist
principally of staff payroll and applicable overhead, are expensed as incurred.
INFORMATION SERVICES SEGMENT - IMPROVENET
Revenues in the home improvement services segment are derived from two
sources: Service revenues and marketing revenues.
SERVICE REVENUES:
Service revenues include lead fees and win fees from ImproveNet's
contractor matching service and enrollment fees from new contractors joining the
ImproveNet network. Lead fees are recognized at the time a homeowner and
contractor are matched by the Company and the service provider becomes obligated
to pay such fee. Win fees are recognized at the time the service provider or the
homeowner notifies the Company that a job has been sold and the service provider
becomes obligated to pay such fee.
MARKETING REVENUES:
Marketing revenues include the sale of banner and other Web site
advertisements and sponsorships. Currently marketing revenues are comprised of
cash advertising. No such revenues have been earned in the reported period
although historically they occurred and the Company anticipates they will again
occur in the future.
CASH ADVERTISING
Cash advertising revenues generally are derived from short-term
advertising contracts in which the Company typically guarantees that a minimum
number of impressions will be delivered to its Web site visitors over a
specified period of time for a fixed fee. Cash marketing revenues from banner,
button and other Web site advertisements are recognized at the lesser of the
amount recorded ratably over the period in which the advertising is delivered or
the percentage of guaranteed impressions delivered. SmartLeads revenues are also
paid for in cash and are recognized when the SmartLeads have been delivered to
the customer. Cash marketing is recognized when the Company has delivered the
advertising, evidence of an agreement is in place and fees are fixed,
determinable and collectible.
The Company follows the allowance method of recognizing uncollectible
accounts receivable. The allowance method recognizes bad debt expense as a
percentage of accounts receivable based on a review of the individual accounts
outstanding and the Company's prior history of uncollectible accounts
receivable. If the financial condition of ImproveNet's customers were to
deteriorate, resulting in an impairment of their ability to make payments,
additional allowances may be required.
Deferred income taxes are provided for on an asset and liability
method, whereby deferred tax assets are recognized for deductible temporary
differences and operating loss carry forwards and deferred tax liabilities are
recognized for taxable temporary differences. Temporary differences are the
differences between the reported amounts of assets and liabilities and their tax
basis.
Deferred tax assets are reduced by a valuation allowance, when in the
opinion of management, it is more likely than not that some portion or all of
the deferred tax assets will not be realized. Deferred tax assets and
liabilities are adjusted for the effects of changes in tax laws and rates on the
date of enactment.
BUSINESS SEGMENTS
The Company follows SFAS No. 131, "Disclosure about Segments of an
Enterprise and Related Information." SFAS No. 131 requires publicly held
companies to report financial and other information about key revenue segments
of an entity for which this information is available and is utilized by the
chief operating decision maker. The Company limits its segment reporting to
revenues, cost of revenues and gross profit by segment. If in the future working
capital permits, the Company may expand its financial accounting systems and
resources to implement full segment financial reporting. The Company currently
operates in two segments:
Software - the Company licenses, installs and maintains its proprietary
e-commerce software products to companies primarily operating in the building
material industry. The software segment is consists primarily of products
developed by eTechLogix, except during the quarter the Company bought the rights
to a line of software tools known as Advantage Software which greatly expands
the Company's software solutions for the BMI.
10
Information Services - Under the brand ImproveNet this service provides
a source for home improvement information services for homeowners, service
providers and suppliers nationwide.
The Company's pre-merger consolidated statements of operations and cash
flows do not reflect operations for ImproveNet (information services segment) as
ImproveNet, for accounting purposes, was acquired effective December 31, 2002 in
the Merger.
Our actual future results could differ materially from those discussed
here.
RESULTS OF OPERATION
REVENUES
Our revenues increased to $2,525,823 for the nine months ended
September 30, 2003 from $731,385 for the nine months ended September 30, 2002,
an increase of $1,794,438 or 245%. The increase is primarily due to revenues
from the ImproveNet business reported in the current period but not included in
the prior period. Our revenues increased to $877,276 for the quarter ending
September 30, 2003 compared with $147,487 for the year earlier period and from
$840,897 for the quarter ending June 30, 2003.
The following table and discussion highlights our revenues for the
three and nine month periods ended September 30, 2003 and 2002:
THREE MONTHS ENDED, SEPTEMBER 30, NINE MONTHS ENDED, SEPTEMBER 30,
--------------------------------- --------------------------------
% %
2003 2002 CHANGE 2003 2002 CHANGE
---- ---- ------ ---- ---- ------
Revenues:
eTechLogix software revenues $ 142,919 $ 147,487 (3)% 430,186 731,385 (41)%
ImproveNet service revenues 734,357 -- % 2,095,637 -- %
---------- ---------- ---------- ----------
Total revenues $ 877,276 $ 147,487 495% $2,525,823 $ 731,385 245%
========== ========== ========== ==========
SOFTWARE (ETECHLOGIX) REVENUES
eTechLogix revenue decreased to $430,186 for the nine months ended
September 30, 2003, from $731,385 for the nine months ended September 30, 2002,
a decrease of 41%. The decrease in eTechLogix revenue resulted from a decrease
in sales of the company's software products and consulting services.
INFORMATION SERVICES (IMPROVENET) REVENUES
ImproveNet revenue was approximately $2,095,637 for the nine months
ended September 30, 2003. No ImproveNet revenue was included in the nine months
ended September 30, 2002 as the Merger occurred effective December 31, 2002.
ImproveNet revenue consists almost entirely of service revenues from its
contractor matching service.
OPERATING EXPENSES
COST OF REVENUES
Cost of revenues increased to $1,432,929 for the nine months ended
September 30, 2003 from $194,671 for the nine months ended September 30, 2002,
an increase of $1,238,258. The increase is primarily due to cost of revenues
from the newly acquired ImproveNet business.
The following table and discussion highlights our cost of revenues for
the nine months ended September 30, 2003 and 2002:
NINE MONTHS ENDED SEPTEMBER 30,
2003 2002 CHANGE
----------- ----------- -----------
COST OF REVENUES
Software (eTechLogix) $ 87,812 $ 194,671 $ (106,859)
Information Services (ImproveNet) 1,345,117 -- $ 1,345,117
----------- ----------- -----------
Total $ 1,432,929 $ 194,671 $ 1,238,258
=========== =========== ===========
11
SOFTWARE (ETECHLOGIX) COST OF REVENUE
eTechLogix cost of revenues decreased to $87,812 for the nine months
ended September 30, 2003, from approximately $194,671 for the nine months ended
September 30, 2002. The decline in eTechLogix's cost of revenue is primarily a
result of decrease in sales in the current year over the prior year reported
period.
INFORMATION SERVICES (IMPROVENET) COST OF REVENUE
ImproveNet cost of revenue was $1,345,117 for the nine months ended
September 30, 2003. No ImproveNet cost of revenue was included in the nine
months ended September 30, 2002 as the Merger occurred effective December 31,
2002. ImproveNet cost of revenue consists primarily of the cost of home
improvement leads and the cost for the outsourced project service group, which
is responsible for all phases of our proprietary matching services and includes
our project advisors.
SELLING, GENERAL AND ADMINISTRATIVE
Our selling, general and administrative expenses increased to
$1,263,380 for the nine months ended September 30, 2003 from $627,522 for the
nine months ended September 30, 2002, an increase of $635,858 due primarily to
the Improvenet acquisition.
Our selling, general and administrative ("sg&a") expenses include
payroll and related costs and travel, recruiting, professional and advisory
services and other general expenses for our executive, sales, finance, legal,
and human resource departments.
RESEARCH AND DEVELOPMENT
Our research and development expenses increased to approximately
$286,416 for the nine months ended September 30, 2003 from approximately $68,976
for the nine months ended September 30, 2002, an increase of $217,440.
Our research and development costs include the payroll and related
costs of our technology staff, other costs of Web site design and new
technologies required to enhance the performance of our Web sites.
The increase in research and development expenses in 2003 was primarily
attributable to increased payroll and related costs improving the functionality
and features of www.improvenet.com and working on integration and improvement of
the eTechLogix software products which management believes will benefit the
Company longer-term if it obtains additional working capital to implement its
sales and marketing strategy for these products.
OTHER REVENUES (EXPENSES)
NINE MONTHS ENDED SEPTEMBER 30,
2003 2002 CHANGE
--------- --------- ---------
OTHER REVENUES (EXPENSES)
Interest income $ 3,548 $ 107 $ 3,441
Interest expense and financing costs (9,763) (74,133) 64,370
Loss on disposal of property and equipment -- (51,295) 51,295
Miscellaneous income 6,721 17,891 (11,170)
--------- --------- ---------
$ 506 $(107,430) $ 107,936
========= ========= =========
RELIEF OF DEBT
The relief of debt recognized in the first quarter of $103,876 is
attributable to a favorable settlement of a liability under a furniture lease
agreement. While the settlement requires the Company to make installment
payments not benefiting operations, the settlement positively impacted the
reported results for the nine month period ending September 30, 2003.
12
INCOME TAXES
We have recorded a 100% valuation allowance against our net deferred
tax assets, which arose primarily as a result of our aggregate operating losses.
The valuation allowance will remain at this level until such time as we believe
that the realization of the net deferred tax assets is more likely than not.
Accordingly, our results of operations do not reflect any tax benefits for our
reported losses.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents totaled approximately $115,224 at September
30, 2003, a decrease of $331,609 from $446,833 at December 31, 2002. The
decrease was primarily due to cash used in reducing indebtedness and in
operating activities.
Cash used in operating activities for the nine months ended September
30, 2003 was $349,590, compared to cash used of $261,233 for the nine months
ended September 30, 2002. Cash used in operating activities in the current year
first nine months reflects the impact of the Merger and tender offer obligations
as well as our net loss before depreciation, offset by changes in operating
assets and liabilities.
Cash used for investing activities was $22,104 for the nine months
ended September 30, 2003, an increase of $20,732 from cash used of $1,372 for
the nine months ended September 30, 2002.
Cash provided in financing activities was $40,085 in the nine months
ended September 30, 2003 and cash provided in financing activities was $234,085
in the nine months ended September 30, 2002, an decrease of $194,000 due
primarily to less new debt used in operations.
Our operating losses have limited our ability to obtain vendor credit
or extended payment terms and bank financing on favorable terms; accordingly, we
depend on our cash and cash equivalent balances to fund our operations,
supplemented by borrowings or other financing activity. Any negative impact on
our cash or cash equivalents will directly impact both our ability to meet our
short-term funding needs and our business operations.
Due to the significant level of current liabilities and the history of
operating losses, there is no assurance that our available cash resources will
be sufficient to meet our anticipated needs for operations and capital
expenditures during the next 12 months. We need to raise additional funds in
order to develop new and enhance existing services, to respond to competitive
pressures, or to acquire complementary businesses, services or technologies. No
assurances can be given that additional financing will be available on terms
favorable to us, or at all.
ITEM 3. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Under the supervision and with the participation of our Chief Executive
Officer and Chief Financial Officer, we have, as of a date within 90 days before
the filing date of this nine month report (the "Evaluation Date") evaluated the
effectiveness of our "disclosure controls and procedures." Based upon that
evaluation, our Chief Executive Officer and Chief Financial Officer concluded
that our disclosure controls and procedures are effective in timely alerting
them to material information required to be disclosed by us in our periodic
reports to the Securities and Exchange Commission although desired improvements
have been identified for implementation and additional review and analysis is
ongoing. Disclosure controls and procedures are controls and procedures that are
designed to ensure that information required to be disclosed in Company reports
filed or submitted under the Exchange Act of 1934, as amended, is recorded,
processed, summarized and reported within the time periods specified in the
SEC's rules and forms. They include, without limitation, controls and procedures
designed to ensure that information required to be disclosed in such reports is
accumulated and communicated to management, including the Chief Executive
Officer and Chief Financial Officer, as appropriate, to allow timely decisions
regarding required disclosure.
CHANGES IN INTERNAL CONTROLS
There were no significant changes in our internal controls or to our
knowledge, in other factors that could significantly affect these controls,
including any corrective actions with regard to deficiencies and material
weaknesses, subsequent to the date of their last evaluation, although we have
begun implementing additional controls aimed to improve the accounting and
financial systems operations and control which include initiatives that will
require additional working capital before they can be effectively implemented
and integrated such as but not limited to priority of accounting integration
tasks, adequacy of our accounting software to accommodate growth, and other
system and process improvements including elimination of duplicate
13
entry tasks, improvements in the billing and collection processes, and
additional staffing requirements. The impact, positive or negative, of
implementing or failure to implement these planned changes will not be known or
realized until future periods.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, we may be involved in litigation relating to claims
arising out of our operations, and currently we are a party to several routine
litigation matters that are incidental to our business. As of the date of this
filing, we are engaged in legal proceedings that could materially affect our
business should an adverse judgment be entered against us. One pending
arbitration matter in Phoenix, Arizona involves First Systech International,
Inc., a predecessor to Etech. This proceeding concerns the 1998 sale of an ERP
software product to a client who is demanding a refund of the purchase price,
and First Systech International is counterclaiming for the balance due on the
contract plus additional work performed and professional expenses of the
litigation. The matter is before an arbitration panel. Should a third party in
any of the ongoing litigation matters obtain a judgment against the Company or
its subsidiary, it is unlikely the Company or its subsidiary would have
sufficient working capital available to timely pay any such judgment. In
addition, we have received preliminary information regarding possible erroneous
cancellation of health insurance benefits for former employees under COBRA for
which we may have potential liability.
ITEM 2. CHANGES IN SECURITIES
During the three months ending September 30, 2003, 350,000 warrants to
purchase common stock, and 430,000 employee stock options were issued. During
the nine months ending September 30, 2003, 1,030,000 employee stock options and
350,000 warrants were issued. As of September 30, 2003, there were a total of
1,850,000 warrants outstanding and 1,768,889 stock options outstanding. The
warrants are all vested, while 476,670 of the employee stock options are vested.
Unvested options are subject to forfeiture.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------ -----------------------
31.1 Certification of Jeffrey I. Rassas, Chief Executive Officer pursuant to
Securities and Exchange Act of 1934 Rules 13a-15 and 15d-15
31.2 Certification of Thomas A. Cifelli, Chief Financial Officer pursuant to
Securities and Exchange Act of 1934 Rules 13a-15 and 15d-15
32.1 Certification of Jeffrey I. Rassas, Chief Executive Officer pursuant to
section 906 of the Sarbanes Oxley Act of 2002
32.2 Certification of Thomas A. Cifelli, Chief Financial Officer pursuant to
section 906 of the Sarbanes Oxley Act of 2002
(b) Reports on Form 8-K
- None filed for the quarter ending September 30, 2003.
14
SIGNATURES
Pursuant to the requirements of the Securities and Exchange
Act of 1934, the Registrant has duly caused this report to be signed, November
13, 2003 on its behalf by the undersigned duly authorized.
IMPROVENET, INC.
(Registrant)
By:/s/ Jeffrey I. Rassas
------------------------
Jeffrey I. Rassas
Co-Chairman and CEO
By:/s/ Thomas A. Cifelli
------------------------
Thomas A. Cifelli
Chief Financial Officer
Date: November 13, 2003
15
Exhibit Index
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------ -----------------------
31.1 Certification of Jeffrey I. Rassas, Chief Executive Officer pursuant to
Securities and Exchange Act of 1934 Rules 13a-15 and 15d-15
31.2 Certification of Thomas A. Cifelli, Chief Financial Officer pursuant to
Securities and Exchange Act of 1934 Rules 13a-15 and 15d-15
32.1 Certification of Jeffrey I. Rassas, Chief Executive Officer pursuant to
section 906 of the Sarbanes Oxley Act of 2002
32.2 Certification of Thomas A. Cifelli, Chief Financial Officer pursuant to
section 906 of the Sarbanes Oxley Act of 2002
16