<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM 10-Q
(Mark One)
[X] Quarterly Report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended June 30, 2000,
Or
[_] Transition Report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from ______ to ______
Commission File Number: 000-29037
eMERGE INTERACTIVE, INC.
------------------------
(Exact name of registrant as specified in its charter)
Delaware 65-0534535
-------- ----------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
10315 102nd Terrace, Sebastian, Florida 32958
---------------------------------------------
(Address of principal executive offices)
(561) 589-7331
--------------
Registrant's telephone number, including area code:
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days: YES [X] NO [ ]
The number of shares of the registrant's common stock, $0.008 par value,
outstanding as of June 30, 2000 was 34,348,376. There were 28,653,931 shares of
Class A common stock outstanding and 5,694,445 shares of Class B common
outstanding as of this date.
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eMERGE INTERACTIVE, INC.
FORM 10-Q QUARTERLY REPORT
(For Three Months Ended and Six Months Ended June 30, 2000)
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Part I FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets as of December 31, 1999 and June 30,
2000...................................................................................... 3
Condensed Consolidated Statements of Operations for the three months ended June 30,
1999 and 2000............................................................................. 5
Condensed Consolidated Statements of Operations for the six months ended June 30,
1999 and 2000............................................................................. 6
Condensed Consolidated Statement of Stockholders' Equity for the six months ended
June 30, 2000............................................................................. 7
Condensed Consolidated Statements of Cash Flows for the six months ended June 30,
1999 and 2000............................................................................. 8
Notes to Condensed Consolidated Financial Statements...................................... 9
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations................................................................................ 15
Item 3. Quantitative and Qualitative Disclosures about Market Risk................................ 24
Part II OTHER INFORMATION
Item 1. Legal Proceedings......................................................................... 24
Item 2. Changes in Securities and Use of Proceeds................................................. 24
Item 4. Submission of Matters to a Vote of Security Holders....................................... 25
Item 6. Exhibits and Reports on Form 8-K.......................................................... 25
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
eMERGE INTERACTIVE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1999 2000
------------- -------------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 12,316,497 $ 44,605,426
Short term investments -- 1,361,914
Trade accounts receivable 1,144,133 23,865,541
Inventories (note 3) 1,201,203 6,861,870
Cattle deposits 473,859 3,965,510
Prepaid expenses 71,078 1,237,183
Net assets of discontinued operations 297,003 --
Other current assets 136,349 170,332
------------- -------------
TOTAL CURRENT ASSETS 15,640,122 82,067,776
Property and equipment, net 1,895,754 10,204,374
Capitalized offering costs 447,644 --
Investment in Turnkey Computer Systems, Inc. 1,822,833 1,822,833
Intangibles, net 5,955,360 44,060,662
------------- -------------
TOTAL ASSETS $ 25,761,713 $ 138,155,645
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current installments of capital lease obligation $ 82,320 $ 140,726
Note payable 500,000 --
Accounts payable 1,187,900 10,909,320
Accrued liabilities:
Salaries and benefits 967,749 1,267,115
Other 818,041 5,225,096
Advance payments from customers 222,750 1,210,325
Due to related parties (note 4) 12,053,715 1,101,176
------------- -------------
TOTAL CURRENT LIABILITIES 15,832,475 19,853,758
Capital lease obligation, excluding current installments 224,068 167,162
Note payable 400,000 --
------------- -------------
TOTAL LIABILITIES 16,456,543 20,020,920
Commitments and contingencies
Redeemable Class A common stock, issued and outstanding 62,500 414,339 --
shares in 1999 and -0- shares in 2000
</TABLE>
3
<PAGE> 4
<TABLE>
<S> <C> <C>
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value, authorized 15,000,000 shares:
Series A preferred stock, (aggregate involuntary liquidation preference of
$8,030,675 in 1999 and $0 in 2000),
designated 6,500,000 shares; issued and outstanding 64,436 --
6,443,606 shares in 1999 and -0- shares in 2000
Series B junior preferred stock, (aggregate involuntary liquidation
preference of $5,281,316 in 1999 and $0 in 2000), designated 2,400,000
shares; issued and outstanding
2,400,000 shares in 1999 and -0- shares in 2000 24,000 --
Series C preferred stock, (aggregate liquidation preference of $5,891,781
in 1999 and $0 in 2000), designated
1,300,000 shares; issued and outstanding 1,100,000 shares 11,000 --
in 1999 and -0- shares in 2000
Series D preferred stock, (aggregate liquidation preference of $41,823,749
in 1999 and $0 in 2000), designated
4,555,556 shares; issued and outstanding 4,555,556 shares 45,556 --
in 1999 and -0- shares in 2000
Common stock, $.008 par value, authorized 100,000,000 shares:
Class A common stock, designated 92,711,110 shares; issued and outstanding
7,046,444 shares in 1999 and
28,653,931 shares in 2000 56,372 229,231
Class B common stock, designated 7,288,890 shares; no
shares issued and outstanding in 1999; 5,694,445 shares -- 45,556
issued and outstanding in 2000
Additional paid-in capital 62,312,315 185,953,989
Accumulated deficit (32,375,926) (45,780,932)
Subscription receivable from Internet Capital Group, Inc. (21,188,320) (22,263,533)
Unearned compensation (58,602) (49,586)
------------- -------------
TOTAL STOCKHOLDERS' EQUITY 8,890,831 118,134,725
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 25,761,713 $ 138,155,645
============= =============
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
4
<PAGE> 5
eMERGE INTERACTIVE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the three months ended June 30, 1999 and 2000
(Unaudited)
<TABLE>
<CAPTION>
1999 2000
------------- -------------
<S> <C> <C>
Revenue (including sales to related parties of approximately $ 1,972,786 $ 160,416,086
$0 in 1999 and $58,500,000 in 2000; note 4)
Cost of revenue (including purchases from related parties of
approximately $0 in 1999 and $15,900,000 in 2000;
note 4) 2,142,598 158,967,116
------------- -------------
Gross profit (loss) (169,812) 1,448,970
------------- -------------
Operating expenses:
Selling, general and administrative (note 6) 2,639,992 10,043,017
Research and development 1,009,087 1,212,521
------------- -------------
Total operating expenses 3,649,079 11,255,538
------------- -------------
Profit (loss) from continuing operations (3,818,891) (9,806,568)
Interest and other income (expense), net (154,882) 1,868,713
------------- -------------
Profit (loss) from continuing operations
before income taxes (3,973,773) (7,937,855)
Income tax expense (benefit) -- --
------------- -------------
Profit (loss) from continuing operations (3,973,773) (7,937,855)
Discontinued operations:
Income from operations of discontinued
transportation segment -- 41,606
------------- -------------
Net profit (loss) $ (3,973,773) $ (7,896,249)
============= =============
Net profit (loss) from continuing operations per
common share -- basic and diluted $ (0.58) $ (0.23)
============= =============
Net profit (loss) per common share -- basic and diluted $ (0.58) $ (0.23)
============= =============
Weighted average number of common shares
outstanding -- basic and diluted 6,851,724 33,899,540
============= =============
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
5
<PAGE> 6
eMERGE INTERACTIVE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the six months ended June 30, 1999 and 2000
(Unaudited)
<TABLE>
<CAPTION>
1999 2000
------------- -------------
<S> <C> <C>
Revenue (including sales to related parties of
approximately $ 0 in 1999 and $ 58,500,000 in 2000;
note 4) $ 2,578,253 $ 198,968,985
Cost of revenue (including purchases from related parties of
approximately $ 0 in 1999 and $ 15,900,000 in 2000;
note 4) 2,767,919 197,258,909
------------- -------------
Gross profit (loss) (189,666) 1,710,076
------------- -------------
Operating expenses:
Selling, general and administrative (note 6) 4,068,860 15,696,735
Research and development 1,450,433 2,513,245
------------- -------------
Total operating expenses 5,519,293 18,209,980
------------- -------------
Profit (loss) from continuing operations (5,708,959) (16,499,904)
Interest and other income (expense), net (288,765) 3,010,264
------------- -------------
Profit (loss) from continuing operations
before income taxes (5,997,724) (13,489,640)
Income tax expense (benefit) -- --
------------- -------------
Profit (loss) from continuing operations (5,997,724) (13,489,640)
Discontinued operations:
Income from operations of discontinued
transportation segment 10,420 84,634
------------- -------------
Net profit (loss) $ (5,987,304) $ (13,405,006)
============= =============
Net profit (loss) from continuing operations per
common share -- basic and diluted $ (1.15) $ (0.47)
============= =============
Net profit (loss) per common share -- basic and diluted $ (1.15) $ (0.47)
============= =============
Weighted average number of common shares
outstanding -- basic and diluted 5,223,403 28,598,587
============= =============
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
6
<PAGE> 7
eMERGE INTERACTIVE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited)
<TABLE>
<CAPTION>
Preferred Stock Preferred Stock Preferred Stock
Series A Series B Series C
-------------------------- -------------------------- --------------------------
Shares Amount Shares Amount Shares Amount
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1999 6,443,606 64,436 2,400,000 24,000 1,100,000 11,000
Conversion of Series A (6,443,606) (64,436) -- -- -- --
preferred stock for 8,054,508
shares of Class A common stock
Conversion of Series B -- -- (2,400,000) (24,000) -- --
preferred stock for 3,000,000
shares of Class A common stock
Conversion of Series C -- -- -- -- (1,100,000) (11,000)
preferred stock for 1,375,000
shares of Class A common stock
Conversion of Series D -- -- -- -- -- --
preferred stock for 5,694,445
shares of Class B common stock
Sale of Class A common -- -- -- -- -- --
stock in connection with
initial public offering
Issuance of 1,215,913 -- -- -- -- -- --
shares of Class A Common
Stock in connection with purchase
of Eastern Livestock
Exercise of stock options -- -- -- -- -- --
Exercise of Turnkey's put -- -- -- -- -- --
right for 62,500 shares of
Class A common stock
Accretion to redemption -- -- -- -- -- --
value of note receivable
from Internet Capital
Group, Inc.
Net profit (loss) -- -- -- -- -- --
Non cash compensation -- -- -- -- -- --
Amortization of unearned compensation -- -- -- -- -- --
---------- ---------- ---------- ---------- ---------- ----------
Balances at June 30, 2000 -- -- -- -- -- --
---------- ---------- ---------- ---------- ---------- ----------
<CAPTION>
Preferred Stock Common Stock Common Stock
Series D Class A Class B
-------------------------- -------------------------- --------------------------
Shares Amount Shares Amount Shares Amount
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1999 4,555,556 45,556 7,046,444 56,372 -- --
Conversion of Series A -- -- 8,054,508 64,436 -- --
preferred stock for 8,054,508
shares of Class A common stock
Conversion of Series B -- -- 3,000,000 24,000 -- --
preferred stock for 3,000,000
shares of Class A common stock
Conversion of Series C -- -- 1,375,000 11,000 -- --
preferred stock for 1,375,000
shares of Class A common stock
Conversion of Series D (4,555,556) (45,556) 5,694,445 45,556
preferred stock for 5,694,445
shares of Class B common
stock
Sale of Class A common -- -- 7,675,000 61,400 -- --
stock in connection with
initial public offering
Issuance of 1,215,913 -- -- 1,215,913 9,727 -- --
shares of Class A Common
Stock in connection with
purchase of Eastern Livestock
Exercise of stock options -- -- 224,566 1,796 -- --
Exercise of Turnkey's put -- -- 62,500 500 -- --
right for 62,500 shares of
Class A common stock
Accretion to redemption -- -- -- -- -- --
value of note receivable
from Internet Capital
Group, Inc.
Net profit (loss) -- -- -- -- -- --
Non cash compensation -- -- -- -- -- --
Amortization of unearned compensation -- -- -- -- -- --
---------- ---------- ---------- --------- --------- -------
Balances at June 30, 2000 -- -- 28,653,931 229,231 5,694,445 45,556
========== ========== ========== ========= ========= =======
<CAPTION>
Additional Note Receivable
paid-in Accumulated from Internet Unearned
capital deficit Capital Group, Inc compensation Total
---------- ----------- ------------------ ------------ -----------
<S> <C> <C> <C> <C> <C>
Balances at December 31, 1999 62,312,315 (32,375,926) (21,188,320) (58,602) 8,890,831
Conversion of Series A -- -- -- -- --
preferred stock for
8,054,508 shares
of Class A common stock
Conversion of Series B -- -- -- -- --
preferred stock for 3,000,000
shares of Class A common stock
Conversion of Series C -- -- -- -- --
preferred stock for 1,375,000
shares of Class A common stock
Conversion of Series D -- -- -- -- --
preferred stock for 5,694,445
shares of Class B common stock
Sale of Class A common 107,138,544 -- -- -- 107,199,944
stock in connection with
initial public offering
Issuance of 1,215,913 14,490,273 -- -- -- 14,500,000
shares of Class A Common
Stock in connection with
purchase of Eastern Livestock
Exercise of stock options 259,750 -- -- -- 261,546
Exercise of Turnkey's put 413,839 -- -- -- 414,339
right for 62,500 shares of
Class A common stock
Accretion to redemption -- -- (1,075,213) -- (1,075,213)
value of note receivable
from Internet Capital
Group, Inc.
Net profit (loss) -- (13,405,006) -- -- (13,405,006)
Non cash compensation 1,339,268 -- -- -- 1,339,268
Amortization of unearned compensation -- -- -- 9,016 9,016
----------- ----------- ----------- ---------- -----------
Balances at June 30, 2000 185,953,989 (45,780,932) (22,263,533) (49,586) 118,134,725
=========== =========== =========== ========== ===========
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
7
<PAGE> 8
eMERGE INTERACTIVE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the six months ended June 30, 1999 and 2000
(Unaudited)
<TABLE>
<CAPTION>
1999 2000
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net profit (loss) $ (5,987,304) $ (13,405,006)
Adjustments to reconcile net profit (loss) to net cash used in
operating activities:
Depreciation and amortization 704,548 2,574,742
Accretion to redemption value of note receivable -- (1,075,213)
Non cash compensation -- 1,339,268
Amortization of unearned compensation 4,509 9,016
Changes in operating assets and liabilities:
Trade accounts receivable, net (36,083) (22,721,408)
Inventories (33,120) (5,660,667)
Cattle deposits -- (3,491,651)
Prepaid expenses and other assets (140,545) (1,200,088)
Net assets of discontinued operations 604,729 297,003
Accounts payable 297,078 9,721,420
Accrued liabilities 1,383,360 133,700
Advance payments from customers -- 987,575
------------- -------------
Net cash used by operating activities (3,202,828) (32,491,309)
------------- -------------
Cash flows from investing activities:
Purchases of short term investments -- (1,361,914)
Purchases of property and equipment (1,193,077) (6,129,825)
Business combinations, net of cash acquired (3,145,297) (23,478,230)
------------- -------------
Net cash used by investing activities (4,338,374) (30,969,969)
------------- -------------
Cash flows from financing activities:
Purchases of short term investments -- (1,361,914)
Net borrowings (payments) from (to) related parties 2,909,789 (10,952,539)
Payment on Turnkey note payable -- (900,000)
Payments on capital lease obligations (38,536) (306,388)
Net proceeds from issuance of common stock 5,587,280 107,909,134
Offering costs (254,458) --
------------- -------------
Net cash provided by financing activities 8,204,075 95,750,207
------------- -------------
Net increase in cash 662,873 32,288,929
------------- -------------
Cash and cash equivalents - beginning of period 268 12,316,497
------------- -------------
Cash and cash equivalents - end of period $ 663,141 $ 44,605,426
============= =============
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
8
<PAGE> 9
eMERGE INTERACTIVE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the six months ended June 30, 1999 and 2000
(Unaudited)
<TABLE>
<CAPTION>
1999 2000
----------- -----------
<S> <C> <C>
Supplemental disclosures:
Cash paid for interest $ 13,752 $ 549,027
Issuance of Class A common stock in connection with CIN
transaction 720,000 --
Issuance of Class A common stock in connection with
Cyberstockyard transaction 450,000 --
Issuance of Class A common stock in connection with
Eastern Livestock transaction -- 14,500,000
Liabilities incurred with Eastern Livestock transaction -- 4,500,000
Conversion of Series A, B, and C preferred stock and
redeemable Class A common stock into Class A common
stock 513,775
Conversion of Series D preferred stock into Class B
common stock -- 45,556
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
eMERGE INTERACTIVE, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(1) ORGANIZATION
(a) Basis of Presentation
The condensed consolidated financial statements include the
accounts of eMerge Interactive, Inc. and its wholly-owned
subsidiaries, Cyberstockyard, Inc. ("Cyberstockyard"), a
Mississippi corporation, and eMerge San Saba, Inc., a
Delaware corporation. All significant intercompany accounts
and transactions have been eliminated in consolidation.
The Company's condensed consolidated balance sheet as of
December 31, 1999, has been derived from the Company's
audited balance sheet as of that date. The Company's
condensed consolidated financial statements as of and for the
three months ended and six months ended June 30, 2000 and
1999, have not been audited. In the opinion of management,
the unaudited condensed consolidated financial statements
include all adjustments and accruals (consisting of normal
recurring adjustments) necessary to present fairly the
Company's financial position as of June 30, 2000, and the
results of its operations and cash flows for the periods
ended June 30, 1999 and 2000.
Results of interim periods are not necessarily indicative of
the results to be expected during the remainder of the
current year or for any future period. Certain information
and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted
accounting principles have been omitted or condensed. The
accounting policies used in preparing these consolidated
financial statements are the same as those described in our
Form 10-K and the consolidated financial statements
incorporated by reference therein.
9
<PAGE> 10
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Revenue Recognition
The Company generates the majority of its revenue from cattle
sales transactions where it acts as either a principal or
agent in the purchase and sale of cattle. For cattle sales
transactions where the Company is the primary obligor in the
arrangement, the Company purchases cattle from the seller,
records the cattle as inventory until delivered to an accepted
buyer and is exposed to both the inventory and credit risk
that results from of the transaction. In these types of
transactions, the Company records the gross revenue earned and
related product costs incurred. For cattle sales transactions
in which the Company is not the primary obligor, it generally
earns a fixed fee upon sale of the cattle which is based on
weight or number of cattle. In these types of transactions,
the Company records only the fee received as revenue. For all
other products and services offered by the Company, the
Company acts as a principal to the transaction and gross
revenue and related product cost are recognized as products
are shipped or services are provided.
In December 1999, the Securities and Exchange Commission (the
"SEC") issued Staff Accounting Bulletin No. 101 ("SAB 101"),
"Revenue Recognition in Financial Statements." SAB 101 was
followed by Staff Accounting Bulletin No. 101A,
"Implementation Issues Related to SAB 101," in March 2000 and
by Staff Accounting Bulletin No. 101B, "Second Amendment:
Revenue Recognition in Financial Statements" ("SAB 101B"), in
June 2000. These bulletins summarize certain views of the SEC
regarding applying generally accepted accounting principles
to revenue recognition in financial statements. The impact of
SAB 101B on the Company was to delay the implementation date
of SAB 101 until the fourth quarter of 2000. The SEC is
providing this guidance due, in part, to the large number of
revenue recognition issues that registrants encounter. The
Company is in the process of analyzing the implications of
these bulletins and is anticipating that further
implementation guidance will be forthcoming from the
Securities and Exchange Commission. Based on what is
currently known by the Company about SAB 101, management does
not believe that adoption of SAB 101 will have a material
impact on the Company's financial position or results of
operations.
(b) Net Profit (Loss) Per Share
Net profit (loss) per share is computed in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 128,
"Earnings Per Share," by dividing the net profit (loss)
allocable to common stockholders (net profit (loss) less
accretion related to redeemable Class A common stock) by the
weighted average number of shares of common stock outstanding
less the shares of redeemable Class A common stock. The
Company's stock options (2,443,648 at June 30, 1999 and
3,582,096 at June 30, 2000) and convertible preferred stock
(9,943,606 at June 30, 1999 and 0 at June 30, 2000), have not
been used in the calculation of diluted net profit (loss) per
share because to do so would be anti-dilutive. As such, the
numerator and the denominator used in computing both basic
and diluted net profit (loss) per share allocable to common
stockholders are equal.
(c) Capitalized Software Costs
The Company accounts for the software components of its
websites in accordance with the American Institute of
Certified Public Accountants' Statement of Position ("SOP")
98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use". Accordingly, certain
costs to develop internal-use computer software are
capitalized after the Company has completed a preliminary
project assessment and management, with relevant authority,
commits to funding the related software project and it is
probable that the project will be completed and the software
will be used to perform the function intended. As of June 30,
2000, approximately $1.0 million has been capitalized and is
included in property and equipment in the
10
<PAGE> 11
accompanying condensed consolidated balance sheets. These
costs relate to the Company's internet site development and
will be amortized to operations over the assets' estimated
useful life of three years upon completion of the application
development stage.
(d) Cash Equivalents
For the purposes of the statement of cash flows, the Company
considers all short term investments with a purchase to
maturity of three months or less to be cash equivalents.
As of June 30, 2000, the Company had approximately $40.3
million of highly liquid debt instruments with maturities of
less than three months included in cash equivalents and
approximately $1,362,000 of highly liquid debt instruments
and certificates of deposit with maturities of less than six
months included in short term investments. The Company
accounts for all of these investments in accordance with SFAS
No. 115, "Accounting for Certain Investments in Debt and
Equity Securities". As of June 30, 2000, all of the Company's
cash equivalents and short term investments were classified
as held-to-maturity and their amortized cost approximated
fair value due to their short term nature.
(3) INVENTORIES
Inventories consist of:
<TABLE>
<CAPTION>
1999 2000
----------- -----------
<S> <C> <C>
Raw materials $ 658,454 $ 386,698
Work-in-process 139,187 --
Cattle 403,562 6,397,119
Other -- 78,053
----------- -----------
$ 1,201,203 $ 6,861,870
=========== ===========
</TABLE>
(4) RELATED PARTY TRANSACTIONS
Amounts due to related parties consist of:
<TABLE>
<CAPTION>
1999 2000
----------- -----------
<S> <C> <C>
XL Vision $ 1,668,317 $ 754,557
Safeguard Scientifics, Inc. and Safeguard Delaware, Inc. 10,385,398 12,115
Eastern Livestock, Inc. -- 53,164
Employees and shareholders -- 281,340
----------- -----------
$12,053,715 $ 1,101,176
=========== ===========
</TABLE>
In connection with the acquisition of Eastern's rollover business
during May 2000, the Company has entered into various transactions
during the ordinary course of business with Eastern's former
shareholders and their related entities. The former shareholders, who
are now employees and shareholders of the Company, continue to provide
services and support
11
<PAGE> 12
to the Company pursuant to a Supply and Support Agreement dated May 1,
2000. This agreement requires the former shareholders and their
related entities to assist the Company in obtaining cattle inventory
supplies and to use their best efforts to cause customers to purchase
cattle inventory from the Company. In addition, the agreement calls
for the former shareholders and their related entities to continue
conducting any and all activities and types of transactions with the
Company throughout the term of the agreement. All such activities and
transactions are provided to the Company on an arm's length and fair
value basis pursuant to this agreement.
For the three and six months ended June 30, 2000, the Company had
cattle sales of approximately $58,500,000 and purchases of cattle of
approximately $15,900,000 with related parties. Approximately
$38,600,000 of related party sales were consummated pursuant to cattle
sales contracts in effect prior to the Company's acquisition of
Eastern.
(5) SEGMENT INFORMATION
In 1998, the Company adopted SFAS No. 131, which requires the reporting
of segment information using the "management approach" versus the
"industry approach" previously required. The management approach
requires the Company to report certain financial information related to
continuing operations that is provided to the Company's chief operating
decision-maker. The Company's chief operating decision-maker receives
revenue, cost of revenue and gross profit (loss) by source, and all
other statement of operations data and balance sheet data on a
consolidated basis. The Company's reportable segments consist of cattle
sales and other products and services. The gross profit (loss)
associated with cattle sales and the related prospects for this portion
of the Company's business differ from the rest of the Company's
products and service offerings.
The following summarizes revenue, cost of revenue and gross profit
(loss) information related to the Company's two operating segments:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
-------------------------------- -----------------------------
1999 2000 1999 2000
---------- ------------ ---------- ------------
<S> <C> <C> <C> <C>
Revenue:
Cattle $1,740,955 $159,807,763 $1,740,955 $197,818,847
Other 231,831 608,323 837,298 1,150,138
---------- ------------ ---------- ------------
Total $1,972,786 $160,416,086 $2,578,253 $198,968,985
========== ============ ========== ============
Cost of revenue:
Cattle $1,729,029 $158,270,165 $1,729,029 $196,082,067
Other 413,569 696,951 1,038,890 1,176,842
---------- ------------ ---------- ------------
Total $2,142,598 $158,967,116 $2,767,919 $197,258,909
========== ============ ========== ============
Gross profit (loss):
Cattle $ 11,926 $ 1,537,598 $ 11,926 $ 1,736,780
Other (181,738) (88,628) (201,592) (26,704)
---------- ------------ ---------- ------------
Total $ (169,812) $ 1,448,970 $ (189,666) $ 1,710,076
========== ============ ========== ============
</TABLE>
The Company's assets and other statement of operations data are not
allocated to a segment.
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<PAGE> 13
(6) STOCK PLAN
A summary of stock option transactions for the six months ended June
30, 2000, follows:
<TABLE>
<CAPTION>
WEIGHTED
RANGE OF WEIGHTED AVERAGE
EXERCISE PRICE AVERAGE REMAINING
PER EXERCISE CONTRACTUAL
SHARES SHARE PRICE LIFE (IN YEARS)
--------- --------------- ------------- ---------------
<S> <C> <C> <C> <C>
Balance outstanding, December 31,
1999 2,769,116 $ 0.80 - 11.20 $ 2.93 9.01
====
Granted 1,117,726 $ 10.56 - 62.38 $ 17.48
Exercised (224,566) $ 0.80 - 4.80 $ 1.16
Cancelled (80,180) $ 1.60 - 11.20 $ 7.81
--------- --------------- -------
Balance outstanding, June 30,
2000 3,582,096 $ 0.80 - 62.38 $ 7.47 8.89
========= =============== ======= ====
</TABLE>
For the three and six months ended June 30, 2000, the Company
recognized $1,339,268 of non cash compensation expense resulting from
the accelerated vesting of stock options. This amount is included
in selling, general and administrative expenses within the condensed
consolidated statements of operations.
(7) ACQUISITIONS
On May 1, 2000, the Company closed on an Agreement for the Purchase
and Sale of Assets with Eastern Livestock Co. ("Eastern"), and its
shareholders. Eastern engages in buying cattle for immediate or
short-term resale ("the rollover business"). The purchase of the
rollover business included acquisition of all tangible and intangible
systems used in the conduct or operation of the business, all
furniture and/or equipment and systems associated with the business,
and any presence on the World Wide Web, including email addresses,
maintained by or on behalf of Eastern in connection with the rollover
business. The purchase price for these assets consisted of (i)
$17,000,000 in cash, (ii) 1,215,913 shares of eMerge common stock
valued at $14,500,000 and (iii) $4,500,000 in cash to be paid one year
after the closing date or earlier upon certain events occurring. The
acquisition was accounted for as a purchase and the estimated excess
of the purchase price over the fair value of net assets acquired of
approximately $36,100,000 was recorded as goodwill and is being
amortized over five years.
On June 1, 2000, the Company closed on an Agreement for the Purchase
and Sale of Assets with W.P. Land and Livestock, Inc. d/b/a Jordan
Cattle Auction ("Jordan") and its shareholders. In connection with
this purchase, the Company acquired all of the tangible and intangible
property of W.P. Land and Livestock relating to its business of
purchasing and reselling of cattle through auction as well as any
presence on the World Wide Web maintained by or on behalf of W.P. Land
and Livestock, including the page located at URL
http://www.jordancattle.com, and any email addresses used in
connection with the business. The purchase price for these assets was
$2,864,748 in cash. Concurrent with the purchase and sale of assets,
the Company also closed on a Contract for Sale and Purchase of Real
Estate with the shareholders of W.P. Land and Livestock. The Company
purchased three parcels of land and buildings used in the above
described business for a purchase price of $3,472,000 in cash. The
acquisition was accounted for as a purchase and the
13
<PAGE> 14
estimated excess of the purchase price over the fair value of net
assets acquired of approximately $3,900,000 was recorded as goodwill
and is being amortized over five years.
The results of operations of the acquired companies are included in
the condensed consolidated statements of operations since the
respective dates of acquisition.
The following unaudited proforma financial information presents the
combined results of operations of eMerge, Eastern, and Jordan as if
the acquisitions occurred on January 1, 1999, after giving effect to
certain adjustments, including amortization of goodwill. The unaudited
pro forma financial information does not necessarily reflect the
results of operations that would have occurred had eMerge, Eastern,
and Jordan constituted a single entity during such periods.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------- ---------------------------
1999 2000 1999 2000
----------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenue $217,312,193 $210,285,693 $331,687,763 $408,287,820
Net loss (4,670,243) (8,917,010) (8,303,060) (14,575,467)
Net loss per share$ $ (0.58) $ (0.26) $ (1.29) $ (0.50)
</TABLE>
(8) SUBSEQUENT EVENTS
On May 30, 2000, the Company entered into an asset purchase agreement
with the sole owner of the E4 Cattle Business ("Ed Edens Farms") for
the purchase of certain tangible and intangible assets. Concurrent
with the asset purchase agreement, the Company also entered into a
contract for the purchase of real estate from the Edens Family Trust.
The acquisition of the business closed on July 24, 2000, and the
purchase of real estate associated with the business is scheduled to
close on or before August 31, 2000, or on such other date agreed to by
both parties. Ed Edens Farms engages in the buying of cattle for
immediate or short-term resale. The purchase price for these assets,
including real estate, consisted of (i) $2,250,000 in cash, and (ii)
83,858 shares of eMerge's common stock valued at $1,000,000. The
transaction will be accounted for as a purchase and the results of the
acquired operations are expected to be included in the Company's
financial statements subsequent to the closing date of the purchase.
On July 11, 2000, the Company entered into an asset purchase agreement
with the sole owner of Billings Livestock Commission ("Billings") for
the purchase of certain tangible, including real estate, and
intangible assets. The purchase is scheduled to close on or before
August 31, 2000, or on such other date as agreed to by both parties.
Billings engages in the buying and reselling of cattle through its
auction facilities. The purchase price for these assets consists of
(i) $2,000,000 in cash, (ii) shares of eMerge's common stock valued at
$750,000, and (iii) $250,000 in cash to be paid one year after the
closing date or earlier based upon the occurrence of certain events.
The transaction will be accounted for as a purchase and the results of
the acquired operations are expected to be included in the Company's
financial statements subsequent to the closing date of the purchase.
On July 12, 2000, the Company entered into an asset purchase agreement
with LeMaster Livestock, Inc. ("LeMaster") for the purchase of certain
tangible, including real estate, and intangible assets associated with
LeMaster's business. The purchase is scheduled to close on or before
August 31, 2000, or on such other date as agreed to by both parties.
LeMaster's business engages in the buying of cattle for immediate or
short-term resale. The purchase price for these assets consists of (i)
$3,060,000 in cash, (ii) shares of eMerge's common stock valued at
$2,240,000, and (iii) $300,000 in cash to be paid one year after the
closing date or earlier based upon the occurrence of certain events.
The transaction will be accounted for as a purchase and the results of
the acquired operations are expected to be included in the Company's
financial statements subsequent to the closing date of the purchase.
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<PAGE> 15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion of our financial condition and results of
operations should be read together with the consolidated financial statements
and the related notes included elsewhere in this report.
FORWARD LOOKING STATEMENTS
In addition to historical information, this report contains statements
that constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. These statements can be identified by
the use of predictive, future tense or forward-looking terminology, such as
"anticipates," "believes," "estimates," "expects," "intends," "may," "will" and
words of similar meaning. These statements include statements regarding, among
other things, our electronic commerce strategy, acquisition and expansion
strategy, product and service development, projected capital expenditures,
liquidity and capital, development of additional revenue sources, expansion
into new market segments, technological advancement, ability to develop "brand"
awareness and the market acceptance of the Internet as a medium of commerce.
These statements are based on management's current expectations and are subject
to a number of uncertainties and risks that could cause actual results to
differ significantly from those described in the forward-looking statements,
including the acceptance by our customers of electronic commerce as a means of
conducting business, our ability to grow revenue, our ability to increase
margins, our ability to implement our acquisition and expansion strategy, the
impact of competition on pricing, general economic conditions, employee
turnover, the impact of litigation and other factors. Other factors that may
cause such a difference include, but are not limited to, those discussed in
this "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and in "Factors Affecting Our Business, Financial Condition and
Results of Operation," as well as those discussed elsewhere in this report and
as set forth from time to time in our other public filings and public
statements. Readers of this report are cautioned to consider these risks and
uncertainties and to not place undue reliance on these forward-looking
statements.
OVERVIEW
We are a business-to-business Value Chain Integrator serving the U.S.
beef-production industry. Our goal is to improve the nation's beef-production
process by adding previously unrealized value to the supply chain via an
e-marketplace, information-management infrastructure, and value-enhancing
technologies. We believe that by accomplishing our goal, we can improve the
industry's productivity and profitability and help its participants enhance
beef quality, safety and market share. We offer our products and services to
cattle industry participants through our family of integrated web sites, our
proprietary information management application and our direct sales force. Our
business strategy is to utilize our electronic commerce, information management
and technology resources to develop and offer complementary products and
services that reduce inefficiencies throughout the cattle production chain,
improve cattle quality and improve overall productivity in the cattle industry.
In implementing our existing business strategy and developing and
providing our current products and services, we recently have determined that
by refocusing and expanding our existing business strategy we may be able to
better serve the overall needs of the cattle industry. In this regard, we
intend to focus our ongoing business efforts on developing and implementing our
"value chain integrator" strategy.
Through our value chain integrator strategy, we intend to build upon
and expand our existing business strategy to positively affect the
manufacturing process in the cattle industry and add previously unrealized
value to the nation's beef supply system. We intend to implement our value
chain integration strategy through our existing CattleinfoNet business network,
which is comprised of our existing electronic commerce platform, information
management infrastructure and value enhancing technologies. As an integral part
of our value chain integration strategy, we intend to enhance the
15
<PAGE> 16
effectiveness and scope of our CattleinfoNet business network by developing a
network of Interactive Facilities, a regional network of facilities that we
previously referred to as "e-market hubs."
We believe that a network of Interactive Facilities will allow us to
more productively operate our electronic commerce platform, more accurately
gather, track and analyze information through our information management
infrastructure and more uniformly implement and monitor our technologies. As a
result, we believe that by combining our CattleinfoNet business network with a
network of Interactive Facilities we will be able to more effectively and
rapidly reduce the inefficiencies in the cattle industry and provide ranchers
and producers with increased product quality, consistency, yield and safety.
Our recent acquisitions of Jordan Cattle Auction and Eastern, and our
proposed acquisitions of Ed Edens Farms, Billings and LeMaster, are the initial
stages of implementing this strategy. We will continue to aggressively explore
additional acquisition, licensing and strategic alliance opportunities that
provide a strategic fit for our value integration strategy, in terms of both
the geographic reach and technological assets offered by a potential facility
or partner.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2000 AND JUNE 30, 1999
Revenue increased from $2.0 million for the quarter ended June 30,
1999 to $160.4 million for the quarter ended June 30, 2000. Revenue from cattle
sales increased from $1.7 million for the quarter ended June 30, 1999 to $159.8
million for the quarter ended June 30, 2000. This increase reflects a higher
volume of cattle sales transactions brought about primarily by the May 2000
acquisition of Eastern. Revenue from other products and services increased by
162% from $232,000 for the quarter ended June 30, 1999 to $608,000 for the
quarter ended June 30, 2000. This increase is due primarily to higher revenue
derived from the sale of an equine imaging system and related inventory,
subscriptions to our comparative feedlot analysis and market information
services, as well as the addition of advertising revenue. We expect that cattle
revenue will continue to account for a majority of our revenue for the
foreseeable future.
Cost of revenue consists primarily of the direct cost to acquire
cattle, NutriCharge, our proprietary feed supplement, and equine imaging
systems components. In addition, cost of revenue also includes the indirect
manufacturing overhead costs, such as support personnel, facilities costs,
supplies and depreciation, that are primarily associated with the production of
the equine imaging system. Cost of revenue attributed to cattle sales increased
from $1.7 million for the quarter ended June 30, 1999 to $158.3 million for the
quarter ended June 30, 2000. Cost of revenue attributed to other products and
services increased by 69% from $414,000 for the quarter ended June 30, 1999 to
$697,000 for the quarter ended June 30, 2000. This increase is due principally
to the sale of an equine imaging system as well as the sale of related
inventory to a single customer during the quarter ended June 30, 2000. We
generated a gross loss of $170,000 for the quarter ended June 30, 1999 and a
gross profit of $1.4 million for the quarter ended June 30, 2000. The increase
in gross profit is due primarily to the increase in cattle revenue, as cost of
goods, principally manufacturing overhead, did not increase in proportion to
the increase in revenue.
Selling, general and administrative expenses increased 280% from $2.6
million for the quarter ended June 30, 1999 to $10.0 million for the quarter
ended June 30, 2000.
Sales and marketing expenses consist primarily of salaries and related
costs for sales and marketing personnel, recruiting and relocation charges,
consulting fees, travel, advertising and trade shows. Sales and marketing
expenses increased 323% from $1.6 million for the quarter ended June 30, 1999
to $6.8 million for the quarter ended June 30, 2000, and included non-cash
compensation charges of $1.3 million associated with employee separations. The
remaining increase in sales and marketing expenses is due primarily to costs
associated with expanding the number of personnel within the organization as
well as consulting, travel and advertising costs. We expect these costs to
continue to increase as we continue to pursue additional sales and marketing
opportunities.
Our general and administrative expenses consist primarily of salaries
and related costs for executive, administrative, and finance personnel,
amortization of intangibles and professional service fees. General and
administrative expenses increased 215% from $1.0 million for the quarter ended
June 30, 1999 to $3.2 million (including intangibles amortization of $1.6
million) for the quarter ended June 30, 2000. The increase was primarily due to
increased amortization of intangibles resulting from acquisitions, higher
expenses associated with expanding the number of personnel within the
organization and increased legal and travel expenses required to support and
grow our business. We expect these expenses to continue to increase as
additional acquisitions are made, personnel are hired, and expenses are
incurred to support future growth.
Our research and development expenses consist primarily of salaries
and related costs, payments to outside consultants, travel, material costs for
prototype imaging systems and, to a lesser extent, depreciation on equipment
used for development. Our expenses increased 20% from $1.0 million for the
quarter ended June 30, 1999 to $1.2 million for the quarter ended June 30,
2000. This increase in expenses was primarily due to increased consulting
costs, higher travel expenses, an increase in salaries and related costs, and
increased spending for materials and supplies. The increase in expenses was
required to integrate and expand our product lines such as our online cattle
sales and auction software, Interactive Manager software (formerly referred to
as Feedlot Information System software), and continued development efforts on
imaging systems. We expect these costs to increase significantly as we plan to
invest heavily to develop and commercialize new products, expand our offerings
and adapt our technologies to new markets. During the quarter ended June 30,
2000, we capitalized certain internal software development costs as required by
SOP 98-1, "Accounting for the Costs of Computer Software Developed or Obtained
for Internal Use".
Interest and other income (expense), net rose from ($155,000) for the
quarter ended June 30, 1999 to $1.9 million for the quarter ended June 30,
2000. This increase was primarily due to increased interest income generated by
short-term investments and a reduction in interest expense following the
initial public offering and repayment of related party debt. Currently, we
invest the majority of our cash balances in debt instruments of high-quality
corporate issuers.
Due to the losses incurred, we did not have any income tax expense for
the quarter ended June 30, 1999 or the quarter ended June 30, 2000.
SIX MONTHS ENDED JUNE 30, 2000 AND JUNE 30, 1999
Revenue increased from $2.6 million for the six months ended June 30,
1999 to $199.0 million for the six months ended June 30, 2000. Revenue from
cattle sales increased from $1.7 million for the six months ended June 30, 1999
to $197.8 million for the six months ended June 30, 2000. This increase
reflects a higher volume of cattle sales transactions brought about primarily
by the May 2000 acquisition of Eastern. Revenue from other products and
services increased by 37% from $837,000 for the six months ended June 30, 1999
to $1.2 million for the six months ended June 30, 2000. This increase is due
primarily to higher revenue derived from subscriptions to our comparative
feedlot analysis and market information services as well as the addition of
advertising revenue. The increased revenue derived from other products and
services was partially offset by lower sales of our equine imaging systems and
related inventory. We expect that cattle revenue will continue to account for a
majority of our revenue for the foreseeable future.
Cost of revenue consists primarily of the direct cost to acquire
cattle, NutriCharge, our proprietary feed supplement, and equine imaging
systems components. In addition, cost of revenue also includes the indirect
manufacturing overhead costs, such as support personnel, facilities costs,
supplies and depreciation, that are primarily associated with the production of
the equine imaging system. Cost of revenue attributed to cattle sales increased
from $1.7 million for the six months ended June 30, 1999 to $196.1 million for
the six months ended June 30, 2000. Cost of revenue attributed to other
products and services increased by 13% from $1.0 million for the six months
ended June 30, 1999 to $1.2 million for the six months ended June 30, 2000.
This increase is due principally to the sale of an equine imaging system as
well as the sale of related inventory to a single customer during the quarter
ended June 30, 2000. We generated a gross loss of $190,000 for the six months
ended June 30, 1999 and a gross profit of $1.7 million for the six months ended
June 30, 2000. The increase in gross profit is due primarily to the increase in
cattle revenue, as cost of goods, principally manufacturing overhead, did not
increase in proportion to the increase in revenue.
Selling, general and administrative expenses increased 286% from $4.1
million for the six months ended June 30, 1999 to $15.7 million for the six
months ended June 30, 2000.
Sales and marketing expenses consist primarily of salaries and related
costs for sales and marketing personnel, recruiting and relocation charges,
consulting fees, travel, advertising and trade shows. Sales and marketing
expenses increased 312% from $2.6 million for the six months ended June 30,
1999 to $10.6 million for the six months ended June 30, 2000, and included
non-cash compensation charges of $1.3 million associated with employee
separations. The remaining increase in sales and marketing expenses is due
primarily to costs associated with expanding the number of personnel within the
organization as well as consulting, travel and advertising costs.
16
<PAGE> 17
We expect these costs to continue to increase as we continue to pursue
additional sales and marketing opportunities.
Our general and administrative expenses consist primarily of salaries
and related costs for executive, administrative, and finance personnel,
amortization of intangibles and professional service fees. General and
administrative expenses increased 241% from $1.5 million for the six months
ended June 30, 1999 to $5.1 million (including intangibles amortization of $1.9
million) for the six months ended June 30, 2000. The increase was primarily due
to increased amortization of intangibles resulting from acquisitions, higher
expenses associated with expanding the number of personnel within the
organization, and increased legal and travel expenses required to support and
grow our business. We expect these expenses to continue to increase as
additional acquisitions are made, personnel are hired, and expenses are
incurred to support future growth.
Our research and development expenses consist primarily of salaries
and related costs, payments to outside consultants, travel, material costs for
prototype imaging systems and, to a lesser extent, depreciation on equipment
used for development. Our expenses increased 73% from $1.5 million for the six
months ended June 30, 1999 to $2.5 million for the six months ended June 30,
2000. This increase in expenses was primarily due to increased consulting
costs, higher travel expenses, an increase in salaries and related costs, and
increased spending for materials and supplies. The increase in expenses was
required to integrate and expand our product lines such as our online cattle
sales and auction software, Interactive Manager software (formerly referred to
as Feedlot Information System software), and continued development efforts on
imaging systems. We expect these costs to increase significantly as we plan to
invest heavily to develop and commercialize new products, expand our offerings
and adapt our technologies to new markets. During the six months ended June 30,
2000, we capitalized certain internal software development costs as required by
SOP 98-1, "Accounting for the Costs of Computer Software Developed or Obtained
for Internal Use".
Interest and other income (expense), net rose from ($289,000) for the
six months ended June 30, 1999 to $3.0 million for the six months ended June
30, 2000. This increase was primarily due to increased interest income
generated by short-term investments and a reduction in interest expense
following the initial public offering and repayment of related party debt.
Currently, we invest the majority of our cash balances in debt instruments of
high-quality corporate issuers.
Due to the losses incurred, we did not have any income tax expense for
the six months ended June 30, 1999 or the six months ended June 30, 2000.
17
<PAGE> 18
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 2000, our primary source of liquidity consisted of cash
and highly liquid, high quality debt instruments. Our intent is to make such
funds, which have maturities of less than one year, readily available for
operating purposes. At June 30, 2000, we had cash, cash equivalents, and short
term investments, primarily investments in marketable debt securities and
certificates of deposit, totaling $46.0 million compared to $12.3 million at
December 31, 1999. The Company has entered into asset purchase agreements
subsequent to June 30, 2000 that are expected to require the use of
approximately $7.3 million of cash.
18
<PAGE> 19
On February 10, 2000, we completed our initial public offering and
private placement of 7,675,000 shares of common stock which generated net
proceeds, after deducting underwriting discounts, commissions and other
offering costs, of $107.1 million. Subsequent to the offering, approximately
$12.3 million of the proceeds were used to pay amounts due to related parties
and Turnkey Computer Systems and $23.5 million was used for acquisitions of
other businesses. We believe that the net proceeds from the offering, together
with our existing cash and short term investments, will be sufficient to meet
our working capital and capital expenditure requirements for at least the next
24 months under our current business plan, which may change.
We have had significant negative cash flows from operating activities
for each fiscal and quarterly period to date. For the six months ended June 30,
2000, net cash used in operating activities was $32.5 million and primarily
consisted of net operating losses and increases in accounts receivable,
inventories, cattle deposits and prepaid expenses. These amounts were offset in
part by increases in accounts payable and customer advances.
Net cash used in investing activities was $31.0 million for the six
months ended June 30, 2000. Our investing activities included the acquisitions
of Eastern and W.P. Land and Livestock, Inc. for $23.5 million, purchases of
short term investments of $1.4 million and capital expenditures of $6.1 million.
We expect a continued increase in acquisition activity and capital expenditures
for the foreseeable future as we continue to effect our business strategy.
Net cash provided by financing activities was $95.1 million for the
six months ended June 30, 2000. Cash provided by financing activities was
primarily due to our initial public offering and private placement, which
raised net proceeds of $107.1 million, as well as the exercise of stock
options. These amounts were partially offset by related party payments of $10.4
million to Safeguard Scientifics, Inc. and $900,000 to XL Vision and the
repayment of a $900,000 note payable due to Turnkey Computer Systems.
FACTORS AFFECTING OUR BUSINESS, FINANCIAL CONDITION, AND RESULTS OF OPERATIONS
In addition to the other information included in this report and our
other public filings and releases, the following factors should be considered
while evaluating our business, financial condition, results of operations and
prospects:
We have a limited operating history and unproven business model. As a result,
we may not be able to accurately predict future results and our business
strategy may not be successful.
We commenced operations in 1994 and commercially released our initial
product in November 1997. Accordingly, we have only a limited operating history
upon which to evaluate our business. In addition, our business strategy and
revenue model has changed significantly during the past 18 months. Our limited
operating history, combined with our recent shift in business strategy, makes
predicting our future results of operations difficult. Our new business model
has not been tested and, accordingly, we cannot be certain that our business
strategy will be successful.
Specific uncertainties relating to our new business model include our
ability to:
- achieve acceptance of our Web site as a marketplace for
electronic commerce;
- expand the number of cattle producers, feedlots and packers
that utilize our services;
- develop and upgrade our products and technologies more
effectively and rapidly than our competitors; and
- successfully implement our acquisition, sales and marketing
strategies.
We have a history of net losses and expect to continue to incur losses for the
foreseeable future. If we continue to incur losses, our business may not
ultimately be financially viable.
We have incurred significant net losses since inception. We reported a
net loss of approximately $6.0 million for the six months ended
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<PAGE> 20
June 30, 1999, or 232% of total revenue, and a net loss of approximately $13.4
million for the six months ended June 30, 2000, or 7% of total revenue. As of
June 30, 2000, we had accumulated net losses totaling approximately $45.8
million. Our operating expenses have increased significantly in each year of
our operation, and we anticipate that such expenses will continue to increase
over the next several years as we expand our operations. Our revenue may not
grow or may not even continue at its current level and, as a result, our
financial condition and results of our operations may be harmed and our
business may not be financially viable in the future.
To achieve profitability, we must successfully address the following
risks:
- lack of commercial acceptance of our Internet cattle sales
and services;
- failure to expand the number of livestock industry
participants using our network;
- failure to obtain access to data from feedlots to adequately
address the information needs of our customers;
- inability to respond to competitive developments;
- failure to achieve brand recognition;
- failure to introduce new products and services; and
- failure to upgrade and enhance our technologies to
accommodate expanded product and service offerings and
increased customer traffic.
If we are unable to successfully address any of these risks, our
business may be harmed.
The Internet livestock products and services market, including, in particular,
the cattle sales market, is new and uncertain and our business may not develop
as we anticipate.
The Internet market for livestock products and services, including, in
particular, the cattle sales market, has only recently developed, and its
continued development is subject to substantial uncertainty. To date, we have
not realized adequate revenues and gross margins from this market to achieve
profitability. We cannot be assured that this market will continue to develop
as we expect, if at all. Our revenue model depends on the commercial acceptance
of our Internet-based products and services. We do not know if our target
customers will use the Internet as a means of purchasing products and services.
Even if potential customers choose to purchase livestock products and services
over the Internet, they may not choose our online services to do so. If the
market for livestock products and services over the Internet does not develop
as we anticipate, our business and the results of our operations will be
harmed.
For the six months ended June 30, 2000, we relied on cattle sales for
over 99% of our revenue and we expect to rely on the success of our cattle
sales and auction services for a significant majority of our revenue for the
foreseeable future. As a result, our ability to achieve commercial acceptance
of our cattle sales is critical to our ability to obtain future revenue. To
date, we have not achieved revenues from cattle sales that are sufficient for
us to determine whether these services will achieve commercial acceptance. Any
failure to successfully gain commercial acceptance of these services would harm
our business and the results of our operations. In addition, as the result of
our dependence on cattle sales, if the demand for beef declines, the demand for
our products and services would likely decline, and our results of operations
would be harmed.
We recently completed significant acquisitions of businesses and technologies
and we may make other business acquisitions in the future, which may be
difficult to integrate into our business and may disrupt or negatively impact
our business.
We recently made, and will continue to make, investments in and
acquisitions of complementary companies, technologies and assets that
constitute critical aspects of our current and future business operations. If
we fail to successfully integrate the operations of these companies,
technologies or assets into our business, we may not be able to successfully
execute our business strategy. In connection with a number of our acquisitions
we hire key employees. The businesses we have acquired generally are critical
to our current business operations and growth strategy.
Our acquisitions may result in:
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- difficulties in assimilating technologies, products,
personnel and operations;
- diversion of our management's attention;
- entering markets in which we have no or limited prior
experience;
- loss of key employees of acquired organizations; and
- capital requirements in excess of what we anticipate.
In the future, acquiring companies, assets or technologies may also
require us to make cash payments, assume debt, incur large write-offs related
to intangible assets and issue equity, which will dilute ownership interest.
If we are unable to manage our growth effectively, our business may be harmed.
We cannot assure that we will be able to effectively or successfully
manage our growth. If we are unable to manage our growth effectively, our
business operations would suffer. We seek to grow by increasing transaction and
subscription volume, adding new products and services and by hiring additional
employees. Our growth is likely to place a significant strain on our resources
and systems. As we continue to increase the scope of our operations, we will
need an effective planning and management process to implement our business
strategy successfully and we will need to implement new and improve existing
systems, procedures and controls. We will also need to expand, train and manage
our workforce.
If we are unable to protect our intellectual property rights, our business and
competitive position will be harmed.
Proprietary rights are important to our success and our competitive
position. We protect our intellectual property through a combination of patent,
copyright, trade secret and trademark law and confidentiality agreements with
third parties. We cannot guarantee that any of our pending patent or trademark
applications will be approved. Even if they are approved, the patents or
trademarks may be challenged by other parties or invalidated. Because brand
recognition is an important component of our business strategy, the protection
of our trademarks is critical to our success. We also depend upon patents
licensed to us by the Canadian government and trade secret law to protect the
proprietary nature of our NutriCharge products. In addition, we depend upon our
proprietary database of industry and client information to provide our clients
with our information services. Despite our efforts to protect our proprietary
rights, unauthorized parties may copy aspects of our products and technology or
obtain access to our confidential proprietary database. Other parties may also
breach confidentiality agreements and other protective contracts. We may not
become aware of these breaches or have adequate remedies available. In
addition, effective copyright, patent and trademark protection may be
unavailable in certain countries to which we might expand our operations.
In technology markets, there is generally frequent and substantial
intellectual property litigation. We may be subject to legal proceedings and
claims, including claims that we infringe third-party proprietary rights. While
we are not aware of any patents, copyrights or other rights that would prevent
us from manufacturing and commercializing our products or services in the
United States and abroad, there can be no assurance that other parties will not
assert infringement claims against us. There also can be no assurance that
former employers of our present and future employees will not claim that our
employees have improperly disclosed confidential or proprietary information to
us. Any of these claims, with or without merit, could subject us to costly
litigation and divert the attention of our personnel.
We typically assume the ownership of cattle sold through our Internet cattle
marketplace and are subject to the risk of loss while we hold title and market
risk.
In the sales transactions conducted through our Internet cattle sales
and auction services network, we typically contract to purchase cattle from a
seller, identify a buyer for the cattle, take title to the cattle from the
seller and then resell the cattle to the buyer. In this process, we enter into
a contract to purchase cattle in advance of entering into a contract to sell
the cattle. Therefore, until we actually complete a sale transaction, we are
subject to the risk that we may be unable to sell cattle that we are
contractually obligated to purchase. In addition, once we purchase the cattle,
we assume title to the cattle for generally up to 48 hours. As a result, we
assume the risk of liability, loss and deterioration in value of the cattle
during that period. As a result, our business may be harmed.
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We depend on our key employees for our success. The loss of any of these
persons could harm our ability to compete.
The loss of the services of any key person could harm our business,
including our ability to compete effectively. Our performance also depends on
our ability to attract, retain and motivate additional key officers and
employees. We may be unable to retain our employees or to attract, assimilate
and retain other qualified employees with relevant livestock and electronic
commerce industry skills in the future. If we fail to attract, retain and
motivate qualified employees, our business will be harmed.
We expect our quarterly operating results to fluctuate. If we fail to meet the
expectations of public market analysts and investors, the market price of our
common stock could decline.
We expect that our revenue and operating results will vary in the
future as a result of a number of factors. Our quarterly results of operations
may not meet the expectations of securities analysts and investors, which could
cause the price of our common stock to decline. Our operating results in the
future may not follow any prior trends and should not be relied upon as an
indication of future results. The factors that affect our quarterly operating
results include:
- our ability to retain existing customers and attract new
customers;
- our ability to develop and market new and enhanced products
and services on a timely basis;
- the introduction of new or enhanced Web sites, products and
services by us; and
- continued purchases by our existing customers.
In addition, a number of factors that are beyond our control will also
affect our quarterly operating results, such as:
- demand for our products and services;
- product and price competition;
- the introduction of new or enhanced Web sites, products and
services by our competitors; and
- significant downturns in our targeted markets.
Our quarterly results could fluctuate as a result of seasonal fluctuations in
the cattle industry.
The cattle industry has historically experienced, and may continue to
experience, seasonal fluctuations. These seasonal patterns may cause quarterly
fluctuations in our operating results. In particular, a disproportionate number
of cattle are sold to feedlots during the third and fourth quarters of each
calendar year. Therefore, a greater number of sales transactions occur during
these two calendar quarters. Due to our limited operating history and the
recent changes in our business as a result of acquisitions, it is difficult to
predict the effect that this seasonal pattern will have on our revenue and
quarterly operating results.
Our back-up mechanisms are unproven, and therefore are vulnerable to damage or
interruption which would harm our ability to reliably service our customers.
Our network server, satellites, computers and facilities are
vulnerable to damage or interruption from a number of sources, including fire,
flood, power loss, earthquakes, telecommunications failures, system failures,
Internet brownouts, computer viruses, electronic break-ins and similar
disruptions. We depend on these systems to provide our customers with online
cattle sales and auction services, feedlot and cattle industry analyses, cattle
inventory management tools and the sale of NutriCharge. During the past year,
we experienced a system interruption caused by adverse weather conditions,
which resulted in our system shutting down for approximately 24 hours. We may
experience such an interruption in the future. Any substantial interruptions
could result in the loss of data and could impair our ability to provide our
products and services to customers and to generate revenues. Presently, we do
not have a formal disaster recovery plan in effect. Moreover, our business
interruption insurance may not be sufficient to compensate us for losses that
may occur if any of our Internet-based services are interrupted.
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Risks associated with the security of transactions and transmitting
confidential information over the Internet may negatively impact our electronic
commerce business.
We believe that concern regarding the security of confidential
information transmitted over the Internet, such as credit card numbers and
proprietary data, may prevent many potential customers from engaging in online
transactions and may harm our business. Despite the measures we intend to take
to enhance our Internet security, our infrastructure is potentially vulnerable
to physical or electronic break-ins, viruses or similar problems. If our
security measures are circumvented, proprietary information could be
misappropriated or our operations could be interrupted. Security breaches that
result in access to confidential information could expose us to a risk of loss
or liability. If we do not adequately address these concerns or face any claims
in connection with a breach of security, our business, financial condition and
operating results could be harmed.
We could face liability for information retrieved from or transmitted through
our Web sites, which could result in high litigation or insurance costs.
As a publisher and distributor of online content, we face potential
liability for defamation, negligence, copyright, patent or trademark
infringement and other claims based on the nature and content of the materials
that we publish or distribute on our Web sites. Any imposition of liability
could negatively impact our reputation and result in increased insurance costs.
Claims have been successfully brought against online services. Although we
carry general liability insurance, our insurance may not cover claims of these
types or may not be adequate to cover us for all liability that may be imposed.
Government regulation and legal uncertainties could result in additional
burdens to doing business on the Internet.
The laws governing the Internet remain largely unsettled, even in
areas where there has been some legislative action. It may take years to
determine whether and how existing laws including those governing intellectual
property, privacy, libel and taxation apply to the Internet. Our business,
results of operations and financial condition could be harmed by the adoption
or modification of laws or regulations relating to the Internet that result in
the imposition of additional costs on conducting business over the Internet or
impose additional restrictions on our ability to conduct our business
operations. In 1998, the Internet Tax Freedom Act placed a three-year
moratorium on state and local taxes on Internet access, except for taxes
imposed prior to October 1, 1998, and on taxes that discriminate against online
commerce. However, Congress may not renew this legislation in 2001 and state
and local governments would be able to impose Internet-specific taxes on goods
purchased electronically, in addition to taxes that are otherwise imposed on
sales transactions.
Internet Capital Group, Safeguard and XL Vision will be able to control matters
requiring stockholder approval.
The concentration of ownership of our common stock may delay, deter or
prevent acts that would result in a change of control, which could reduce the
market price of our common stock. Internet Capital Group and Safeguard are
affiliated entities and Safeguard and XL Vision are affiliated entities.
Internet Capital Group, Safeguard and XL Vision together have the power to vote
approximately 71% (as of June 30, 2000) of the aggregate number of votes to
which the holders of our common stock are entitled. As a result, these
stockholders will be able to control all matters requiring stockholder
approval.
In addition, currently five of the seven members of our board of
directors also serve as directors and/or officers of Internet Capital Group,
Safeguard or XL Vision. Internet Capital Group has the right to elect two
directors to our board. Under the joint venture agreement, Safeguard and
Internet Capital Group have agreed to vote for two designees of Safeguard and
two designees of Internet Capital Group in all future elections of directors.
Safeguard, XL Vision and Internet Capital Group will therefore have the ability
to significantly influence our management.
Our common stock price is likely to be highly volatile.
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The market price of our common stock, like the market for
Internet-related and technology companies in general, has been and will likely
continue to be highly volatile. Any significant fluctuations in the future
might result in a material decline in the market price of our common stock.
These fluctuations may be caused by factors such as:
- actual or anticipated variations in quarterly operating
results;
- announcements of technological innovations;
- conditions or trends in the cattle industry;
- new sales formats of new products or services;
- changes in or failure by us to meet financial estimates of
securities analysts;
- conditions or trends in the Internet industry;
- announcements by us or our competitors of significant
acquisitions, strategic partnerships or joint ventures;
- capital commitments;
- additions or departures of key personnel; and
- sales of common stock.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We held no derivative securities as of June 30, 2000. Our exposure to
market risk relates to changes in interest rates and their potential impact on
our investment portfolio. We invest in marketable debt securities that meet
high credit quality standards and limit our credit exposure to any one issue,
issuer and type of investment. At June 30, 2000, our investments consisted of
$40.3 million in cash equivalents with maturities of less than three months and
$1.4 million in debt securities and certificates of deposit with a maturity of
less than six months. Due to the short-term, conservative nature of our
investment portfolio, a 10% increase or decrease in interest rates would not
have a material effect on our results of operations or the fair value of our
portfolio. The impact on our future results of operations and the future value
of our portfolio will depend largely on the gross amount of our investments.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There have been no material developments in the legal proceedings
previously reported.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
RECENT SALES OF UNREGISTERED SECURITIES
In connection with the purchase of assets of Eastern on May 1, 2000,
we issued 1,215,953 shares of Class A common stock with an aggregate value of
$14,500,000. The shares were issued pursuant to an exemption by reason of
Section 4(2) of the Securities Act of 1933. This sale was made without general
solicitation or advertising. Each purchaser represented that he, she, or it was
acquiring the shares without a view to distribute and was afforded an
opportunity to review all publicly filed documents and ask questions of our
officers.
USE OF PROCEEDS
On February 4, 2000, we commenced an initial public offering of our
common stock. Our registration statement on Form S-1 (File No. 333-89815)
covering the offering of 7,175,000 shares was declared effective on February 3,
2000. As part of the offering, we sold 2,806,000 shares of our class A common
stock at the public offering price to shareholders of Safeguard Scientifics,
Inc., one of our principal stockholders, that owned at least 100 shares of
common stock of Safeguard as of October 20, 1999, and Safeguard sold 694,000 of
its eMerge Interactive shares to its shareholders. In addition, we issued
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<PAGE> 25
500,000 shares of class A common stock at $15.00 per share in a private
placement that was completed simultaneously with the offering.
The net proceeds from the offering and the private placement after
deducting discounts, commissions, management fees, finders fees and expenses
was $107,142,769. From the effective date of the registration statement to June
30, 2000, the net proceeds have been used for the following purposes:
<TABLE>
<CAPTION>
<S> <C>
Temporary investments:
Cash and cash equivalents $ 44,605,426
Short term investments 1,361,914
-------------
Subtotal $ 45,967,340
Acquisition of other businesses 23,478,230
Working capital 19,102,525
Repayment of indebtedness 12,343,610
Purchase and installation of machinery and equipment 6,251,064
Construction of plant, building and facilities --
Other purposes --
-------------
$ 107,142,769
=============
</TABLE>
We have used $12.3 million of the proceeds from this offering for
payments to related parties and Turnkey Computer Systems, Inc., $23.5 million
for the acquisitions of Eastern Livestock, Inc. and W.P. Land and Livestock,
Inc., $6.3 million for capital expenditures, and $19.1 million for general
working capital purposes. None of the remaining payments constituted direct or
indirect payments to our directors, officers, general partners or their
associates or to persons owning 10% or more of any class of our equity
securities or to our affiliates.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the quarter ended June 30, 2000.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit Index
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION REFERENCE
------ ----------- ---------
<S> <C> <C>
10.35 Agreement for the Purchase and Sale of Assets, dated April 20, 2000 *
10.36 Registration Rights and Restricted Stock Agreement, dated May 1, 2000 *
10.37 Supply and Support Agreement, dated May 1, 2000 *
10.38 Cattle Purchase Contract Agreement, dated May 1, 2000 *
10.39 Agreement for the Purchase and Sale of Assets, dated April 21, 2000 *
10.40 Contract for Sale and Purchase of Real Estate, dated April 21, 2000 *
27.1 Financial Data Schedule. **
</TABLE>
* Incorporated by reference to Current Report on Form 8-K filed with the
Securities and Exchange Commission on May 5, 2000.
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** Filed herewith.
(b) Reports on Form 8-K
On May 5, 2000, the Company filed a report on Form 8-K, pursuant to
Items 2 and 7 of such Form, regarding its acquisitions of Eastern
Livestock Co., Inc. and W.P. Land and Livestock, Inc.
On July 14, 2000, the Company filed an amended report on Form 8-K,
pursuant to Item 7, paragraph (a) (4), of such Form, to provide the
financial information required by this item for Eastern Livestock Co.,
Inc. and W.P. Land and Livestock, Inc.
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<PAGE> 27
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Dated: August 14, 2000 eMerge Interactive. Inc.
By:
President, Chief Executive
/s/ Charles L. Abraham Officer and Director (Principal
---------------------- Executive Officer)
Charles L. Abraham
Vice President and Chief Financial
/s/ T. Michael Janney Officer (principal financial and
---------------------- accounting officer)
T. Michael Janney
27
