U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: June 30, 2001
Commission file number: 000-26047
EMAILTHATPAYS.COM, INC.
(Exact Name of Small Business Issuer as Specified in Its Charter)
Florida 65-0609891
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
428 West Sixth Avenue
Vancouver, British Columbia V5Y1L2
(Address of Principal Executive Offices)
(604) 801-5566
(Issuer's Telephone Number, Including Area Code)
(Former Name, Former Address and Former Fiscal Year, if Changed
Since Last Report)
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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 No
-- --
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: July 10, 2001: 8,635,093 shares of
common stock, $.005 par value per share.
EMAILTHATPAYS.COM, INC. AND SUBSIDIARIES
FORM 10-QSB
QUARTERLY PERIOD ENDED JUNE 30, 2001
INDEX
Page
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PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Consolidated Balance Sheets
As of June 30, 2001 (Unaudited) and December 31, 2000......................3
Consolidated Statements of Operations and Deficit (Unaudited)
For the Three and Six Months Ended June 30, 2001 and June 30, 2000 ........4
Consolidated Statements of Cash Flows (Unaudited)
For the Six Months Ended June 30, 2001 and June 30, 2000 ..................5
Notes to Unaudited Consolidated Financial Statements .............................6-8
Item 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations .................................................9-11
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings .......................................................11
Item 2 - Changes in Securities and Use of Proceeds.................................11
Item 3 - Defaults Upon Senior Securities...........................................11
Item 4 - Submission of Matters to a Vote of Security Holders ......................11
Item 5 - Other Transactions........................................................11
Item 6 - Exhibits and Reports on Form 8-K .........................................11
Signatures ........................................................................12
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
emailthatpays.com, Inc.
Consolidated Balance Sheets (unaudited)
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June 30, December 31,
2001 2000
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Assets
Current assets:
Cash $ - $ -
Accounts receivable 219,750 74,932
Prepaid expenses 49,376 55,224
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269,126 130,516
Property and equipment, less accumulated depreciation 131,493 150,951
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$ 400,619 $ 281,107
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Liabilities and Stockholders' Deficit
Current liabilities:
Bank indebtedness $ 133,459 $ 8,479
Accounts payable and accrued liabilities 338,503 229,106
Accrued salaries 19,285 19,285
Loans payable - current portion 158,846 139,741
Lease obligation - current portion 5,418 5,242
---------------------------------------------------------------------------------------------
655,511 401,853
Loans payable 82,308 102,508
Note payable 50,000 50,000
Lease obligation 13,451 16,373
Due to related parties 397,360 60,020
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Total liabilities 1,198,630 630,754
Stockholders' deficit:
Common stock 44,175 44,615
Additional paid-in capital 3,390,147 3,532,957
Deficit (3,818,112) (3,008,038)
Deferred stock-based compensation (392,650) (900,200)
Accumulated other comprehensive income (loss):
Foreign currency translation adjustment (21,571) (18,981)
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Total stockholders' deficit (798,011) (349,647)
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$ 400,619 $ 281,107
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See accompanying notes to unaudited financial statements
3
emailthatpays.com, Inc.
Consolidated Statements of Operations and Deficit (unaudited)
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Three Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
2001 2000 2001 2000
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Revenue $ 412,921 $ 311,282 $ 644,532 $ 544,207
Cost of revenue (360,724) (248,051) (549,618) (435,215)
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Gross profit 52,197 63,231 94,914 108,992
Operating expenses:
Depreciation 18,696 17,786 35,366 31,917
Salaries and fringe benefits 151,971 222,842 336,936 483,811
Stock-based compensation 306,475 57,450 363,925 114,900
Legal and accounting 21,232 48,667 36,105 72,589
Consulting fees and
computer services 33,237 16,363 66,663 67,016
Phones and utilities 5,243 9,056 10,027 20,398
Rent 10,175 21,299 17,363 45,586
Advertising and promotion 443 30,383 2,232 57,190
Other selling, general
and administrative 7,212 46,137 21,983 123,570
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554,684 469,983 890,600 1,016,977
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Loss from operations (502,487) (406,752) (795,686) (907,985)
Other income (expenses):
Interest Income - 3,942 - 3,967
Interest expense (7,252) (5,861) (14,388) (14,884)
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(7,252) (1,919) (14,388) (10,917)
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Net loss (509,739) (408,671) (810,074) (918,902)
Deficit, beginning of period (3,308,373) (1,883,024) (3,008,038) (1,372,793)
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Deficit, end of period $(3,818,112) $(2,291,695) $(3,818,112) $(2,291,695)
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Net loss per common share,
basic and diluted (0.06) (0.05) (0.09) (0.11)
Weighted average common
shares outstanding, basic
and diluted 8,704,037 8,717,597 8,713,652 8,612,130
See accompanying notes to the unaudited financial statements
4
emailthatpays.com, Inc.
Consolidated Statements of Cash Flows (unaudited)
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Six Months Ended
June 30, June 30,
2001 2000
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Cash provided by (used in):
Operations:
Net loss $ (810,074) $ (918,902)
Items not involving cash:
Depreciation 35,366 31,917
Stock-based compensation 363,925 114,900
Foreign exchange on subsidiary operations (2,590) (1,916)
Loss on disposal of equipment - 2,914
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable (144,818) (80,438)
Decrease (increase) in prepaid expenses 5,848 (40,612)
Increase (decrease) in accounts payable and accrued liabilities 109,396 1,464
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Net cash used in operating activities (442,947) (890,673)
Cash flows used in investing activities:
Purchase of property and equipment (15,908) (36,755)
Proceeds from disposal of equipment - 10,912
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Net cash used in investing activities (15,908) (25,843)
Cash flows from financing activities:
Increase (decrease) in loans payable (3,841) (109,100)
Increase (decrease) in advances from related parties 337,340 (146,804)
Proceeds from bank indebtedness 124,981 -
Issue of share capital 375 1,310,000
----------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 458,855 1,054,096
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Increase (decrease) in cash - 137,580
Cash, beginning of period - 121,609
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Cash, end of period $ - $ 259,189
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Supplementary information:
Interest paid 14,388 14,884
Income taxes paid 0 0
See accompanying notes to the unaudited financial statements.
5
EMAILTHATPAYS.COM, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2001
1. The Company and description of business:
emailthatpays.com, Inc. (the "Company") is incorporated in the state of Florida
and is a "permission-based" e-mail marketing and integrated advertising
strategies service. The Company's services include the design, delivery,
tracking, and analysis of targeted "one-to-one" e-mail campaigns, customized
loyalty programs, comprehensive list management/brokerage packages and the
creation, integration and execution of both online and traditional advertising
strategies.
On October 22, 1999, the Company, then named Realm Production and Entertainment,
Inc. ("Realm"), a public company listed on the over-the-counter bulletin board
in the United States, issued 6,572,000 shares of its common stock in connection
with the merger of a wholly owned subsidiary of Realm with and into
emailthatpays.com ("email Nevada"), a company incorporated in the state of
Nevada. This transaction was accounted for as a recapitalization of email
Nevada, effectively as if email Nevada had issued common shares for
consideration equal to the net monetary assets of Realm. On October 27, 1999
Realm changed its name to tvtravel.com, Inc. and subsequently on December 21,
1999 to emailthatpays.com, Inc.
The Company's historical financial statements reflect the financial position,
results of operations and cash flows of email Nevada since its inception and
include the operations of Realm from the date of the effective recapitalization,
being October 22, 1999. Stockholders' equity gives effect to the shares issued
to the stockholders of email Nevada prior to October 22, 1999 and of the Company
thereafter.
email Nevada (formerly Hotel Media Group Inc.) was incorporated on June 26,
1998. In August 1999, it acquired 100% of Coastal Media Group Ltd ("Coastal"), a
full-service advertising agency founded in May 1998. A common group of
shareholders controlled both Coastal and email Nevada. For accounting purposes,
the transaction was considered to be an acquisition by Coastal for consideration
equal to the net assets and liabilities of email Nevada. Accordingly, the assets
and liabilities of email Nevada have been recorded at their carrying values in
the Company's accounts.
2. Liquidity and future operations:
The Company has sustained net losses and negative cash flows from operations
since its inception. At June 30, 2001, the Company has negative working capital
of $386,385. The Company's ability to meet its obligations in the ordinary
course of business is dependent upon its ability to establish profitable
operations or to obtain additional funding through public or private equity
financing, collaborative or other arrangements with corporate sources, or other
sources. Management is seeking to increase revenues through continued marketing
of its services; however additional funding will be required.
Management is working to obtain sufficient working capital from external sources
in order to continue operations. There is however no assurance that the
aforementioned events, including the receipt of additional funding, will occur
or be successful.
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EMAILTHATPAYS.COM, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2001
3. Basis of Presentation:
The unaudited consolidated financial statements of the Company at June 30, 2001
and for the three and six month periods then ended include the accounts of the
Company and its wholly-owned subsidiaries and reflect all adjustments
(consisting only of normal recurring adjustments) which are, in the opinion of
management, necessary for a fair presentation of the financial position and
operating results for the interim periods. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted in
these interim statements under the rules and regulations of the Securities and
Exchange Commission ("SEC"). Accounting policies used in fiscal 2001 are
consistent with those used in fiscal 2000. The results of operations for the
three and six months ended June 30, 2001 are not necessarily indicative of the
results for the entire fiscal year ending December 31, 2001. These interim
financial statements should be read in conjunction with the financial statements
for the fiscal year ended December 31, 2000 and the notes thereto included in
the Company's Form 10-KSB filed with the SEC on April 2, 2001.
4. Foreign currency:
The functional currency of the operations of the Company's wholly-owned Canadian
operating subsidiaries is the Canadian dollar. Assets and liabilities measured
in Canadian dollars are translated into United States dollars using exchange
rates in effect at the balance sheets date with revenue and expense transactions
translated using average exchange rates prevailing during the period. Exchange
gains and losses arising on this translation are excluded from the determination
of income and reported as foreign currency translation adjustment (which is
included in the comprehensive income (loss)) in stockholders' equity.
5. Net loss per share:
The Company computes net loss per share in accordance with SFAS No. 128,
Earnings per Share, and SEC Staff Accounting Bulletin ("SAB") No. 98. Under the
provisions of SFAS No. 128 and SAB No. 98, basic loss per share is computed
using the weighted average number of common stock outstanding during the
periods, and gives retroactive effect to the shares issued on the
recapitalization described in note 1. Diluted loss per share is computed using
the weighted average number of common and potentially dilutive common stock
outstanding during the period. As the Company generated net losses in each of
the periods presented, basic and diluted net loss per share are the same as any
exercise of options or warrants would be anti-dilutive.
7
EMAILTHATPAYS.COM, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2001
6. Comprehensive income (loss):
Effective January 1, 1999, the Company adopted the provisions of SFAS No. 130,
"Reporting Comprehensive Income" SFAS No. 130 which establishes standards for
reporting comprehensive income (loss) and its components in financial
statements. Other comprehensive income, as defined, includes all changes in
equity (net assets) during a period from non-owner sources. Comprehensive loss
for each of the periods presented is as follows:
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Three Months Ended Six Months Ended
June 30 June 30
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2001 2000 2001 2000
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Net loss $509,739 $408,671 $810,074 $918,902
Other comprehensive (income) / loss: 26,273 2,372 2,590 1,916
Foreign currency translation adjustment
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Comprehensive loss $536,012 $411,043 $812,664 $920,818
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Cautionary Statement Regarding Forward-Looking Statements
This Report includes forward-looking statements. We have based these
forward-looking statements on our current expectations and projections about
future events. These forward-looking statements are subject to risks,
uncertainties and assumptions about us and about our subsidiary companies,
including, among other things:
o our ability to obtain additional funding;
o development of an e-commerce market;
o our ability to successfully execute our business model;
o growth in demand for Internet products and services; and
o adoption of the Internet as an advertising medium.
In light of these risks, uncertainties and assumptions, the forward-looking
events discussed in this Report might not occur.
Results of Operations
For the Three and Six Months Ending June 30, 2001 and 2000
Revenue
We earn revenues by delivering online direct marketing, promotional, and
informational offers and by developing and implementing integrated marketing and
advertising strategies. We charge our advertisers based upon a number of
criteria including offers delivered, qualified leads generated, online
transactions executed and marketing services performed.
Revenue consists of the gross value of our billings to clients and includes the
price of the advertising that we purchase from offline and online suppliers.
Under marketing services contracts, we recognize the cost of the advertising we
purchase for our clients as an expense and the payments we receive from our
clients for this advertising as revenue. Under these arrangements, we are
ultimately responsible for payment to suppliers for the cost of the advertising
that we purchase.
We believe that our revenues will be subject to seasonal fluctuations as a
result of general patterns of retail advertising, which are typically higher
during the second and fourth calendar quarters. In addition, expenditures by
advertisers tend to be cyclical, reflecting overall economic conditions and
consumer buying patterns.
To date, the vast majority of our revenue has been generated from the provision
of integrated marketing and advertising strategies as our email delivery system,
relational database program and Canadian email marketing sales offices were not
fully operational until February 2000. With increased focus, time and
expenditure being directed to these online services, we anticipate proportionate
increases in revenue, both in absolute and percentage terms. However, if these
services do not continue to achieve market acceptance, we cannot assure you that
we will generate business at a sufficient level to support our continued
operations.
9
Revenues for the quarter ending June 30, 2001 were $413,000, an increase of 79%
over the first quarter of 2001 and 33% over the quarter ending June 30, 2000.
The increases reflect the return of a previous client, an expansion of our
services into the production and marketing of Event brochures, and seasonal
fluctuations in retail advertising, which typically are higher in the second and
fourth quarters. For the six months ending June 30, 2001, total revenues of
$644,000 exceed last year by 18%. This increase results from the return of a
previous client and an expansion of our services into the production and
marketing of Event brochures.
Cost of revenue
Cost of revenue represents the cost of advertising purchased for clients. The
increases over last year correspond to our increased revenue. As well, our
expansion into the production and marketing of Event brochures involved
additional costs and resulted in a decrease in our overall margins. Excluding
these costs, our gross profit margins have remained relatively constant.
Operating Expenses
Since the end of the first quarter of fiscal 2000, we have taken substantive
steps to reduce our ongoing operating costs. These steps include the completion
of the initial development of our relational database and email delivery system
programs, consolidation of our two western Canada offices into one location,
closure of our eastern Canada sales office, controlled use of professional
services, cutbacks in administrative and marketing positions and the reduction
of our internal technological staff through the outsourcing of the maintenance
and storage of our technological facilities and the utilization of IT
professionals on a project-by-project contract basis.
Lower staffing levels generated from the steps noted above have resulted in
salary costs for the three and six months ending June 30, 2001 being $71,000 and
$147,000 lower than for the same respective periods last year. Other operating
expenses also reflect cost reduction strategies with non-compensation costs for
the quarter and half year decreasing by 49% and 54% respectively from the
comparable three and six month periods ending June 30, 2000.
During the three months ending June 30, 2001 we recognized, in addition to our
anticipated amortization of $57,000, $249,000 in additional non-cash
compensation expense and a reduction in aggregate deferred stock-based
compensation of $143,000. These amounts reflect the earlier than estimated
exercising and the cancellation of options previously issued to a former
marketing executive. The remaining deferred compensation will continue to be
amortized over the estimated service life of the employee holding the options.
We expect this amount to be $29,000 per quarter for the remainder of the fiscal
year.
Liquidity and Capital Resources
We have sustained net losses and negative cash flows from operations since our
inception. At June 30, 2001, we have negative working capital of $386,385. Since
January 31, 2001, our existing credit facilities have been fully utilized.
Advances from a company controlled by a principal stockholder are funding our
current operations. Our ability to meet our current obligations is dependent
upon these advances.
We need to raise funds in order to continue operations and implement our
strategies of client realization and servicing, expansion and maintenance of
products, brand awareness, technological advancement and infrastructure
development. We cannot assure you that additional financing will be available on
terms favorable to us, or at all. If adequate funds are not available on
acceptable terms, our ability to continue operations, implement our strategies,
take advantage of unanticipated opportunities, or otherwise respond to
competitive pressures will be significantly limited.
10
Net cash used in operating activities was $443,000 and $891,000 for the six
months ending June 30, 2001 and 2000, respectively. Net cash used in investing
activities was $16,000 and $26,000 for the six months ending June 30, 2001 and
2000, respectively and relates to purchases of property and equipment.
Net cash provided by financing activities was $459,000 and $1,054,000 for the
six months ending June 30, 2001 and 2000, respectively. Cash provided by
financing activities for the period ending June 30, 2001 consists of an increase
in bank indebtedness of $125,000 and $337,000 in advances from related parties.
Cash provided by financing activities for the six months ending June 30, 2000
consists of $1,310,000 from the issuance of capital stock; less repayments of
loans totaling $109,000 and a reduction in advances from related parties of
$147,000.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
None.
Item 2. Changes in Securities and Use of Proceeds.
On June 15, 2001, a recently departed employee exercised options to
purchase 75,000 shares of common stock at a price of $.005 per share
which had been granted to him under the terms of the 1999 Equity
Compensation Plan. The issuance of the shares of common stock was made
pursuant to the exemption from registration provided by Section 4(2) of
the Securities Act of 1933, as amended.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to Vote of Security Holders.
The Company held its Annual Meeting of Stockholders on June 28, 2001.
At the meeting two matters were voted on.
1. Election of two directors to serve a one-year term ending at the
2002 Annual Meeting.
Daniel Hunter...Votes For: 5,782,755 Against: 0 Abstentions: 200,175
James MacKenzie...Votes For: 5,782,755 Against: 0 Abstentions: 200,175
2. Ratification of the selection of KPMG as independent auditors for the
fiscal year ending December 31, 2002.
............Votes For: 5,782,380 Against: 50 Abstentions: 200,500
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
None.
11
SIGNATURES
----------
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
EMAILTHATPAYS.COM, INC.
Dated: August 10, 2001 By: /s/ Daniel Hunter
--------------------------
Daniel Hunter
Chief Executive Officer
Principal Accounting and Financial
Officer, Director
12