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: September 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.
__X__ Yes _____ No
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: November 8, 2001: 10,247,409 shares
of common stock, $.005 par value per share.
EMAILTHATPAYS.COM, INC. AND SUBSIDIARIES
FORM 10-QSB
QUARTERLY PERIOD ENDED SEPTEMBER 30, 2001
INDEX
Page
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Consolidated Balance Sheets
As of September 30, 2001 (Unaudited) and December 31, 2000............................3
Consolidated Statements of Operations and Deficit (Unaudited)
For the Three and Nine Months Ended September 30, 2001 and September 30, 2000 ........4
Consolidated Statements of Cash Flows (Unaudited)
For the Nine Months Ended September 30, 2001 and September 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
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets (unaudited)
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September 30, December 31,
2001 2000
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Assets
Current assets:
Cash $ - $ -
Accounts receivable 138,918 74,932
Prepaid expenses 60,371 55,224
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199,289 130,516
Property and equipment, less accumulated depreciation 113,765 150,951
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Total assets $ 313,054 $ 281,107
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Liabilities and Stockholders' Deficit
Current liabilities:
Bank indebtedness $ 159,614 $ 8,479
Accounts payable and accrued liabilities 383,671 229,106
Accrued salaries 19,285 19,285
Loans payable - current portion 121,510 139,741
Lease obligation - current portion 5,233 5,242
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689,313 401,853
Loans payable 70,061 102,508
Note payable - 50,000
Lease obligation 11,723 16,373
Due to related parties 227,916 60,020
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Total liabilities 999,013 630,754
Stockholders' deficit:
Common stock 52,509 44,615
Additional paid-in capital 3,715,148 3,532,957
Deficit (4,086,952) (3,008,038)
Deferred stock-based compensation (363,925) (900,200)
Accumulated other comprehensive income (loss):
Foreign currency translation adjustment (2,739) (18,981)
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Total stockholders' deficit (685,959) (349,647)
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Total liabilities and stockholders' deficit $ 313,054 $ 281,107
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See accompanying notes to unaudited financial statements
3
Consolidated Statements of Operations and Deficit (unaudited)
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Three Months Ended Nine Months Ended
September 30, September 30, September 30, September 30,
2001 2000 2001 2000
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Revenue $ 305,880 $ 227,218 $ 950,413 $ 771,425
Cost of revenue (251,362) (185,605) (800,980) (620,820)
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Gross profit 54,518 41,613 149,433 150,605
Operating expenses:
Depreciation 18,702 17,335 54,068 49,252
Salaries and fringe benefits 177,304 232,999 514,240 716,811
Stock-based compensation 28,725 57,450 392,650 172,350
Legal and accounting 18,553 10,148 54,658 82,737
Consulting fees and
computer services 27,368 24,736 94,031 93,823
Phones and utilities 5,051 5,376 15,078 25,775
Rent 9,790 12,033 27,153 57,618
Advertising and promotion 4,197 7,770 6,429 64,961
Other selling, general
and administrative 15,147 4,350 37,130 125,847
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304,837 372,197 1,195,437 1,389,174
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Loss from operations (250,319) (330,584) (1,046,004) (1,238,569)
Other income (expenses):
Interest Income - 789 - 4,756
Interest expense (18,521) (9,670) (32,910) (24,554)
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(18,521) (8,881) (32,910) (19,798)
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Net loss (268,840) (339,465) (1,078,914) (1,258,367)
Deficit, beginning of period (3,818,112) (2,291,695) (3,008,038) (1,372,793)
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Deficit, end of period $ (4,086,952) $ (2,631,160) $ (4,086,952) $ (2,631,160)
---------------------------------------------------------------------------------------------------------------
Net loss per common share,
basic and diluted (0.03) (0.04) (0.12) (0.15)
Weighted average common
shares outstanding, basic
and diluted 10,247,409 8,723,092 9,230,430 8,649,388
See accompanying notes to the unaudited financial statements
4
Consolidated Statements of Cash Flows (unaudited)
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Nine Months Ended
September 30, September 30,
2001 2000
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Cash provided by (used in):
Operations:
Net loss $ (1,078,914) $ (1,258,367)
Items not involving cash:
Depreciation 54,068 49,252
Stock-based compensation 392,650 172,350
Foreign exchange on subsidiary operations 16,242 (2,749)
Loss on disposal of equipment - 2,914
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable (63,986) (38,155)
Decrease (increase) in prepaid expenses (5,147) (40,782)
Increase (decrease) in accounts payable and accrued liabilities 154,565 (55,285)
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Net cash used in operating activities (530,522) (1,170,822)
Cash flows used in investing activities:
Purchase of property and equipment (16,882) (35,735)
Proceeds from disposal of equipment - 10,912
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Net cash used in investing activities (16,882) (24,823)
Cash flows from financing activities:
Increase (decrease) in loans payable (105,337) (81,901)
Increase (decrease) in advances from related parties 167,896 (146,804)
Proceeds from bank indebtedness 151,135 -
Issue of share capital 333,710 1,310,000
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Net cash provided by financing activities 547,404 1,081,295
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Increase (decrease) in cash - (114,350)
Cash, beginning of period - 121,609
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Cash, end of period $ - $ 7,259
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Supplementary information:
Interest paid 32,909 24,554
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
September 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 September 30, 2001, the Company had negative working
capital of $490,024. 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
and be successful.
6
EMAILTHATPAYS.COM, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2001
3. Basis of Presentation:
The unaudited consolidated financial statements of the Company at September 30,
2001 and for the three and nine 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 nine months ended September 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
September 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 Nine Months Ended
September 30 September 30
2001 2000 2001 2000
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Net loss $268,840 $339,465 $1,078,914 $1,258,367
-------------------------------------------------------------------------------------------------
Other comprehensive (income)/loss:
Foreign currency translation
adjustment (18,832) 833 (16,242) 2,749
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Comprehensive loss $250,008 $340,298 $1,062,672 $1,261,116
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8
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;
X our ability to successfully execute our business model;
X development of an e-commerce market;
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 Nine Months Ending September 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 September 30, 2001 were $306,000, an increase of
34% over the quarter ending September 30, 2000 and a decrease of 26% from the
second quarter of 2001. The increase over last year reflects increased spending
by existing clients. The decrease from last quarter results from seasonal
fluctuations in retail advertising, which typically are higher in the second and
fourth quarters. For the nine months ending September 30, 2001, total revenues
of $950,000 exceed last year by 23%. This increase results from the return of a
previous client, the addition of a new 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 nine months ending September 30, 2001 being
$56,000 and $202,000 lower than for the respective periods last year. Other
operating expenses also reflect cost reduction strategies with non-compensation
costs on a year-to-date basis decreasing by 43% from the comparable nine-month
period ending September 30, 2000.
For the quarter ending September 30, 2001 we recognized $29,000 in non-cash
compensation expense or approximately one-half of the amount recognized in the
same period last year. As discussed in last quarter's report, during the quarter
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. This amount
reflected the earlier than estimated exercising and the cancellation of options
previously issued to a former marketing executive. This cancellation is also the
reason for the reduced non-compensation expense on a go forward basis.
Liquidity and Capital Resources
We have sustained net losses and negative cash flows from operations since our
inception. At September 30, 2001, we have negative working capital of $490,024.
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 $530,000 and $1,170,000 for the nine
months ending September 30, 2001 and 2000, respectively. Net cash used in
investing activities was $16,000 and $25,000 for the nine months ending
September 30, 2001 and 2000, respectively and relates to purchases of property
and equipment.
Net cash provided by financing activities was $547,000 and $1,081,000 for the
nine months ending September 30, 2001 and 2000, respectively. Cash provided by
financing activities for the period ending September 30, 2001 consists of an
increase in bank indebtedness of $151,000, $167,000 in advances from related
parties, $333,000 from the issuance of capital stock, net of a $105,000
repayment of loans. Cash provided by financing activities for the nine months
ending September 30, 2000 consists of $1,310,000 from the issuance of capital
stock; less repayments of loans totaling $82,000 and a reduction in advances
from related parties of $147,000.
11
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
None.
Item 2. Changes in Securities and Use of Proceeds.
On July 4, 2001, the Company issued and sold an aggregate of 1,666,665
shares of common stock at $0.20 per share pursuant to Regulation S
under the Securities Act of 1933, as amended. In connection with this
share issuance, the Company issued warrants to purchase 1,666,665
shares of common stock with an exercise price of $0.20 and an expiry
date of March 2002.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to Vote of Security Holders.
None
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
None.
12
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: November 14, 2001 By: /s/ Daniel Hunter
-----------------------------------
Daniel Hunter
Chief Executive Officer
Principal Accounting and
Financial Officer, Director
13