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, 2006.
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 incorporation or organization) |
(I.R.S. Employer Identification No.) |
10305 102nd Terrace Sebastian, Florida 32958
(Address of principal executive offices, including zip code)
(772) 581-9700
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
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 ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
LARGE ACCELERATED FILER ¨ ACCELERATED FILER ¨ NON-ACCELERATED FILER x
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.): YES ¨ NO x
The number of shares of the registrant’s common stock, $0.01 par value per share, outstanding as of August 8, 2006, was 4,030,579.
FORM 10-Q QUARTERLY REPORT
(For the Three and Six Months Ended June 30, 2006)
TABLE OF CONTENTS
2
Condensed Balance Sheets
(Unaudited)
| June 30, 2006 |
December 31, 2005 |
|||||||
| Assets |
||||||||
| Current assets: |
||||||||
| Cash and cash equivalents |
$ | 2,995,937 | $ | 2,943,335 | ||||
| Trade accounts receivable, less allowance for doubtful accounts of $96,737 as of June 30, 2006 and $100,831 as of December 31, 2005 |
45,027 | 119,409 | ||||||
| Inventories |
158,565 | 236,047 | ||||||
| Prepaid expenses and other assets |
434,178 | 480,644 | ||||||
| Total current assets |
3,633,707 | 3,779,435 | ||||||
| Property, plant and equipment, net of accumulated depreciation of $6,807,407 as of June 30, 2006 and $6,632,951 as of December 31, 2005 |
913,474 | 1,115,417 | ||||||
| Food safety systems installed at customers, net of accumulated depreciation of $232,339 as of June 30, 2006 and $165,963 as of December 31, 2005 |
403,694 | 470,070 | ||||||
| Other assets |
25,000 | 37,500 | ||||||
| Total assets |
$ | 4,975,875 | $ | 5,402,422 | ||||
| Liabilities and Stockholders’ Equity |
||||||||
| Current liabilities: |
||||||||
| Current installment of capital lease obligation |
$ | 4,924 | $ | 4,639 | ||||
| Accounts payable |
158,804 | 153,437 | ||||||
| Accrued liabilities: |
||||||||
| Salaries and benefits |
150,211 | 185,740 | ||||||
| Legal and professional |
122,200 | 211,004 | ||||||
| Other |
19,440 | 4,901 | ||||||
| Advance payments from customers – current portion |
754,539 | 842,183 | ||||||
| Total current liabilities |
1,210,118 | 1,401,904 | ||||||
| Capital lease obligation – long term |
4,288 | 7,041 | ||||||
| Advance payments from customers – long term |
197,762 | 531,210 | ||||||
| Total liabilities |
1,412,168 | 1,940,155 | ||||||
| Stockholders’ equity: |
||||||||
| Common stock, $.01 par value per share, authorized 9,000,000 shares, issued 4,113,502 shares as of June 30, 2006 and 3,529,274 shares as of December 31, 2005; outstanding 4,030,579 shares as of June 30, 2006 and 3,446,351 shares as of December 31, 2005 |
41,135 | 35,293 | ||||||
| Additional paid-in capital |
220,037,427 | 216,243,777 | ||||||
| Accumulated deficit |
(216,086,818 | ) | (212,388,766 | ) | ||||
| Treasury stock, 82,923 shares, at cost |
(428,037 | ) | (428,037 | ) | ||||
| Total stockholders’ equity |
3,563,707 | 3,462,267 | ||||||
| Total liabilities and stockholders’ equity |
$ | 4,975,875 | $ | 5,402,422 | ||||
See accompanying notes to condensed financial statements.
3
Condensed Statements of Operations
For the Three Months Ended June 30, 2006 and 2005
(Unaudited)
| Three Months Ended June 30, | ||||||||
| 2006 | 2005 | |||||||
| Revenue |
||||||||
| Products |
$ | 56,656 | $ | 69,469 | ||||
| Leases |
173,508 | 173,508 | ||||||
| Services |
104,098 | 91,623 | ||||||
| Total revenue |
334,262 | 334,600 | ||||||
| Cost of revenue |
||||||||
| Products |
136,641 | 185,761 | ||||||
| Leases |
44,030 | 46,178 | ||||||
| Services |
25,830 | 17,165 | ||||||
| Total cost of revenue |
206,501 | 249,104 | ||||||
| Gross profit |
127,761 | 85,496 | ||||||
| Operating expenses: |
||||||||
| Selling, general and administrative |
1,458,929 | 1,506,840 | ||||||
| Technology and development |
168,737 | 700,936 | ||||||
| Depreciation |
64,015 | 314,556 | ||||||
| Total operating expenses |
1,691,681 | 2,522,332 | ||||||
| Operating loss |
(1,563,920 | ) | (2,436,836 | ) | ||||
| Interest and other income, net |
51,385 | 47,553 | ||||||
| Interest expense |
(5,162 | ) | (4,858 | ) | ||||
| Gain (loss) on disposal of assets |
1,000 | (19,405 | ) | |||||
| Loss from continuing operations before income taxes |
(1,516,697 | ) | (2,413,546 | ) | ||||
| Income tax expense (benefit) |
— | — | ||||||
| Loss from continuing operations |
(1,516,697 | ) | (2,413,546 | ) | ||||
| Discontinued operations: |
||||||||
| Gain from discontinued cattle operations, net of income taxes of $0 in 2006 and 2005 |
430 | 1,399 | ||||||
| Net loss |
$ | (1,516,267 | ) | $ | (2,412,147 | ) | ||
| Loss from continuing operations per common share – basic and diluted |
$ | (0.38 | ) | $ | (0.72 | ) | ||
| Net loss per common share – basic and diluted |
$ | (0.38 | ) | $ | (0.72 | ) | ||
| Weighted average number of common shares outstanding – basic and diluted |
3,956,023 | 3,358,084 | ||||||
See accompanying notes to condensed financial statements.
4
Condensed Statements of Operations
For the Six Months Ended June 30, 2006 and 2005
(Unaudited)
| Six Months Ended June 30, | ||||||||
| 2006 | 2005 | |||||||
| Revenue |
||||||||
| Products |
$ | 129,670 | $ | 516,214 | ||||
| Leases |
347,016 | 412,822 | ||||||
| Services |
237,162 | 156,487 | ||||||
| Total revenue |
713,848 | 1,085,523 | ||||||
| Cost of revenue |
||||||||
| Products |
210,043 | 443,828 | ||||||
| Leases |
88,118 | 109,555 | ||||||
| Services |
46,689 | 23,692 | ||||||
| Total cost of revenue |
344,850 | 577,075 | ||||||
| Gross profit |
368,998 | 508,448 | ||||||
| Operating expenses: |
||||||||
| Selling, general and administrative |
3,057,817 | 2,827,997 | ||||||
| Technology and development |
589,012 | 1,191,919 | ||||||
| Depreciation |
205,918 | 669,123 | ||||||
| Total operating expenses |
3,852,747 | 4,689,039 | ||||||
| Operating loss |
(3,483,749 | ) | (4,180,591 | ) | ||||
| Interest and other income, net |
86,361 | 174,352 | ||||||
| Interest expense |
(10,136 | ) | (9,343 | ) | ||||
| Gain (loss) on disposal of assets |
1,050 | (25,695 | ) | |||||
| Net increase in fair value of common stock warrants |
(301,107 | ) | (21,614 | ) | ||||
| Loss from continuing operations before income taxes |
(3,707,581 | ) | (4,062,891 | ) | ||||
| Income tax expense (benefit) |
— | — | ||||||
| Loss from continuing operations |
(3,707,581 | ) | (4,062,891 | ) | ||||
| Discontinued operations: |
||||||||
| Gain from discontinued cattle operations, net of income taxes of $0 in 2006 and 2005 |
9,529 | 20,942 | ||||||
| Net loss |
$ | (3,698,052 | ) | $ | (4,041,949 | ) | ||
| Loss from continuing operations per common share – basic and diluted |
$ | (0.96 | ) | $ | (1.25 | ) | ||
| Net loss per common share – basic and diluted |
$ | (0.96 | ) | $ | (1.24 | ) | ||
| Weighted average number of common shares outstanding – basic and diluted |
3,868,484 | 3,259,938 | ||||||
See accompanying notes to condensed financial statements.
5
Condensed Statements of Cash Flows
For the Six Months Ended June 30, 2006 and 2005
(Unaudited)
| Six Months Ended June 30, | ||||||||
| 2006 | 2005 | |||||||
| Cash flows from operating activities: |
||||||||
| Net loss |
$ | (3,698,052 | ) | $ | (4,041,949 | ) | ||
| Adjustments to reconcile net loss to net cash used for operating activities: |
||||||||
| Depreciation |
272,294 | 744,720 | ||||||
| (Gain) loss on disposal of assets |
(1,050 | ) | 25,210 | |||||
| Stock compensation |
— | 4,813 | ||||||
| Stock option compensation |
345,583 | — | ||||||
| Forfeiture of non-cash compensation |
(23,086 | ) | — | |||||
| Amortization of unearned non-cash compensation |
236,488 | — | ||||||
| Payment for fractional shares due to reverse split |
(574 | ) | — | |||||
| Issuance of common stock for services |
— | 60,552 | ||||||
| Increase in fair value of common stock warrants |
301,107 | 21,614 | ||||||
| Reserve for inventory obsolescence |
98,035 | 104,914 | ||||||
| Gain on sale of assets |
— | (100,000 | ) | |||||
| Changes in operating assets and liabilities: |
||||||||
| Trade accounts receivable, net |
74,382 | 198,105 | ||||||
| Inventories |
(20,553 | ) | 138,813 | |||||
| Prepaid expenses and other assets |
43,417 | (229,256 | ) | |||||
| Accounts payable and accrued liabilities |
(104,427 | ) | 42,991 | |||||
| Advance payments from customers |
(421,092 | ) | (680,356 | ) | ||||
| Net cash used for operating activities |
(2,897,528 | ) | (3,709,829 | ) | ||||
| Cash flows from investing activities: |
||||||||
| Purchases of property and equipment |
(3,975 | ) | (155,751 | ) | ||||
| Proceeds from sale of property, plant and equipment |
1,050 | 45 | ||||||
| Payments received on note receivable |
15,549 | — | ||||||
| Proceeds from sale of assets |
— | 50,000 | ||||||
| Net cash provided by (used for) investing activities |
12,624 | (105,706 | ) | |||||
| Cash flows from financing activities: |
||||||||
| Net proceeds from private equity placement |
2,939,974 | 3,792,098 | ||||||
| Net proceeds from issuance of common stock |
— | 203,594 | ||||||
| Payments on capital lease obligation |
(2,468 | ) | (1,987 | ) | ||||
| Net cash provided by financing activities |
2,937,506 | 3,993,705 | ||||||
| Net change in cash and cash equivalents |
52,602 | 178,170 | ||||||
| Cash and cash equivalents, beginning of period |
2,943,335 | 5,954,976 | ||||||
| Cash and cash equivalents, end of period |
$ | 2,995,937 | $ | 6,133,146 | ||||
| Supplemental disclosures: |
||||||||
| Cash paid for interest |
$ | 10,136 | $ | 8,783 | ||||
| Non-cash investing and financing activities: |
||||||||
| Issuance of note receivable for sale of assets |
— | 50,000 | ||||||
| Capital lease for equipment |
— | 15,992 | ||||||
See accompanying notes to condensed financial statements.
6
Notes to Condensed Financial Statements
(Unaudited)
(1) Description of Business and Summary of Significant Accounting Policies
(a) Overview
eMerge Interactive, Inc. (the “Company”), a Delaware corporation, is a technology company focusing on the agricultural and meat processing industries. The Company’s technologies focus primarily on information-management and individual-animal tracking tools, as well as innovative food safety technologies.
(b) Reverse Stock Split
On May 31, 2006, the Company effected a one-for-fifteen reverse stock split of its class A common stock (the “Reverse Split”). As a result of the Reverse Split and additional amendments to the Company’s certificate of incorporation, every fifteen shares of issued and outstanding class A common stock, par value $0.008 per share, were automatically converted into one issued and outstanding share of common stock, par value $0.01 per share and cash in lieu of fractional shares. In connection with the Reverse Split, the number of issued and outstanding shares of common stock has been reduced from approximately 60.5 million to approximately 4.0 million. Similarly, the number of authorized shares of common stock has been reduced from 100 million to 9 million and the authorized shares of preferred stock has been reduced from 15 million to 1 million. All common share data presented herein has been restated to retroactively reflect the Reverse Split.
(c) Basis of Presentation
The accompanying unaudited Condensed Financial Statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States and with the instructions to Form 10-Q and Article 10 of Regulation S-X. The Company has continued to follow the accounting policies set forth in the financial statements included in its fiscal 2005 Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”). In the opinion of management, the interim financial information provided herein reflects all adjustments (consisting of normal and recurring adjustments) necessary for a fair presentation of the Company’s financial position as of June 30, 2006, and the results of operations and cash flows for the three and six month periods ended June 30, 2006 and 2005. The results of operations for the six months ended June 30, 2006 are not necessarily indicative of the results to be expected for the full year ended December 31, 2006.
These condensed financial statements and footnotes should be read in conjunction with the Company’s audited financial statements for the year ended December 31, 2005, included in the Company’s Annual Report on Form 10-K as filed with the SEC.
(d) Revenue Recognition
Revenues from the sale of all Animal Information Solutions (“AIS”) products and services are recognized as products are shipped or services are provided.
Revenues from the sale of hand-held VerifEYE™ Solo™ units and Carcass Inspection System (“CIS”) products and related services that include multiple deliverables, such as after-market supplies or services, are allocated based on the relative fair values of the individual components as determined in accordance with the revenue recognition principles of EITF 00-21, “Accounting for Revenue Arrangements with Multiple Deliverables.” Revenue allocated to each component is recognized as products are shipped or services are provided.
When products are sold and the buyer is given the right to return the product, revenue from the sales transactions are recognized at the time of the sale only when all of the specified conditions of Statement of Financial Accounting Standards (“SFAS”) No. 48, “Revenue Recognition When Right of Return Exists” have been met. Sales revenue and cost of sales that are not recognized at the time of the sale because the specified conditions have not been met are recognized either when the return privilege has substantially expired or if those conditions are subsequently met, whichever occurs first.
7
Revenues from operating leases of the VerifEYE CIS are recognized on a straight-line basis over the life of the lease, once the unit is installed.
(e) Stock-Based Compensation
As of January 1, 2006, SFAS No. 123(R), “Share-Based Payment,” became effective for the Company. The Company had previously followed Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Certain Transactions Involving Stock Compensation,” and related interpretations in accounting for its employee stock options. Under APB No. 25, no compensation expense was recognized if the exercise price of the Company’s employee stock options equaled or exceeded the market price of the underlying stock on the date of the grant. Under SFAS No. 123(R), compensation expense is now recognized. Stock-based compensation cost is measured at the grant date, based on the fair value of the award and is recognized over the directors’ and employees’ requisite service period. Effective with the adoption of SFAS No. 123(R), the Company has elected to use a bi-nomial model to calculate the compensation expense of options issued after adoption, rather than the Black-Scholes model previously used for calculating the fair value of stock compensation under SFAS No. 123 “Accounting for Stock-Based Compensation.” The Company has elected to use the modified prospective transition method. Under the modified prospective transition method, an entity uses the fair value based accounting method for all director and employee awards granted, modified or settled after the effective date. As of the effective date, compensation costs related to the non-vested portion of awards outstanding as of that date are based on the grant-date fair value of those awards as calculated under the original provisions of SFAS No. 123 that is, an entity would not re-measure the grant-date fair value estimate of the unvested portion of awards granted prior to the effective date of SFAS No. 123(R). See note 7 – Stock Plan for additional information.
(f) Use of estimates
Generally accepted accounting principles require management to make estimates and assumptions during the preparation of the Company’s financial statements and accompanying notes. Such estimates and assumptions could change in the future as more information becomes available, which in turn could impact the amounts reported and disclosed herein.
(2) Liquidity
The Company has incurred losses and negative cash flows from operations in every year since inception and has an accumulated deficit of $216.1 million as of June 30, 2006. For the six months ended June 30, 2006, the Company incurred a net loss of $3.7 million and negative cash flows from operations of $2.9 million. The Company’s objectives are to increase its revenue related to sales of both AIS products and services and Food Safety Technologies (“FST”) products and services, actively control operating costs and continue to evaluate the structure of its operations to improve cash flows for the foreseeable future. In January 2006, the Company received $3.2 million in gross proceeds from the issuance of common stock and warrants and the exercise of an outstanding warrant. Cash and cash equivalents at June 30, 2006 are $3.0 million. Increases in sales of the Company’s products are expected to be the most important source of future cash flow. The Company expects that existing cash balances, working capital and sales of products and services will meet the Company’s cash flow needs during 2006. However, unless the Company is able to generate significantly higher sales from the Company’s products and services in 2006, the Company will need to seek additional sources of liquidity and implement additional cost control measures. As previously disclosed, the Company has retained AgriCapital Corporation and B. Riley & Co, in a joint engagement, to advise management and the Board of Directors regarding alternative strategies concerning liquidity and shareholder value, including potential capital sources, investors, acquirers, licensees, and/or merger partners, for all or part of the business. This process is ongoing, and the Company has taken cost reduction measures in part to enhance the Company’s ability to pursue any potential opportunities that arise from this process. There can be no assurance that sources of liquidity will be available in an amount and on terms that are acceptable to the Company. If the Company is unable to significantly grow sales or raise additional funds, the business may not ultimately be financially viable.
8
On May 31, 2006, the Company effected a one-for-fifteen reverse stock split in an effort to regain compliance with The Nasdaq Stock Market, Inc.’s (“Nasdaq”) $1 minimum bid price requirement. During the ten-day trading period ended June 14, 2006, the Company’s stock closed at a bid price above $1 on each trading day. On June 16, 2006, Nasdaq notified the Company that the Company had regained compliance with Nasdaq’s minimum bid price requirement for continued listing on The Nasdaq Capital Market (the “Capital Market”).
While the Company currently meets all applicable requirements for continued listing on the Capital Market, there can be no assurance that the Company will be able to maintain long-term compliance with all such requirements. The Capital Market’s requirements for continued listing include: (i) stockholders’ equity of $2.5 million or market value of listed securities of $35 million or net income from continuing operations (in the latest fiscal year or in two of the last three fiscal years) of $500,000; (ii) 500,000 publicly held shares: (iii) market value of publicly held shares of $1 million; (iv) minimum bid price of $1; (v) 300 round lot shareholders and (vi) two market makers. A delisting could have an adverse effect on the liquidity of the Company’s common stock and could also adversely impact the Company’s ability to raise additional equity capital or consummate strategic transactions such as mergers or acquisitions.
(3) Inventories
Inventories as of June 30, 2006 and December 31, 2005 consist of:
| June 30, 2006 |
December 31, 2005 | |||||
| Raw materials |
$ | 117,053 | $ | 95,537 | ||
| Finished goods |
41,512 | 140,510 | ||||
| $ | 158,565 | $ | 236,047 | |||
Provision for potentially obsolete or slow-moving inventory is made based on management’s analysis of inventory levels and future demand and market conditions. Based on this analysis, the Company recorded a provision for obsolescence of $98,035 and $104,914, for the three and six-month periods ended June 30, 2006 and 2005, respectively, which is included in cost of revenues – products, in the condensed statement of operations.
(4) Related Party Transactions
Through June 10, 2005, the Company leased office facilities in Sebastian, Florida from an affiliated entity, XL Realty Corp. Rent paid to XL Realty Corp. was $0 and $110,000 for the six months ended June 30, 2006 and 2005, respectively. Effective June 10, 2005, XL Realty Corp. sold the property to an unrelated party and there will be no additional rent paid to XL Realty Corp. XL Realty Corp. is owned by Safeguard Scientifics, Inc. (“Safeguard”), which owns 501,638 shares of the Company’s common stock, or 12.0% of the outstanding shares as of June 30, 2006.
(5) Issuances of Common Stock
On January 27, 2006, the Company issued 533,333 shares of common stock to an investor in a private placement transaction (the “Biegert II Transaction”) for $5.40 per share, receiving gross proceeds of $2.9 million. In connection with the transaction, the Company issued warrants to purchase 333,333 shares of the Company’s common stock. The exercise price of the warrants is $6.75 per share. The warrants are exercisable at any time after the six-month anniversary of the date of issuance, or July 27, 2006, and expire on January 27, 2011. In addition, the investor exercised an existing warrant to purchase 53,504 shares of common stock at an exercise price of $5.40 per share for additional gross proceeds of $288,924. The Company has agreed to file, within nine months after the closing or October 27, 2006, a registration statement covering the resale of the shares issued in this private placement and issuable pursuant to the warrants issued in this private placement. As part of this transaction, the Company issued warrants exercisable for 26,666 shares of the Company’s common stock at an exercise price of $5.40 per share to the placement agent as partial consideration for providing financial and advisory services. The $2.9 million of net proceeds from the stock sale and warrant exercise were recorded in stockholders equity.
9
(6) Common Stock Warrants and Additional Investment Rights
In 2004 and 2003, three private placement transactions were completed, which included the issuance of warrants, which have been subsequently re-priced due to the completion of additional private placement transactions. These transactions consist of a private placement completed in November 2003 (the “Biegert Transaction”), which included the issuance of warrants to purchase 53,504 shares of the Company’s common stock, a private placement completed in January 2004 (the “Sage Transaction”), which included the issuance of warrants to purchase 55,365 shares of the Company’s common stock and a private placement completed in December 2004 (the “HBK Transaction”), which included the issuance of warrants to purchase 58,333 shares of the Company’s common stock.
Upon completion of a private placement transaction on January 27, 2005, (the “HBK II Transaction”), the warrants issued in the Sage Transaction were re-priced to reflect the price per share of the stock issued in this transaction. The effect of the re-pricing on January 27, 2005 from $24.00 per share to $21.00 per share is $22,000 and is recorded as expense and included in net increase in fair value of common stock warrants in the condensed statement of operations for the six months ended June 30, 2005.
Upon completion of the Biegert II Transaction on January 27, 2006, the warrants issued in the Biegert Transaction, the Sage Transaction and the HBK Transaction were re-priced to reflect the price per share of the stock issued in this transaction. The Biegert Transaction warrants re-priced from $14.70 per share to $5.40 per share with an effect of $76,000, which is recorded as expense and included in net increase in fair value of common stock warrants in the condensed statement of operations for the six months ended June 30, 2006. The Sage Transaction warrants re-priced from $21.00 per share to $5.40 per share with an effect of $103,000, which is recorded as expense and included in net increase in fair value of common stock warrants in the condensed statement of operations for the six months ended June 30, 2006. The HBK Transaction warrants re-priced from $30.00 per share to $5.40 per share with an effect of $122,000, which is recorded as expense and included in net increase in fair value of common stock warrants in the condensed statement of operations for the six months ended June 30, 2006.
(7) Stock Plan
Prior to January 1, 2006, the Company accounted for stock-based employee compensation arrangements in accordance with the provisions of APB No. 25 and its related implementation guidance, and complied with the disclosure provisions of SFAS No. 123 and SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure.” Under APB No. 25, compensation cost was generally recognized based on the difference, if any, between the quoted market price of the Company’s stock on the date of grant and the amount an employee must pay to acquire the stock.
On January 1, 2006 the Company adopted SFAS No. 123(R) and its related implementation guidance in accounting for stock-based employee compensation arrangements. SFAS No. 123(R) requires the recognition of the fair value of stock compensation in net income. SFAS No. 123(R) also requires a public entity to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award (with limited exceptions). Stock-based compensation expense will be recognized over the period during which an employee is required to provide service in exchange for the award—the requisite service period (usually the vesting period), net of estimated forfeitures.
The Company has decided to use the modified prospective transition method for adopting SFAS No. 123(R). Under this method, the provisions of SFAS No. 123(R) apply to all awards granted or modified after the date of adoption. In addition, the unrecognized expense of awards not yet vested at the date of adoption shall be recognized in the periods after the date of adoption using the same valuation method (i.e. Black-Scholes) and assumptions determined under the original provisions of SFAS No. 123, as disclosed in our previous filings. Accordingly, the Company did not restate its prior period financial statements. Instead, the Company applies SFAS No. 123(R) for new options granted after the adoption of SFAS No. 123(R), i.e. January 1, 2006, and any portion of options that were previously granted and had not vested by January 1, 2006. Effective with the adoption of SFAS No. 123(R), the Company has elected to use a bi-nomial model to determine the weighted average fair value of options issued after adoption, rather than the Black-Scholes model previously used for calculating the fair value of stock compensation under SFAS No. 123.
10
The valuation model for stock compensation expense requires the Company to make several assumptions and judgments about the variables to be used in the calculation, including expected life of the stock option, historical volatility of the underlying security, an assumed risk free interest rate and estimated forfeitures over the expected life of the option. SFAS No. 123(R) requires companies to utilize an estimated forfeiture rate when calculating the expense for the period, whereas, SFAS No. 123 permitted companies to record forfeitures based on actual forfeitures. To the extent actual results differ from the Company’s estimates, such amounts will be recorded as a cumulative adjustment in the period estimates are revised. The dividend yield of zero is based on the fact that the Company has never paid cash dividends and has no present intention to pay cash dividends. The expected life represents the weighted average period of time that options granted are expected to be outstanding giving consideration to vesting schedules and the Company’s historical exercise patterns; expected volatilities are based on historical volatilities of the Company’s common stock; the risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant for periods corresponding with the expected life of the option; and the Company considered many factors when estimating expected forfeitures, including types of awards, employee class, and historical experience. For the three and six months ended June 30, 2006, the Company has applied an estimated forfeiture rate of 22.2% in determining the expense recorded in the condensed statement of operations.
The weighted average fair value of options granted during the three and six months ended June 30, 2006, under the bi-nomial valuation method, were $2.01 and $2.91, respectively and the three and six months ended June 30, 2005, under the Black-Scholes valuation method, were $6.21 and $11.31, respectively. The following weighted average assumptions were used to determine fair value:
| Three Months Ended June 30, |
Six Months Ended June 30, |
|||||||||||
| 2006 | 2005 | 2006 | 2005 | |||||||||
| Expected volatility |
100.3 | % | 100.8 | % | 99.0 | % | 98.2 | % | ||||
| Dividend yield |
0 | % | 0 | % | 0 | % | 0 | % | ||||
| Risk-free interest rate |
5.07 | % | 3.77 | % | 4.80 | % | 3.90 | % | ||||
| Expected life in years |
2.77 | 5.00 | 2.67 | 5.00 | ||||||||
During the three and six month periods ended June 30, 2006, the Company recorded $160,000 and $346,000, respectively, of stock-based compensation expense as a result of the adoption of SFAS No. 123(R). The stock-based compensation expense for the three months ended June 30, 2006 included $147,000 in selling, general and administrative expenses and $13,000 in technology and development expenses and the compensation expense reduced both basic and diluted earnings per share by $0.04 per share. The stock-based compensation expense for the six months ended June 30, 2006 included $315,000 in selling, general and administrative and $31,000 in technology and development and the compensation expense reduced both basic and diluted earnings per share by less than $0.09 per share.
Prior to adopting SFAS No. 123 (R), the Company accounted for stock-based compensation under APB 25. If the Company had elected to adopt the fair value based recognition provisions of SFAS No. 123 for its stock option plans in the prior period, net loss and net loss per share would have been changed to the pro forma amounts indicated below:
| Three Months Ended June 30, |
Six Months Ended June 30, 2005 |
|||||||
| Net loss as reported |
$ | (2,412,147 | ) | $ | (4,041,949 | ) | ||
| Add: Stock-based employee compensation (related to modified options) included in reported net loss |
4,813 | 4,813 | ||||||
| Deduct: total stock-based employee compensation expense determined under fair value based methods for all awards |
(319,727 | ) | (801,858 | ) | ||||
| Pro forma net loss |
$ | (2,727,061 | ) | $ | (4,838,994 | ) | ||
| Net loss per share as reported – basic and diluted |
$ | (0.72 | ) | $ | (1.24 | ) | ||
| Pro forma net loss per share – basic and diluted |
$ | (0.81 | ) | $ | (1.48 | ) | ||
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A summary of stock based compensation transactions for the six months ended June 30, 2006 and 2005 follows:
| 2006 | 2005 | |||||||||||
| Number of Shares |
Weighted Average Exercise Price |
Number Shares |
Weighted Average Exercise Price | |||||||||
| Stock options: |
||||||||||||
| Options outstanding at beginning of period |
345,359 | $ | 26.28 | 305,131 | $ | 31.42 | ||||||
| Granted |
74,669 | 5.26 | 80,433 | 15.06 | ||||||||
| Exercised |
— | — | (1,601 | ) | 7.39 | |||||||
| Cancelled |
(66,419 | ) | 47.09 | (22,415 | ) | 25.69 | ||||||
| Options outstanding at end of period |
353,609 | $ | 17.93 | 361,548 | $ | 28.24 | ||||||
| Options exercisable at end of period |
247,723 | $ | 20.37 | 237,779 | $ | 32.97 | ||||||
| Restricted awards: |
||||||||||||
| Awarded and restricted at beginning of period |
77,165 | — | ||||||||||
| Awarded |
— | — | ||||||||||
| Vested |
— | — | ||||||||||
| Cancelled |
(2,609 | ) | — | |||||||||
| Awarded and restricted at end of period |
74,556 | — | ||||||||||
| Total |
428,165 | 361,548 | ||||||||||
The weighted average remaining contractual life (in years) for the stock options outstanding as of June 30, 2006 and June 30, 2005 was 7.51 and 7.76, respectively. The weighted average remaining contractual life (in years) for the stock options exercisable as of June 30, 2006 was 6.86.
All stock options granted, except as noted in the paragraphs below, have been granted to directors or employees with an exercise price equal to the fair value of the common stock at the grant date.
In July 2005, the Company granted certain senior executives 77,165 restricted shares of the Company’s common stock in accordance with the Company’s Amended and Restated 1999 Equity Compensation Plan (the “Plan”). The shares vest as of the earlier of (1) January 29, 2007, (2) the date of a Reorganization or Change of Control (as such terms are defined in the Plan) or (3) the termination of the executive’s employment on account of death or disability. Upon the termination of the executive’s employment for any reason other than death or disability, all restricted shares that are not then vested will be forfeited. The market value of the restricted shares was $682,910 at the date of the grant and was recorded as unearned compensation, a component of the stockholders’ equity. This amount is being charged to expense over the vesting period and totaled $109,971 and $236,488 for the three and six months ended June 30, 2006.
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In June 2005, the Company accelerated the vesting of 497 stock options and extended the expiration date of 17,243 stock options for six months, recognizing expense of $4,813. This amount is included in technology and development expenses in the condensed statement of operations.
Basic earnings (loss) per share are computed by dividing net income (loss) by the weighted average shares outstanding for the period. Diluted earnings (loss) per share reflects the potential dilution that could occur if common stock equivalents, such as stock options and warrants were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the Company. Restricted stock is unvested; accordingly, these shares are only included in the computation of diluted earnings per share as they are only contingent upon vesting.
As a result of the losses incurred for the three and six months ended June 30, 2006, incremental shares from the assumed conversion of common stock equivalents totaling 1,443 and 4,601 shares for the three and six months ended June 30, 2006, are excluded from the calculation of diluted loss per share, as their inclusion would have been anti-dilutive.
(8) Segment Information
The Company’s reportable segments consist of AIS products and services and FST products and services. AIS consists of animal tracking, data management and supply procurement services. FST consists of the VerifEYE inspection systems.
The following summarizes revenue, cost of revenue and gross profit information related to these two segments for the three and six months ended June 30, 2006 and 2005:
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2006 | 2005 | 2006 | 2005 | |||||||||||||
| Revenue: |
||||||||||||||||
| Animal Information Solutions |
$ | 123,716 | $ | 113,387 | $ | 292,756 | $ | 205,239 | ||||||||
| Food Safety Technologies |
210,546 | 221,213 | 421,092 | 880,284 | ||||||||||||
| Total |
$ | 334,262 | $ | 334,600 | $ | 713,848 | $ | 1,085,523 | ||||||||
| Cost of revenue: |
||||||||||||||||
| Animal Information Solutions |
$ | 46,717 | $ | 47,665 | $ | 114,523 | $ | 77,097 | ||||||||
| Food Safety Technologies (1) |
159,784 | 201,439 | 230,327 | 499,978 | ||||||||||||
| Total |
$ | 206,501 | $ | 249,104 | $ | 344,850 | $ | 577,075 | ||||||||
| Gross Profit (Loss): |
||||||||||||||||
| Animal Information Solutions |
$ | 76,999 | $ | 65,722 | $ | 178,233 | $ | 128,142 | ||||||||
| Food Safety Technologies |
50,762 | 19,774 | 190,765 | 380,306 | ||||||||||||
| Total |
$ | 127,761 | $ | 85,496 | $ | 368,998 | $ | 508,448 | ||||||||
| Operating expense |
1,691,681 | 2,522,332 | 3,852,747 | 4,689,039 | ||||||||||||
| Other income (expense) |
47,223 | 23,290 | (223,832 | ) | 117,700 | |||||||||||
| Loss from continuing operations before income taxes |
$ | (1,516,697 | ) | $ | (2,413,546 | ) | $ | (3,707,581 | ) | $ | (4,062,891 | ) | ||||
| (1) | Cost of revenue for FST includes $98,035 and $104,914 in provision for obsolete inventory for the three and six months ended June 30, 2006 and 2005, respectively. |
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The Company’s assets and other condensed statement of operations data are not allocated to a segment. During the three months ended June 30, 2006, 63% of total revenues were from one FST customer and during the three months ended June 30, 2005, 63% of total revenues were from one FST customer. During the six months ended June 30, 2006, 59% of total revenues were from one FST customer and during the six months ended June 30, 2005, 77% of total revenues were from one FST customer.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements made by or on behalf of eMerge Interactive, Inc. (“eMerge,” “us,” “we,” “our” or the “Company”). All statements in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this report, other than statements of historical facts, which address activities, events or developments that we expect or anticipate will or may occur in the future, including such things as future capital expenditures, growth, product development, sales, business strategy and other similar matters are forward-looking statements. 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 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 market acceptance of our products and services. These forward-looking statements are based largely on our current expectations and assumptions and are subject to a number of risks and uncertainties, many of which are beyond our control. Actual results could differ materially from the forward-looking statements set forth herein as a result of a number of factors, including, but not limited to, the acceptance by our customers of our products and services, our ability to grow revenue, the impact of competition on pricing, general economic conditions, employee turnover, the impact of litigation, our products’ current stage of development, the need for additional financing, competition in various aspects of our business and other risks described in this report and in our other reports on file with the Securities and Exchange Commission. 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,” 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. In light of these risks and uncertainties, all of the forward-looking statements made herein are qualified by these cautionary statements and there can be no assurance that the actual results or developments anticipated by us will be realized. We undertake no obligation to update or revise any of the forward-looking statements contained in this report.
In addition to the other information included in this report and our other public filings and releases, a discussion of factors affecting our business is included in our Annual Report on Form 10-K for the year ended December 31, 2005 and should be considered while evaluating our business, financial condition, results of operations and prospects.
Overview
We are a technology company focusing on individual-animal tracking, food-safety and database management services to the agricultural and meat processing industries. Our products include CattleLog™, a USDA-approved Process Verified Program (“PVP”) providing individual animal data collection and reporting that enables livestock tracking, verification and branding and our VerifEYE™ Carcass Inspection System (“CIS”), a real-time, optical inspection system that scans beef carcasses in packing plants. We are structured into two business segments, Animal Information Systems (“AIS”) and Food Safety Technologies (“FST”).
Key Indicators of Financial Condition and Operating Performance
We believe that sales growth will be our best indicator of success. We believe that increased sales volume will be necessary to permit us to generate a self-sustaining cash flow from operations. The success of our business model depends on the broad acceptance of our technologies into markets that have only recently begun to develop as a result of the growing focus on food safety and assurance. We believe that our products, if adopted on a wide-scale basis, would have a significant impact on improving the safety, quality and confidence in our nation’s food supply. However, potential customers for our products historically have been very slow to change and reluctant to adopt new technologies and business practices. This means that before the industry will fully embrace our primary technologies, like VerifEYE and CattleLog, they likely will conduct a substantial amount of due diligence and testing to ensure that the technology not only performs but also delivers an acceptable rate of return on their investment. Potential factors that may speed up industry adoption of our primary technologies include a regulatory or economic mandate that forces industry adoption.
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Our business is currently dependent on the beef industry. Recent factors, including an ongoing trade dispute between the U.S. and Japan, and the impact of the closing of live cattle trade between the U.S. and Canada in late 2003 through mid 2005, have come together to create poor market conditions in key segments of the U.S. beef industry. The discovery, in December 2003, of Bovine Spongiform Encephalopathy (“BSE”) in the U.S., led to the suspension of $3.0 billion of annual beef exports. Following a federal appeals court decision on July 15, 2005, the Canadian border re-opened for live-cattle trade on a limited basis. On December 12, 2005, the Japanese re-opened to beef imports under specific guidelines and shipments of beef products were begun on a limited basis. In January 2006, several shipments were made to Japan that did not comply with the approved guidelines and on January 20, 2006, Japan re-closed the border while these shipments were investigated. The result of these developments has been a reduction in the U.S. cattle supply and unfavorable prospects for some segments of the industry in 2006. Among other implications of these industry conditions is that key industry segments have reduced discretionary capital spending, which could have a material adverse effect on our prospects.
Effective July 27, 2006, Japan announced that it will reopen its market to U.S. beef from cattle 20 months of age and younger. Although we believe this is good news for our Company, the effect of this announcement on the U.S. cattle export market and future prospects for the various segments of the industry is unknown at this time, and it is anticipated that it will be several months or more before the effects of the re-opening will start to be realized by the industry
As previously disclosed, we have retained AgriCapital Corporation and B. Riley & Co, in a joint engagement, to advise our management and our Board of Directors regarding alternative strategies concerning liquidity and shareholder value, including potential capital sources, investors, acquirers, licensees, and/or merger partners, for all or part of our business. This process is ongoing, and we have taken the cost reduction measures discussed below in part to enhance our ability to pursue any potential opportunities that arise from this process.
As previously disclosed, we had been working on the application of the VerifEYE food safety technology for detection of bio-hazardous contamination on human hands and other surfaces. In implementing our 2006 business plan, we completed a review of our products under development, including the HandScan, CIS II and the cameraless version of VerifEYE products. Based on additional market research and the anticipated costs required to successfully bring these products to market, as well as our determination that it is necessary to implement additional cost cutting measures for 2006, the research and development of these VerifEYE derivative products was halted. As a result of this decision to halt research and development, we reduced our workforce by ten, effective March 7, 2006. We will continue to maintain and market the existing CIS products. We will continue to maintain the existing Solo products on behalf of our current customers and we will respond to customer demand for new units. However, we do not believe there will be any significant increase in the revenues on these existing products in the near future.
The following discussion of our financial condition, results of operations and liquidity should be read in conjunction with the financial statements of the Company and the related notes included elsewhere in this report.
Liquidity and Capital Resources
In January 2006, we completed a private equity placement of common stock and warrants, receiving gross proceeds of $3.2 million in cash. Cash and cash equivalents as of June 30, 2006 were $3.0 million. Increases in sales of our products are expected to be the most important source of future cash flow. We expect that our existing cash balances, working capital and sales of our products and services will meet our cash flow needs during 2006. Unless we are able to generate significantly higher sales from our products and services in 2006, we will need to seek additional sources of liquidity and implement cost control measures. There can be no assurance that sources of liquidity will be available in an amount and on terms that are acceptable to us. If we are unable to significantly grow our sales or raise additional funds, our business may not ultimately be financially viable.
We will continue to explore strategic alternatives to improve our liquidity with a focus on merger partners, acquisitions, investors or other debt or equity financing alternatives to meet our working capital requirements. If additional funds are raised through alternative debt financing that provides for the issuance of equity securities or through the issuance of
16
equity securities, our stockholders may experience significant dilution. Furthermore, there can be no assurance that any additional funding will be available when needed, or that if available, such financing will include favorable terms. See “Item 1A – Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2005.
Sources and Uses of Cash
As of June 30, 2006, we had cash and cash equivalents totaling $3.0 million compared to $2.9 million at December 31, 2005. Our working capital balance as of both June 30, 2006 and December 31, 2005 was $2.4 million.
We have had significant negative cash flows from operating activities for each fiscal and quarterly period to date. Net cash used in operating activities was $2.9 million for the six months ended June 30, 2006 and consisted primarily of net operating losses offset by changes in working capital.
Net cash provided by investing activities was $13,000 for the six months ended June 30, 2006. Our investing activities consist primarily of capital expenditures offset by payments received on the note receivable associated with the sale of Professional Cattle Consultants (“PCC”) assets in March 2005.
Net cash provided by financing activities was $2.9 million for the six months ended June 30, 2006. Our financing activities consist primarily of a private equity placement and warrant exercise, which together resulted in net proceeds of $2.9 million.
Our future working capital requirements will depend on a variety of factors including our ability to successfully implement our current business plan, the adoption and timely implementation of our products and our reduction of net cash outflow.
Other Matters
There were no changes in the components of the Company’s critical accounting policies except for the adoption of SFAS 123(R) during the six months ended June 30, 2006.
We are not engaged in off-balance sheet arrangements or trading activities that involve non-exchange traded contracts.
On May 31, 2006, we effected a one-for-fifteen reverse stock split in an effort to regain compliance with Nasdaq’s $1 minimum bid price requirement. During the ten-day trading period ending June 14, 2006 our stock closed at a bid price above $1 on each trading day. On June 16, 2006, Nasdaq notified us that we had regained compliance with the minimum bid price requirement for continued listing on the Capital Market. All common share data presented in this Quarterly Report on Form 10-Q and in the financial statements and notes thereto included herein has been restated to retroactively reflect the Reverse Split.
While we currently meet all applicable requirements for continued listing on the Capital Market, there can be no assurance that we will be able to maintain long-term compliance with all such requirements. The Capital Market’s requirements for continued listing include: (i) stockholders’ equity of $2.5 million or market value of listed securities of $35 million or net income from continuing operations (in the latest fiscal year or in two of the last three fiscal years) of $500,000; (ii) 500,000 publicly held shares: (iii) market value of publicly held shares of $1 million; (iv) minimum bid price of $1; (v) 300 round lot shareholders and (vi) two market makers. . A delisting could have an adverse effect on the liquidity of our common stock and could also adversely impact our ability to raise additional equity capital or consummate strategic transactions such as mergers or acquisitions.
Results of Operations
Three months ended June 30, 2006 and June 30, 2005
Revenue
Revenue remained level at $334,000 for the quarter ended June 30, 2006 and $335,000 for the quarter ended June 30, 2005. AIS revenues increased 9% to $124,000 for the quarter ended June 30, 2006 from $113,000 for the quarter ended June 30, 2005 due primarily to growth in CattleLog data and consulting services, while FST revenues decreased 5% to 211,000 for the quarter ended June 30, 2006 from $221,000 for the quarter ended June 30, 2005 due to a decrease in the number of Solo units sold in 2006.
17
Cost of Revenue
Cost of revenue decreased by 17% to $207,000 for the quarter ended June 30, 2006 from $249,000 for the quarter ended June 30, 2005. This decrease is due primarily to the change in the mix of products sold, particularly the decrease in FST revenues and the associated decrease in direct costs, versus an increase in the higher profit margin AIS revenues. In addition, cost of revenue includes a write-off of obsolete inventory of $98,000 and $105,000 for the quarters ended June 30, 2006 and 2005, respectively. We generated a gross profit of $128,000 and $85,000 for the quarters ended June 30, 2006 and 2005, respectively. The increase in gross profit is due primarily to the decrease in direct costs associated with FST products and the decrease in the provision for obsolete inventory in the current quarter.
Selling, General and Administrative Expenses
Selling, general and administrative expenses remained level at $1.5 million for both the quarter ended June 30, 2006 and the quarter ended June 30, 2005, reflecting primarily decreased corporate expenses for salaries and wages as well as lower professional services and insurance expenses in the current quarter offset in part by the non-cash expense of $147,000 for stock option expense which we began recording as of January 1, 2006 upon the adoption of SFAS 123(R).
Technology and Development
Our technology and development expenses decreased 76% to $169,000 for the quarter ended June 30, 2006 from $701,000 for the quarter ended June 30, 2005, reflecting the expected decrease in salaries and benefits, consulting and travel expenses that resulted from the halting of all research and development of new VerifEYE products and the termination of all of our employees performing research and development of VerifEYE products in March 2006. We expect technology and development expenses to continue to decrease for the balance of 2006.
Depreciation
Depreciation expense decreased 80% to $64,000 for the quarter ended June 30, 2006 from $315,000 for the quarter ended June 30, 2005. The decrease is primarily due to an increase in the portion of property, plant and equipment that has been fully depreciated during the period ended June 30, 2006.
Other Income and Expense
Interest and other income, net increased to $51,000 for the quarter ended June 30, 2006 from $48,000 for the quarter ended June 30, 2005. Income for the quarter ended June 30, 2006 consists of interest income of $45,000 and miscellaneous income of $7,000. Income for the quarter ended June 30, 2005 consists of interest income of $31,000 and miscellaneous rental income on a sublease of $17,000.
Interest expense was $5,000 for both the quarter ended June 30, 2006 and the quarter ended June 30, 2005.
Due to the losses incurred, we did not recognize income tax expense for the quarter ended June 30, 2006 or the quarter ended June 30, 2005.
Discontinued Operations
The gain from discontinued cattle operations was $400 and $1,400 for the three months ended June 30, 2006 and 2005, respectively. The gains from discontinued operations for both periods relates to the collection of receivables, previously considered uncollectible, in excess of expenses relating to previously closed cattle operations.
Six months ended June 30, 2006 and June 30, 2005
Revenue
Revenue decreased by 34% to $714,000 for the six months ended June 30, 2006 from $1.1 million for the six months ended June 30, 2005. In the six months ended June 30, 2006, AIS revenues increased 43% to $293,000 compared to $205,000 in the prior year period. This increase was offset by FST revenues, which decreased 52% to $421,000 in the six
18
months ended June 30, 2006, consisting of the leases on two CIS units and the service revenues on the one CIS unit sold in the prior year, compared to $880,000 in the prior year period, which consists of the sale of one CIS unit, previously under a lease agreement, the leases on two CIS units and the sale of a number of Solo units in the same period a year ago.
Cost of Revenue
Cost of revenue decreased by 40% to $345,000 for the six months ended June 30, 2006 from $577,000 for the six months ended June 30, 2005. This decrease is due principally to the cost of revenues associated with the sale of the CIS unit in the prior year. We generated a gross profit of $369,000 and $508,000 for the six months ended June 30, 2006 and 2005, respectively. The decrease in gross profit is due primarily to the decrease in VerifEYE CIS revenues.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased 8% to $3.1 million for the six months ended June 30, 2006, from $2.8 million for the six months ended June 30, 2005, reflecting primarily the non-cash expense relating to vesting stock options of $315,000, which we began recording as of January 1, 2006 upon the adoption of SFAS 123(R). In addition, we recorded compensation expense of $70,000 for severance packages provided due to the work force reduction completed on March 7, 2006.
Technology and Development
Our technology and development expenses decreased 51% to $589,000 for the six months ended June 30, 2006 from $1.2 million for the six months ended June 30, 2005, reflecting primarily decreased salaries and benefits, consulting and travel expenses, resulting from the halting of all research and development of new VerifEYE products and the termination of all of our employees performing research and development of VerifEYE products in March 2006. These savings are partially offset by the non-cash expense relating to vesting stock options of $31,000, which we began recording as of January 1, 2006 upon the adoption of SFAS 123(R) and compensation expense of $124,000 for severance packages provided due to the work force reduction completed on March 7, 2006. We expect technology and development expenses to continue to decrease in 2006.
Depreciation
Depreciation expense decreased 69% to $206,000 for the six months ended June 30, 2006 from $669,000 for the six months ended June 30, 2005. The decrease is primarily due to an increase in the portion of property, plant and equipment that has been fully depreciated during the year ended June 30, 2006.
Other Income and Expense
Interest and other income, net decreased to $86,000 for the six months ended June 30, 2006 from $174,000 for the six months ended June 30, 2005. Interest and other income, net for the six months ended June 30, 2006 consists of interest income of $79,000 and miscellaneous income of $7,000. Interest and other income, net for the six months ended June 30, 2005 consists of interest income of $68,000, income from the sale of a marine application technology rights of $88,000, miscellaneous rental income of $17,000 from a sublease contract and $1,000 in miscellaneous income.
Interest expense was $10,000 for the six months ended June 30, 2006 and $9,000 for the six months ended June 30, 2005.
Net increase in fair value of common stock warrants of $301,000 for the six months ended June 30, 2006, represents the change in fair value of the warrants due to the re-pricing of the Biegert warrants from $14.70 per share to $5.40 per share, the Sage warrants from $21.00 per share to $5.40 per share and the HBK warrants from $30.00 per share to $5.40 per share effective as of the completion of the private equity financing on January 27, 2006. Net increase in fair value of common stock warrants of $22,000 for the six months ended June 30, 2005, represents the change in fair value of the warrants due to the re-pricing of the Sage warrants from $24.00 per share to $21.00 per share effective as of the completion of the private equity financing on January 27, 2005. These transactions are more fully described in notes 5 and 6 to the condensed financial statements.
19
Due to the losses incurred, we did not recognize income tax expense for the six months ended June 30, 2006 or the six months ended June 30, 2005.
Discontinued Operations
The gain from discontinued operations was $10,000 and $21,000 for the six months ended June 30, 2006 and 2005, respectively. The gain from discontinued operations relates primarily to the collection of receivables, previously considered uncollectible, in excess of expenses relating to previously closed cattle operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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. As of June 30, 2006, our investments consisted of $2.9 million in cash equivalents with maturities of less than three 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 of a 10% increase or decrease in interest rates on our future results of operations and the future value of our portfolio will depend largely on the gross amount of our investments.
ITEM 4. CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports that we file or submit under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC, and that such information is accumulated and communicated to our management timely. An evaluation was performed under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of June 30, 2006. Based upon that evaluation, our management, including our Chief Executive Officer and our Chief Financial Officer, concluded that our disclosure controls and procedures were effective as of June 30, 2006.
During the quarter ended June 30, 2006, there was no change in the Company’s internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
There have been no material developments in the legal proceedings previously reported.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
We held our Annual Meeting of Stockholders on May 18, 2006. At the Annual Meeting, the stockholders approved the following proposals listed in our Proxy Statement dated April 21, 2006:
| I. | Election of Four Directors |
The number of votes cast or withheld with respect to the election of each of the directors is set forth below:
| For | Withheld | |||
| John C. Belknap |
3,680,010 | 86,470 | ||
| John C. Foltz |
3,701,875 | 64,696 | ||
| Robert S. Spencer |
3,705,261 | 61,310 | ||
| David C. Warren |
3,679,703 | 86,868 |
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There were no broker non-votes with respect to the election of directors.
| II. | Approve an Amendment and Restatement of the Certificate of Incorporation to Effect a Reverse Split and Reduce the Number of Authorized Shares |
The shareholders voted to approve an amendment and restatement of our Certificate of Incorporation to, (i) effect a reverse split of our Company’s outstanding shares of class A common stock by a ratio of one-for-five to one-for-fifteen, inclusive and (ii) reduce the number of authorized shares of common stock and preferred stock. 3,418,694 votes were cast for the amendment, 281,645 votes were cast against the amendment and 3,232 shares abstained from voting.
| III. | Approve an Amendment and Restatement of the Certificate of Incorporation to Effect Specified Changes in the Designated Stock, Clarifications and Corrections |
The shareholders voted to approve an amendment and restatement of our Certificate of Incorporation to, (i) eliminate several series of common and preferred stock that are no longer outstanding, (ii) change the designation of class A common stock, par value $0.008 per share, to common stock, par value $0.01 per share, (iii) clarify the Board of Directors’ authority to set the terms of and issue series of preferred stock in the future and (iv) make certain typographical corrections. 3,606,979 votes were cast for the amendment, 142,513 votes were cast against the amendment and 17,078 shares abstained from voting.
These items were the only matters voted upon at the Annual Meeting.
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| (a) | Exhibits |
| Exhibit Number |
Description |
Reference | ||
| 10.1 | Letter Agreement, dated May 22, 2006, by and between eMerge Interactive, Inc. and Susan D. Mermer, regarding the amended and restated terms of Ms. Mermer’s employment agreement with eMerge Interactive, Inc. (Exhibit 10.1) | (1) | ||
| 10.2 | Commercial lease, dated July 6, 2006, by and between eMerge Interactive, Inc. and Waldo Development, Inc. (Exhibit 10.1) | (2) | ||
| 10.3 | Cooperative Marketing Agreement, dated July 7, 2006, by and between eMerge Interactive, Inc. and Power Genetics Company (Exhibit 10.2) | (2) | ||
| 31.1 | Certificate of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | * | ||
| 31.2 | Certificate of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | * | ||
| 32.1 | Certification by David C. Warren Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | * | ||
| 32.2 | Certification by Susan D. Mermer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | * | ||
| (1) | Incorporated by reference from exhibit shown in parentheses contained in the Company’s Current Report on Form 8-K dated May 25, 2006, filed with the Commission. |
| (2) | Incorporated by reference from exhibit shown in parentheses contained in the Company’s Current Report on Form 8-K dated July 12, 2006, filed with the Commission. |
| * | Filed herewith. |
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Pursuant to the requirements 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 10, 2006 | EMERGE INTERACTIVE, INC. | |||
| By: | /s/ DAVID C. WARREN | |||
| David C. Warren | ||||
| President, Chief Executive Officer and Director (Principal Executive Officer) | ||||
| /s/ SUSAN D. MERMER | ||||
| Susan D. Mermer | ||||
| Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) | ||||
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