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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

  x Quarterly Report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended June 30, 2002.

OR

  o 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
(State or other jurisdiction of
incorporation or organization)
   65-0534535
(I.R.S. Employer Identification No.)
  

10305 102nd Terrace Sebastian, Florida 32958
(Address of principal executive offices)

(772) 299-8000
Registrant’s telephone number, including area code:

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days:
YES x NO o

The number of shares of the registrant’s common stock, $0.008 par value, outstanding as of August 9, 2002, was 39,883,338. There were 34,188,893 shares of Class A common stock outstanding and 5,694,445 shares of Class B common outstanding as of this date.

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eMerge Interactive, Inc.

FORM 10-Q QUARTERLY REPORT
(For Three Months Ended June 30, 2002)

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      Page
PART I FINANCIAL INFORMATION  
     
Item 1. Financial Statements:  
     
  Condensed Consolidated Balance Sheets as of June 30, 2002 and December 31, 2001 3
     
  Condensed Consolidated Statements of Operations for the three months ended June 30,
   2002 and 2001		 5
     
  Condensed Consolidated Statements of Operations for the six months ended June 30, 2002
   and 2001		 6
     
  Condensed Consolidated Statements of Cash Flows for the six months ended June 30,
   2002 and 2001		 7
   
  Notes to Condensed Consolidated Financial Statements 9
   
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 18
   
Item 3. Quantitative and Qualitative Disclosures about Market Risk 27
   
   
   
PART II OTHER INFORMATION  
     
Item 1. Legal Proceedings 28
     
Item 4. Submission of Matters to a Vote of Security Holders 28
     
Item 6. Exhibits and Reports on Form 8-K 29
     

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PART I.  FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

eMerge Interactive, Inc.
Condensed Consolidated Balance Sheets
(Unaudited)

June 30,
2002 		December 31,
2001
    ASSETS              
Current assets:              
   Cash and cash equivalents   $ 6,101,304   $ 8,934,348  
   Restricted cash (note 3)     3,338,857     9,801,814  
   Trade accounts receivable, less allowance for doubtful accounts of $982,049 in
      2002 and $382,512 in 2001 (including receivables from related parties of
      approximately $978,000 in 2002 and $735,000 in 2001) (note 5)		     12,112,528     12,775,126  
   Inventories (note 4)     9,872,138     6,873,315  
   Cattle deposits     2,083,082     2,082,567  
   Prepaid expenses     475,575     2,189,794  
   Other current assets     —     182,175  
   Due from related parties (note 5)     77,029     121,004  
   Assets held for sale     1,999,679     —  
             
       Total current assets     36,060,192     42,960,143  
             
Property, plant and equipment, net of accumulated depreciation of $6,496,180 in
   2002 and $5,409,117 in 2001		     8,108,466     15,207,829  
Investment in Turnkey Computer Systems, Inc.     2,698,935     2,716,424  
Intangibles, net of accumulated amortization of $1,323,127 in 2002 and $6,309,028 in
   2001 (note 6)		     791,938     6,308,659  
Restricted cash (note 3)     1,505,000     1,505,000  
       Total assets   $ 49,164,531   $ 68,698,055  

See accompanying notes to condensed consolidated financial statements.

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LIABILITIES AND STOCKHOLDERS’ EQUITY      
             
Current liabilities:              
   Current installments of capital lease obligation   $ 307,127   $ 366,542  
   Lines of credit (note 7)     14,148,274     9,658,062  
   Accounts payable (including payables to related parties of approximately
      $982,000 in 2002 and $3,800,000 in 2001) (note 5)		     9,325,888     12,041,661  
   Accrued liabilities:              
     Salaries and benefits     1,056,309     1,336,415  
     Other     1,602,823     1,228,196  
   Advance payments from customers     277,790     392,566  
   Due to related parties (note 5)     —     10,641  
       Total current liabilities     26,718,211     25,034,083  
Capital lease obligation, excluding current installments     382,963     537,054  
       Total liabilities     27,101,174     25,571,137  
Minority interest     51,622     549,309  
Stockholders’ equity (notes 8 and 12)              
   Common stock, $.008 par value, authorized 100,000,000 shares:              
     Class A common stock, designated 92,711,110 shares, issued
        34,278,478 shares in 2002 and 33,939,725 shares in 2001		     274,227     271,517  
     Class B common stock, designated 7,288,890 shares, 5,694,445 shares
        issued and outstanding in 2002 and 2001		     45,556     45,556  
Additional paid-in capital     200,729,243     200,231,953  
Accumulated deficit     (178,969,160 )   (157,928,313 )
Unearned compensation     (34,089 )   (43,104 )
Treasury stock, 89,585 Class A common shares in 2002 and
   0 Class A common shares in 2001, at cost (note 10)		     (34,042 )   —  
       Total stockholders’ equity     22,011,735     42,577,609  
       Total liabilities and stockholders’ equity   $ 49,164,531   $ 68,698,055  

See accompanying notes to condensed consolidated financial statements.

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eMerge Interactive, Inc.
Condensed Consolidated Statements of Operations
For the Three Months Ended June 30, 2002 and 2001
(Unaudited)

Three Months Ended
June 30,
2002 2001
Revenue (including sales to related parties of approximately $1,213,000 in
   2002 and $29,000 in 2001) (note 5)		   $ 23,982,906   $ 43,494,066  
Cost of revenue (including purchases from related parties of approximately $0
   in 2002 and 2001) (note 5)		     23,803,124     43,122,590  
     Gross profit     179,782     371,476  
Operating expenses:              
   Selling, general and administrative     3,511,541     4,669,714  
   Technology and development     804,273     1,203,530  
   Depreciation and amortization of intangibles     1,000,684     1,396,374  
   Impairment, restructuring and related charges (note 9)     2,039,879     11,786,054  
     Total operating expenses     7,356,377     19,055,672  
     Operating loss     (7,176,595 )   (18,684,196 )
Interest and other income, net     77,610     8,024  
Interest expense     (117,768 )   ––  
Loss on disposal of assets     (54,009 )   ––  
Equity in operations of unconsolidated investee     (19,875 )   (59,314 )
       Loss from continuing operations before income taxes and extraordinary
          item		     (7,290,637 )   (18,735,486 )
Income tax expense (benefit)     ––     ––  
       Loss from continuing operations before extraordinary item     (7,290,637 )   (18,735,486 )
Discontinued operations: (note 10)              
   Loss from discontinued operations, net of income taxes of $0 in 2002 and
      2001 (note 9)		     (6,343,649 )   (5,496,669 )
   Loss on disposition of discontinued operations, net of income taxes of $0 in
      2002		     (1,437,841 )   ––  
       Loss before extraordinary item     (15,072,127 )   (24,232,155 )
Extraordinary item – loss on early extinguishment of debt (note 7)     (1,813,547 )   ––  
       Net loss   $ (16,885,674 ) $ (24,232,155 )
Basic and diluted earnings (loss) per share:              
     Loss from continuing operations before extraordinary item   $ (0.18 ) $ (0.53 )
     Loss from discontinued operations     (0.19 )   (0.15 )
    Extraordinary item – loss on early extinguishment of debt     (0.05 )   ––  
     Net loss per common share – basic and diluted   $ (0.42 ) $ (0.68 )
Weighted average number of common shares outstanding - basic and diluted     39,972,923     35,580,420  

See accompanying notes to condensed consolidated financial statements.

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eMerge Interactive, Inc.
Condensed Consolidated Statements of Operations
For the Six Months Ended June 30, 2002 and 2001
(Unaudited)

Six Months Ended
June 30,
2002 2001
Revenue (including sales to related parties of approximately $3,319,000 in
   2002 and $29,000 in 2001) (note 5)		   $ 55,758,553   $ 90,159,195  
Cost of revenue (including purchases from related parties of approximately
   $418,000 in 2002 and $0 in 2001) (note 5)		     55,143,277     89,108,613  
     Gross profit     615,276     1,050,582  
Operating expenses:              
   Selling, general and administrative     6,004,754     9,926,898  
   Technology and development     1,390,435     2,633,597  
   Depreciation and amortization of intangibles     2,035,274     2,961,752  
   Impairment, restructuring and related charges (note 9)     2,225,443     11,786,054  
     Total operating expenses     11,655,906     27,308,301  
     Operating loss     (11,040,630 )   (26,257,719 )
Interest and other income, net     174,856     124,356  
Interest expense     (426,360 )   ––  
Loss on disposal of assets     (54,009 )   ––  
Equity in operations of unconsolidated investee     (17,489 )   (97,577 )
       Loss from continuing operations before income taxes, extraordinary
          item and cumulative effect of accounting change		     (11,363,632 )   (26,230,940 )
Income tax expense (benefit)     ––     ––  
       Loss from continuing operations before extraordinary item and
          cumulative effect of accounting change		     (11,363,632 )   (26,230,940 )
Discontinued operations: (note 10)              
   Loss from discontinued operations, net of income taxes of $0 in 2002 and
      2001 (note 9)		     (6,425,827 )   (7,990,066 )
   Loss on disposition of discontinued operations, net of income taxes of $0 in
      2002		     (1,437,841 )   ––  
       Loss before extraordinary item and cumulative effect of accounting
          change		     (19,227,300 )   (34,221,006 )
Extraordinary item – loss on early extinguishment of debt (note 7)     (1,813,547 )   ––  
Cumulative effect of a change in accounting principle     ––     (232,688 )
       Net loss   $ (21,040,847 ) $ (34,453,694 )
Basic and diluted earnings (loss) per share:              
   Loss from continuing operations before extraordinary item and cumulative
      effect of accounting change		   $ (0.28 ) $ (0.74 )
   Loss from discontinued operations     (0.20 )   (0.22 )
   Extraordinary item – loss on early extinguishment of debt     (0.05 )   ––  
   Cumulative effect of a change in accounting principle     ––     (0.01 )
     Net loss per common share – basic and diluted   $ (0.53 ) $ (0.97 )
Weighted average number of common shares outstanding – basic and diluted     39,841,914     35,505,304  

See accompanying notes to condensed consolidated financial statements.

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EMerge Interactive, Inc.
Condensed Consolidated Statements of Cash Flows
For the Six Months Ended June 30, 2002 and 2001
(Unaudited)

2002 2001
Cash flows from operating activities:              
   Net loss   $ (21,040,847 ) $ (34,453,694 )
   Adjustments to reconcile net loss to net cash used in operating activities:              
     Cumulative effect of change in accounting principle     —     232,688  
     Write-off of deferred debt issue costs     1,358,126        
     Depreciation and amortization     2,137,482     9,513,314  
     Loss on disposal of assets     52,138     —  
     Noncash compensation     —     301,156  
     Amortization of unearned compensation     9,015     16,654  
     Impairment of assets held and used     1,822,640     ––  
     Impairment of assets held for sale     6,675,955     12,360,759  
     Equity in operations of unconsolidated investee     17,489     (38,708 )
     Change in fair value of financial instruments     (59,540 )   (434,472 )
     Minority interest     (96,687 )   ––  
   Changes in operating assets and liabilities:              
     Trade accounts receivable, net     662,598     (6,749,563 )
     Inventories     (2,998,823 )   (2,062,252 )
     Cattle deposits     (515 )   (1,985,806 )
     Prepaid expenses and other assets     597,808     (390,937 )
     Due from/to related parties, net     33,334     514,094  
     Accounts payable and accrued liabilities     (2,651,303 )   4,140,332  
     Advance payments from customers     (114,776 )   115,711  
     Net cash used in operating activities     (13,595,906 )   (18,920,724 )
Cash flows from investing activities:              
   Business combinations, net of cash acquired     (687,500 )   (9,311,770 )
   Purchase of property, plant and equipment     (494,800 )   (6,606,189 )
   Proceeds from sale of property, plant and equipment     6,499     ––  
   Proceeds from sale of assets held for sale     1,600,000     ––  
     Net cash provided by (used in) sale of investing activities     424,199     (15,917,959 )
Cash flows from financing activities:              
   Payments on capital lease obligations     (213,506 )   (146,953 )
   Net borrowings on lines of credit     4,490,212     ––  
   Proceeds from minority interest     100,000     ––  
   Distribution to minority interest     (501,000 )      
   Net proceeds from issuance of common stock     ––     295,191  
     Net cash provided by financing activities     3,875,706     148,238  
     Net change in cash     (9,296,001 )   (34,690,445 )
Cash and cash equivalents, beginning of period     18,736,162     42,811,572  
Cash and cash equivalents, end of period   $ 9,440,161   $ 8,121,127  

See accompanying notes to condensed consolidated financial statements. 

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EMerge Interactive, Inc.
Condensed Consolidated Statements of Cash Flows
For the Six Months Ended June 30, 2002 and 2001
(Unaudited)

2002 2001
             
Supplemental disclosures:              
   Cash paid for interest   $ 535,647   $ 52,913  
   Non-cash investing and financing activities:              
     Accrued liability for Class A common stock to be issued in connection with
        business combination		     30,051     ––  
     Issuance of Class A common stock in connection with business combinations     500,000     687,500  
     Receipt of Class A common stock in connection with business divestiture     (34,042 )   ––  
     Reclass of property, plant and equipment to assets held for sale     5,398,044     ––  
     Reclass of intangible assets to assets held for sale     4,911,632     ––  

See accompanying notes to condensed consolidated financial statements.

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eMerge Interactive, Inc.
Notes to Condensed Consolidated 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 providing individual-animal tracking, food-safety and supply-procurement services to the beef production industry. The Company’s technologies focus primarily on information-management and individual-animal tracking tools, as well as other food safety technologies.
         
        During the second quarter of 2002, the Company announced that it is divesting its cattle operations and plans to either sell or dispose of these operations. Accordingly, operating results for all periods presented exclude the cattle operations that are held for sale and are classified as discontinued operations in the accompanying financial statements. The remaining cattle operations, which are in the process of being disposed, are considered held and used and are included in the operating results for all periods presented until their disposal date, at which time they will be reclassified to discontinued operations.
         
    (b)   Basis of Presentation
         
        The accompanying unaudited Condensed Consolidated Financial Statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America 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 consolidated financial statements included in its fiscal 2001 Annual Report on Form 10-K filed with the Securities and Exchange Commission, except for the adoption of the provisions of Statement of Financial Accounting Standards (“SFAS”) Nos. 142 and 144, “Goodwill and Other Intangible Assets” (see Note 6 of Notes to Condensed Consolidated Financial Statements) and “Accounting for the Impairment or Disposal of Long-Lives Assets,” respectively. 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 consolidated financial position as of June 30, 2002, and the results of operations for the three and six-month periods ending June 30, 2002 and 2001. The results of operations for the six months ended June 30, 2002 are not necessarily indicative of the results to be expected for the full year.
         
        These condensed consolidated financial statements and footnotes should be read in conjunction with the Company’s audited financial statements for the year ended December 31, 2001, included in the Company’s Annual Report on Form 10-K as filed with the Securities and Exchange Commission.

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    (c)   Principles of Consolidation
         
        The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, as well as the activities conducted under the lease and operating agreements. The Company believes that consolidation of these activities, notwithstanding lack of technical majority ownership, is necessary to present fairly the financial position and results of operations of the Company because of the existence of a parent-subsidiary relationship by means of the lessee/operator remaining an employee of the Company, the Company’s majority share of the profits or losses derived from the activities, certain Company control terms of the lease and operating agreements and the relatively short-term nature of the agreements which are terminable by either party. The lessee/operators’ interest in the activities conducted under the lease and operating agreements is included in Discontinued Operations. All significant intercompany balances and transactions have been eliminated in consolidation.
         
        The Company’s investment in Turnkey Computer Systems, Inc. (“Turnkey”), a private corporation, is accounted for by the equity method. Accordingly, the Company’s share of Turnkey’s earnings or losses is reflected in the caption “equity in operations of unconsolidated investee” in the consolidated statements of operations. The Company’s carrying value of Turnkey includes the unamortized excess of the cost of the Company’s interest in Turnkey over its equity in the underlying net assets determined at the dates of acquisition. This excess has been amortized on a straight-line basis over 10 years and the related amortization is included in “equity in operations of unconsolidated investee” in the consolidated statements of operations through December 31, 2001. Upon adoption of SFAS No. 142, the Company ceased amortization of the goodwill and will continue to review for impairment in accordance with APB Opinion No. 18. The Company would recognize a loss when there is a loss in value of the investment that is other than a temporary decline.
         
    (d)   Revenue Recognition
         
        The Company generates substantially all of its revenue from cattle sales transactions where it acts as either a principal or agent in the purchase and sale of cattle. For cattle sales transactions where the Company is the principal in the arrangement, the Company purchases cattle from the seller, records the cattle as inventory until delivered to an accepted buyer and is exposed to both the inventory and credit risk that results from the transaction. In these types of transactions, the Company records the gross revenue earned and related product costs incurred. For cattle sales transactions in which the Company acts as an agent, the Company sells cattle consigned to it on a commission basis, where it is not subject to inventory and credit risk, or the Company sells cattle on a fee basis and records the net revenue earned. For all other products and services offered by the Company, the Company acts as a principal to the transaction and gross revenue and related product cost are recognized as products are shipped or services are provided.
         
    (e)   Impairment of Long-Lived Assets
         
        The Company adopted Statement of Financial Accounting Standard No. 144, “Accounting for the Impairment or Disposal of Long-lived Assets” (SFAS No. 144), as of January 1, 2002. SFAS No. 144 addresses the financial accounting and reporting for the impairment of long-lived assets and for long-lived assets to be disposed of. SFAS No. 144 supercedes Statement of Financial Accounting Standard No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of” (SFAS No. 121), but retains the fundamental provision of SFAS No. 121 for (a) recognition and measurement of the impairment of long-lived assets to be held and used and (b) measurement of long-lived assets to be disposed by sale. SFAS No. 144 also supercedes the accounting and reporting provisions of Accounting Principles Board Opinion No. 30, “Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions.”
         
        Under SFAS No. 144, long-lived assets to be disposed of by sale are classified as held for sale when six specific criteria are met. Assets held for sale are measured at the lower of their carrying amount or fair value less cost to sell. Goodwill is included in an asset group when the asset group is or includes a reporting unit. The results of
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        operations of a component of an entity that has either been disposed of or is classified as held for sale is reported in discontinued operations when the operations and cash flows of the component have been or will be eliminated form the ongoing operations of the entity as a result of the disposal transaction and the entity will not have any significant continuing involvement in the operations of the component after the disposal transaction. A component of an entity comprises operations and cash flows that can clearly be distinguished, operationally and for financial reporting purposes from the rest of an entity. In the period in which a component of an entity has been disposed of or is classified as held for sale, the income statement for current and prior periods report the result s of operations of the component, including any gain or loss resulting from adjustments to fair value, in discontinued operations.
         
        Assets not meeting the criteria of held for sale continue to be classified as held and used until they are disposed of. Impairment losses for assets held and used are measured as the amount by which the carrying amount of the long-lived asset (asset group) exceeds its fair value and are included in continuing operations.
         
    (f)   Recent Accounting Pronouncements
         
        In June 2001, the FASB issued SFAS No. 143, “Accounting for Asset Retirement Obligations” (SFAS No. 143). SFAS No. 143 requires the Company to record the fair value of an asset retirement obligation as a liability in the period in which it incurs a legal obligation associated with the retirement of tangible long-lived assets that result from the acquisition, construction, development and/or normal use of the assets. The Company also records a corresponding asset, which is depreciated over the life of the asset. Subsequent to the initial measurement of the asset retirement obligation, the obligation will be adjusted at the end of each period to reflect the passage of time and changes in the estimated future cash flows underlying the obligation. The Company is required to adopt SFAS No. 143 on January 1, 2003. The Company does not currently have obligations subject to SFAS No. 143 and, therefore, does not currently expect adoption to have an impact on the financial statements.
         
        Statement of Financial Accounting Standards No. 145 “Recission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections” (SFAS No. 145), was issued in April 2002. SFAS No. 145 is applicable for years beginning after May 15, 2002 with respect to early extinguishment of debt and for financial stateme