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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 September 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) 581-9700
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 November 8, 2002, was 38,729,068. There were 33,034,623 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 September 30, 2002)

TABLE OF CONTENTS

        Page
           
PART I   FINANCIAL INFORMATION  
           
    Item 1.   Financial Statements:  
        Condensed Consolidated Balance Sheets as of September 30, 2002 and December 31, 2001 3
        Condensed Consolidated Statements of Operations for the three months ended September 30, 2002 and 2001 5
        Condensed Consolidated Statements of Operations for the nine months ended September 30, 2002 and 2001 6
        Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2002 and 2001 8
        Notes to Condensed Consolidated Financial Statements 10
    Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations 21
    Item 3.   Quantitative and Qualitative Disclosures about Market Risk 30
    Item 4.   Controls and Procedures 31
           
PART II   OTHER INFORMATION  
           
    Item 1.   Legal Proceedings 31
    Item 6.   Exhibits and Reports on Form 8-K 31

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PART I. FINANCIAL INFORMATION

ITEM 1.    FINANCIAL STATEMENTS

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

September 30,
2002		 December 31,
2001
         
Assets          
Current assets:              
   Cash and cash equivalents   $ 4,630,085   $ 8,934,348  
   Restricted cash (note 3)     1,150,000     9,801,814  
   Trade accounts receivable, less allowance for doubtful accounts of $575,558 in
       2002 and $382,512 in 2001 (including receivables from related parties of
       approximately $0 in 2002 and $735,000 in 2001) (note 5)		     371,211     12,775,126  
   Inventories (note 4)     88,097     6,873,315  
   Cattle deposits     734,958     2,082,567  
   Prepaid expenses     367,066     2,189,794  
   Other current assets     1,370     182,175  
   Due from related parties (note 5)     3,897,524     121,004  
   Assets held for sale     108,931     —  
             
     Total current assets     11,349,242     42,960,143  
             
Property, plant and equipment, net of accumulated depreciation of $5,853,127 in
    2002 and $5,409,117 in 2001		     6,103,750     15,207,829  
Investment in Turnkey Computer Systems, Inc. (note 6)     321,554     2,716,424  
Intangibles, net of accumulated amortization of $839,664 in 2002 and
    $6,309,028 in 2001 (note 6)		     748,127     6,308,659  
Restricted cash (note 3)     —     1,505,000  
             
     Total assets   $ 18,522,673   $ 68,698,055  

See accompanying notes to condensed consolidated financial statements.

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September 30,
2002		 December 31,
2001
     
Liabilities and Stockholders’ Equity      
Current liabilities:              
   Current installments of capital lease obligation   $ 311,821   $ 366,542  
   Lines of credit (note 7)     —     9,658,062  
   Accounts payable (including payables to related parties of approximately
       $0 in 2002 and $3,800,000 in 2001) (note 5)		     489,327     12,041,661  
   Accrued liabilities:              
     Salaries and benefits     465,505     1,336,415  
     Other     953,782     1,228,196  
   Advance payments from customers     134,820     392,566  
   Due to related parties (note 5)     —     10,641  
             
       Total current liabilities     2,355,255     25,034,083  
             
Capital lease obligation, excluding current installments     277,083     537,054  
             
       Total liabilities     2,632,338     25,571,137  
             
Minority interest     —     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, 34,278,478 shares
         issued and 33,034,623 shares outstanding in 2002 and 33,939,725 shares
         issued and outstanding 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     200,699,936     200,231,953  
Accumulated deficit     (184,701,074 )   (157,928,313 )
Unearned compensation     (274 )   (43,104 )
Treasury stock, 1,243,855 Class A common shares in 2002 and 0 Class A
    common shares in 2001, at cost (note 10)		     (428,036 )   —  
             
       Total stockholders’ equity     15,890,335     42,577,609  
             
       Total liabilities and stockholders’ equity   $ 18,522,673   $ 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 September 30, 2002 and 2001
(Unaudited)

Three Months Ended
September 30,
2002 2001
             
Revenue (including sales to related parties of approximately $190,000 in 2002
    and $858,000 in 2001) (note 5)		   $ 764,733   $ 6,250,906  
             
Cost of revenue (including purchases from related parties of approximately $0
    in 2002 and $391,000 in 2001) (note 5)		     670,072     6,113,406  
             
     Gross profit     94,661     137,500  
             
Operating expenses:              
   Selling, general and administrative     1,445,062     2,550,235  
   Technology and development     823,847     933,335  
   Depreciation and amortization of intangibles     946,816     1,005,849  
   Impairment, restructuring and related charges (note 9)     856,443     523,732  
     Total operating expenses     4,072,168     5,013,151  
             
     Operating loss     (3,977,507 )   (4,875,651 )
             
Interest and other income, net     1,344,299     9,184  
Interest expense     (9,454 )   (159,618 )
Gain on disposal of assets     13,732     ––  
Equity in operations of unconsolidated investee     21,554     (77,137 )
Impairment of investment in unconsolidated investee (note 6)     (2,398,935 )   ––  
             
         Loss from continuing operations before income taxes     (5,006,311 )   (5,103,222 )
Income tax expense (benefit)     ––     ––  
         Loss from continuing operations     (5,006,311 )   (5,103,222 )
             
Discontinued operations: (note 10)              
   Loss from discontinued operations, net of income taxes of $0 in 2002 and
       2001 (note 5 and 9)		     (869,045 )   (42,147,241 )
   Gain on disposition of discontinued operations, net of income taxes of $0 in
       2002		     143,442     ––  
             
       Net loss   $ (5,731,914 ) $ (47,250,463 )
             
Basic and diluted earnings (loss) per share:              
     Loss from continuing operations   $ (0.13 ) $ (0.14 )
     Loss from discontinued operations     (0.02 )   (1.18 )
             
       Net loss per common share – basic and diluted   $ (0.15 ) $ (1.32 )
             
Weighted average number of common shares outstanding - basic and diluted     39,236,131     35,761,243  

See accompanying notes to condensed consolidated financial statements.

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

Nine Months Ended
September 30,
2002 2001
             
Revenue (including sales to related parties of approximately $2,931,000 in
    2002 and $2,155,000 in 2001) (note 5)		   $ 13,348,557   $ 26,532,951  
             
Cost of revenue (including purchases from related parties of approximately
    $418,000 in 2002 and $391,000 in 2001) (note 5)		     13,015,624     26,261,591  
             
     Gross profit     332,933     271,360  
             
Operating expenses:              
   Selling, general and administrative     6,425,008     11,008,086  
   Technology and development     2,214,281     3,566,932  
   Depreciation and amortization of intangibles     2,982,090     3,901,339  
   Impairment, restructuring and related charges (note 9)     2,954,246     12,309,786  
     Total operating expenses     14,575,625     30,786,142  
             
     Operating loss     (14,242,692 )   (30,514,782 )
             
Interest and other income, net     1,517,625     171,568  
Interest expense     (435,814 )   (161,326 )
Loss on disposal of assets     (41,577 )   ––  
Equity in operations of unconsolidated investee     4,066     (174,714 )
Impairment of investment in unconsolidated investee (note 6)     (2,398,935 )   ––  
             
       Loss from continuing operations before income taxes, extraordinary
            item and cumulative effect of accounting change		     (15,597,327 )   (30,679,254 )
Income tax expense (benefit)     ––     ––  
       Loss from continuing operations before extraordinary item and
            cumulative effect of accounting change		     (15,597,327 )   (30,679,254 )
             
Discontinued operations: (note 10)              
   Loss from discontinued operations, net of income taxes of $0 in 2002 and
       2001 (note 5 and 9)		     (8,067,489 )   (50,792,215 )
   Loss on disposition of discontinued operations, net of income taxes of $0 in
       2002		     (1,294,398 )   ––  
             
       Loss before extraordinary item and cumulative effect of accounting
            change		     (24,959,214 )   (81,471,469 )
             
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   $ (26,772,761 ) $ (81,704,157 )

 

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Nine Months Ended
September 30,
2002 2001
Basic and diluted earnings (loss) per share:              
   Loss from continuing operations before extraordinary item and cumulative
       effect of accounting change		   $ (0.39 ) $ (0.86 )
   Loss from discontinued operations     (0.24 )   (1.43 )
   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   $ (0.68 ) $ (2.30 )
             
Weighted average number of common shares outstanding – basic and diluted     39,637,767     35,578,598  

See accompanying notes to condensed consolidated financial statements.

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eMerge Interactive, Inc.
Condensed Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 2002 and 2001
(Unaudited)

Nine Months Ended September 30,
2002 2001
Cash flows from operating activities:              
   Net loss   $ (26,772,761 ) $ (81,704,157 )
   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     3,089,082     13,737,081  
     Loss on disposal of assets     52,138     ––  
     Impairment of assets held and used     2,679,082     12,421,627  
     Impairment of assets held for sale     6,958,107     39,362,583  
     Equity in operations of unconsolidated investee     (4,066 )   (29,712 )
     Impairment of investment in unconsolidated investee     2,398,936     ––  
     Noncash compensation     ––     301,156  
     Amortization of unearned compensation     13,523     21,161  
     Change in fair value of financial instruments     (64,238 )   (551,735 )
     Minority interest     (136,447 )   ––  
Changes in operating assets and liabilities:              
     Trade accounts receivable, net     12,403,915     (8,474,486 )
     Inventories     6,785,218     (328,784 )
     Cattle deposits     1,347,609     (1,485,161 )
     Prepaid expenses and other assets     709,645     (285,093 )
     Restricted cash     355,000     (478,131 )
     Due from/to related parties, net     (3,413,955 )   (268,299 )
     Accounts payable and accrued liabilities     (12,727,709 )   1,324,300  
     Advance payments from customers     (257,746 )   17,940  
             
     Net cash used in operating activities     (5,226,541 )   (26,187,022 )
             
Cash flows from investing activities:              
   Business combinations, net of cash acquired     (687,500 )   (9,311,770 )
   Purchase of property, plant and equipment     (536,469 )   (6,457,639 )
   Proceeds from sale of property, plant and equipment     6,499     ––  
   Proceeds from sale of assets held for sale     2,723,550     ––  
             
     Net cash provided (used) by investing activities     1,506,080     (15,769,409 )
             
Cash flows from financing activities:              
   Payments on capital lease obligations     (314,692 )   (198,086 )
   Net borrowings (payments) on lines of credit     (9,658,062 )   14,573,870  
   Proceeds from minority interest     100,000     ––  
   Distribution to minority interest     (512,862 )      
   Net proceeds from issuance of common stock     ––     2,995,859  
             
     Net cash provided (used) by financing activities     (10,385,616 )   17,371,643  
             
     Net change in cash     (14,106,077 )   (24,584,788 )
             
Cash and cash equivalents, beginning of period     18,736,162     42,811,572  
             
Cash and cash equivalents, end of period   $ 4,630,085   $ 18,226,784  

See accompanying notes to condensed consolidated financial statements.

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eMerge Interactive, Inc.
Condensed Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 2002 and 2001
(Unaudited)

Nine Months Ended September 30,
2002 2001
             
Supplemental disclosures:              
   Cash paid for interest   $ 568,449   $ 141,813  
   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     (428,036 )   ––  
     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     ––  
     Acquisition of equipment through capital lease obligations     ––     864,015  
     Issuance of warrants for debt issue costs     ––     914,376  

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.

  The Company operates entirely within the cattle marketplace. However, the gross margins associated with cattle sales differ from the rest of the Company’s cattle-related product offerings. Accordingly, the Company’s reportable segments consist of cattle sales and other products and services.

         (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-Lived 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 September 30, 2002, and the results of operations for the three and nine-month periods ending September 30, 2002 and 2001. The results of operations for the nine months ended September 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. As of September 30, 2002, all lease and operating agreements are no longer effective and the related assets have been sold. Accordingly, the activities conducted by these businesses are no longer consolidated. 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 during the three months ended September 30, 2002 completed a review for impairment in accordance with APB Opinion No. 18. Based on this review, the Company recognized a of $2.4 million impairment charge as management believes there is a loss in value of the investment that is other than a temporary decline.

         (d)      Revenue Recognition

  The Company generates 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.

  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 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

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  from 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 results 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 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 statements issued after May 15, 2002 for other provisions. Early application is encouraged. Based on the Company’s current situation, only the recission of SFAS No. 4 is currently expected to impact the Company. Upon adoption, the Company will be required to reclassify the $1.8 million extraordinary item related to early extinguishment of debt recorded during the quarter ended June 30, 2002 to continuing operations. The Company has not yet determined the date it will adopt SFAS No. 145.

  Statement of Financial Accounting Standards No. 146 “Accounting for Costs Associated with Exit or Disposal Activities” (SFAS No. 146), was issued in June 2002. SFAS No. 146 is applicable for exit or disposal activities initiated after December 31, 2002. Early adoption is encouraged. SFAS No. 146 applies to costs associated with an exit activity or with a disposal of long-lived assets. Upon adoption, a company may not restate previously issued financial statements. The Company has not yet determined the date it will adopt SFAS No. 146.

(2)      Liquidity

  The Company has incurred losses and negative cash flows from operations in every year since inception and has an accumulated deficit of $184.7 million as of September 30, 2002. For the nine months ended September 30, 2002, the Company incurred a net loss of approximately $26.8 million and negative cash flows from operations of $5.2 million. Management expects operating losses and negative cash flows to continue throughout 2002. During the second quarter of 2002, the Company determined that the Company’s long term goals and interests are best served by divesting all the remaining owned cattle operations, as well as the leased cattle operations, through sale or liquidation. This action is expected to free up working capital and generate proceeds from sales. The Company expects that cash balances and cash flows generated from all activities will meet its anticipated cash requirements during 2002. In addition, the Company plans to increase its revenue related to non-cattle sales, actively control operating costs and continue to evaluate the structure of its operations to improve cash flows for the foreseeable future.

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(3)      Restricted Cash

  Current restricted cash as of September 30, 2002 consists of cash invested in certificates of deposit with maturities of 180 days or less. These certificates of deposit are necessary to support the Company’s bond requirement with the U.S. Department of Agriculture Grain Inspection, Packers and Stockyards Administration to buy and sell cattle in the U.S. public market. These balances were non-current restricted cash as of December 31, 2001. These balances are considered current as of September 30, 2002 due to the divestiture of the cattle businesses and the resulting reduction in the Company’s bond requirement. As of October 25, 2002, the Company received $870,000 due to a release of the collateral supporting the trust fund agreement associated with the cattle order buying businesses. The balance of $280,000 is expected to be released by December 31, 2002.

  Current restricted cash as of December 31, 2001 is cash held by lessee/operator entities and is related to the lease and operating agreement activities. Accordingly, this cash may only be used to satisfy the cash flow requirements of these activities and is not available to the Company for other uses. As of September 30, 2002, the lease and operating agreements are no longer effective and, therefore, there is