U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: September 30, 2002
Commission file number: 000-26047
FORGE, INC.
(Exact Name of Small Business Issuer as Specified in Its Charter)
Delaware 65-0609891
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
Suite 610 - 375 Water Street
Vancouver, British Columbia V6B5C6
(Address of Principal Executive Offices)
(604) 801-5566
(Issuer's Telephone Number, Including Area Code)
428 West Sixth Avenue, Vancouver, British Columbia V5Y1L2
(Former Name, Former Address and Former Fiscal Year, if Changed
Since Last Report)
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: December 6, 2002: 519,751 shares of
common stock, $.001 par value per share.
Transitional Small Business Disclosure Format (check one):
Yes No X
----- -----
FORGE, INC. AND SUBSIDIARIES
FORM 10-QSB
QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002
INDEX
Page
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PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Consolidated Balance Sheets
As of September 30, 2002 (Unaudited) and December 31, 2001..................................1
Consolidated Statements of Operations and Deficit (Unaudited)
For the Three and Nine Months Ended September 30, 2002 and September 30, 2001 ..............2
Consolidated Statements of Cash Flows (Unaudited)
For the Nine Months Ended September 30, 2002 and September 30, 2001 ........................3
Notes to Unaudited Consolidated Financial Statements ..............................................4-6
Item 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations ....................................................................7-9
Item 3 - Controls and Procedures ....................................................................9
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings ........................................................................10
Item 2 - Changes in Securities and Use of Proceeds..................................................10
Item 3 - Defaults Upon Senior Securities............................................................10
Item 4 - Submission of Matters to a Vote of Security Holders .......................................10
Item 5 - Other Transactions.........................................................................10
Item 6 - Exhibits and Reports on Form 8-K ..........................................................10
Signatures .........................................................................................11
FORGE, Inc.
Consolidated Balance Sheets (unaudited)
-------------------------------------------------------------------------------------------------------------------
September 30, December 31,
2002 2001
-------------------------------------------------------------------------------------------------------------------
Assets
Current assets:
Cash $ - $ 24,387
Accounts receivable 85,095 87,195
Prepaid expenses 50,943 52,144
--------------------------------------------------------------------------------------------------------------
136,038 163,726
Property and equipment, less accumulated depreciation 87,213 97,335
-------------------------------------------------------------------------------------------------------------------
$ 223,251 $ 261,061
===================================================================================================================
Liabilities and Stockholders' Deficit
Current liabilities:
Bank indebtedness $ 22,026 $ -
Accounts payable and accrued liabilities 966,972 269,990
Accrued salaries 146,738 79,041
Unearned revenue - 259,369
Lease obligation - current portion 5,791 5,375
--------------------------------------------------------------------------------------------------------------
1,141,527 613,775
Due to related parties 562,060 498,322
Note payable 27,239 25,578
Lease obligation 5,765 10,041
-------------------------------------------------------------------------------------------------------------------
Total liabilities 1,736,591 1,147,716
Stockholders' deficit:
Common stock 520 52,184
Additional paid-in capital 3,645,386 3,593,222
Deficit (5,161,220) (4,542,324)
Accumulated other comprehensive income (loss):
Foreign currency translation adjustment 1,974 (10,263)
------------------------------------------------------------------------------------------------------------
Total stockholders' deficit (1,513,340) (349,647)
-------------------------------------------------------------------------------------------------------------------
$ 223,251 $ 261,061
===================================================================================================================
See accompanying notes to unaudited financial statements
1
FORGE, Inc.
Consolidated Statements of Operations and Deficit (unaudited)
-------------------------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
-------------------------------------------------------------------------------------------------------------------
September 30, September 30, September 30, September 30,
2002 2001 2002 2001
-------------------------------------------------------------------------------------------------------------------
Revenue $ 365,237 $ 305,880 $ 1,657,961 $ 950,413
Cost of revenue (283,092) (251,362) (1,237,377) (800,980)
-------------------------------------------------------------------------------------------------------------------
Gross profit 82,145 54,518 420,583 149,433
Operating expenses:
Depreciation 7,479 18,702 23,514 54,068
Salaries and fringe benefits 180,961 177,304 605,428 514,240
Stock-based compensation - 28,725 - 392,650
Legal and accounting 12,016 18,553 94,113 54,658
Consulting fees and
computer services 66,569 27,368 132,000 94,031
Phones and utilities 4,470 5,051 12,397 15,078
Rent 9,676 9,790 28,288 27,153
Advertising and promotion 13,997 4,197 47,483 6,429
Other selling, general
and administrative 11,471 15,147 49,006 37,130
---------------------------------------------------------------------------------------------------------------
306,639 304,837 992,228 1,195,437
-------------------------------------------------------------------------------------------------------------------
Loss from operations (224,494) (250,319) (571,645) (1,046,004)
Other income (expenses):
Interest expense (19,333) (18,521) (47,251) (32,909)
-------------------------------------------------------------------------------------------------------------------
Net loss (243,827) (268,840) (618,896) (1,078,914)
Deficit, beginning of period (4,917,393) (3,818,112) (4,542,324) (3,008,038)
-------------------------------------------------------------------------------------------------------------------
Deficit, end of period $ (5,161,220) $ (4,086,952) $ (5,161,220) $ (4,086,952)
===================================================================================================================
Net loss per common share,
basic and diluted (0.47) (0.52) (1.19) (2.34)
Weighted average common
shares outstanding, basic
and diluted, after giving rise to
reverse stock split described
in Note 3. 519,751 512,370 519,046 461,522
See accompanying notes to the unaudited financial statements
2
FORGE, Inc.
Consolidated Statements of Cash Flows (unaudited)
-------------------------------------------------------------------------------------------------------------------
Nine Months Ended
September 30, September 30,
2002 2001
-------------------------------------------------------------------------------------------------------------------
Cash provided by (used in):
Operations:
Net loss $ (618,896) $ (1,078,914)
Items not involving cash:
Depreciation 23,514 54,068
Stock-based compensation - 392,650
Foreign exchange on subsidiary operations 12,237 16,242
Changes in operating assets and liabilities:
Change in accounts receivable 2,100 (63,986)
Change in prepaid expenses 1,201 (5,147)
Change in accounts payable and accrued liabilities 696,982 154,565
Change in unearned revenue (259,369) -
Change in accrued salaries 62,243 -
--------------------------------------------------------------------------------------------------------------
Net cash used in operating activities (79,988) (530,522)
Cash flows used in investing activities:
Purchase of property and equipment (13,392) (16,882)
--------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (13,392) (16,882)
Cash flows from financing activities:
Repayment of loans payable - (105,337)
Repayment of lease obligation (3,860) -
Proceeds from bank indebtedness 22,026 151,135
Proceeds from (repayment of) advances from related parties 50,827 167,896
Issue of share capital - 333,710
--------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 68,993 547,404
-------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash (24,387) -
Cash, beginning of period 24,387 -
-------------------------------------------------------------------------------------------------------------------
Cash, end of period $ - $ -
===================================================================================================================
Supplementary information:
Interest paid 42,870 32,909
Income taxes paid 0 0
See accompanying notes to the unaudited financial statements.
3
FORGE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2002
1. The Company and description of business:
Forge, Inc. (the "Company") is incorporated in the state of Delaware and is a
"permission-based" e-mail marketing and integrated advertising strategies
service. The Company's services include the design, delivery, tracking, and
analysis of targeted "one-to-one" e-mail campaigns, customized loyalty programs,
comprehensive list management/brokerage packages and the creation, integration
and execution of both online and traditional advertising strategies.
On May 13, 2002 emailthatpays.com, Inc. ("email"), the Company's parent
corporation, was merged into the Company in order to, among other things, change
email's domicile from Florida to Delaware and to change its name. References to
"the Company" refer to email for periods prior to May 13, 2002.
On October 22, 1999, the Company, then named Realm Production and Entertainment,
Inc. ("Realm"), a public company listed on the Over-The-Counter Bulletin Board
in the United States, issued 6,572,000 shares of its common stock in connection
with the merger of a wholly owned subsidiary of Realm with and into
emailthatpays.com ("email Nevada"), a company incorporated in the state of
Nevada. This transaction was accounted for as a recapitalization of email
Nevada, effectively as if email Nevada had issued common shares for
consideration equal to the net monetary assets of Realm. On October 27, 1999
Realm changed its name to tvtravel.com, Inc. and subsequently on December 21,
1999 to emailthatpays.com, Inc.
The Company's historical financial statements reflect the financial position,
results of operations and cash flows of email Nevada since its inception and
include the operations of Realm from the date of the effective recapitalization,
being October 22, 1999. Stockholders' equity gives effect to the shares issued
to the stockholders of email Nevada prior to October 22, 1999 and of the Company
thereafter.
email Nevada (formerly Hotel Media Group Inc.) was incorporated on June 26,
1998. In August 1999, it acquired 100% of Coastal Media Group Ltd ("Coastal"), a
full-service advertising agency founded in May 1998. A common group of
shareholders controlled both Coastal and email Nevada. For accounting purposes,
the transaction was considered to be an acquisition by Coastal for consideration
equal to the net assets and liabilities of email Nevada. Accordingly, the assets
and liabilities of email Nevada have been recorded at their carrying values in
the Company's accounts.
2. Liquidity and future operations:
The Company has sustained net losses and negative cash flows from operations
since its inception. At September 30, 2002, the Company has negative working
capital of $1,005,489. The Company's ability to meet its obligations in the
ordinary course of business is dependent upon its ability to establish
profitable operations or to obtain additional funding through public or private
equity financing, collaborative or other arrangements with corporate sources, or
other sources. Management is seeking to increase revenues through continued
marketing of its services; however additional funding will be required.
Management is working to obtain sufficient working capital from external sources
in order to continue operations. There is, however, no assurance that the
aforementioned events, including the receipt of additional funding, will occur
and be successful.
4
FORGE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2002
3. Basis of Presentation:
The unaudited consolidated financial statements of the Company at September 30,
2002 and for the three and nine month periods then ended include the accounts of
the Company and its wholly-owned subsidiaries and reflect all adjustments
(consisting only of normal recurring adjustments) which are, in the opinion of
management, necessary for a fair presentation of the financial position and
operating results for the interim periods. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted in
these interim statements under the rules and regulations of the Securities and
Exchange Commission ("SEC"). Accounting policies used in fiscal 2002 are
consistent with those used in fiscal 2001. The results of operations for the
three and nine months ended September 30, 2002 are not necessarily indicative of
the results for the entire fiscal year ending December 31, 2002. These interim
financial statements should be read in conjunction with the financial statements
for the fiscal year ended December 31, 2001 and the notes thereto included in
the Company's Form 10-KSB filed with the SEC on March 29, 2002.
On May 13, 2002, pursuant to the merger of email into the Company, the Company
effected a reverse stock split of email's outstanding common stock by exchanging
one share of the Company's common stock for 20 shares of email's common stock.
All earnings per share calculations have been retroactively restated to give
effect to this reverse stock split.
4. Foreign currency:
The functional currency of the operations of the Company's wholly-owned Canadian
operating subsidiaries is the Canadian dollar. Assets and liabilities measured
in Canadian dollars are translated into United States dollars using exchange
rates in effect at the balance sheets date with revenue and expense transactions
translated using average exchange rates prevailing during the period. Exchange
gains and losses arising on this translation are excluded from the determination
of income and reported as foreign currency translation adjustment (which is
included in the comprehensive income (loss)) in stockholders' equity.
5. Net loss per share:
The Company computes net loss per share in accordance with SFAS No. 128,
Earnings per Share, and SEC Staff Accounting Bulletin ("SAB") No. 98. Under the
provisions of SFAS No. 128 and SAB No. 98, basic loss per share is computed
using the weighted average number of common stock outstanding during the
periods, and gives retroactive effect to the shares issued on the
recapitalization described in note 1. Diluted loss per share is computed using
the weighted average number of common and potentially dilutive common stock
outstanding during the period. As the Company generated net losses in each of
the periods presented, basic and diluted net loss per share are the same as any
exercise of options or warrants would be anti-dilutive.
5
FORGE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2002
6. Comprehensive income (loss):
Effective January 1, 1999, the Company adopted the provisions of SFAS No. 130,
"Reporting Comprehensive Income", which establishes standards for reporting
comprehensive income (loss) and its components in financial statements. Other
comprehensive income, as defined, includes all changes in equity (net assets)
during a period from non-owner sources. Comprehensive loss for each of the
periods presented is as follows:
---------------------------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30 September 30
---------------------------------------------------------------------------------------------------------------------
2002 2001 2002 2001
Net loss $243,827 $268,840 $618,896 $1,078,914
---------------------------------------------------------------------------------------------------------------------
Other comprehensive (income) / loss: (33,919) (18,832) (12,237) (16,242)
Foreign currency translation adjustment
---------------------------------------------------------------------------------------------------------------------
Comprehensive loss $209,908 $250,008 $606,659 $1,062,672
---------------------------------------------------------------------------------------------------------------------
6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Cautionary Statement Regarding Forward-Looking Statements
This Report includes forward-looking statements. We have based these
forward-looking statements on our current expectations and projections about
future events. These forward-looking statements are subject to risks,
uncertainties and assumptions about us and about our subsidiary companies,
including, among other things:
o our ability to obtain additional funding;
o our ability to successfully execute our business model;
o development of an e-commerce market;
o growth in demand for Internet products and services; and
o adoption of the Internet as an advertising medium.
In light of these risks, uncertainties and assumptions, the forward-looking
events discussed in this Report might not occur.
Results of Operations
For the Three and Nine Months Ending September 30, 2002 and 2001
Revenue
We earn revenues by delivering online direct marketing, promotional, and
informational offers and by developing and implementing integrated marketing and
advertising strategies. We charge our advertisers based upon a number of
criteria including offers delivered, qualified leads generated, online
transactions executed and marketing services performed.
Revenue consists of the gross value of our billings to clients and includes the
price of the advertising that we purchase from offline and online suppliers.
Under marketing services contracts, we recognize the cost of the advertising we
purchase for our clients as an expense and the payments we receive from our
clients for this advertising as revenue. Under these arrangements, we are
ultimately responsible for payment to suppliers for the cost of the advertising
that we purchase.
We believe that our revenues will be subject to seasonal fluctuations as a
result of general patterns of retail advertising, which are typically higher
during the second and fourth calendar quarters. In addition, expenditures by
advertisers tend to be cyclical, reflecting overall economic conditions and
consumer buying patterns.
7
Revenues for the quarter ending September 30, 2002 were $365,237, an increase of
19% over the quarter ending September 30, 2001 and a decrease of 51% from the
second quarter of 2002. The increase over last year reflects increased spending
by existing clients. The decrease from last quarter results from seasonal
fluctuations in retail advertising, which typically are higher in the second and
fourth quarters. For the nine months ending September 30, 2002, total revenues
of $1,657,961 exceed last year by 74%. This increase results from increased
spending of clients, the return of a previous client and an expansion of our
services into creative services and production.
Cost of revenue
Cost of revenue represents the cost of advertising purchased for clients. The
increase over last year corresponds to our increased revenue. As well, our
expansion into creative services and production involved less direct costs and
resulted in an increase in our overall margin. Excluding these costs, our gross
profit margins have remained relatively constant.
Operating Expenses
Over the last two years we have substantially reduced our operating costs
through consolidation of our two western Canada offices into one location,
closure of our eastern Canada sales office, controlled use of professional
services and reduction of our internal technological staff, outsourcing the
maintenance and storage of our technological facilities and utilization of IT
professionals on a project-by-project contract basis. On an on-going basis we do
not anticipate reducing our operating expenses any further.
The increase in salary costs from $514,240 for the nine months ending September
30, 2001 to $605,428 for the nine months ending September 30, 2002 reflects new
staff additions and an increase in employee benefits. Other operating expenses
also reflect an increase in advertising and promotions due to a one time cost
associated with the re-branding of the operating entities and an increase in
legal and accounting fees due to the restructuring of the Company.
The decrease in stock-based compensation is due to the vested options being
fully amortized and recognized as at December 31, 2001.
Liquidity and Capital Resources
We have sustained net losses and negative cash flows from operations since our
inception. At September 30, 2002, we have negative working capital of
$1,005,489. Advances from a company controlled by a principal stockholder are
funding our current operations. Our ability to meet our current obligations is
dependent upon these advances.
We need to raise funds in order to continue operations and implement our
strategies of client realization and servicing, expansion and maintenance of
products, brand awareness, technological advancement and infrastructure
development. We cannot assure you that additional financing will be available on
terms favorable to us, or at all. If adequate funds are not available on
acceptable terms, our ability to continue operations, implement our strategies,
take advantage of unanticipated opportunities, or otherwise respond to
competitive pressures will be significantly limited.
Net cash used in operating activities was $79,988 and $530,522 for the nine
months ending September 30, 2002 and 2001, respectively. Cash used in operations
are primarily the result of the net losses of $618,896 and $1,078,914, for the
nine months ending September 30, 2002 and 2001, respectively.
Net cash used in investing activities was $13,392 and $16,882 for the nine
months ending September 30, 2002 and September 30, 2001, respectively and
relates to purchases of property and equipment.
8
Net cash provided by financing activities was $68,993 and $547,404 for the nine
months ending September 30, 2002 and 2001, respectively. Cash provided by
financing activities for the period ending September 30, 2002 consists of bank
indebtedness of $22,026 and advances from related parties of $50,827. Cash
provided by financing activities for the nine months ending September 30, 2001
consists of bank indebtedness of $151,135 and $333,710 in issuance of share
capital.
ITEM 3. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures - Under the
supervision and with the participation of our management, including principal
executive officer and principal financial officer, we evaluated the
effectiveness of the Company's disclosure controls procedures (as such term is
defined in Rules 13a-14(c) and-14(c) under the Securities Exchange Act of 1934,
as amended) as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"). Based on such evaluation, such
officers have concluded that, as of the Evaluation Date, the Company's
disclosure controls and procedures are effective alerting them on a timely basis
to material information relating to Company (including its consolidated
subsidiaries) required to be included in the Company's reports filed or
submitted under the Act.
(b) Changes in Internal Controls - Since the Evaluation Date, there have
been any significant changes in the Company's internal controls or other factors
that could significantly affect such controls.
9
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
None.
Item 2. Changes in Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to Vote of Security Holders.
None.
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
Exhibit
Number Description
------ -----------
3.3 Certificate of Incorporation of Forge, Inc. *
3.4 Bylaws of Forge, Inc. *
3.5 Certificate of Merger for the State of Florida *
3.6 Certificate of Merger for the State of Delaware *
* Previously filed on Form 8-K12g3, filed on May 13, 2002.
10
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
FORGE, INC.
Dated: December 6, 2002 By: /s/ Daniel Hunter
--------------------------
Daniel Hunter
Chief Executive Officer,
Principal Accounting and Financial
Officer and Director
11
CERTIFICATIONS
I, Dan Hunter, Chief Executive Officer and Principal Financial Officer of Forge,
Inc., hereby certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Forge, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. I am responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for
the registrant and I have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to me by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report my conclusions about the
effectiveness of the disclosure controls and procedures based on my
evaluation as of the Evaluation Date;
5. I have disclosed, based on my most recent evaluation, to the
registrant's auditors and to the audit committee of registrant's board
of directors (or persons performing the equivalent functions):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. I have indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of my
most recent evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Dated: December 6, 2002 By: /s/ Daniel Hunter
--------------------------
Daniel Hunter
Chief Executive Officer and
Principal Financial Officer
12