Crexendo Inc (CXDO) 2006 Q3 法說會逐字稿

Welcome to the iMergent third quarter 2006 earnings conference call. At this time all participants are in a listen only mode. Following management’s prepared remarks, we’ll hold a Q&A session. [OPERATOR INSTRUCTIONS] As a reminder, this conference is being recorded today, May 4, 2006. I would now like to turn the conference over to Kirsten Chapman. Please go ahead ma’am.

Thank you Michelle. Good afternoon, and thank you for joining us for the iMergent fiscal third quarter 2006 results conference call. With me today are Don Danks, Chairman and Chief Executive Officer of iMergent; Brandon Lewis, President and Chief Operating Officer; Rob Lewis, Chief Financial Officer; and Jeff Corn, General Counsel.

After reading a short safe harbor statement, I will turn the call over to Don. Statements and comments made on this call that are not historical in nature constitute forward-looking statements within the meaning of the safe harbor provision of the Private Securities Litigation Reform Act of 1995. These statements and comments are based on the current expectations and beliefs of the management of iMergent, and are subject to a number of factors and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements, and from management’s current expectations.

For a more detailed discussion of factors that affect iMergent’s operating results, please refer to its SEC reports, including its most recent Form 10K and Form 10Q. The company undertakes no obligation to update this forward-looking information. With that, I will turn the call over to Don Danks, Chairman and Chief Executive Officer, Don.

Thanks Kirsten, and thank all of you for joining us on the call today. On behalf of our entire company I’d like to welcome all of you to our fiscal third quarter earnings call.

We are very excited to report to our stockholders today that our results continue to clearly demonstrate the strength of our core business. We will also review with you the new programs that we believe will fuel our growth in the future.

Turning to our financial results, our total revenue for the fiscal third quarter of 2006 reached $25 million, more than doubling revenue from the same period last year. Please note that this increase is primarily due to the change in business model regarding the customer service practice implemented in December of 2005.

As discussed on our last call, we believe that the net dollar volume of contracts written is a relevant and meaningful statistic to the understanding of the operations of the company. This quarter net dollar volume of contracts reached $26.3 million, the highest quarterly total in the company’s history. This resulted in third quarter 2006 net income of $2.8 million, or $0.22 per share, compared to year ago quarter in which we recorded a loss of $6.4 million or $0.54 per share. Again, this year-over-year increase is primarily due to the change in business model regarding the customer service practice implemented in December 2005.

To further our growth we continue to implement strategies of expanding our market reach, our sales base, and our product offerings. This third quarter we conducted 189 workshops, up from 178 in the year ago quarter. As previously mentioned, we added a sixth sales team, and this quarter we worked further to integrate this team into the field, and as they have gained experience this team continues to perform to plan.

Additionally we continue to evaluate and introduce additional ancillary products and services to provide best of breed solutions for our customers. These products and services are important for two reasons, first, they create an even stronger bond between Stores Online and our customers, as the products we sell help merchants leverage their ecommerce websites. Second, they provide additional high margin revenue streams for iMergent.

Importantly, we are building the foundation for one of our newest and most exciting initiatives, the Stores Online customer education center. Brandon Lewis, our President and Chief Operating Officer, will provide you with greater detail on this education strategy, as well as other programs we are going to be rolling out and expanding upon in the future.

Now, before I turn the call over to our CFO, Rob Lewis, for the financial review, I’d like to provide you with a quick legal update. Our company and the Australian Competition and Consumer Commission, known as the ACCC, have resolved all outstanding issues at a mediation previously held in Australian. The court has set a May 9th relisting of this matter for entry of the settlement. We expect the court will confirm the settlement at the hearing. Under the terms of the settlement, and without an admission of any liability, iMergent has agreed to the following; 1) allow refunds up to a maximum of approximately $468,000 to certain Australian customers which cash we have presently held as restricted cash in an Australian bank account; and 2) pay related administrative costs to the ACCC of approximately $28,000.

Importantly, if the refund account is not exhausted by the claims of these certain Australian customers, the remainder of the refund account will be paid back to iMergent. And I’d like to point out that we have reserved nearly the entire amount of this settlement in previous quarters. We are pleased to have reached this resolution and we are confident that it will be finalized when it is entered into court May 9. With the ACCC potentially resolved, we are excited about, and look forward to, returning to Australia, as it has historically been a very lucrative and profitable market for Stores Online workshop, and where we have thousands of satisfied customers.

I’d like to make a comment as it relates to our Stores Online Pro product and our customer service support. I want to reiterate to every stockholder that our company has made product quality and customer satisfaction the cornerstone of our business. Stores Online Pro, the latest version of our ecommerce software platform, is clearly one of the best turnkey ecommerce platforms on the market for the small business owner. I urge listeners to go to www.storesonline.com to check out the feature sets and functionality of the software. Our customers are thrilled with this product, and David Rosenvall, our Chief Technology Officer, and the architect of Stores Online Pro, and his team, continues to improve upon Stores Online’s ease of use, its functionality and its feature sets.

And in terms of customer service, our clients are provided with world-class support by Sean Guy, our head of customer service, and his team. Our support teams are dedicated to help our merchants maximize their products and services, but we also believe that customer support starts in our workshop and we have continued to improve the way in which we create realistic expectations for our customers at the workshop, and before they buy our product.

Our workshops and all of our subsequent training reinforce and reiterate to our clients that it takes dedication, persistence, intelligent planning, and overall business execution to even begin to compete in the very large and rapidly growing, but very crowded, ecommerce market. To that end, customers who purchase our products are keenly aware of their responsibility in leveraging our store’s online software. Ecommerce success comes to those who market a product or service that has demand, is competitively priced, and properly positioned, and from there it takes day to day execution of effective and consistent ecommerce marketing efforts to sustain and further build the business.

It is the competitive landscape of the ecommerce market that compels our team to continue to look for ways to improve our Stores Online marketing tools, to expand our training and educational offerings, and provide a realistic and comprehensive overview of what it takes for any small business owner or entrepreneur to be effective in online marketing. As promised, Brandon will discuss our plans to expand our educational and training offerings to help those customers willing to put in the time and to do the work.

To me, the most exciting thing about our company is that we serve a very large market with a full, complete and comprehensive set of solutions. With over 24 million domestic small business, and perhaps at least that many in all the international markets that we serve, just a fraction of a percent of penetration into that market could translate into hundreds of millions of dollars in revenue. This information comes from the Small Business Administration and quoting officer of advocacy.

We are extremely focused on continuing our strict focus on this market through our traditional workshop model as well as through new distribution channels like we are currently testing and developing with a major financial institution that we’ve talked about earlier. In addition, we will never stop striving to improve in areas of product and customer service, and support. Now I’d like to turn the call over to Rob Lewis, our Chief Financial Officer, for our financial review. Rob.

Thank you Don. First I’ll review our three month results, then discuss our nine month results for the period ended March 31, 2006. Total revenue for the three months ended March 31, 2006, increased to $25.0 million from $10.3 million for the three months ended March 31, 2005. The increase is primarily due to the change in business model regarding the customer service practice implemented in December 2005.

Notable was that net dollar volume of contracts written was the highest in the company’s history. Net dollar volume of contracts written represents gross dollar sales contracts executed during the period, less estimates for bad debts, and discounts incurred on sales of trade receivables. For the three months ended March 31, 2006, net dollar volume of contracts written was $26.3 million compared to $23.8 million for the same period a year ago, representing an increase of 11%.

Total operating expenses were $21.5 million in the third quarter of fiscal 2006 compared to $17.8 million in the same quarter of fiscal 2005. The increase was primarily attributable to the increase of net dollar volume of contracts written, increased travel costs associated with higher fuel prices, additional marketing activities associated with an increase in workshops conducted in early April 2006, an increase in accounting fees of $390,000 associated with the restatement of previously issued financial statements, and an increase in stock option compensation expense of $310,000 resulting from the application of FAS123R in fiscal 2006.

Income tax expense for the three months ended March 31, 2006 was $1.7 million compared to $136,000 for the same period of the previous year. The increase in income tax expense is primarily attributable to the reversal of a portion of the deferred tax asset valuation allowance in December 2005, due to the change in business model in December 2005. We expect we will incur a relatively normal statutory income tax rate in the future, as a result of the changes in December 2005. However, this may change if it becomes more likely than not that additional deferred tax income tax assets will be realized in the future.

Net income was $2.8 million or $0.22 per diluted common share in the third fiscal quarter of 2006 compared to a net loss of $6.4 million or a loss of $0.54 per common share in the third quarter of the previous fiscal year. For the nine months ended March 31, 2006, revenue increased to $148.0 million from $17.7 million for the nine months ended March 31, 2005. The increase reflects the recognition of $108 million in December 2005 of previously deferred revenue that would have been recognized in future periods had the change in business model not occurred.

Net dollar volume of contracts written was $68.4 million for the nine months ended March 31, 2006, compared to $65.8 million for the nine months ended March 31, 2005. Net income was $108.5 million or $8.55 per diluted common share for the nine months ended March 31, 2006 compared to a net loss of $21.2 million or a loss of $1.81 per diluted common share for the same period of the prior year.

Net cash provided by operating activities for the three months ended March 31, 2006 was $2.4 million and $17.7 million for the nine months ended March 31, 2006. As of March 31, 2006, we had $28.1 million of cash and cash equivalents. As of March 31, 2006 we had working capital of $11.2 million and deferred revenue of $25.6 million. The deferred revenue balance represents historical sales for which the company cannot immediately recognize revenue. The costs and expenses we expect to incur as these deferred revenue amounts are recognized as product and other revenue, are expected to be insignificant. Consequently, we did not consider deferred revenue to be a factor that impacts our liquidity or future cash requirements. With that I’ll turn the call over to Brandon.

Thanks Rob. As noted by my colleagues, we’re in a very exciting point in iMergent’s evolution. Last quarter we released a major upgrade in our product entitled Stores Online Pro, and the reception has been very strong thus far. The demand for our workshops also remains strong. During the current quarter we conducted 189 workshops, including seven held internationally, up from 178, including 32 held internationally, during the prior year quarter. Year to date we’ve conducted 564 workshops, including 73 held internationally, compared to 532, including 112 held internationally, during the prior period.

The decrease in international workshops was due to our business decision not to market in Australia during our litigation. Also throughout the quarter our sixth sales team, the newest team added to iMergent, continued to be integrated into our workshop rotation. Progress is being made, and we now have the capacity to drive future growth.

As you know, one element of our growth strategy is to focus on ancillary products. We continually evaluate options and identify best of breed products that can help our merchants develop more effective websites, then we introduce these products to our merchants, all the while leveraging our proprietary database. Examples include proactive tools and solutions that offer innovative and enhanced functionality. These programs are mutually beneficial as the ancillary products can drive revenue and leverage our current workshops. Additionally, if the ancillary products were developed by a third party we’re not responsible for many of the costs, which translate into higher margins.

Another example is our eBay training program. Originally the course was available only to those customers purchasing the premium package at our Stores Online training workshops. We’ve recently made the eBay program available to all our customers who purchase a license from us. Furthermore the cost of the eBay program is being offered at a reduced price, which has increased attendance and expanding our audience at the eBay programs has translated into increased sales of our ancillary research product offered to our customers exclusively at these eBay events.

Finally, we’re working on a very interesting new customer education program. We’re in the development stages to build a customer education center located in Salt Lake City in partnership with PMI and EMS. The center will offer customers the opportunity to participate in world-class educational sessions and coaching programs. This customer education program will be available to Stores Online merchants, as well as customers of PMI and EMS. This advanced program will be offered to anyone wishing to increase their education on building and managing their ecommerce websites via Class A training programs. The customer education center is under development and we’ll discuss it more in detail on future calls. With that, I want to turn the call back over to Don.

Thank you very much Brandon. As you can see, we have consistently executed our strategy and delivered growth. we’ve systematically increased the number of workshops and the number of products we offer to our workshops. Additionally, we have taken measures that have refined our customer base so we now have more active merchants.

As a result of all the programs sales have grown. Looking ahead, we continue to evaluate options to diversify our revenue streams and we are truly excited about our educational center, which will provide Class A customer education to our merchants. We view this program as another way to leverage our resources and talent. Like the rest of our offerings, we will review the education center for other means to increase revenue and provide value for our customers. For example, we are considering offering different courses from Stores Online or potentially leasing the center to other companies.

Finally, now that we have resolved three major issues, the financial statement, Texas and Australia, the board is focusing its full attention on the most prudent and effective uses of our growing cash balance to maximize shareholder value. We will be providing more information on this in the future but analyzing the best uses of our cash to maximize shareholder value is a priority.

In summary, we continue to deliver quality products and services, provide excellent customer service and identify and develop additional distribution channels. We’re extremely excited about the direction and the future of our company.

I would now like to open up the call for questions and answers.

[OPERATOR INSTRUCTIONS]

Our first question is from David [Kane], with KCM.

Howdy. I’m doing my best to think about the business in terms of sort of cash flow generation and I wanted to see if I’m reading the financial statements correctly in this regard. And the way I sort of look at it is in terms of fiscal years 2003, 2004, 2005, plus the first three quarters of 2006. You know, total CFO is around $28 million, which is pretty close to what the cash on the balance sheet is.

Now, and as I think about that in terms of the long-term, that’s after sort of 15 quarters. So, on a per-quarter basis, that’s some number around sort of $1.9 million or $2.0 million per quarter, which is not that far away from the $2.4 million of CFO for this quarter. Does that seem like a reasonable way to look at the business to you? And would, going forward, a forecast of sort of $10 million CF0 for the next 12 months be unreasonable in your view?

Rob, do you want to handle that?

Yes, I’ll handle that one. As far as cash flows from operations, if you take a look at the cash flows from operations for the past two years, it’s much higher than the previous years prior to that. So, I would assume – I mean cash flows from operations have increased dramatically this past year or two compared to the periods prior to that, which would indicate that cash flows from operations has been increasing steadily over the past couple of years. With the acceleration in continued growth of the company, logically you could assume that cash flows from operations would also continue to accelerate.

And so, if it’s been accelerating over the last sort of two years, then why would it decelerate this current quarter to just $2.4 million?

Well, one of the reasons why is because we took some of our cash flow from our trade receivables and monetized that cash in one quarter, which was the sale of our trade receivables of $14 million during August of 2005. So, we took some of that cash flow that would’ve come in over two years and monetized that into one quarter. So, this quarter, the subsequent quarter in December, was basically flat. This quarter was slower than what we would normally expect to see because we monetized those receivables in one quarter.

Right, but some of that money could have been monetized in 2004, if you had wanted to at that time, if you had sold the receivables in 2004.

Correct, but due to the fact that we’ve changed business focus and we’re going to retain receivables, we would expect to see that, in the future, after those two years of those receivables that would’ve come in from August in the sale, that cash flows will continue to accelerate. We would expect, because our income tax expense is non-cash and we have a few other non-cash expenses in our expenses as well, such as stock option expense, that cash flows could exceed earnings in the future.

Understood. Now my second question relates to sort of future insider sales. One of the things, looking back over the last two or three years of the company, that, at the time, might’ve been viewed as a danger signal, was when some insider sold, at about $25 a year-and-a half ago. Do any insiders have plans to sell in the next year?

I’ll take that one, Rob. Insider sales are something that is individual to each insider and I don’t think that anybody right now has mapped out their plans for the next year.

And so, just as a potential, I mean, the way I and, I think, others think about that is, if you told me today that no insiders were going to sell for the next year, I’d feel very confident about how the company’s going to look for the next year. If you told me today, “Hey, insiders are going to unload half their positions a month from now”, I would feel very nervous.

David, I can assure you that insiders aren’t unloading their positions.

Right, I know they’re not unloading them today, but I’m – you know, two months, three months from now….

Well, there’re no plans for insiders to unload their shares. So, if you have any other questions?

No, go ahead and take the next call. Thank you for your time.

Your next question is from Neal Goldman, with Goldman Capital Management.

Good morning, guys. First of all, you gave me the nicest birthday present I could have, which was those earnings, so I appreciate it. Rob, on the non-recurring costs, you mentioned what, $390,000 for stock option, and $310,000 for extra accounting? Is that fair?

Yes. It was $390,000 for extra accounting fees during the period, and $310,000 for stock option expense. I want to make it very clear that stock option expense is not a one-time item, that FAS123R is an ongoing pronouncement. We will continue to incur stock option expense in the future, but it is non-cash and it is an expense that wasn’t recognized in the past.

But we did incur $390,000 of increased accounting fees due to the restatement. As you recall, the restatement incurred in March and there was work being done by the auditors and by the accounting teams all the way through that period.

All right. Were there any legal bills, extraordinarily legal this quarter?

Legal bills were pretty much flat this quarter compared to last quarter. If you recall, the quarter ended March 31, 2005, we had the Texas lawsuit arise and we also had the class-action lawsuit arise, during that quarter. So, we had significant legal expenses in that quarter. The expenses we incurred this quarter were similar to the expenses we incurred in the prior year quarter. They were higher than we would normally expect to see on a normal quarter, but quarter-over-quarter, you know, year-over-year, they were pretty much flat.

OK, so basically, it would be $200,000 or about $0.02 a share after tax of extraordinary costs that are truly non-recurring, right? So, if I take the $390,000 and I tax affect it?

Yes, if you take the $390,000 and tax affect it.

Would’ve earned $0.24 from that standpoint, potentially, right?

Correct.

In terms of seasonality, Don, now that this company’s been – you know, the accounting has changed, is there any reason in the fourth quarter that it shouldn’t be at least equal to, or greater than, the third quarter, in terms of revenues at this point?

No, there should be no reason why it couldn’t be equal to or greater than the March quarter.

OK, when do you expect to go back into the Australian market?

Probably in the early part of our next fiscal year. Brandon?

Yes. Neal, I think we actually don’t want to address that, right now, just really for competition reasons. But right now, we are working with a PR firm and some things over there to help people understand what our customers are doing and the successes they’re having over there. We do have plans to go back.

OK, because, I mean, for the nine months, it was like you were down 40. So it sounds like now closer to 55 seminars, which is 7% to 8% of your total revenues, historically, right?

Yes, that’s about right.

And so that would start coming back some time next year, the next fiscal year?

That’s correct, yes.

If we sold off all the existing receivables, I would assume it would generate about, between the long and short, you’d generate about $10 million to $12 million, correct?

Correct.

And, as far as [tax loss] carried forward at this point, Rob, how big is it?

The net operating loss, as far as that carry-forward period, on our balance sheet right now we have a deferred tax asset of approximately about $10.6 million, is the deferred tax asset we have on our balance sheet right now, as of March 31.

Right. But going forward, will it create more tax loss? Or, when do you start paying actual cash taxes?

We stopped paying cash taxes now, because of that deferred tax asset. So, we stopped paying, I apologize, not start. But, we won’t pay taxes for quite some time. Right now, we’re projecting that, at least for the next couple of years, we won’t have to pay taxes. It could be much longer than that, depending on if we get to recognize and realize additional deferred tax assets for which we have evaluation amounts right now.

OK. If I step back, my numbers, not your numbers because you’re not making any forecasts yet, but if I assume there were $0.02 in this quarter of non-recurring and there’s no Australia, so the fourth quarter is at least equal if not better, we could be at a $0.30 quarterly run rate, whether it’s the fourth quarter or the first quarter. In my mind, we’re going to do $1.20, $1.50 next year, next fiscal year, starting July 1, as if taxed but non-taxed. So, we should be able to generate an additional $20 million in cash. Is there anything structurally wrong in that thinking?

Neal, those are your projections, not ours.

OK.

And, you know, we wouldn’t want to comment on them at all.

Right, but you’re going to have – if you sold the receivables, you’d have $40 million in cash. You generate another $20 million in my numbers next year, you’d have $5.00 a share in cash in this company, OK? In a growth business. You don’t need any capital, for working capital, you don’t need any Cap Ex in this company. There’re no meaningful acquisitions out there that would be strategic. So, I mean, we really ought to do a massive shrink on the capitalization at this point.

That’s a good suggestion and it will be taken under advisement.

OK, one last question. In terms of the current sales, what are we doing in terms of cash sales, vs. installment sales, vs., you know, historically? How is that running now?

Rob?

I can talk about that. Historically, it’s going to be – an analysis will be done in the Q, the form 10Q, which we hope to be filing here within the next couple of days. But, we have improved our cash percentage, as far as the percentage of cash collected at the workshops. Compared to financing at the workshops, it has improved.

Let me pull up the numbers real quick here, but we’re at approximately 60%, compared to about 50% in the prior year.

And you feel that’s sustainable at this point?

Yes.

Do you think you can increase that Brandon?

I’m really comfortable, Neal, in the mid-50%s to mid-60%s. We’re always trying to improve those numbers, Neal. But I feel comfortable in the mid-50%s to mid-60%s.

Anyhow, just great numbers guys. I appreciate it.

Is today your birthday?

Today is my 62nd birthday, Don.

Happy Birthday, Neal.

Don’t sing; thank you.

Our next question is from Ted [Karakis], with Forrester Financial.

Greetings gentlemen. I have to tell you that you’ve blown me away this morning. Thank you very much. Really good job.

I’ve got a few questions. I want to clarify on the numbers as I work through this, this morning. The first is, you mentioned that cash generation for the quarter, I think you said it was $2.4 million. Is that correct?

Correct.

What additional contracts that were sold this quarter, I’m sorry; could’ve been sold this quarter, to generate more cash if you’d wanted to sell them?

If we had wanted to sell – let me get that number here, just one second. I think we generated $3.25 – about, you know, between $5 million – $5.5 million of net contracts during the period that we could’ve sold at 93% of that.

So, if you had wanted to generate more cash, just from what was from operations from this quarter, you’re basically doing in the area of about $8 million? Is that right?

Well, if we would’ve taken the contracts we wrote, it’s about $5.5 million at 93% that would be around $5 million, plus the $2.4 million. So, it would be about $7 million.

Yes, about $7.5 million.

If we’d elected to do that, but -.

So on an annualized basis, we’re talking about your generating $30 million, annualized, in generating cash if you choose to sell your contracts? OK.

If you took this quarter and annualized it, yes. And Rob mentioned this earlier; it’s a business decision to keep those contracts and to collect the interest off of those, as opposed to monetizing them.

Now, and I’m assuming the reasons you’re doing that when you’re earning 18% interest two, you don’t need the cash?

That’s correct.

And I’m assuming the third reason is, since you’re on a cash basis instead of accrual basis in accounting, even if you sold those, it wouldn’t show up in earnings anyway, correct?

That’s correct.

So therefore, if you don’t need the cash and you’re earning high interest, there would be no reason to sell off these receivables?

That’s exactly right.

I want to make the point that we have the ability to if we want to or need to.

OK. I mean, that’s just an enormous amount of cash generated relative to the current market cap, just my opinion. Anyway, moving forward, I want to, more important to me, I want to just study the numbers a little bit of what you reported on a cash basis, vs. an accrual basis.

I assume your expenses would be reported exactly the same way, whether you’re on cash accounting or accrual accounting. Is that correct?

That is correct.

So therefore the difference between what you reported in revenues and your net contracts written in effect would be right about $1.3 million to revenues, which would have been the reported revenues on an accrual basis, since the expenses would be the exact same. In effect your pre-tax earnings would have increased by that same $1.3 million difference. Would you agree with that number?

I would agree with that statement.

OK, so therefore working backward, I worked back to pre-tax numbers and I came out with an earnings number of between $0.29 and $0.30 on an accrual basis, if you were reporting on an accrual basis, and that does not include two important things. The first is the one time expenses, and I know that Neil just mentioned that he’d add about $0.02 to that. However, he’s only adding for accounting. I’m also looking at the legal; I’m assuming a lot of your legal had to do with issues that are now cleared up between the Texas HE and between Australia. I’m assuming your legal is going to drop going forward. Is that a fair comment?

It has the potential to do that, things really depend upon the SEC investigation and then if any other litigation arises. I won’t comment on what legal expense is going to do in the future.

OK and in terms of the option expenses, I understand these are based on options that have already previously been issued?

That’s correct.

And is this just based on the stock price going up, and they’re more in the money, or is it just based on expensing them over time?

It’s just expensing them over time during the vesting period, as those stock options end.

OK so what is the vesting period, or how long can we expect that option expense to continue to hit the balance sheet?

Well typically our stock options last anywhere from three to four years, so you could expect it to continue to hit the balance sheet, and it depends on if new grants are issued in the future, then we would continue to have additional expenses in the future.

OK, but again that’s obviously a non-cash item, I guess you can argue either way if you want to look at the true earnings power of the company I wouldn’t include that number. But the bottom line is, in terms of one time expenses you certainly add another few cents to the $0.29 to $0.30 number that I come up with on a current accrual basis accounting.

Chad I really feel uncomfortable commenting on that, we haven’t done the calculations, so that’s the math, people can do it.

OK but on an accrual basis obviously we’re earning right now on an annualized basis this quarter, somewhere around $1.20 plus of earnings.

On a pro forma basis one could make that conclusion, yes.

OK good. Just moving forward real quick, how are things going with the test marketing of the major financial institution that you had mentioned in previous calls?

It’s continuing, and we’re very excited about it, and we’re making progress. When we have more to talk about we’ll let the shareholders know.

OK. In much the same way that your sixth sales team increased revenues and earnings, could we see a seventh sales team in the second half of this year, which would continue to generate, and which would give us visibility to future growth in revenue and earnings?

Yes, you could see that. We are currently, as we mentioned on our last call, we’re currently in the process of translating all of our presentations and all of our product into Spanish, and we are planning to launch a Spanish team. So you could expect that to happen in the next year.

As we get further away from the previous problems of the company, do you anticipate an acceleration of revenue and earnings growth?

We aren’t commenting on giving guidance at this point.

OK, and last question, I’m just going through these numbers and as I said, on an accrual basis, I come up with over $1.20 of current annualized earnings. Obviously that number, in my mind, is going to grow over the next year. So we’re talking about somewhere around 10 times earnings if you look at the amount of cash you’re generating, it’s huge. You’re sitting on a ton of cash, and we’re sitting on a stock price that at a normal multiple we’d be at double the current stock price.

Do you anticipate any new sponsorship coming into the stock, either through analyst coverage or new institutional investors?

Let me just add a general statement, we are always looking to grow our business as rapidly, as prudently possible. There’s a huge market, we want to make sure we address it in a thorough, professional way, something that’s sustainable. Just like we grow our business, we are constantly talking to investors and potential investors and showing them the way that we’ve a) grown the company over the last several years, and b) worked through some very, very difficult challenges this last year.

And during this time, I just want to take a second to comment on Brandon and his team for, in a nearly impossible situation just with all kinds of extraneous things going on out there, and I know all the stockholders know what those are; he and his team have done an amazing job of focusing on the business and executing the business, improving in every area. So we take these results and we’re always talking to new investors, and we hope to get coverage again on the company, we’re working toward that. And we certainly will be taking our story as far and wide as we can as we continue to grow the company. We’re very excited about where we are right now.

And by the way, it’s not my birthday today, but that sure felt like a nice present this morning, and I’m looking even more forward to the June quarter. Great job guys, thanks very much.

Our next question comes from Jeff [Bess], a private investor.

Good morning Don. A couple of questions, Ted covered some of them. On this Spanish initiative and the potential relationship with a major financial institution, should we look for these in the next fiscal year, or might it come sooner? And with respect to the major financial institution, if that materializes would that likely have its own dedicated sales team?

Let me answer the last part of the question, yes, it could potentially have its own sales team.

And then in terms of – I think we already talked about the Spanish team; we’re planning on deploying that within the next year. Do you have any better estimate than that, Brandon?

Better estimate on what, Don?

Within the next year –

Oh, on the major financial institution?

On the Spanish team.

On the Spanish, when we’ll be launching it? Yes, it will be in the next year.

OK, can you comment at all on the situation in Indiana?

Well we filed a motion to dismiss on that matter, and a detailed discussion will be included in our Form 10Q, which we’ll be filing in the next couple of days.

OK. I want to make an observation on the comments you made, you said that you can sell receivables at book value less 7%, but I think that overlooks the fact that the purchaser acquires the cost of administration, which has been previously estimated to be in the neighborhood of 10%. So in fact I think it’s a correct statement to say that you truly sell them at the carrying value. Would you agree with that statement?

We would agree with that statement.

And in terms of the cash generation, I was real surprised at some of the numbers that were mentioned. I’ll tell you what I did, and ask for a comment. I looked at the increase in current assets less the increase in payables for the quarter, excluding the tax assets and the deferred revenues, and I got around 400,000. Then I looked at the increase in receivables in the quarter, which was $4.1 million, and I add the two together and say well if you wanted to sell receivables as a policy you would have generated about $4.5 million in the quarter. I think, at least in my view, something close to $20 million is a little more accurate number of the annualized rate of cash generating assets that you had in the quarter.

We would agree that that’s one interpretation, if we were to make certain moves. Rob, would you agree?

Yes.

OK, that’s all I have, great quarter guys.

Our next question comes from Walter Schenker with Trident Capital.

Hi Don, hi Rob, hi guys. I hate to harp on something that’s been brought up, but which is the use of the cash, because everything else is going well and you don’t need me to tell you that. We have discussed, and you have discussed, and it’s come up on calls for years, at least the last year that once we clarify the accounting, once we get the business on an even keel, once we clean up some of the litigation issues, we will let you know what we’re going to do with the cash.

Clearly there’s been an opportunity over six, twelve, pick your number of months, for the board to discuss what we’re going to do with the cash. I don’t understand, Don, why a decision by the board could not be announced on this meeting, and would like a firm commitment to let us know when we’re going to know that’s going to happen, so in three months it’s not going to be ‘we’re still contemplating what we’re going to do with the cash’. I don’t understand what incremental data you need to make a decision.

Well first of all we haven’t for the last six months been sitting around discussing what to do with the cash. We’ve done some cursory investigation what the possible things are, we’ve looked at potential acquisitions, we’ve looked at the merits of the things we announced earlier, dividends, stock buybacks, etc. What we’ve been focused primarily on is getting to the position where the company is operating, customer service is great, products are great, our sales organization is good, these legal matters are being resolved. The accounting restatement, I don’t know if anybody has any idea what it takes to go through four years of accounting restatements with our business. But we have been laser focused on making sure we got through all these challenges. And we just completed the negotiation in getting Australia settled.

So in the last few weeks we have started to turn our attention to what to do with the cash, and whatever we do it’s going to be after very, very careful consideration and very prudent action, taking into consideration a number of variables that may not be apparent to stockholders right now, but do relate to some of the things that are still outstanding out there, including the SEC investigation, there’s a class action lawsuit. We’re working, as we have with the other issues, to get those resolved.

So we are -- I can assure the stockholders that we are looking at this extremely seriously and we’ve told the stockholders that there are a potential number of things we can do with the cash. The great news is that we are in a position to do it. The cash is sitting there and it’s not going anywhere. When we do decide what we’re going to do it’s going to be after complete thorough and thoughtful process and one where we’re not going to have regrets or second thoughts about having done something prematurely.

But we had not really focused on it in earnest until we knew we were going to get through these things. Now we are. I can’t give you an exact time, but we’ll move as fast as possible, but we’re going to be prudent and cautious and make sure what we do is in the best interest to maximize shareholder value. You have that commitment.

Thank you Don.

You’re welcome.

[OPERATOR INSTRUCTIONS]

Your next question comes from Andrew Mathis of Mathis Capital.

Thank you. Of your $25 million in sales reported, what percentage of that was previously deferred revenue that was booked this quarter?

We have a deferred revenue roll forward in the press release itself and then also in the Form 10Q that will be coming out that show the amount that was coming in through deferred revenue.

But you don’t have that number?

In the press release itself it was $21.5 million was recognized in there that was deferred from the previous period. That was the amount that’s recognized in the financial statements.

You ended last quarter with $18.8 million in deferred current.

Right, everything flows, goes into it, and then comes back out through it. Everything has to go into the deferred revenue because of the three day write, and then it comes right back out as being recognized.

OK. So when you say 60% of the customers paid cash, does that mean they paid up front for everything?

That’s the cash collected, yes, at the workshop.

Cash collected, OK. Then the other question is have is

Tape #4

OK, and the other question I have is, if cash needs to be come in to be booked as revenue, as I believe I read in the 10Qs, how is that the accounts receivable keep growing?

Because we continue to grow the business and, as you recall, we’ve sold a bunch of our receivables, all of our domestic receivables, in August and we’re simply replenishing that receivables balance. That’s what we’re doing right now.

So then, those would be booked sales that weren’t actually received?

That’s correct. That will be booked as revenue in the future as the cash payments are received.

OK, and one final question; do you have a penetration and average sales number?

That is actually going to be in the queue; let me pull that up here. Penetration, as far as close rate?

Yes, you gave 26% last quarter.

That basically remained - will be flat during the period. Yes, 26%.

And the average sale?

The average sales price, we broke it down between domestic and international this period. Let me see, average, domestic was $5,500, approximately. International was approximately $6,800.

Wow, doing well there. OK, one final-final, could we just make a clarification on the international

The international is high because we conducted events in the UK this quarter, which has a very favorable translation rate. Last year we also did quite a few events in the UK. Last year’s quarter was $6,100 because of the favorable UK translation rate as well.

So that international average sales price will fluctuate, period to period. But this year it was $5,500. One of the main reasons why is because of the launch of the Stores Online Pro software. We have a $100 price increase on the software with the launch of the new product.

Yes, and more specifically – this is Brandon speaking and just to make sure the expectation is correct. When we go heavy into Canada, for example, that average sale would go down because of the weakness of their currency, just to make that clear for you.

And what would that make the overall average sale, as compared to last – the $5,300 last quarter?

Rob do you have that in there? I think it’s around $5,400-something, isn’t it Rob?

I have it right here; just one second. It would be approximately – I apologize. Just one second; $5,500.

$5,500, OK.

We did very few, because of the low number of workshops we did in the UK, international workshops. So, it’s very close to the domestic sales price.

OK, and one final-final. I’ve noticed the receivable reserve has declined from 57.5% two quarters ago, to 39%.

That’s correct.

What are the drivers of that? Is that the – [two people talking].

Because of the aging of the receivables. The bad ones drop off after a period of time and as the receivables continue to age out, we’re left with the really good receivables. Our receivables continue to perform very well.

OK, thanks a lot.

Our next question comes from Brad [Halverson], with North Point Capital.

Hi gentlemen, great quarter. I appreciate you all staying focused on your business. I have just a handful of questions here. Most things have been asked that I wanted to understand, but strategically - this might be for Brandon - can you go over the customer education center a little bit more? You know, the purpose there and – a little understanding.

You bet. We really felt like when we get our customers in front of our live training that it’s just created a really good experience for our customers. It’s really benefited the customers long-term in their businesses. And last October, we began experimenting selling an intensive two-day training to our existing customer base, where we brought them out to Salt Lake City and brought in trainers and gave them that intensive training. It was very, very well received.

So, in that we started talking to our various partners and have decided it would be in our best interest to go ahead and develop our own training center in Salt Lake City that we owned and controlled. And we began to form partnerships. We’ve already developed an additional two-day eBay training that we’re delivering to our partners’ customers. I believe the first one is June 7th and 8th. These trainings are sold anywhere from $10,000 to $15,000. Again, they’re being very well received by our customers.

So, these – you know, going forward, those $10,000 to $15,000, will that be included in your, kind of, average revenue per customer? Wouldn’t that be – supposed to be making this number go quite a bit higher?

No. That revenue runs through commission and other. The average revenue that we’ve been talking about per-customer is on our workshop sales, our software sales at the workshop.

OK. And what sort of volume do you expect to be able to do in this center? Do you have any rough gauge?

I don’t think that’s a number that we’re going to discuss at this point, but I can say that I’m really excited about the current results. I’m excited about the future of this center.

And what sort of investment is entailed, either in the past so far or in the future, with this center?

In the past there really hasn’t been any investment on our part. But, we’re currently working on deciding among three different facilities up in Salt Lake. We can probably comment on that in the future.

In the sense would you be buying a building, or leasing a building?

No, we’ll be leasing the building.

OK.

OK. So most of the improvements will be tied up in the TI, so it most likely won’t take any capital on our part.

OK, and then this may be a question for you, Don. Just generally speaking, you know we have a lot of history here in the last year or so and you’ve had a number of opportunities obviously to communicate publicly for different reasons, but when would we expect to hear something from you guys, again, as far as meaningful press releases or before the next quarter? Would we even expect that, or is it just kind of we’ll wait to hear from you next quarter?

No, I think that things have become more normal. We’ve resolved a lot of outstanding issues and we don’t like to put press releases out for press release sake. We like to have – [two people talking].

Yes, I understand.

...they have to be material. But, there are several things we’ve commented on in this call, as it revolves around new products and redistribution channels and new opportunities that you’ll probably see a couple of things come out. We’re focused on expanding the products and services we provide to our clients. As I said earlier in the prepared remarks, it’s getting to be a really competitive and complex market out there. We’re finding that our clients and customers are very, very receptive to training, education, support tools and things of that nature, to help give their business an advantage.

So, you’ll probably be seeing things that revolve in that area and then maybe some things on, you know, the uses of our cash, etc.

OK, thank you. Nice job, guys.

Our next question comes from Doug Roberts with [inaudible] Investments.

Good morning gentlemen. How’re you doing?

Good Doug, how are you?

Doing well. Where’s the leverage? I’ve got accounting, a $390,000 one-time expense and legal, I don’t know what number I should be putting in for that. I was hoping you could clarify where the leverage is coming in for this quarter over last year.

I think the leverage in the business always revolves around our ability to bring clients into our workshops and to improve on the close rates, to improve on the percentage of clients that sell cash, vs. contracts, improve the quality of the receivables, and in adding new products, high margin products, ancillary products into the pipeline. So, leverage comes from several areas and we’re continuing to focus on those things.

Can you give me a little more color into extraneous and non-comparable expenses that came in this quarter?

The ones we gave you are – Rob, I think the ones we gave them are probably the most obvious. There may be things we can improve on operating margins and there might be some variables there. But the leverage in the business is in our distribution channel, improving close rates, improving cash percentage, improving collection of receivables and expanding product offerings, and, introducing new distribution channels. And, working our proprietary database.

We do have our clients opt in for other products and services that become available through our relationships and partnerships with others. So, going forward, I think you can – we’re always looking for margin expansion that will come from those areas. And we did have some cost this time that can be considered one-time, but I think the key drivers are going to be in becoming more effective and efficient in the things I just mentioned.

OK. And, as also, I mean, commissions and other revenues, why was it flat, when the number of customers is increasing?

The reason why it was flat was primarily because in the December of 2004 quarter, we had a lot of international events. We did a lot of workshop sales towards the end of that December 2004 quarter, which fed into commission and other revenue. Commission and other revenue usually follows anywhere from two to four weeks after the workshop sale.

Because of the timing and the volume of the workshops that we did in the December 2004 quarter, that fed very positively into the commission and other revenues into the March 31, 2005 quarter. We didn’t have nearly as many international events in the December 2005 quarter, or as many events towards the latter part of December, 2005 that fed into the March 31, 2006 quarter.

So, that’s the reason why for basically leveling off on the commissions and other revenue. It was simply the timing of the December workshops.

OK. Thank you very much.

Your next question comes from Scott [Mettaglano], with Kingsford Capital.

Good morning, guys. I have a question in your most recent 10Q, with regard to the change in your business model. My question, I guess, basically has two parts. The first one is there’s a sentence in there that says the Company’s general counsel has reviewed the agreement between the Company and the Company’s customers and is of the opinion that the company has a legal right to limit the free access service to one year for all existing customers. It goes along a little bit further and gives more detail.

The first part of my question is, has the SEC given you kind of an A-OK, so to speak, on your move to do this and change your business model essentially?

The SEC was aware of the change in business model. Before we - obviously, we had to get clearance on this. We had what was discussed with the SEC, with the Division of Corporation Finance, prior to us being able to get cleared on our accounting.

OK. The next part of my question is you know, it seems to me, just reading this and I’m fairly new to the Company, just to let you guys know; it seems as though you’re kind of retroactively changing the terms that a lot of your customers have signed up. I’m wondering if that’s truly the case, like it’s basically these guys signed up a couple of years ago assuming that they’d be getting unlimited service. Whereas, now it seems as though you’re changing that, saying, “Well you know, you have to pay us now for service beyond a year.”

No, that’s not the case. If you look at the agreements, the agreements indicated that they had one year. In practice, we gave them access for beyond that period simply because we thought it would generate additional revenues, if they have developed websites. But, at the end of the day, everything in our documents stated that it was pretty much limited to one year.

Your documents [two people talking] the documents that your customers were signing?

That’s correct

OK, so basically you were just kind of giving them kind of a freebie?

It was a freebie and it was simply that all we did was clarify the business practice.

OK, and all that $117.5 million was recognized, I believe, last quarter?

Correct.

OK, great. Thank you.

Your next question is a follow up question from Jeff Bess, a private investor.

Rob, would it be fair to say that part of the reason, also, that the reserve factors against gross receivables have come down to like 39% in the last quarter is the improved credit standards? In other words, your mix of customers is more towards the ones who require smaller percentages?

And the second part of that question is that would you say that your credit standards are now stable, and that the only further changes you might see are that, as the better quality credit customers work their way through your time cycle, the percentage comes down somewhat more but, otherwise, you’re more or less stable at the current standards?

I mean, as the receivables continue to build up and kind of level off, then you’ll see a normal rate on the bad debt percentage. I apologize, I didn’t quite get the first question.

The first question was that, isn’t it fair to say that part of the reason that you’ve seen this improvement, down to 39%, I think it was 44% last quarter, is that also the improved credit quality standards that you have means that you have few poorer customers, which require higher percentages and more customers which require lower percentages.

Yes. I mean, we’re definitely financing less to lower credit quality people. So, that’s going to drive it for sure.

OK, thanks a lot.

Our next question is from Morgan Frank, with Manchester.

Hi guys. I have a couple of questions about some of the receivable sales that had been done in the past and then some of the comments you made on the call.

So the $5.5 million of receivables that could have been sold this quarter, is that net of the 32% discount that the receivables were sold at? I mean, net book value according to your 8K is defined as, as few as 68.89% of principal balance. So, I’m just trying to figure out whether that number included that discount or not?

Yes. The numbers that we’ve kind of been giving, these are just kind of - they’re not exact, they’re not scientific. These are just kind of numbers that have been thrown out but, you know, it’s going to be somewhere around there, but it does include and take into consideration the reserve for bad debts, and then also, you know, the 7% discount that we would take.

So, [two people talking].

I’m not talking about the 7% discount for processing fee. I’m talking about the fact that, under that agreement, you define net book value as 68.89% of the sum of principal balances of each contract.

Right, that was [two people talking] -.

So obviously, it would be discounted – a 32% discount is pretty significant, so that becomes you’re only getting $0.64 on the dollar once you’ve paid that 7% on top of that.

Well, you have to consider that, though, that 32% discount is the bad debt reserve and it’s 7% off of that. Now, what we reflect in the financial statements, and the numbers that we’ve given out, is already net of that discount

OK. And then, second, I mean, what’s the accounting treatment of the cash raised from this? Because, it’s my understanding that ADP has significant recourse to return contracts to you if, in their opinion, any sort of misrepresentations or failure to live up to warranties to the customers are made.

So, you then have 10 days to repay them in cash. Given that they seem to have recourse on a number of these contracts, is there a reason why that cash isn’t considered restricted?

No, not at all. You know, the warranty provisions are there primarily in the event that an attorney general declares the contract illegal. So, then we have to refund the customer for those type of things.

That’s not how the contract reads. If any representation or warranty made to the Company, or to the seller’s customer in connection with the contract, is in the conclusive opinion of the Company breached or untrue. So, in that case, this doesn’t seem to require any action by an attorney general; merely the opinion of ADP.

It’s also that - yes, it depends on if the Company has determined that we messed up or misrepresented something, we haven’t done something right by the customer, the Company has the ability to say we need to refund this customer’s contract. We work with ADP and ADP has the option to put the contract back to us, if the Company determines that some sort of fault was on the Company’s part. That’s part of just our normal customer service returns and allowances.

Have you received any contracts back under that?

Very few, very few. But, that’s all part of our customer service returns and allowances.

Got it. OK, great. Thanks very much.

Ladies and gentlemen, we have time for one final question and it is a follow up question from Andrew Mathis of Mathis Capital.

Thanks for taking my second question here. As recent as March of last year, you guys disclosed that 47% of the -

Hello?

Michelle, was Andrew cut off?

I’m here.

OK, go ahead Matthew.

Sorry about that. I was saying, as recently as March of last year, the 10Q stated that 47% of the long-term customers eventually don’t pay and I haven’t seen any recent – do you have an update on that number?

No we don’t, because it’s not really part of GAAP accounting any longer, since we’re not on an accrual basis. It’s no longer a relevant statistic.

So, what is relevant is, the percentage of allowance for doubtful accounts is a percentage of receivables now. [Two people talking].

And what determines that factor?

What determines that factor is there’re a few criteria. Number one, the credit score of the customer; number two, how many payments they’ve made and number three, how aged is the account? And there’s a detailed calculation that we go through. All of these are based upon historical experience, or reserve calculation.

OK. One final on housekeeping; what were the number of units per seminar?

Units per seminar – G&A at the seminar was, for the past quarter, 95.

So, that’s down a little bit from the previous?

Yes, slightly from the previous quarter.

OK, thank you very much.

That is all the time that we have today. Please proceed with your presentation or any closing remarks.

OK. Thank you very much. I appreciate all the great questions today and I’d like to thank the entire management team for their responses.

As you can see, we’ve worked very, very hard to resolve all the outstanding issues, many of the outstanding issues, I should say. We’re pleased with the outcomes to date. Our team has continued to execute on our plan and deliver growth. Additionally, we’ve built a flexible model that enables us to increase our product offerings and the means to diversify our revenue. In the future, we look forward to updating you more about developments at iMergent.

Thank you very much.

Ladies and gentlemen, that concludes your conference call for today. We thank you for your participation and ask that you please disconnect your lines.