FORM 10-QSB

-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, H624b57LdYsy7aGYH7tJTPhNhwAG3PQOn6RiwMFiBAnX9LX/exBt1R1xx7UiSbU6 TUaK3vDo7u2nDBSyJTZA2Q== 0001193125-03-046348.txt : 20030908 0001193125-03-046348.hdr.sgml : 20030908 20030908080148 ACCESSION NUMBER: 0001193125-03-046348 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20030630 FILED AS OF DATE: 20030908 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AXTIVE CORP CENTRAL INDEX KEY: 0001015172 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 133778895 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-20995 FILM NUMBER: 03885081 BUSINESS ADDRESS: STREET 1: 1445 ROSS AVENUE STREET 2: SUITE 4500 CITY: DALLAS STATE: TX ZIP: 75202 BUSINESS PHONE: 214.397.0200 MAIL ADDRESS: STREET 1: 1445 ROSS AVENUE STREET 2: SUITE 4500 CITY: DALLAS STATE: TX ZIP: 75202 FORMER COMPANY: FORMER CONFORMED NAME: EDGE TECHNOLOGY GROUP INC DATE OF NAME CHANGE: 20000912 FORMER COMPANY: FORMER CONFORMED NAME: VISUAL EDGE SYSTEMS INC DATE OF NAME CHANGE: 19960604 10QSB 1 d10qsb.htm FORM 10-QSB FORM 10-QSB

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-QSB

QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2003

TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number: 0-20995

AXTIVE CORPORATION

(Exact name of small business issuer as specified in its charter)

Delaware

13-3778895

(State or other jurisdiction of

incorporation or organization)

(IRS Employer

Identification No.)

1445 ROSS AVENUE, SUITE 4500, DALLAS, TEXAS 75202

(Address of principal executive offices)

(214) 397-0200

(Issuer’s telephone number)

(Former name, former address and former fiscal year, if changed since last report)

Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the issuer was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ¨ No x

State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date.

As of September 2, 2003, the issuer had 21,956,445 shares of Common Stock outstanding.

AXTIVE CORPORATION

TABLE OF CONTENTS

		Page No.
PART I—FINANCIAL INFORMATION

ITEM 1.	Financial Statements:

Consolidated Balance Sheets as of December 31, 2002 and June 30, 2003 (unaudited)		3
Unaudited Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2002 and 2003		4
Unaudited Consolidated Statements of Comprehensive Income (Loss) for the Six Months Ended June 30, 2002 and 2003		4
Unaudited Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2002 and 2003		5
Notes to Unaudited Consolidated Financial Statements		6

ITEM 2.	Management’s Discussion and Analysis or Plan of Operations	16

ITEM 3.	Controls and Procedures	19

PART II—OTHER INFORMATION

ITEM 1.	Legal Proceedings	20

ITEM 2.	Changes in Securities and Use of Proceeds	21

ITEM 3.	Defaults Upon Senior Securities	22

ITEM 4.	Submission of Matters to a Vote of Security Holders	23

ITEM 5.	Other Information	23

ITEM 6.	Exhibits and Reports on Form 8-K	23

SIGNATURES		24

AXTIVE CORPORATION

CONSOLIDATED BALANCE SHEETS

	December 31, 2002			June 30, 2003
				(unaudited)
CURRENT ASSETS
Cash and cash equivalents	$	444,275		$	1,146,571
Marketable securities		26,873			14,927
Accounts receivable, net		392,043			1,922,143
Other current assets		121,984			290,779

Total current assets		985,175			3,374,420

NON-CURRENT ASSETS
Property and equipment, net		301,388			630,587
Goodwill		2,247,714			5,200,587
Intangible assets, net		361,476			3,857,789
Other assets		8,853			90,209

TOTAL ASSETS	$	3,904,606		$	13,153,592

CURRENT LIABILITIES
Accounts payable	$	408,187		$	1,383,060
Accrued expenses		322,380			485,120
Short-term notes payable		995,619			1,031,159
Current portion—long-term debt		—			367,239
Settlement notes payable		—			677,793
Lease termination liability		—			706,150
Other current liabilities		666,333			732,519

Total current liabilities		2,392,519			5,383,040

Long-term debt, less current portion		—			4,989,702
Other liabilities		69,195			57,147

Total non-current liabilities		69,195			5,046,849

TOTAL LIABILITIES		2,461,714			10,429,889

COMMITMENTS AND CONTINGENCIES		—			—

STOCKHOLDERS’ EQUITY
Series A convertible preferred stock, $.01 par value, 5,000,000 shares authorized, 4,440 and 6,775 issued and outstanding at December 31, 2002 and June 30, 2003, net of discount; liquidation preference of $4,440,000 and $6,775,000, respectively.		3,925,572			5,873,473
Common stock, $.01 par value, 100,000,000 shares authorized, 19,039,622 and 20,258,771 issued and outstanding at December 31, 2002 and June 30, 2003, respectively.		190,396			202,587
Additional paid in capital		41,924,284			42,641,158
Accumulated deficit		(44,586,502	)		(45,970,711	)
Accumulated other comprehensive loss		(10,858	)		(22,804	)

TOTAL STOCKHOLDERS’ EQUITY		1,442,892			2,723,703

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	3,904,606		$	13,153,592

The accompanying notes are an integral part of these financial statements.

AXTIVE CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

	For the three months ending June 30,						For the six months ending June 30,
	2002			2003			2002			2003
Net revenue	$	511,101		$	1,706,660		$	511,101		$	2,692,943
Cost of revenue		(340,040	)		(1,108,308	)		(340,040	)		(1,550,717	)

Gross profit		171,061			598,352			171,061			1,142,226

Operating expenses
General and administrative		787,521			1,150,397			979,482			1,956,375
Marketing		34,185			111,517			34,185			227,878
Bad debt		—			13,232			—			13,507
Depreciation and amortization		12,167			197,119			12,167			258,217

Total operating expenses		833,873			1,472,265			1,025,834			2,455,977

Operating loss		(662,812	)		(873,913	)		(854,773	)		(1,313,751	)

Other income (expense)
Interest income		4,381			31			4,389			355
Interest expense		(2,920	)		(63,517	)		(37,259	)		(84,030	)
Income—other		—			40,000			—			100,000
Expenses—other		(8,828	)		(65,128	)		(9,790	)		(86,783	)

Total other income (expense)		(7,367	)		(88,614	)		(42,660	)		(70,458	)

Net loss		(670,179	)		(962,527	)		(897,433	)		(1,384,209	)

Provision for preferred stock dividends		(82,849	)		(107,501	)		(82,849	)		(196,005	)
Amortization of discount on preferred stock		(92,500	)		(334,000	)		(92,500	)		(429,934	)

Net loss attributed to common stockholders	$	(845,528	)	$	(1,404,028	)	$	(1,072,782	)	$	(2,010,148	)

Net loss per share, basic and diluted	$	(0.05	)	$	(0.07	)	$	(0.06	)	$	(0.10	)

Weighted average common shares outstanding, basic and diluted		17,767,656			19,283,452			17,127,898			19,161,537

COMPREHENSIVE INCOME (LOSS)

Net loss	$	(670,179	)	$	(962,527	)	$	(897,433	)	$	(1,384,209	)
Unrealized loss on available for sale securities		—			(11,946	)		—			(11,946	)

Comprehensive loss	$	(670,179	)	$	(974,473	)	$	(897,433	)	$	(1,396,155	)

The accompanying notes are an integral part of these financial statements.

AXTIVE CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

	For the Six Months Ended June 30,
	2002			2003
CASH FLOWS FROM OPERATING ACTIVITIES
Net cash used in operating activities	$	(890,229	)	$	(1,014,152	)

CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures		(37,006	)		(5,002	)
Cash received in the acquisition of ThinkSpark		—			91,832
Cash paid in connection with the ThinkSpark acquisition		—			(258,914	)
Acquisition of subsidiaries, net of cash received		(1,640,168	)		—
Settlements of prior acquisitions		—			(189,710	)

Net cash used in investing activities		(1,677,174	)		(361,794	)

CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from the issuance of preferred stock and warrants		2,561,000			2,212,966
Deferred financing fees		(35,007	)		—
Repayment of settlement costs		—			(114,391	)
Principal payments on capital leases		—			(20,333	)

Net cash provided by financing activities		2,725,993			2,078,242

NET CHANGE IN CASH AND CASH EQUIVALENTS		158,590			702,296

Cash and cash equivalents, beginning of period		340,683			444,275

Cash and cash equivalents, end of period	$	499,273		$	1,146,571

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest	$	1,841		$	51,816
Cash paid for taxes	$	8,386		$	—

SUPPLEMENTAL DISCLOSURE OF NON-CASH INFORMATION
Fair value of warrants issued in connection with sale of preferred stock	$	—		$	411,000
Fair value of warrants issued to settle a note payable	$	—		$	414,000
Amortization of preferred stock beneficial conversion feature	$	—		$	95,936
Issuance of common stock as collateral	$	—		$	12,191
Issuance of note payable in connection with acquisition of ThinkSpark	$	—		$	181,440
Preferred stock issues in satisfaction of note payable	$	—		$	84,115
Preferred stock issues—cash not yet received	$	—		$	50,000

The accompanying notes are an integral part of these financial statements.

AXTIVE CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

In this Quarterly Report on Form 10-QSB, we will refer to Axtive Corporation, a Delaware corporation, as “Axtive,” “Company,” “we,” “us” and “our.” Prior to October 28, 2002, the Company was known as Edge Technology Group, Inc. Throughout this Quarterly Report where prior reports included a reference to “Edge” in a historical context, the reference to Edge has been changed to “Axtive.” Axtive is a publicly traded company (OTC:AXTV.PK).

1. BASIS OF PRESENTATION

The consolidated financial statements included herein have been prepared by us, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations. Additionally, certain amounts reported in prior periods have been reclassified to conform to the current period’s presentation.

In the opinion of management, the accompanying unaudited consolidated financial statements include all necessary adjustments (consisting only of normal recurring adjustments) necessary to present fairly the financial position, results of operations, comprehensive loss, and cash flows of the Company. The results of operations and cash flows for the interim dates are not necessarily indicative of the results of operations or cash flows that may be reported for the year ended December 31, 2003. The unaudited consolidated financial statements included herein should be read in conjunction with the audited financial statements and the notes thereto included in the Company’s Annual Report on Form 10-KSB for the year ended December 31, 2002 (“Annual Report”).

As disclosed in the Annual Report, we apply Accounting Principles Board Opinion No. 25 (“APB No. 25”), Accounting for Stock Issued to Employees, in accounting for our stock plans. Under APB No. 25, no compensation cost is generally recognized for fixed stock options in which the exercise price is equal to or greater than the market price on the grant date. Compensation cost related to stock options recognized by us in accordance with APB No. 25 was not significant during the three and six months ended June 30, 2002 or 2003.

The following table illustrates the effect had we determined compensation cost based on fair value at the grant date for our stock options under SFAS No. 123, “Accounting for Stock-Based Compensation” and SFAS No. 148, “Accounting for Stock-Based Compensation—Disclosure and Transition”:

	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2002			2003			2002			2003
Net loss attributed to common stockholders
As reported	$	(845,528	)	$	(1,404,028	)	$	(1,072,782	)	$	(2,010,148	)
Pro forma compensation expense	$	(440,338	)	$	(994,935	)	$	(1,292,333	)	$	(1,600,958	)

Pro forma	$	(1,285,866	)	$	(2,398,963	)	$	(2,365,115	)	$	(3,611,106	)

Basic and diluted loss per share
As reported	$	(0.05	)	$	(0.07	)	$	(0.07	)	$	(0.11	)
Pro forma	$	(0.08	)	$	(0.13	)	$	(0.14	)	$	(0.19	)

2. UNCERTAINTY OF PROPOSED PLAN OF OPERATION

The Company has suffered recurring losses from operations and has an accumulated deficit of approximately $46.0 million at June 30, 2003. Of this amount, approximately $33.5 million had accumulated through March 31, 2001, and is attributable to the Company’s former One-on-One golf video business. An additional amount totaling approximately $6.2 million reflects impairment charges and bad debts stemming from investments and loans made prior to the Company’s creation of its current business plan.

We believe we will continue to incur losses until we are able to generate sufficient revenues to offset the operating costs associated with executing our new business plan. These losses could limit our ability to raise new funds and could ultimately jeopardize our ability to remain in business.

Our business strategy is dependent upon making additional acquisitions of software-related technology companies. To be suitable for acquisition by us, these companies must be small enough to be affordable yet profitable. Acquisition candidates may be few in number and may attract offers from companies with greater financial resources than us. Acquisitions involve numerous risks, including, among others, loss of key personnel of the acquired company, difficulties associated with assimilating the personnel and operations of the acquired company, potential disruption of our ongoing business and the maintenance of uniform standards, controls, procedures and policies. While we believe our past acquisitions are compatible with our business plan, we can provide no assurance that we will be able to locate other suitable acquisition targets or that we will be able to complete additional acquisitions. Our business plan will succeed only if we are able to identify, acquire and manage additional acquisitions. There can be no assurance that we will be able to implement our business plan, and failure to effectively implement our business plan will have a material adverse effect on us.

Our current financial condition will not allow us to finance additional acquisitions independently. We have no assurance that Axtive will be able to obtain additional financing on acceptable terms or at all. If we cannot obtain additional financing, we will not be able to complete any future acquisitions and will consequently not be able to successfully implement our business plan.

3. BUSINESS COMBINATIONS

The acquisitions described below were made pursuant to our business model as discussed in the Annual Report. The purchase price for each acquisition was generally based upon a multiple of earnings before interest, taxes, depreciation and amortization (“EBITDA”), adjusted for certain non-recurring costs deemed to be unique to the particular company or situation. Since the acquired companies are technology service companies with minimal tangible or intangible assets, the purchases resulted in payments characterized as goodwill.

Acquisition of Media Resolutions, Inc.

On April 11, 2002, we completed the acquisition of Media Resolutions, Inc., an Application Service Provider (“ASP”) and website hosting company located in Dallas, Texas.

Acquisition of The Visionary Group, Inc.

On April 8, 2002, we acquired the Visionary Group, Inc., a professional services firm providing IT Professional Services related to Oracle applications software. Headquarted in Dallas, Texas, The Visionary Group has operations in Dallas and Austin, Texas.

Acquisition of Universal Data Technology, Inc.

On May 31, 2002, our newly created and wholly owned subsidiary, UDT Consulting, Inc., acquired the assets of Universal Data Technology, Inc., an IT Professional Services practice headquartered in Dallas, Texas with additional operations in Arkansas and Florida. In July 2003, Axtive, UDT Consulting, Inc., and Universal Data Technology, Inc. entered into a settlement agreement to resolve all outstanding obligations of the parties arising from the acquisition of Universal Data Technology, Inc.’s assets. We paid Universal Data Technology, Inc. $310,000 in full and final payment of the purchase price for the acquisition.

Acquisition of Virtually There, Inc.

In May 2002, we acquired Virtually There, Inc., an ASP and website hosting company located in Fort Worth, Texas.

Acquisition of ThinkSpark Corporation

In May 2003, we acquired ThinkSpark Corporation and its subsidiaries (“ThinkSpark”), a professional services firm providing IT Professional Services related to Oracle database software. ThinkSpark is headquartered in Dallas, Texas with additional offices in Austin, San Antonio, Oklahoma City, and Las Vegas, Nevada. The Company believes that ThinkSpark is a significant building block for growing Axtive’s IT professional services

business in conjunction with executing the Company’s current business plan. As a result of the acquisition, the Company gained an industry savvy management team with decades of professional service experience, an established and profitable partnership with Oracle Education, and numerous long-term government contracts. We assigned a value of $662,000 to non-compete agreements entered into by ThinkSpark management, amortizable over 2 years; $662,000 to the Oracle Education partnership, amortizable over 2 years; and approximately $2.3 million to the government contracts acquired, amortizable over 5 years.

In exchange for all of the outstanding shares of ThinkSpark, we paid approximately $242,000 in cash and notes and $198,000 in acquisition-related costs. As part of the acquisition, Axtive assumed $5.0 million of long-term debt from ThinkSpark’s secured creditor, Merrill Lynch Business Financial Services, Inc. The debt assumed is secured by $1.0 million of accounts receivable of ThinkSpark and is guaranteed by the remaining subsidiaries of Axtive. We also issued Merrill Lynch warrants to acquire 5,000,000 shares of Axtive’s common stock in exchange for of the retirement of an additional $1.9 million of debt due from ThinkSpark To Merrill Lynch. The warrants have an exercise price of $0.01 per share and can be exercised anytime prior to the 10th anniversary of their issuance (May 2013). As a result of the warrants, Merrill Lynch could acquire a significant equity interest in Axtive. The issuance of these warrants, valued at $414,000 had no effect in the statement of operations as the debt was recorded as part of the ThinkSpark acquisition.

The acquisition was accounted for using the purchase method of accounting. As such, the assets and liabilities of ThinkSpark have been recorded at their estimated fair value and the results of operations have been included in our consolidated results of operations from the date of acquisition. The excess purchase price over the fair value of the tangible and intangible assets acquired in the acquisition totaled $3.6 million and was allocated to goodwill.

Allocation of Purchase Price

Following is a summary of the amounts assigned to the assets and liabilities of ThinkSpark:

Net Assets Acquired
Cash	$	91,832
Accounts receivable		1,757,279
Property and equipment		445,746
Goodwill		2,958,163
Intangibles		3,639,854
Other assets		98,812

Total assets acquired		8,991,686

Accounts payable and accrued expenses		1,288,333
Other liabilities		7,262,999

Total liabilities assumed		8,551,332

Total purchase price	$	440,354

None of the goodwill recorded as a result of the acquisition is expected to be deductible for tax purposes.

Pro Forma Results

The following unaudited pro forma consolidated results of operations have been prepared as if the acquisitions discussed above had occurred at January 1, 2002:

	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2002			2003			2002			2003
Revenues	$	6,960,280		$	3,360,185		$	15,833,528		$	7,625,186
Net income (loss) attributed to common stockholders	$	(2,268,010	)	$	(2,364,245	)	$	(3,196,253	)	$	(1,240,500	)
Net income (loss) per share attributed to common stockholders, basic and diluted	$	(0.13	)	$	(0.12	)	$	(0.19	)	$	(0.06	)
Weighted average shares outstanding, basic and diluted		17,767,656			19,283,452			17,127,898			19,161,537

4. RELATED PARTY TRANSACTIONS

Investment in PurchasePooling Solutions, Inc.

In October 2001, we participated in the amount of $400,000 in a syndicated loan to PurchasePooling Solutions, Inc. (“PurchasePooling”) in the total amount of $1,600,000. The loan was considered impaired and written off by the Company during 2001. In February 2003, the lenders to PurchasePooling (including Axtive) declared the loan to PurchasePooling in default and foreclosed upon the assets of the company. The previous lenders formed a new entity, Demand Aggregation Solutions, LLC (“DAS”), to hold the assets, and Axtive, under a management agreement, has agreed to manage the affairs of DAS in exchange for a management fee of $25,000 per month beginning in May 2003. Stemming from Axtive’s participation in the loan, the Company has a 25% membership interest in DAS that is subject to forfeiture if Axtive breaches its obligations under the management agreement. Additionally, the management agreement with DAS obligates Axtive to advance DAS for working capital needs at a rate not exceeding, on average, $50,000 per month up to a maximum of $1.2 million over the three year life of the agreement. At such time when DAS’s cash flow permits, DAS will reimburse the Company for all outstanding advances. As of June 30, 2003, Axtive has funded DAS approximately $100,000 which is included in “Other current assets” on the consolidated balance sheet.

In connection with the formation of DAS and Axtive’s agreement to manage its affairs, DAS participated in the Axtive 2003 Series A Preferred Financing (see Note 10 “Financing Transactions” ) investing $1.2 million of the $2.3 million raised.

Acquisition of “Axtive” Name

In June 2002, the Company acquired the name “Axtive” and its related logo and trademark and certain tangible assets including furniture and fixtures, signage and office supplies from Axtive Software Corporation, as represented by it sole shareholder, G.C. “Scooter” Beachum III, our Executive Vice President and General Manager. The assets were acquired in exchange for an initial grant of 400,000 restricted shares of Axtive’s common stock, which was valued at approximately $168,000 at the time of acquisition. This amount was allocated between relative fair values of the intangible ($153,000) and tangible assets ($15,000) purchased by us.

Additionally, on July 1, 2003, we issued 297,674 restricted shares of our common stock valued at approximately $15,000 to TSTC International Holding Company, formerly known as Axtive Software Corporation. These shares constituted an additional payment due to TSTC in connection with our June 2002 purchase of certain assets. We were obligated to issue the additional restricted shares, not in excess of 297,674 shares, if the market price of our common stock had not been at or above $0.75 within the one-year period after our purchase.

5. PRINCIPLES OF CONSOLIDATION

The accompanying consolidated financial statements include the Company and its wholly owned subsidiaries. All significant intercompany balances and intercompany transactions have been eliminated in consolidation.

6. REVENUE RECOGNITION

The Company earns revenues from providing consulting services, providing education, and selling products.

In Emerging Issues Task Force Issue No. 99-19, Reporting Revenue Gross as a Principal versus Net as an Agent (EITF 99-19), the Task Force established certain criteria for net versus gross recording of sales transactions. EITF 99-19 requires, among other things, that revenues derived from products or services in which companies typically act as an intermediary be reported on a net basis. The Company has reported applicable revenues in accordance with EITF 99-19 in the accompanying financial statements.

Although the Company provides consulting services under both time-and-material and fixed-price contracts, the majority of our service revenues are recognized under time-and-material contracts as hours and costs are incurred. Revenues include reimbursable expenses billed to customers. Revenues from consulting services and database monitoring services are recognized when the Company has received a signed agreement, the Company has delivered the services, and collection is considered probable by management. Cost of revenues for consulting services and database management includes salaries, benefits, and other direct expenses related to providing consulting services. Deposits received from customers in advance of the delivery of product or provision of service are included in other current liabilities in the accompanying balance sheets.

Education revenues include amounts billed for providing training seminars at Company-owned and third-party facilities. Revenues from Company-organized courses are reported on a gross basis. Revenues from training courses conducted for Oracle Corporation are recorded on a net basis, as the Company receives a percentage of the amounts billed to participants. Cost of revenues for education revenues includes salaries, benefits, and other direct expenses related to providing education services.

Revenues for products primarily include sales of Oracle software, Oracle Education Credits, and hardware. These revenues are predominantly recorded at the net amount received by the Company, primarily because the Company typically acts only as an intermediary. Cost of revenues for products includes direct costs of providing products.

7. FOREIGN SUBSIDIARY

The Company’s wholly owned foreign subsidiary, Thinkspark Limited is currently in liquidation. No adjustments have been made to these consolidated financial statements to reflect the possible effects of this liquidation, which could include the reduction or settlement of certain liabilities.

8. GOODWILL AND OTHER INTANGIBLE ASSETS

Effective January 1, 2002, we adopted Statement of Financial Accounting Standards (“SFAS”) No, 141, “Business Combinations” and SFAS No. 142, “Goodwill and Other Intangible Assets.” SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001, and also specifies the criteria for the recognition of intangible assets separately from goodwill. Under the new rules, goodwill is no longer amortized but is subject to an impairment test at least annually or more frequently if impairment indicators arise. In accordance with SFAS No. 142, we performed an annual impairment test of goodwill in the third quarter of 2002. Of the approximate $906,000 of goodwill recorded in the acquisition of The Visionary Group, $600,000 was written off in September 2002, and the balance was written off in December 2002.

Intangible assets consist of the following as of June 30, 2003:

	Gross Carrying Value		Accumulated Amortization
Amortizable intangible assets:
Non-compete agreements	$	911,040	$	122,591
Oracle partnership		661,792		29,733
Government contracts acquired		2,316,270		41,627

Total	$	3,889,102	$	193,951

Intangible assets not subject to amortization:

Tradename	$	162,638	$	0
Goodwill		5,200,587		0

Total	$	5,363,225	$	0

Amortization expense related to the intangible assets totaled $122,317 and $143,541 for the three and six months ended June 30, 2003. The aggregate estimated amortization expense for intangible assets remaining as of June 30, 2003 is as follows:

2003	$	597,638
2004		1,175,872
2005		765,472
2006		489,738
2007		473,408
2008		193,023

Total	$	3,695,151

9. LOSS PER SHARE

Basic loss per share is calculated by dividing loss attributable to common stockholders by the weighted average number of shares of common stock outstanding during each period.

For the six months ended June 30, 2002 and 2003, due to our net losses, all shares of our Common Stock issuable upon conversion of convertible preferred stock, convertible debt and the exercise of outstanding options and warrants have been excluded from the computation of diluted loss per share in the accompanying statements of operations as their impact would be antidilutive. The aggregate number of warrants and options excluded from the loss per share calculation for the six months ended June 30, 2002 and 2003 are 9,011,401, and 39,022,834, respectively.

10. FINANCING TRANSACTIONS

2003 Series A Preferred Financing

On May 23, 2003, the Company issued 2,335 shares of Series A Preferred shares in a private offering to new and existing private, accredited investors at $1,000 per share. The Company received gross proceeds of $2.3 million, consisting of $2.25 million in cash, less $122,024 of issuance costs and $84,000 in satisfaction of debt owed by the Company to a stockholder and an executive officer. The Series A Preferred shares carry an 8% cumulative dividend and are immediately convertible, at the option of the holder, into shares of common stock at $0.10 per share. The purchasers also received warrants to acquire 4,670,000 shares of Common Stock at $0.20 per share in connection with the transaction. These warrants were valued at $386,000 using the Black-Scholes model and have been treated as a discount to the Series A Preferred and have been recorded as an increase in additional paid in capital. Demand Aggregation Solutions, LLC (“DAS”) purchased $1.2 million of the Series A Preferred Stock. See Note 4 “Related Party Transactions” regarding our obligation to provide up to $1.2 million in funding to DAS.

The 2002 issuances of Series A Preferred, as discussed in our 2002 Annual Report, provided that subsequent issuances of such securities on terms more favorable than those provided to the original investors in the Series A Preferred would automatically adjust the terms and conditions on the outstanding Series A Preferred to the more favorable terms and conditions (“Superior Rights”). As a result, the initial conversion price on all Series A Preferred outstanding prior to the 2003 issuance was reduced from $0.75 to $0.10 per share and the exercise price of the warrants was reduced from $1.15 per share to $0.20 per share. Each purchaser of Series A Preferred Stock in 2002 was issued a restated warrant exercisable for additional shares as a result of the decrease in the initial conversion price. The additional value of the modified warrants was determined to be $77,000 using the Black-Scholes model and has been treated as a discount to the Series A Preferred and have been recorded as an increase in additional paid in capital. The restated warrants are exercisable for a total of 4,440,000 additional shares of common stock.

of Series A Preferred Stock in May 2003. The terms were identical to the May 2003 sale of Series A Preferred Stock. The Company received gross proceeds of $50,000 in cash in July 2003. Based upon an irrevocable commitment to purchase, the $50,000 is included with “Other assets” as of June 30, 2003. As part of this subsequent issuance, we issued additional warrants exercisable for 100,000 shares of our common stock.

Receivables Factoring

One of the Company’s subsidiaries, UDT Consulting, Inc., has engaged with a third-party to factor certain of its receivables. The receivables are purchased by the factor with recourse to UDT Consulting, and amounts due under the Factoring and Security Agreement are secured by a pledge of receivables and other assets of UDT Consulting, and are guaranteed by Axtive. Under the agreement, UDT Consulting receives approximately 80% of the face amount of the receivable, pays interest at a rate of prime plus 2% and is subject to additional fees in certain circumstances. At June 30, 2003, UDT Consulting had approximately $194,000 of receivables sold under the agreement. These receivables remain on the Company’s financial statements until collected and the related liability to the factor is included in Other Current Liabilities in the Consolidated Balance Sheet.

Dividends in Arrears

As of June 30, 2003, there had been no dividends declared on the Series A Preferred stock and total dividends in arrears at June 30, 2003 totals $457,449. Undeclared dividends for the three and six months ended June 30, 2003 on the preferred shares as of that date totaled $107,501 and $196,005 and are reflected in the computation of net loss attributable to common stockholders in the Consolidated Statements of Operations.

11. ACCRUED EXPENSES

Accrued expenses are summarized as follows:

	December 31, 2002		June 30, 2003
Professional fees	$	59,632	$	60,641
Interest		—		31,325
Salaries, bonuses and benefits		223,806		393,154
Other		38,942		—

	$	322,380	$	485,120

12. OTHER CURRENT LIABILITIES

Other current liabilities are summarized as follows:

	December 31, 2002		June 30, 2003
Current portion of capital lease obligations	$	41,522	$	37,723
Deferred vendor liabilities		377,969		338,682
Amounts due on receivables factored		151,089		194,378
Customer deposits		39,941		39,275
Deferred revenue		37,707		22,805
Other		18,105		99,656

	$	666,333	$	732,519

13. SHORT-TERM NOTES PAYABLE, LONG-TERM DEBT, AND SETTLEMENT NOTES PAYABLE

Concurrent with the ThinkSpark acquisition, the Company entered into an Assignment and Assumption Agreement to assume $5.0 million of debt of ThinkSpark outstanding with Merrill Lynch Business Financial Services, Inc. (“Merrill Lynch”). The debt assumed is secured by $1.0 million of accounts receivable of ThinkSpark and is guaranteed by the remaining subsidiaries of Axtive. The debt is payable in monthly installments of $55,000

including 6.0% percent interest in year one, and monthly installments of $60,000 including 8.0% interest in year two, with the remaining balance due on June 1, 2005. The Company also issued Merrill Lynch warrants to acquire 5,000,000 shares of Axtive’s common stock at $0.01 per share for a term of 10 years in exchange for Merrill Lynch’s assignment to Axtive and settlement of an additional $1.9 million of debt due from ThinkSpark. These warrants were valued at $414,000 using the Black-Scholes model on the date of grant.

Also concurrent with the ThinkSpark acquisition, the Company entered into various other settlement agreements with former landlords, customers, and employees of ThinkSpark. Of these settlements, $1.17 million bear interest rates of 6.0%, and are all due and payable within six months to twenty four months of execution; and $160,000 bear no interest rate and are due and payable within twelve months of execution. As of June 30, 2003, the balance remaining due is $1.03 million and is included in “Short-term notes payable” on the consolidated balance sheet.

14. LEASE TERMINATION LIABILITY

During 2002, ThinkSpark closed certain offices that had existing lease obligations. The Company has estimated the liability associated with terminating these leases prior to their respective maturity dates. At June 30, 2003, the estimated liability related to these obligations that has been recorded by the Company totaled approximately $706,000. This estimate is based on signed releases, if applicable, or management’s expected liability based on ongoing negotiations. The Company is involved in litigation related to unpaid rent on several of these facilities, however management believes that the Company will be able to settle these claims and that the ultimate remaining liability will approximate $706,000.

15. LEGAL PROCEEDINGS

PROCEEDINGS AGAINST THE VISIONARY GROUP

In June 2002, we were notified that The Visionary Group and Axtive had been sued in the District Court of Dallas County, Texas for non-payment of approximately $110,000 due to former sub-contractors of The Visionary Group. In order to limit our costs to defend the matter, Axtive agreed to a partial summary judgment pursuant to which Axtive admitted the liability of The Visionary Group, but retained our defenses on the third-party beneficiary claim against Axtive. Trial has been set for October 2003.

The Visionary Group ceased operations in December 2002 and currently has no employees and no assets and identified liabilities totaling, including the $110,000 non-payment discussed above, of approximately $190,000, which have been recorded in the accompanying consolidated balance sheets. We do not expect that an adverse judgment against The Visionary Group in this lawsuit would have a material impact on Axtive.

With respect to any exposure directly against Axtive Corporation, we believe we have meritorious defenses, but an adverse judgment against Axtive could have a material negative impact on our business.

In April 2003, a judgment was entered against The Visionary Group in the amount of approximately $3,000 for failure to pay the business related expenses of a former employee. The judgment remains outstanding.

PROCEEDINGS AGAINST THINKSPARK

In 2002, a former customer obtained a final judgment against ThinkSpark. The former customer filed a collection suit against ThinkSpark with respect to the judgment in the amount of $940,000, including attorneys’ fees. The former customer also filed a lawsuit against certain of ThinkSpark’s then directors and stockholders with respect to alleged improper repurchases of stock from certain stockholders. Effective with Axtive’s acquisition of ThinkSpark, ThinkSpark entered into a settlement agreement with the former customer. ThinkSpark agreed to make a cash payment of $18,000 to the former customer and issue a promissory note for $150,000. The promissory note bears interest at 6% per year and is payable on a monthly basis amortized over 12 months. In exchange, the former customer agreed not to seek to enforce the judgment, to dismiss with prejudice the separate lawsuit, and upon payment in full of the promissory note, to fully release ThinkSpark and the individual defendants from all claims.

In October 2002, a former employee and shareholder filed a suit against ThinkSpark, certain of its subsidiaries, and certain of its directors and shareholders seeking damages in the amount of $612,000 for breach of a severance agreement. Effective with Axtive’s acquisition of ThinkSpark, ThinkSpark entered into a mutual release agreement with the former employee. In exchange for mutual releases of all claims, ThinkSpark agreed to issue to

the former employee a promissory note in the amount of $169,000, a portion of which represented the merger consideration payable to the former employee and shareholder. The promissory note bears interest at 6% per year and is payable on a monthly basis amortized over 18 months. The former employee agreed to then abate his lawsuit and, upon payment in full of the promissory note, to dismiss all claims against ThinkSpark and the other defendants.

In January 2001, a United Kingdom subsidiary of ThinkSpark entered into a lease for office space in London for a 15-year term. ThinkSpark was required to be a surety on this lease agreement. In October 2002, the ThinkSpark subsidiary ceased operations in the United Kingdom and consequently breached the lease agreement. The United Kingdom subsidiary is now in liquidation. The landlord filed suit against ThinkSpark in the United Kingdom. In May 2003, ThinkSpark and the landlord entered into a settlement agreement. Pursuant to the terms of the settlement agreement, and in consideration of the terms of the settlement, Axtive executed a promissory note in favor of the landlord for $200,000. The promissory note bears interest at 6% per year and is payable over 12 months. Axtive issued 1,219,149 restricted shares of our common stock to the landlord as security for the promissory note. Pursuant to the settlement agreement and the promissory note, the shares will be returned to us at various stages based upon payments made on the promissory note. Assuming the promissory note is paid in full pursuant to its terms, all of the shares will be returned. All returned shares will be held by us as treasury shares. If there is a default on the promissory note, the landlord has the right to keep all or part of the shares to satisfy any remaining obligation. These shares have been treated as outstanding in the accompanying financial statements. These shares were recorded at par value with an offset to additional paid in capital.

ThinkSpark was sued in state court in Cuyahoga County, Ohio, for breach of a November 1998 lease agreement for office space in Cleveland, Ohio, which has been vacated by ThinkSpark. The landlord obtained a judgment in March 2003 for approximately $203,000 plus 10% per year until paid and all costs, including collection costs. The landlord has filed in state court in Texas an authenticated copy of a judgment for domestication under the Uniform Enforcement of Foreign Judgments Act, and ThinkSpark has been served with post-judgment discovery. The ThinkSpark subsidiary is in discussions with the landlord to settle the judgment; however, we can give you no assurance that ThinkSpark will be able to enter into a settlement. Management’s estimated of the potential liability has been recorded in the accompanying consolidated balance sheets as “Lease termination liability.”

A subsidiary of ThinkSpark was sued in state court in Tarrant County, Texas for breach of an October 1998 lease agreement for office space in Fort Worth, Texas, which has been vacated by the ThinkSpark subsidiary. The landlord seeks damages for past due rent, utilities and other sums due under the lease, future rents, brokerage commissions paid by the landlord at the commencement of the lease, and unreimbursed tenant improvement expenses in the total amount of approximately $212,000, plus attorneys’ fees. The ThinkSpark subsidiary is in discussions with the landlord to settle the claims; however, we can give you no assurance that the ThinkSpark subsidiary will be able to enter into a settlement or otherwise successfully defend against the landlord’s claims. Management’s estimate of the potential liability has been recorded in the accompanying consolidated balance sheets as “Lease termination liability.”

A subsidiary of ThinkSpark was sued in state court in Fulton County, Georgia for breach of a June 2000 lease agreement for office space in Atlanta, Georgia, which has been vacated by the ThinkSpark subsidiary. The landlord seeks damages for past due rent of approximately $12,000 per month since August 2002. The action as originally filed claimed past due rent from August-November 2002; however, the landlord has indicated its intent to seek the full remaining obligation under the lease from November 2002 of approximately $420,000. The ThinkSpark subsidiary is in discussions with the landlord to settle the claims; however, we can give you no assurance that the ThinkSpark subsidiary will be able to enter into a settlement or otherwise successfully defend against the landlord’s claims. Management’s estimate of the potential liability has been recorded in the accompanying consolidated balance sheets as “Lease termination liability.”

In August 2003, ThinkSpark was sued in Greene County, Ohio for breach of a November 1998 lease agreement extension for office space in Dayton, Ohio, which has been vacated by ThinkSpark. The landlord seeks damages for $55,556. ThinkSpark is in discussions with the landlord to settle the judgment; however, we can give you no assurance that ThinkSpark will be able to enter into a settlement. Management’s estimate of the potential liability has been recorded in the accompanying consolidated balance sheets as “Lease termination liability.”

In July 2003, an individual filed suit against ThinkSpark alleging breach of contract and seeking damages of $14,040 plus interest, attorney’s fees and costs of court. The suit was based on a contract between ThinkSpark and the former employee whereby the individual served as an independent contractor as a consultant and expert witness in a collection against a former customer. The individual rendered these services in 2001. ThinkSpark agreed to pay the individual $1,500 per month for a term of eleven months, commencing in August 2003. The

parties also executed an Agreed Judgment in the amount of $21,500. In the event ThinkSpark defaults on its payments to this individual, the Agreed Judgment will be enforced with an offset equal to the amounts ThinkSpark had paid prior to the default. In exchange, the individual agreed to abate the proceedings against ThinkSpark and will file a motion for nonsuit with prejudice upon full satisfaction of the payments due.

16. INVESTMENT BANKING AGREEMENT

On June 26, 2003, the Company entered into an amended Investment Banking Agreement with Atlas Capital Services, LLC (“Atlas”), that was effective May 1, 2003, to act as an agent on a per transaction fee basis on our behalf in connection with certain advisory and investment banking services. At execution, the Company issued to Atlas 1,115,000 shares of its common stock and warrants to purchase 1,250,000 shares of common stock at $0.20 per share. Additionally, Atlas is entitled to a $10,000 per month advisory fee. As of June 30, 2003, we have paid Atlas $10,000 under the terms of this amended agreement and have recorded a liability for the fees accrued but not yet paid.

17. SUBSEQUENT EVENT

On August 18, 2003, ThinkSpark engaged with a third-party to factor certain of its receivables. The receivables are purchased by the factor with recourse to ThinkSpark, and amounts due under the Factoring and Security Agreement are secured by a pledge of receivables and other assets of ThinkSpark, and are guaranteed by Axtive. Under the agreement, ThinkSpark receives approximately 80% of the face amount of the receivable, pays interest at a rate of prime plus 2% and is subject to additional fees in certain circumstances.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS

The following discussion and analysis should be read in conjunction with the consolidated financial statements and notes thereto included as Item 1 of this report. This document contains “forward-looking statements” relating to future events or our future financial performance within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 and which are intended to be covered by the safe harbors created thereby. These forward-looking statements are based on the beliefs of our management as well as assumptions made by and information currently available to our management. These statements include without limitation, statements regarding our future capital requirements and our ability to satisfy our capital needs, statements regarding our recent acquisitions, statements regarding our ability to implement our plans to acquire additional companies, and other statements which speak to projections of future conditions or our anticipated performance which contain the words “anticipate”, “believe,” “expect” and words or phrases of similar import, as they relate to us or our management. You should be aware that these “forward-looking” statements are subject to certain risks, uncertainties and assumptions related to certain factors including, without limitation, the ability to adopt and successfully execute a revised business plan, respond to future business opportunities, and overcome numerous other risks and difficulties generally experienced by early stage business models, including, but not limited to, those factors set forth under the heading “RISK FACTORS” in Annual Report on Form 10-KSB for our fiscal year ended December 31, 2002. Although we believe that the expectations reflected in such forward-looking statements are reasonable, we can give no assurance that such expectations will prove to have been correct. Based upon changing conditions, should any one or more of these risks or uncertainties materialize, or should any underlying assumptions prove incorrect, actual results may vary materially from those described herein. We expressly undertake no obligation to update these forward-looking statements. Except as required by federal securities laws, we undertake no obligation to publicly update or revise any written or oral forward-looking statements, whether as a result of new information, future events, changed circumstances or any other reason after the date of this report.

GENERAL

Axtive’s business model is to acquire software related technology companies that deliver software products and related information technology services to middle-market companies. We offer products and services that improve the utilization of business information for middle-market companies, initially within the United States. We expect that customer organizations will benefit from integrated business process applications that are delivered on a fully outsourced basis through portal technology or, if needed, as traditional licensed products. Our acquisition targets are companies with existing strategic relationships with Oracle, IBM or Microsoft that will allow us to take advantage of partnership opportunities available only to select parties. The technology companies targeted for acquisition are those that operate within the following business sectors and operating business units: (1) IT Professional Services; (2) Business Application Software, comprised of six product groups; and (3) Application Services and Management.

Initial development of our business model has involved the acquisition of IT Professional Services and Application Services and Management firms that have existing relationships with numerous middle-market customers. Subsequent acquisitions are expected to target software products with common data structures (such as Oracle, IBM and Microsoft) designed for the application service delivery channel. We expect that synergistic relationships will develop between the acquired companies and that funding for operating business unit -specific projects will be provided through public and private offerings of Axtive securities. Nearly all operations are expected to continue within each operating business unit while a small corporate staff will interface with the capital markets, formulate and manage our overall strategic objectives and oversee all mergers and acquisitions.

Prior to our emphasis on IT Professional Services, Business Application Software and Application Services and Management, the business consisted primarily of developing, marketing and selling personalized videotape golf lessons featuring One-on-One golf video instruction by leading professional golfer Greg Norman, sold under the name “One-on-One with Greg Norman.” In September 2001, we sold all the assets related to our One-on-One business to Visual Edge, Inc., a newly created company formed by certain members of our previous management. Visual Edge, Inc. is not related to us.

OUR ONGOING PLAN

Our plan of operation for the upcoming months calls for the following:

•

Operation of the businesses Axtive has acquired to date;

•

Additional fundraising activities to continue our acquisition strategy and funding operational requirements; and

•

Additional acquisitions to fill in Axtive’s end-to-end (“E2E”) offering of business application software products and professional services to meet the needs of middle market companies.

RESULTS OF OPERATIONS

Three months ended June 30, 2003 compared to three months ended June 30, 2002

Net Sales. As a result of our acquisitions in 2002 and the acquisition in May 2003, revenues from continuing operations for the three months ended June 30, 2003 were $1.7 million. Gross margins across all businesses averaged 35.0%, which is a decline from previous reporting periods. This decline is primarily due to the inclusion of cost of sales associated with over-runs on government contracts not yet authorized to be billed as of June 30, 2003 and not reflected in sales for the three months ended June 30, 2003.

General and Administrative Expenses. General and administrative expenses increased $360,000 to $1.15 million for the three months ended June 30, 2003 from $790,000 for the three months ended June 30, 2002. This increase is substantially a result of the acquisitions.

Marketing Expenses. Marketing expenses increased $77,300 to $111,500 for the three months ended June 30, 2003 from $34,200 for the three months ended June 30, 2002. This increase in expenses was primarily related to salaries and bonuses of internal sales and marketing personnel stemming from the acquisitions in 2002.

Depreciation and Amortization Expenses. The depreciation expense of $74,800 for the three months ended June 30, 2003 was related primarily to the property and equipment acquired through the acquisitions. The amortization expense of $122,300 related to non-competition agreements entered into with former employees of the acquired companies; and our Oracle partnership and government contracts assumed in the ThinkSpark acquisition.

Interest Expense. Interest expense increased $60,600 to $63,500 for the three months ended June 30, 2003 from $2,900 for the three months ended June 30, 2002. Interest expense in the three months ended June 30, 2003, reflects primarily the cost of factoring receivables by our subsidiary, UDT Consulting, and one month’s interest expense on the installment note and settlement agreements entered into as a result of the ThinkSpark acquisition.

Other Income. Other income for the three months ended June 30, 2003 consists primarily of the management fees we received from PurchasePooling and DAS (see note 4 “Related Party Transactions”).

Six months ended June 30, 2003 compared to six months ended June 30, 2002

Net Sales. As a result of our acquisitions in 2002 and the acquisition in May 2003, revenues from continuing operations for the six months ended June 30, 2003 were $2.7 million. Gross margins across all businesses averaged 42.4%, which is a slight decline from previous reporting periods. This decline is primarily due to the inclusion of cost of sales associated with over-runs on government contracts not yet billed as of June 30, 2003 and not reflected in sales for the six months ended June 30, 2003.

General and Administrative Expenses. General and administrative expenses increased $979,000 to $1.96 million for the six months ended June 30, 2003 from $979,000 for the six months ended June 30, 2002. This increase is substantially a result of the acquisitions.

Marketing Expenses. Marketing expenses increased $193,700 to $227,900 for the six months ended June 30, 2003 from $34,200 for the six months ended June 30, 2002. This increase in expenses was primarily related to salaries and bonuses of internal sales and marketing personnel stemming from the acquisitions in 2002.

Depreciation and Amortization Expenses. The depreciation expense of $114,700 for the six months ended June 30, 2003 was related primarily to the property and equipment acquired through the acquisitions. The amortization expense of $143,500 related to non-competition agreements entered into with former employees of the acquired companies; and our Oracle partnership and government contracts assumed in the ThinkSpark acquisition.

Interest Expense. Interest expense increased $46,800 to $84,000 for the six months ended June 30, 2003 from $37,200 for the six months ended June 30, 2002. Interest expense in the first six months of 2002 was

attributable to certain loans that were converted into equity in April 2002 with the issuance of Series A Preferred Stock. Interest expense in the six months ended June 30, 2003, reflects primarily the cost of factoring receivables by our subsidiary, UDT Consulting, and one month’s interest expense on the installment note and settlement agreements entered into as a result of the ThinkSpark acquisition.

Other Income. Other income for the six months ended June 30, 2003 consists primarily of the management fees we received from PurchasePooling and DAS (see note 4 “Related Party Transactions”).

LIQUIDITY AND CAPITAL RESOURCES

At June 30, 2003, we had cash and cash equivalents of $1.1 million and a working capital deficit of $2.0 million compared to cash and cash equivalents of $444,300 and a working capital deficit of $1.4 million on December 31, 2002. During the six months ended June 30, 2003, net cash used in operating activities was $1.3 million, net cash used in investing activities was $1,000, and net cash provided by financing activities was $2.1 million, for a total increase in cash and cash equivalents for the period of $0.7 million. We do not maintain a bank credit facility.

During the first six months of 2003, the Company entered into an Assignment and Assumption Agreement to assume $5.0 million of debt of ThinkSpark outstanding with Merrill Lynch Business Financial Services, Inc. (“Merrill Lynch”). As of June 30, 2003, the current portion outstanding is $367,000. The debt assumed is secured by $1.0 million of accounts receivable of ThinkSpark and is guaranteed by the remaining subsidiaries of Axtive. The debt is payable in monthly installments of $55,000 including 6.0% percent interest in year one, and monthly installments of $60,000 including 8.0% interest in year two, with the remaining balance due on June 1, 2004.

Also during the first six months of 2003, the Company entered into various other settlement agreements with former landlords, customers, and employees of ThinkSpark. Of these settlements, $1.17 million bear interest rates of 6.0%, and are all due and payable within six months to twenty four months of execution; and $160,000 bear no interest rate and are due and payable within twelve months of execution. As of June 30, 2003, the balance remaining due is $1.03 million, including $678,000 classified as current on the accompanying consolidated balance sheet.

We expect our liquidity to remain tight throughout the remainder of 2003. We will look to our current cash reserves, cash reserves created by our additional issuance of shares of Series A Preferred Stock in May 2003, cash flows generated by our factoring agreements, and cash flows generated by our acquired companies to meet current liquidity requirements. While we have a level of comfort as to the projected cash flows generated by our acquired companies, we are relying on projections based upon assumptions and forecasts, including factors beyond our control. Actual results could vary from our projections and such variance could have a significant adverse effect on our liquidity.

We have historically financed our operations primarily through the sale of equity securities or instruments convertible into equity securities. There can be no assurance that future financings can be completed.

Ability to Continue as a Going Concern

Our independent accountants included an explanatory paragraph in their report on our financial statements for the year ended December 31, 2002, contained in our most recent Annual Report on Form 10-KSB, that states that our consolidated financial statements have been prepared assuming that we will continue as a going concern, but that substantial doubt exists as to our ability to do so.

SEASONALITY

Based upon our review of current companies and acquisition candidates, the IT Professional Service businesses experience a moderate level of seasonality. The first quarter revenue tends to be the lowest, higher revenues are generally reflected in the second and third quarters and revenues in the fourth quarter decline from the mid-year levels. Revenues for Business Application Software and Application Services and Management do not reflect a discernable pattern of seasonality.

RISK FACTORS

In addition to the information contained herein, readers of this report or any of our press releases should carefully consider the risk factors contained in previous filings, in particular our most recent Annual Report on Form 10-KSB.

THIRD PARTY REPORTS AND PRESS RELEASES

We do not make financial forecasts or projections nor do we endorse the financial forecasts or projections of third parties or comment on the accuracy of third-party reports. We do not participate in the preparation of the reports or the estimates given by analysts. Analysts who issue financial reports are not privy to non-public financial information. Any purchase of our securities based on financial estimates provided by analysts or third parties is done entirely at the risk of the purchaser. We periodically issue press releases to update stockholders on new developments at Axtive and our business. These releases may contain certain ‘forward-looking statements” relating to future events or our future financial performance within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 and which are intended to be covered by the safe harbors created thereby. Readers are cautioned that such statements are only predictions and that actual events or results may materially differ with those statements. In evaluating such statements, readers should specifically consider the various risk factors and other information identified that could cause actual results to differ materially from those indicated by the forward-looking statements.

ITEM 3. CONTROLS AND PROCEDURES

As of the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and current Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934. Based upon their evaluation, the Chief Executive Officer and the current Chief Financial Officer concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in the reports filed or submitted by it under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and include controls and procedures designed to ensure that information required to be disclosed by Axtive in such reports is accumulated and communicated to the Company’s management, including the CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.

There have been no significant changes in the Company’s internal controls or in other factors that could significantly affect internal controls subsequent to the date the Company carried out its evaluation.

PART II—OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

PROCEEDINGS AGAINST THE VISIONARY GROUP

The Visionary Group ceased operations in December 2002. The company has no employees and no assets and identified liabilities totaling, including the $110,000 non-payment discussed above, of approximately $190,000. Accordingly, we do not expect that an adverse judgment against The Visionary Group in this lawsuit would have a material impact on Axtive.

PROCEEDINGS AGAINST THINKSPARK

In 2002, a former customer obtained a final judgment against ThinkSpark. The former customer filed a collection suit against ThinkSpark with respect to the judgment in the amount of $940,000, including attorneys’ fees. The former customer also filed a lawsuit against certain of ThinkSpark’s then directors and stockholders with respect to alleged improper repurchases of stock from certain stockholders. Effective with Axtive’s acquisition of ThinkSpark, ThinkSpark entered into a settlement agreement and a tolling agreement with the former customer. ThinkSpark agreed to make a cash payment of $18,000 to the former customer and issue a promissory note for $150,000. The promissory note bears interest at 6% per year and is payable on a monthly basis amortized over 12 months. In exchange, the former customer agreed not to seek to enforce the judgment, to dismiss with prejudice the separate lawsuit, and upon payment in full of the promissory note, to fully release ThinkSpark and the individual defendants from all claims.

In October 2002, a former employee filed a suit against ThinkSpark, certain of its subsidiaries, and certain of its directors and shareholders seeking damages in the amount of $612,000 for breach of a severance agreement. Effective with Axtive’s acquisition of ThinkSpark, ThinkSpark entered into a mutual release agreement with the former employee. In exchange for mutual releases of all claims, ThinkSpark agreed to issue to the former employee a promissory note in the amount of $169,000, a portion of which represented the merger consideration payable to the former employee. The promissory note bears interest at 6% per year and is payable on a monthly basis amortized over 18 months. The former employee agreed to then abate his lawsuit and, upon payment in full of the promissory note, to dismiss all claims against ThinkSpark and the other defendants.

In August 2003, ThinkSpark was sued in Greene County, Ohio for breach of a November 1998 lease agreement extension for office space in Dayton, Ohio, which has been vacated by ThinkSpark. The landlord seeks damages for $55,555.95. ThinkSpark is in discussions with the landlord to settle the judgment; however, we can give you no assurance that ThinkSpark will be able to enter into a settlement.

In July 2003, an individual filed suit against ThinkSpark alleging breach of contract and seeking damages of $14,040.00 plus interest, attorney’s fees and costs of court. The suit was based on a contract between ThinkSpark and the former employee whereby the individual served as an independent contractor as a consultant and expert witness in a collection against a former customer. The individual rendered these services in 2001. ThinkSpark agreed to pay the indivual $1,500 per month for a term of eleven months, commencing in August 2003. The parties also executed an Agreed Judgment in the amount of $21,500. In the event ThinkSpark defaults on its payments to this individual, the Agreed Judgment will be enforced with an offset equal to the amounts ThinkSpark had paid prior to the default. In exchange, the individual agreed to abate the proceedings against ThinkSpark and will file a motion for nonsuit with prejudice upon full satisfaction of the payments due.

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

ISSUANCE OF SERIES A PREFERRED STOCK

On May 23, 2003, we issued 2,335 shares of our Series A Preferred Stock in a private offering to new and existing private, accredited investors at $1,000 per share. We received gross proceeds of $2.3 million, consisting of $2.25 million in cash and $84,000 in satisfaction of debt owed by Axtive to a stockholder and to an executive officer. Of the net cash proceeds, after $124,000 in legal expenses related to the issuance of Series A Preferred Stock, the acquisition of ThinkSpark and the preparation of the management agreement regarding Demand Aggregation Solutions, LLC, we have used or expect to use $500,000 to satisfy current liabilities arising from prior acquisitions and $61,000 in cash merger consideration for the ThinkSpark acquisition. The balance is available for working capital and general corporate purposes.

Each new share of our Series A Preferred Stock carries an 8% cumulative dividend and is convertible into shares of our common stock at an initial conversion price of $0.10 per share. The new shares of Series A Preferred Stock were immediately convertible upon issuance. Each new purchaser was also granted warrants to purchase 20 shares of our common stock for each 100 shares of common stock the investor was initially entitled to receive upon conversion of the Series A Preferred Stock. The warrants are exercisable at a price of $0.20 per share. We issued warrants to acquire 4,670,000 shares of common stock in connection with the new financing.

The initial issuance of Series A Preferred Stock in 2002 provided that subsequent issuances of the shares on terms more favorable than those provided to the original investors in the Series A Preferred would automatically adjust the terms and conditions on the outstanding Series A Preferred Stock to the more favorable terms and conditions. As a result, the initial conversion price on all shares of Series A Preferred Stock issued in 2002 was reduced from $0.75 to $0.10 per share, and the exercise price of the warrants issued in 2002 was reduced from $1.15 per share to $0.20 per share. Each purchaser of Series A Preferred Stock in 2002 was issued a restated warrant exercisable for additional shares as a result of the decrease in the initial conversion price. The restated warrants are exercisable for a total of 7,696,002 additional shares of common stock. In addition, the holders of the Series A Preferred Stock were given the right to elect one member of our board of directors.

In July 2003, we issued an additional 50 shares of Series A Preferred Stock in a private offering to a purchaser in the May 2003 offering, G.C. “Scooter” Beachum, who is also one of our executive officers. This issuance was pursuant to an irrevocable subscription agreement executed by the purchaser at the time of the issuance of Series A Preferred Stock in May 2003. The terms were identical to the May 2003 sale of Series A Preferred Stock. The Company received gross proceeds of $50,000 in cash. Net proceeds of the sale will be used for general corporate purposes. As part of this subsequent issuance, we issued additional warrants exercisable for 100,000 shares of our common stock.

We paid no commissions in connection with issuance of the new shares of Series A Preferred Stock in 2003. The new shares of Series A Preferred Stock and warrants to purchase common stock were issued by the Company in reliance upon an exemption from registration pursuant to Rule 506 of Regulation D under Section 4(2) of the Securities Act of 1933. A Form D was filed with the SEC.

OTHER ISSUANCES

In connection with the settlement of a lease dispute involving a United Kingdom subsidiary of ThinkSpark Corporation, ThinkSpark entered into a settlement agreement with the landlord. See Item 3, “Legal Proceedings—Proceedings Against ThinkSpark.” Pursuant to the terms of the settlement agreement, we issued 1,219,149 restricted shares of our common stock to the landlord as security for a promissory note from Axtive for $200,000. Pursuant to the settlement agreement and the promissory note, the shares will be returned to us at various stages based upon payments made on the promissory note. Assuming the promissory note is paid in full pursuant to its terms, all of the shares will be returned. All returned shares will be held by us as treasury shares. If there is a default on the promissory note, the landlord has the right to keep all or part of the shares to satisfy any remaining obligation. The issuance of the restricted shares of common stock did not involve a public offering. The restricted shares were issued by the Company in reliance upon an exemption from registration pursuant to Section 4(2) of the Securities Act.

Effective May 1, 2003, we entered into a new services agreement with Atlas Capital Services, LLC. Pursuant to the agreement, in exchange for financial advisory services as described in the agreement Atlas was entitled to an advisory fee consisting of (1) 1,115,000 restricted shares of our common stock, (2) 250,000 restricted shares of our common stock to be issued directly to Leeb Brokerage Services for Leeb’s introduction of Atlas to us, (3) warrants to purchase 1,250,000 restricted shares of our common stock, and (4) a monthly cash fee. The warrants were issued effective June 26, 2003, upon the same terms as the warrants issued to the purchasers of Series A Preferred Stock in May 2003. The restricted shares of common stock were issued in July 2003. The issuance of the restricted shares of common stock and warrants did not involve a public offering. The restricted shares and warrants were issued by the Company in reliance upon an exemption from registration pursuant to Section 4(2) of the Securities Act.

On July 1, 2003, we issued 297,674 restricted shares of our common stock to TSTC International Holding Company, formerly known as Axtive Software Corporation. These shares constituted an additional payment due to TSTC in connection with our June 2002 purchase of certain intangible assets, including the name “Axtive,” and certain tangible assets. We were obligated to issue the additional restricted shares if the market price of our common stock had not been at or above $0.75 within the one-year period after our purchase. G.C. “Scooter” Beachum, our Executive Vice President and General Manager, is the sole shareholder and director of TSTC. The issuance of the restricted shares of common stock did not involve a public offering. The restricted shares were issued to TSTC by the Company in reliance upon an exemption from registration pursuant to Section 4(2) of the Securities Act.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of our stockholders during the second quarter of 2003.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a)

Exhibits

Exhibit Number		Description

31.1		Chief Executive Officer’s Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Chief Financial Officer’s Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Chief Executive and Chief Financial Officer’s Certification Pursuant to 18 U.S.C Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

(b)

Reports on Form 8-K

On August 11, 2003, Axtive filed a Form 8-K/A reporting the unaudited combined pro forma condensed balance sheets of Axtive Corporation and ThinkSpark Corporation as of March 31, 2003, and the related unaudited combined pro forma condensed statements of operations for the year ended December 31, 2002, and the three months ended March 31, 2003, for the previously announced acquisition of ThinkSpark Corporation and its subsidiaries on May 23, 2003.

On August 14, 2003, Axtive filed a Form 8-K announcing the change in their certifying accountant and the change in their Chief Financial Officer.

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.

AXTIVE CORPORATION

By:		/s/ Molly W. MacTaggart
		Molly W. MacTaggart
		Chief Financial Officer
		(Principal Financial and Accounting Officer)

September , 2003

INDEX TO EXHIBITS

Exhibit Number		Description

31.1		Chief Executive Officer’s Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Chief Financial Officer’s Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Chief Executive and Chief Financial Officer’s Certification Pursuant to 18 U.S.C Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

EX-31.1 3 dex311.htm SECTION 302 CERTIFICATION OF CEO SECTION 302 CERTIFICATION OF CEO

EXHIBIT 31.1

CERTIFICATIONS

I, Graham C. Beachum II, certify that:

I have reviewed this quarterly report on Form 10-QSB of Axtive Corporation;

Based on my knowledge, this 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 report;

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods presented in this report;

The small business issuer’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the small business issuer and we have:

(a)

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)

[Intentionally omitted];

(c)

Evaluated the effectiveness of the small business issuer’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)

Disclosed in this report any change in the small business issuer’s internal control over financial reporting that occurred during the small business issuer’s most recent fiscal quarter (the small business issuer’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the small business issuer’s internal control over financial reporting; and

The small business issuer’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the small business issuer’s auditors and the audit committee of the small business issuer’s board of directors (or persons performing the equivalent functions):

(a)

All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the small business issuer’s ability to record, process, summarize and report financial information; and

Any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer’s internal control over financial reporting.

Date: September 8, 2003

/s/ Graham C. Beachum II

Graham C. Beachum II

Chairman of the Board, President and Chief Executive Officer

EX-31.2 4 dex312.htm SECTION 302 CERTIFICATION OF CFO SECTION 302 CERTIFICATION OF CFO

EXHIBIT 31.2

CERTIFICATIONS

I, Molly W. MacTaggart, certify that:

I have reviewed this quarterly report on Form 10-QSB of Axtive Corporation;

(a)

(b)

[Intentionally omitted];

(c)

(d)

(a)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer’s internal control over financial reporting.

Date: September 8, 2003

/s/ Molly W. MacTaggart

Molly W. MacTaggart

Chief Financial Officer and Secretary

EX-32.1 5 dex321.htm SECTION 906 CERTIFICATION OF CEO AND CFO SECTION 906 CERTIFICATION OF CEO AND CFO

EXHIBIT 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. § 1350

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Axtive Corporation, (the “Company”) on Form 10-QSB for the three months ended June 30, 2003, as filed with the Securities and Exchange Commission (the “Report”), and pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, I, Graham C. Beachum II, Chief Executive Officer of Axtive Corporation, certify that, to my knowledge:

(1)

The Report fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934 and

(2)

The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Graham C. Beachum II

Graham C. Beachum II

Chairman of the Board, President and Chief Executive Officer

September 8, 2003

CERTIFICATION PURSUANT TO

18 U.S.C. § 1350

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Axtive Corporation, (the “Company”) on Form 10-QSB for the three months ended June 30, 2003, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), and pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, I, Molly W. MacTaggart, Chief Financial Officer of Axtive Corporation, certify that, to my knowledge:

(1)

The Report fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934 and

(2)

The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Molly W. MacTaggart

Molly W. MacTaggart

Chief Financial Officer and Secretary

September 8, 2003

-----END PRIVACY-ENHANCED MESSAGE-----

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents