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7.

Description of business
Imergent Inc was incorporated as a Nevada corporation on aprip13, 1995. Its name was
changed to Imergent from netgateway to Imergent in the year of 2002. Imergent is an eservice company that provides ecommerce technology, training and a variety of web based
technology to nearly 150,000 small businesses and entrepreneurs. The companys services
help to decrease the risk associated with e-commerce implementation by providing low cost
scalable solutions with minimal lead time.
Significant accounting policies:
The consolidated financial statements are prepared in accordance with US GAAP and
pursuant to the rules and regulations of Securities And Exchange Commission (SEC).
1. Principle of consolidation:
The consolidated financial statements include the accounts and operations of the
company and its wholly owned subsidiaries. All significant intercompany balances
and transactions have been eliminated in the transaction.
2. Reverse Stock Split:
The shareholders of the company approved a 1:10 stock split on june28, 2002. All
data for common stock, options and warrants including prices have been adjusted to
reflect the split.
3. Cash And Cash Equivalents:
It includes highly liquid investments with a maturity of less than three months at the
time of purchase.
4. Accounts Receivables And Allowances:
The company offer to its customers the option to finance, through Extended Payment
Term Arrangements (EPTAs), purchases made at the internet training workshops. A
part of these is sold to the third party financial institution and remaining part is
retained as short term or long term Account Receivable on balance sheet. The
company records an allowance for doubtful accounts, for all EPTA contracts. The
allowances represent estimated loss resulting from the customers failure of non
payment. These allowances are netted against the current and long term account
receivable balances. The company determines its allowances on a lot of factors,
including Companys previous lost history, customers current ability to pay, the
condition of economy etc.
5. Transfer of financial assets:
Transfers of financial assets are accounted for as having been transferred, when
control over the assets has been surrendered. Control over the transferred assets is
deemed to be surrendered when assets have been isolated from the company, the
transferee obtains the right.
6. Inventories:
Inventories are stated at the lower of cost (first-in, first-out) or market. Inventory
consists mainly of products provided in conjunction with the internet training
workshops.
7. Property and equipment:

They are stated at cost less accumulated depreciation and amortization. Depreciation
is calculated on straight line method. Normal maintenance and repair items are
charged to costs and expenses as incurred. The company capitalizes assets with a cost
in excess of 1,000 dollars.
8. Goodwill and intangible assets:
According to the requirement by the SFAS goodwill is no longer amortized but it is
tested on an annual basis for impairment by comparing its fair value to its carrying
value. If the carrying amount of goodwill exceeds its fair value, an impairment loss
will be recognized in n amount equal to that excess.
9. Financial instruments:
The carrying value of cash, trade receivables, accounts payable, accrued liabilities and
notes payable approximated fair value due to either the short maturity of the
instruments or the recent date of the initial transaction.
10. Income taxes:
The company utilizes the liability method of accounting for income taxes. Under the
liability method deferred income tax assets and liabilities are provided based on the
difference between the financial statement and tax bases of assets and liabilities as
measured by the currently enacted tax rates in effect for the years in which these
differences are expected to reverse. For the year ended june30, 2004 and 2003 the
company had taxable income of approx $9.6 million and $5 million.
11. Accounting for stock option and warrants:
The company applies the intrinsic value based method of accounting for its fixed
employee stock option. Compensation expense would be recorded on the date of grant
only if the current market price is higher than the exercise price.
12. Stock-based compensation:
The company has applied the disclosure provision to provide alternate method of
transition for voluntary change to the fair value based method of accounting for stock
based compensation. It amends the disclosure requirements in interim and annual
reports. Company estimates the fair value of each option by black schools option
pricing model. Best assumptions are used to value the option.
13. Revenue recognition:
Company started selling StoresOnlineSoftware (SOS) in October 2000. It is a web
based software product that helps customer to develop their online site. The revenue
from the sale of SOS is recognized when the product is delivered to the customer and
the three days rescission period expires. The company accepts cash and credit cards as
method of payments and also offers 24-month instalment contracts that prefer EPTA.
Through 1999 to 2000 company has collected 70% of its EPTAs all uncollectable
EPTAs are written off against an allowance for doubtful accounts. Revenue through
telemarketing sales is recognized when delivery of product has occurred. The
company receives a commission and recognizes this revenue net of the selling and
marketing costs.
14. Comprehensive income (loss):
The companys only item of comprehensive income was foreign currency translation
adjustments related to the Canadian subsidiary.
15. Per share data:

Basic earnings per share is computed by dividing net earnings available to common
shareholders by the weighted average number of common shares outstanding during
each period.
16. Use of estimates:
Various estimates and assumptions are made that affect the reported amounts of assets
and liabilities and disclosure of contingent liabilities. Actual results could differ from
those estimates.
17. Advertising costs:
The company expenses costs of advertising and promotions as incurred. Advertising
expenses included in selling and marketing expenses for the year ended june30, 2004,
2003 and 2002 were $9.8 million, $7.6milion and $5.3 million.
18. Self insurance:
The company is self insured for health and dental costs during the year. The company
has purchased stop loss coverage in order to limit the exposure to any significant
levels of medical benefit liability claim.

3. Selling of account receivable with recourse-direct guarantee:


The company allocates the total proceeds from the transactions of EPTAs between
sales and estimated loss under the guarantees at their inception. In 2004 they were
worth $3.5 million and an average remaining term of approx two years or less. If the
customer fails to pay the company need to pay 80% of the outstanding aggregate
principal balance of contracts under guarantee.

4. Property and equipment:


Amounts included in the property and equipment for assets capitalized under
capital lease obligations as of June 2004 is $472,651. Capital leases at June 2004 are
the interest rates between 7% and 10%, and mature through January 2007.
Accumulated depreciation for the items under capitalized leases in 2004 was
$214,916.

5. Goodwill and intangible assets:


Goodwill is no longer amortized but is tested on an annual basis for impairment
by comparing its fair value to carrying value. Based on the appraisal made by the
independent consulting firm management has concluded that the fair market value of
the companys assets exceeded the carrying value at July 2002 and determined that
there was no goodwill impairment as of date.

6. Notes payable:
Uncollateralized notes payable at June 2004 consist of $400000 of principal to
king William LLC. Interest on the payable is recorded at an annual interest rate of 8%.
Notes payable at June 2003 consist of $435857 of principal.

7. Line of credit:
In April 2004 Company entered in $3 million revolving loan agreement with a
bank. The assets of the company secure the line of credit. The LOC covenants restrict

the declaration of payment of dividends on any capital stock. The LOC requires the
company to maintain certain ratios.

8. Self insurance:
Company has elected to self insure employee medical benefits. The company is
liable for claims up to $30000 to an individual per claim per year. The company also
maintains a stop loss policy. Accruals for claims are recorded on a claim-incurred
basis.

9. Income taxes:
The companys net operating loss carry forward, which is approx $23million,
represents the losses reported for income tax purposes from the inception of the
company through June30, 2004. FY 2003 was the first year in the companys history
that generated taxable income. At June 30,2004 the company had recognized a tax
valuation allowance of $19.3 million against its net deferred tax assets.

10. Commitments and Contingencies:


Operating leases: the company leases certain of its equipments and corporate
offices under long term operating lease agreement.
Capital lease obligations: the company purchases certain fixed assets under
capital lease agreements with obligations expiring at various dates in 2007.
Legal proceedings: company receive various queries from customers and
government on day today basis. Till now company has been able to resolve all these
matters and it is not involved in any material litigation currently.

11. Stock option Plan:


At June 2004 Company had various stock option plans. The company authorized
1000000 shares of common stock for issuance under various plans. The purchase
price of share under the plan is equal to the fair value at the date. Options vest over a
one to ten year period and are generally exercisable over ten years. Fair value of
options is determined by black scholes model.

12. Stockholders Equity:


During the year ended June 2004 the company issued 464115 shares of common
stock, upon the exercise of options and warrants for $327,497. During the year June
2004 the company recorded an expense totalling $336,546 related to options granted
to consultants that become exercisable during the year.

13. Related party transactions:


On July 2003 John j Poelman, retired and in connection therewith resigned as the
Companys CEO and as a Director of the company. The company had transactions
with companies like ECI, EMS, SIMPLY SPLENDID, LLC which prior to July 1 ,
2003 were considered relate party transactions, but are not considered related party
transactions for the year ended June 30, 2004 since Mr. Poelman was no longer an
affiliate of company after July 2003. Poelman was the sole owner of ECI during
which company purchased various goods from them. In 2002 Poelman sold certain

assets and liabilities of ECI including its name to a third party. Revenue generated by
company in business with ECI was about $1,453,612 in 2003. As of June 2004
Company has no receivable balance due from ECI.
Companys financial advisor was vFinance Investments. During the year 2002
company paid $61,500 in fees and commission for their services. The financial
advisor of company that is SBI-E2 provided fairness opinion regarding the mergers
received a payment of $67,437 for the year June 2002. The company paid $58,679 to
SBI for expenses and commission relating to private placement of unregistered
securities.

14. Segment information:


The company has operated under two principal business segments (internet
services and multimedia projects). The primary business was internet services. The
secondary segment was sold in on Jan 2001 and accordingly is in the accompanying
consolidated statements of operations. As a result company operates in one business
segment.

15. Subsequent event:


On August 19, 2004, the company entered into a two year, $5 million line of
credit with bank One. The new LOC replaces the companys previous $3 million
credit facility with Zions First National Bank. The agreement allows the company to
borrow up to $5million at LIBOR plus 2%.