Despite Sagging Stock, eMerge
To Be Cash-Flow Positive Soon

SEBASTIAN, Fla. — eMerge Interactive Inc., the unique new company that is trying to become the beef industry's leading technology partner, has hit some rocky times. At least that's what their stock price would indicate.

And as if the woes of the stock market weren't enough, the company also recently laid off approximately 35 corporate and service support associates, nine percent of their total workforce, primarily due to discontinuation of their NutriCharge and Infrared Imaging Products.

Chief Executive Officer Charles Abraham, however, says eMerge is here to stay and is well on its way to proving it.

Publicly traded on NASDAQ, eMerge stock is currently valued at about $5 per share, down 90-plus percent from its 52-week high of $70.50. With those kind of figures, Abraham's statement might seem open to question. But Abraham points to the whole technology sector, a vast majority of which is in the tank right along with eMerge stock.

Stock price, he insists, has nothing to do with his company's ability to stay in business. The key is cash flow. The stock price is an assigned value that Wall Street has given to the company, he explains.

"At $4 a share, that’s roughly $150 million or so. We think that’s outrageously low, given our asset value.

"The stock price concerns us, but it doesn’t threaten us," Abraham reiterates. "We are confident that we have built a business model to withstand the ups and downs of the stock market and whatever the tech stocks do, no matter how long it takes."

Instead of over-spending money on advertising and marketing of on-line software products, like many of the dot.com companies, Abraham points out that eMerge has put its money into "bricks and mortar", assets that generate real revenues and real dollars. Their bricks and mortar are represented by 13 interactive livestock marketing and order buying facilities with offices in nine states. The five most recent acquisitions, added just a few weeks ago with a sixth in the works, complete projected acquisitions for the 2000-2001 year.

"We have a basis to sustain our business while we implement our technology," Abraham says. "It’s very difficult for us to distinguish ourselves in this climate from other Internet companies until we’ve demonstrated that we can get cash-flow positive."

eMerge, he says, is expected to reach that goal this year.

"We think we have demonstrated our ability to manage our money," Abraham adds. "Our financials are right on target to what we projected.

"Pay attention to the cash flow situation at eMerge," he reiterated. "Pay attention to the management team. We have to balance the checkbook and keep it balanced as we grow. We have enough wherewithal with the acquisitions that we've done to run a very healthy technology company within that means."

Just what is eMerge?

"We are a technology company involved in the cattle business," Abraham says. "That’s an important distinction to understand. We are not just another order buying company, nor are we another dot-com company.

"Our vision is to become the beef industry’s technology partner. We want to be a state-of-the art neutral player."

Over the past 12 months or so, eMerge has been focused on gaining critical mass through acquisitions.

"I don’t believe we could have implemented our business model without doing that first," Abraham points out. "Our five-year game plan was to market eight million head. We've gotten 50 percent of the way there in a year."

In terms of cattle transactions, growth at their Austin facility roughly tripled. The number of head marketed through that facility grew from 30,000 to 150,000. Overall, eMerge's gross revenue grew from $44 million in 1999 to $476 million in the first nine months of 2000.

"You won't see that kind of growth rate very often. We only made $266,000 in gross margins in 1999. We made $5.4 million through the first nine months of 2000. We grew 10-fold. We don’t expect these rates to continue per se¼ "

In 2001, eMerge expects to market four million head through CattleinfoNet, not only through online auctions and brokering services, but also through onsite sales at their interactive facilities and through their order-buying service. They also expect to electronically identify and track at least one million head through their database system.

"We’ve been building this iceberg," the CEO explains. "Right now we just have a little ice sticking up. But, while we have been working on acquisitions, we have been building on the technology infrastructure. We have about 100 people in Sebastian dedicated to developing the technology.

"We think now is the time to retrench and focus more on expanding the business model and focus on executing the technological vision and bringing the strength of it to bear."

That technological vision is broad, but the primary goal, Abraham says, is to build a state of the art network that facilitates safe and timely flow of critical information and commerce. eMerge believes the best way to deliver the technology to the largest number of producers quickly is to put themselves in the middle of the marketing chain. Thus the reasons for the acquisitions. However, Abraham says, eMerge is not overtly trying to eliminate anyone in the system.

"We don’t raise cattle, feed them or kill them, ever. We had one employee who put some on feed in the company's name. He was fired.

"We try not to own them," he continues. "We do market them and manage the physical flow as part of a marketing and information network. What we’re trying to do is create a very efficient system for customers' use. We don’t need to be 'buy low and sell high.' We need to be neutral so that we can objectively help match buyers and sellers.

"What people don’t understand is that the system in place in the industry is very inefficient and very expensive," he continues. "Whether we like to admit it or not, the industry is paying somewhere around $40 to $50 per head, not just in commissions, but in lost weight, stress, health, etc. due to the excessive number of times an animal changes hands in today's marketing system."

eMerge is currently pocketing about $6 per head gross profit on cattle that go through their system, but the company would like to see that number go to $10 to $15 a head. It's a reasonable figure, Abraham says, if in return they can save the industry an additional $15 to $20 a head. Abraham believes several times this amount can be created through value-added programs such as preconditioning, sorted sales, EID, etc.

A lot of their success, the CEO admits, is gated by people’s willingness to adopt and to accept and trust in their vision and their ability to be a neutral third party. Abraham reminds that because eMerge is a public company there can be no hidden agendas.

"Everything we do is available for public scrutiny."

Still some in the industry view eMerge as an outsider because they went outside the industry and acquired the money from Wall Street and then in turn bought their way into the cattle business rather than doing it with their own sweat and blood and own money.

"That’s true," Abraham says. "But to do what we’ve done took a lot of money. Either the industry was going to have to invest more checkoff dollars to do it, or get it from Wall Street. The fact that we got it from Wall Street is a good thing, we think, because the industry didn’t have to pay for a somewhat risky proposition."

Why would Wall Street want to invest in the cattle industry? And just what does Wall Street know about the cattle business, anyway?

"Wall Street didn’t invest in the cattle industry," Abraham reiterates. "They invested in a technology company focused on the cattle industry. At the time of our IPO, people believed that Internet commerce and Internet technology was going to release all kinds of new opportunity for increased profit, productivity and quality.

"We still very, very strongly believe that," Abraham says. "I think most people still believe that, but many also see that some of the early business models were fundamentally flawed," he continues. "Some of those early business models amounted to nothing more than a software program that resided on the Internet. They were a cost to the industry with relatively little value."

Abraham says all of their acquisition partners signed five-year contracts, but even without contracts the CEO says he's not concerned about any of them jumping ship during this building phase.

"The day of the black book is going to be limited over the next five years," Abraham says. "With all the technology, you can’t just go out with a black book and replicate what’s being done by eMerge.

"The guys who are our partners genuinely want to change the industry. Without exception, they believe in what we’re trying to get done. Most of them came on board with relatively little cash, but a lot of stock, and that, in my opinion, is the strongest vote of confidence. These people who we acquired were not ones who were raising their hands wanting to be bought."

Many question the amount of capital it took to acquire these businesses. Are they in fact spending their money wisely?

"We think we are. The question to ask is whether managing information flow and individual animals and cleaning up the marketing system a wise thing to do. If the answer to those two questions is yes, then we've spent our money wisely, and ultimately we'll get paid for it," he remarks. "If we've missed something big in our thought process, then yes, we've spent some money that we shouldn't have spent.

"We're listening very hard to the industry through our advisory board," he continues, "and with their help trying to discern what is best for the industry."

The heart of eMerge's strategy is the CattleinfoNet business network, which relies on three key components to add previously unrealized value throughout the beef-supply chain: an efficient e-marketplace where one can buy and sell cattle as well as buy cattle business-related products, a powerful information-management infrastructure, and value-enhancing technologies.

The Internet is what holds the platform together.

"We began developing Internet tools and moving into Internet commerce because we believed the flow of information was critical," Abraham explains. "We couldn’t get information to flow the way we needed it to flow through the existing marketing system. So we invested in a marketing system. We put ourselves in a position to help the technology touch a much broader audience.

"Now we're attempting to streamline that marketing system, and in turn, that streamlining process should help lessen stress on animals, improve animal handling, reduce costs and add real value.

eMerge, Abraham says, has not developed anything new. They are merely adapting available concepts so they can be used on a much broader, commercialized scale.

Their interactive website, CattleinfoNet.com, Abraham says, is getting much more exposure. To date they have over 20,000 site registrations, with some 800 unique visitors per week. The website focuses on four key areas: industry-specific content such as news, weather, and market pricing; subscription-based information applications where feedyard managers, for example, can access things like performance information on their yard; an e-marketplace for both cattle and products; and "community", which is still under development.

The interactive marketplace where cattle can be bought and sold online, either through their brokerage service or online auctions, is seeing positive response as well.

"There’s a lot of people who come to our site to see what cattle we have for sale and then they call us," says Scott Sanders, vice president of cattle sales. "There’s a lot of people who go to our website and see what feeder cattle are bringing. Now, is that an online transaction? Maybe not, but did the Internet aid in that transaction? Most definitely."

"We have built this network of communications," Abraham adds. "Even though some of it is by telephone and some by Internet, our ability to match buyers and sellers has increased dramatically and in that way we are helping to bring value to the producer."

Since its launch in January 2000, the company has had approximately 12 Internet sales and each has been more successful than the last. In their January online cattle auction, more than 9000 head of cattle were offered, more than double the number from their December sale. Approximately 140 buyers from feedlots across the nation bid on 66 lots of cattle from 11 states, including three lots of premium animals that had been process-verified through eMerge's LeMaster Livestock of Gaffney, South Carolina. The sale took 2.5 hours.

The management team fully realizes that their sales will never be 100 percent Internet-based.

"It’s very difficult to take an acquisition that has sold 220,000 cattle annually and say, 'okay, all these are now going to be sold over the Internet,' when most of his customers are used to calling him on the phone," Abraham points out.

"It’s not our role to force people into this new marketing method, it’s our role to make it available and make it as user-friendly as possible."

"When we do an acquisition, we don’t want to stunt their growth or stunt their profit. We don’t want to automatically force them to change. What we bought was their reputation, a good customer base, and a good source of cattle that we hope will eventually evolve into Internet sales," he explains.

eMerge wants to provide services to those in the beef industry, no matter whether or not they market their livestock through them. The marketing aspect of buying and selling on the Internet, Abraham explains, is disconnected from the information flow in the sense that the information flow can still occur. However, the company believes that a combination of the two will send the greatest value back to the producer.

The company unveiled the next generation of its CattleinfoNet Interactive Manager, scheduled for a first quarter release. Approximately 300 feedyards across the U.S. currently plug into the network via the eMerge Interactive Platform, a satellite hardware/software system designed to provide high-speed Internet connectivity in rural areas. Using the eIP, they are able to connect to a wealth of industry information, view quality videos of available cattle, participate in real-time premium network auctions, buy products and supplies online while managing their inventory records, and enhance their management practices using Interactive Manager.

The new version will allow users to compare their own operations' performance to regional benchmarking data, and to quickly pinpoint and diagnose problems that could be draining their profitability, down to the pen and lot level.

Abraham admits this part of their program is moving more slowly than they had hoped, but he says it's not so much because of a lack of acceptance as it is in getting the technology perfected.

"We've had some technological challenges. Getting the interfaces right was problem one, and problem two was communication linkage itself and getting the consistent, reliable flow through the Internet. Phone line costs have been high, but we think that’s going to come down quickly and the reliability will improve.

"Problem three is getting the data put in right in the first place and putting in the necessary filters where we catch mistakes and feed it back and get it fixed.

"Getting the technology to where it works on a mass scale is a significant challenge," he reiterates. "That's why we've been taking baby steps."

eMerge wants to be a key player in developing a truly value-based marketing system, a goal they believe can be achieved in five years. Tracking individual animals and managing the flow of information is a critical piece to that puzzle. To enable this, the company also recently debuted its CattlinfoNet-enabled process verification solution featuring the CattleLog, cattle tracking and information-management system.

Abraham says it cost the company approximately $20 million to put the infrastructure in place that will ultimately allow animals to be tracked and data managed from birth to plate. Managing that information, he says, is perhaps the most critical piece to capturing real value.

Currently, only about five to 10 percent of the cattle that pass through eMerge's hands are actually being tracked. Thirty to 35 percent of the cattle transactions through their Austin facility occur over the Internet. eMerge hopes to market eight million head over the next five years, and of that total they want to track and process verify at least 30 percent or 2.5 million head.

"If we can do that, then we can begin to enable the building of real branding strategies," Abraham says. "The beef supply today is brandable with very little change," he adds. "The reason the industry has difficulty branding today is that right now we mix all of these different products together and we call it a commodity. If you could truly know what was what, there’s potential to brand."

In 1999, Professional Cattle Consultants, now part of eMerge, was commissioned by Ranchers Renaissance to handle their data management. That contract was recently renewed with eMerge. To date, eMerge is keeping track of individual data on 150,000 animals annually. With a password, members of the alliance can go online and look at feedyard data, ranch data and kill data electronically.

Abraham fully admits that the 150,000 head at Ranchers Renaissance is only a drop in the bucket and a very small drop at that, considering their sizable goal overall.

"There’s a long way between here and there, but first we have to get a system that works. This is a beta program. A commercial version will roll out in the first quarter of this year."

Abraham, like many in the industry, believes that a voluntary national animal identification program rather than a mandatory program is needed.

"One of the most inefficient things the industry can do is to have a mandatory process-verified system," he stresses.

Management of the data, he believes, should be left up to a "for-profit" entity rather than the government.

"Then, the only way that the for-profit entity can put a tag in an animal is if it can deliver value to you, the producer."

eMerge would certainly like to be the manager of the national database, Abraham concedes.

"What the industry needs more than anything is something that works reliably, safely and protects the information. We can do that, and as long as it's not mandated then we’ll be out there trying to beat the predominant provider. Competition is healthy. We think we’re in a position to get there because of the network we built. You have to start with the input of data, and there’s no one in a better position to capture data on four million head in year 2001 than eMerge. I am very confident that if the industry asked us, that within six months, we could track 28 million head very reliably, very safely. We've built the infrastructure and it's ready to be used now."

Will there be a time when eMerge will not be so dependent on cattle sales for cash flow?

"No," Abraham admits. "As long as the whole industry doesn't want to go to a retained ownership business model, cattle sales for cash flow will always be a significant component of what we do."

That's not to say that their technology will not be a significant contributor to their bottom line.

"We figure it will be a 60-40 split, where 60 percent of our income comes from commissions and 40 percent from technology," Abraham says. "Right now it's about 99-1. Clearly, we want more of our revenue to come from technology."

eMerge is hoping to cash in big on one of their most promising pieces of technology, the commercialization of their fecal detection system. It will be a dividend, Abraham assures, that the entire industry will participate in.

The technology is currently being beta tested by one of the big three packers.

The goal, the CEO says, is to take the cost of food safety inspection down by 50 percent while making it much more effective.

"USDA implemented a zero-tolerance policy a year ago. That policy is fundamentally non-implementable today for contamination not visible with the naked eye because it’s all manual inspection."

The commercial application, set to debut in 2001, will begin in the nation's beef packing plants, facilitating broad-scale compliance with USDA "zero tolerance" standards for fecal contamination and further help packers control the environment that hosts bacteria, Abraham explains. Future uses for the technology include food retailers, restaurants and other industry segments.

Will eMerge still be in business a year or two years from now, given the stock prices and everything else?

"Our answer is a wholehearted yes, absolutely yes," Abraham concludes.

"It doesn't mean we won't have a tough time. We're here for a long time if the customers embrace us. If the industry says to us what we're doing has no value, then we won't survive, but the industry gets that vote.

"We think that the marketing and information system must go together to solve the problems in this system that is so fragmented," he continues. "We believe it has real value. All we have to do is demonstrate that value.

"To do what we’re doing is very easy to talk about, but it's very hard to do well. That’s why we think it needs to be done by a technology company.

"Anyone who is considering attacking the problem should be prepared to invest at the level that we have, both in technology and understanding the marketing channel. It's a long, tough haul. We have designed our company specifically for the task. We bet the whole ball of wax on it — $130 million."