UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] Quarterly report under Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended March 31, 2000
[ ] Transition report under Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _________ to _________
Commission File No. 0-27151
2THEMART.COM, INC.
(Exact Name of registrant as specified in its charter)
OKLAHOMA 33-0544320
(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification Number)
18301 VON KARMAN AVE., 7TH FLOOR
IRVINE, CALIFORNIA 92612
(Address of Principal Executive Offices) (Zip Code)
(949) 477-1200
(Issuer's Telephone Number)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
(None)
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Common Stock, par value $0.001
(Title of Class)
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 registrant was required to file such reports); and (2)
has been subject to such filing requirements for the past 90 days.
Yes [ X ] No [ ]
Indicate the number of shares outstanding of each of the issuer's class of
common stock as of the latest practicable date:
Title of each class of Common Stock Outstanding as May 15, 2000
- ----------------------------------- ---------------------------
Common Stock, $0.001 par value 30,221,350
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
Page
Balance Sheets as of December 31, 1999 and March 31,
2000 (unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Statements of Operations (unaudited) for the period
from December 22, 1998 (date of inception) to
March 31, 1999, for the three months ended March
31, 2000 and for the cumulative period from
December 22, 1998 (date of inception) to March 31,
2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Statements of Cash Flows (unaudited) for the period
from December 22, 1998 (date of inception) to
March 31, 1999; for the three months ended
March 31,2000 and for the cumulative period from
December 22, 1998 (date of inception) to March 31,
2000. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Notes to Financial Statements as of March 31, 2000 . . . . . . . . . . . . 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations . . . . . . . . . . . . . . . . . . 16
Item 3. Quantitative and Qualitative Disclosures About Market Risk . . 18
PART II - OTHER INFORMATION
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . 19
Item 2. Changes in Securities . . . . . . . . . . . . . . . . . . . 19
Item 3. Defaults Upon Senior Securities . . . . . . . . . . . . . . 20
Item 4. Submission of Matters to a Vote of Security Holders. . 20
Item 5. Other Information . . . . . . . . . . . . . . . . . . . . . . 20
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . 20
1
2THEMART.COM, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
BALANCE SHEETS
- --------------------------------------------------------------------------------
ASSETS DECEMBER 31, MARCH 31,
1999 2000
(unaudited)
------------ -------------
Current assets:
Cash and cash equivalents $ 2,521,770 $ 30,694
Prepaid expenses 274,288 349,288
------------ -------------
2,796,058 379,982
------------ -------------
Property and equipment, at cost:
Computer hardware and software 12,148,137 12,660,241
Furniture, fixtures and other office equipment 429,611 451,260
Leasehold improvements 648,168 668,091
------------ -------------
13,225,916 13,779,592
Less accumulated depreciation and amortization (372,099) (942,099)
------------ -------------
12,853,817 12,837,493
------------ -------------
Other assets:
Restricted cash 220,224 220,224
Other 206,429 156,405
------------ -------------
426,653 376,629
------------ -------------
$16,076,528 $ 13,594,104
============ =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,750,805 $ 2,288,602
Accrued liabilities 525,818 1,202,106
Note 1,775,000 1,536,760
------------ -------------
Total current liabilities 4,051,623 5,027,468
------------ -------------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $0.0001 par value; 25,000,000
shares authorized; no shares issued and outstanding - -
Common stock, $0.0001 par value; 50,000,000 shares
authorized; 29,482, 016 and 30,221,350 shares issued
and outstanding at December 31, 1999 and March 31,
2000, respectively 2,948 3,022
Additional paid-in capital 25,990,942 23,730,202
Deferred compensation expense (1,339,263) (1,244,139)
Deficit accumulated during the development stage (9,629,722) (13,922,449)
------------ -------------
Total stockholders' equity 12,024,905 8,566,636
------------ -------------
$16,076,528 $ 13,594,104
============ =============
- --------------------------------------------------------------------------------
See accompanying notes to condensed financial statements
2
2THEMART.COM, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF OPERATIONS (UNAUDITED)
- --------------------------------------------------------------------------------
FROM DECEMBER FOR THE THREE FROM DECEMBER
22,1998 (DATE OF MONTHS ENDED 22,1998 (DATE OF
INCEPTION) TO MARCH 31, INCEPTION) TO
MARCH 31, 1999 2000 MARCH 31, 2000
--------------- ------------------ ----------------
Sales and interest income $ 33,746 $ 13,629 $ 130,659
--------------- ------------------ ----------------
Expenses:
Payroll and related expenses 98,503 1,147,492 3,159,250
Professional fees 34,074 475,093 2,976,403
Value of non-cash stock and option
issuances 264,434 182,624 1,337,796
Marketing - 223,095 1,147,607
Depreciation and amortization - 570,000 942,099
Interest - 86,938 166,913
Other general and administrative 203,764 1,595,114 4,323,040
--------------- ------------------ ----------------
600,775 4,280,356 14,053,108
--------------- ------------------ ----------------
Net loss $ (567,029) $ (4,266,727) $ (13,922,449)
=============== ================== ================
Basic and diluted loss per common share $ (0.03) $ (0.14)
=============== ==================
Basic and diluted weighted average
shares outstanding 21,119,697 29,578,866
=============== ==================
- --------------------------------------------------------------------------------
See accompanying notes to condensed financial statements
3
2THEMART.COM, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENT OF CASH FLOWS (UNAUDITED)
- --------------------------------------------------------------------------------
FROM DECEMBER FOR THE THREE FROM DECEMBER
22, 1998 (DATE MONTHS ENDED 22, 1998 (DATE OF
OF INCEPTION TO MARCH 31, INCEPTION) TO
MARCH 31, 1999 2000 MARCH 31, 2000
--------------- ------------------- ----------------
Cash flows from operating activities:
Net loss $ (567,029) $ (4,266,727) $ (13,922,449)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization - 570,000 $ 942,099
Loss on disposition of software - - 40,000
Value of non-cash stock and
option issuances 264,434 182,624 1,432,920
Accrued interest on notes payable
converted to common stock - - 28,438
Change in operating assets and
liabilities:
Prepaid expenses and other
assets - (24,976) (505,693)
Accounts payable and accrued
liabilities 31,520 1,214,085 3,490,708
--------------- ------------------- ----------------
Net cash used in operating activities (271,075) (2,324,994) (8,493,977)
--------------- ------------------- ----------------
Cash flows provided by (used in)
investing activities:
Purchases of property and equipment
and costs incurred for development
of software and web site (231,962) (553,676) (11,846,892)
--------------- ------------------- ----------------
Cash flows from financing activities:
Proceeds from issuances of common
stock 5,845,500 625,834 18,330,027
Proceeds from issuances of notes
payable - - 2,750,000
Repayment of note payable - - (250,000)
Net change in restricted cash - - (220,224)
Principal payments on note payable - (238,240) (238,240)
--------------- ------------------- ----------------
Net cash provided by financing
activities 5,845,500 387,594 20,371,563
--------------- ------------------- ----------------
Net change in cash and cash equivalents 5,342,463 (2,491,076) 30,694
Cash and cash equivalents at beginning
of period - 2,521,770 -
--------------- ------------------- ----------------
Cash and cash equivalents at end of
period $ 5,342,463 $ 30,694 30,694
=============== =================== ================
- --------------------------------------------------------------------------------
See accompanying notes to condensed financial statements
4
2THEMART.COM, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENT OF CASH FLOWS (UNAUDITED)
- --------------------------------------------------------------------------------
FROM DECEMBER FOR THE THREE FROM DECEMBER
22, 1998 (DATE MONTHS ENDED 22, 1998 (DATE OF
OF INCEPTION TO MARCH 31, INCEPTION) TO
MARCH 31, 1999 2000 MARCH 31, 2000
--------------- ------------------- ----------------
Supplemental disclosure of cash flow
information:
Conversion of short-term note and
accrued interest payable to common
stock $ - $ - $ 510,027
=============== =================== ================
Conversion of short-term note and
accrued interest payable to capital
contribution $ - $ - $ 2,018,411
=============== =================== ================
Purchase of fixed assets with
common stock $ - $ - $ 197,700
=============== =================== ================
Purchase of fixed assets with note
payable $ - $ - $ 1,775,000
=============== =================== ================
Cash paid during the period for
interest $ - $ 86,938 $ 86,938
=============== =================== ================
- --------------------------------------------------------------------------------
See accompanying notes to condensed financial statements
5
2THEMART.COM, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO UNAUDITED FINANCIAL STATEMENTS
MARCH 31, 2000
- --------------------------------------------------------------------------------
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements of 2TheMart.com, Inc.
("2TheMart" or the "Company") have been prepared in accordance with generally
accepted accounting principles for interim financial statements and the
instructions to Form 10-Q related to interim period financial statements.
Accordingly, these condensed financial statements do not include certain
information and footnotes required by generally accepted accounting principles
for complete financial statements. However, the accompanying unaudited condensed
financial statements contain all adjustments (consisting only of normal
recurring accruals) which, in the opinion of management, are necessary in order
to present the financial statements fairly. The results of operations for
interim periods are not necessarily indicative of the results to be expected for
the full year. These condensed financial statements should be read in
conjunction with the Company's audited financial statements, and notes thereto,
which are included in the Company's Annual Report on Form 10-K for the year
ended December 31, 1999.
NOTE 2 - ORGANIZATION
The Company
The Company is a development stage, internet-based electronic commerce
("e-commerce") company. The Company has contracted with an unrelated party to
develop and launch a business-to-consumer and consumer-to-consumer trading
community on the internet. The Company, which launched its web site on November
18, 1999, has developed an e-commerce site in which buyers and sellers are
brought together to buy and sell a variety of goods such as antiques, apparel,
coins, collectibles, computers, memorabilia, movies, music, toys and more. The
2TheMart service enables sellers to list items for sale, buyers to bid on those
items and it allows the 2TheMart users to browse through all items in a fully
automated, topically arranged online service. In connection with the proposed
merger (see Note 12), the Company has temporarily shut down its online service
as of April 25, 2000 (see Note 4).
Reorganization
In December 1998, CD-Rom Yearbook Company, Inc., an Oklahoma corporation
("CD-Rom"), entered into a merger agreement to acquire all of the outstanding
shares of common stock of 2TheMart-Nevada, a Nevada corporation formed on
December 22, 1998. As the shareholders of 2TheMart-Nevada controlled CD-Rom
after this transaction, this business combination was treated as a reverse
acquisition for accounting purposes whereby 2TheMart-Nevada was considered the
accounting acquiror and CD-Rom was considered the accounting acquiree. The
merger became effective on January 8, 1999. Between December 22, 1998 and
January 8, 1999,
6
2THEMART.COM, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO UNAUDITED FINANCIAL STATEMENTS
MARCH 31, 2000
- --------------------------------------------------------------------------------
NOTE 2 - ORGANIZATION, CONTINUED
neither 2TheMart-Nevada nor CD-Rom had any activity of significance including
capital transactions and operating activities. The surviving legal entity,
CD-Rom, changed its name to 2TheMart.com, Inc. The transaction was treated as a
recapitalization of 2TheMart-Nevada with no recording of assets or liabilities
at fair values on that date.
Immediately prior to the merger, CD-Rom had 2,291,850 shares of common stock
outstanding. As part of the reorganization and stock purchase agreement, CD-Rom
issued an additional 17,800,000 shares of common stock to the shareholders of
2TheMart-Nevada in exchange for all of the shares of common stock of
2TheMart-Nevada. In addition, options to purchase 2.5 million shares of the
Company's common stock at an exercise price of $3.00 were issued to various
shareholders of CD-Rom and 1.2 million of the previously issued CD-Rom shares of
common stock were placed in escrow under the terms of an agreement (the "Escrow
Agreement"), to be distributed to the 2TheMart-Nevada shareholders upon the
occurrence of either of the following events: 1) the exercise of any of the
CD-Rom options given to the previous controlling shareholders of CD-Rom; or 2)
the effectiveness of any Registration Statement filed with the Securities and
Exchange Commission ("SEC") with respect to any of the shares of common stock
underlying the CD-Rom options. In the event that either the CD-Rom options are
not exercised or the Company fails to file and have declared effective a
Registration Statement covering the shares of common stock underlying the CD-Rom
options by June 22, 2000, all of the escrow shares of common stock would be
returned to the previous controlling shareholder of CD-Rom. Shares of common
stock covered by this Escrow Agreement are depicted as outstanding since January
8, 1999 (the merger date).
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Property and Equipment
The Company has adopted Statement of Position 98-1 ("SOP 98-1"), "Accounting for
the Cost of Computer Software Developed or Obtained for Internal Use." In
fiscal 1999 and 2000, the Company capitalized external costs to acquire and
customize hardware, software and its Internet web site.
Depreciation and amortization are provided for over the estimated useful lives
of the assets, ranging from 2.5 years to 7 years. Leasehold improvements are
amortized over the lives of the respective leases or the useful lives of the
improvements, whichever is shorter. The straight-line method of depreciation is
followed for substantially all assets for financial reporting purposes, but
accelerated methods are used for tax purposes.
7
2THEMART.COM, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO UNAUDITED FINANCIAL STATEMENTS
MARCH 31, 2000
- --------------------------------------------------------------------------------
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
Betterments, renewals, and extraordinary repairs that extend the lives of the
assets are capitalized; other repairs and maintenance charges are expensed as
incurred. The cost and related accumulated depreciation applicable to assets
retired are removed from the accounts, and
the gain or loss on disposition is recognized in current operations.
Impairment of Long-Lived Assets
The Company evaluates the recoverability of long-lived assets in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of." SFAS No. 121 requires recognition of impairment of long-lived assets in
the event the net book value of such assets exceeds the future undiscounted cash
flows attributable to such assets. During the quarter ended March 31, 2000, the
Company temporarily discontinued the use of its Lawson software ("Lawson") in
order to reduce costs related to maintaining the software. The Company is
currently using another accounting software package in place of Lawson until
revenue-generating activities justify the cost of maintaining the Lawson
software. At March 31, 2000, management determined that there has been no
impairment of the Company's long-lived assets. There can be no assurance,
however, that market conditions will not change or demands for the Company's
services will continue which could result in future long-lived asset impairments
(see Note 4).
Revenue Recognition
Online transaction revenues are derived primarily from success fees charged for
the selling of items on the 2TheMart web site and are calculated as a percentage
of the final sales transaction value. Revenues related to success fees are
recognized at the time that the transaction is successfully concluded. A
transaction is considered successfully concluded when at least one buyer has bid
above the seller's specified minimum price or reserve price, whichever is
higher, at the end of the transaction term.
Segment Information
The Company has adopted Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information," which
requires public companies to report selected segment information in their
quarterly reports. It also requires entity-wide disclosures about the products
and services an entity provides, the material countries in which it holds assets
and reports revenues and its major customers. As the Company is currently in
the start-up phase, it does not yet have any reportable segments.
8
2THEMART.COM, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO UNAUDITED FINANCIAL STATEMENTS
MARCH 31, 2000
- --------------------------------------------------------------------------------
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
Earnings Per Share
Basic net income per common share is computed by dividing the net income
available to common stockholders for the period by the weighted average number
of common shares outstanding during the period. Incremental common shares
issuable upon the exercise of stock options and warrants, are included in the
computation of diluted net loss per common share to the extent such shares are
dilutive. As the Company has a loss for the periods presented, all options are
antidilutive and are therefore not included in the per share computation.
Recent Accounting Pronouncements
The FASB issued Statement of Financial Accounting Standards No. 133 ("SFAS
133"), "Accounting for Derivative Instruments and Hedging Activities." SFAS 133
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities on the balance sheet at their fair value. This
statement, as amended by SFAS 137, is effective for financial statements for all
fiscal quarters of all fiscal years beginning after June 15, 2000. The Company
does not expect the adoption of this standard to have a material impact on its
results of operations, financial position or cash flows as it currently does not
engage in any derivative or hedging activities.
In March 2000, the Emerging Issues Task Force reached a consensus on Issue No.
00-2, "Accounting for Web Site Development Costs" ("EITF 00-2") to be applicable
to all web site development costs incurred for the quarter beginning after June
30, 2000. The consensus states that for specific web site development costs,
the accounting for such costs should be accounted for under AICPA Statement of
Position 98-1 (SOP 98-1), "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use." The Company has not yet addressed
whether the adoption of EITF 00-2 will have a material effect on its financial
statements.
NOTE 4 - DEVELOPMENT STAGE ENTERPRISE AND GOING CONCERN
Since December 22, 1998 (date of inception), the Company has been in
the development stage and its principal activities have consisted of raising
capital and developing its internet-based e-commerce web site.
The accompanying financial statements have been prepared on the basis of a going
concern, which contemplates the realization of assets and liquidation of
liabilities in the normal course of business.
9
2THEMART.COM, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO UNAUDITED FINANCIAL STATEMENTS
MARCH 31, 2000
- --------------------------------------------------------------------------------
NOTE 4 - DEVELOPMENT STAGE ENTERPRISE AND GOING CONCERN, CONTINUED
The Company has an accumulated deficit of $13,948,449 since inception, has
negative working capital of $4,647,486 at March 31, 2000, has no substantive
revenues since inception, has shut down its web site and has significant
contingent liabilities. The Company is currently in discussions with certain of
its vendors for the satisfaction of the amounts due them. The Company does not
currently have sufficient funds to meet those commitments. Failure to
successfully negotiate a reduction of the amounts due or failure to raise
additional funding to meet those expenditures would have a materially adverse
effect on the Company's operations. All of the above factors raise substantial
doubt about the Company's ability to continue as a going concern. The ability
of the Company to continue in existence is dependent primarily upon obtaining
additional debt and equity financing to fund the Company's short-term operating
expenses, capital expenditure requirements and marketing needs, as well as the
successful resolution of contingent liabilities and the generating of income
from strategic alliances and from the Company's web site. The Company has
entered into a proposed merger (see Note 12) that it anticipates will enhance
its ability to successfully accomplish the above items. Management believes
these funding sources (including the interim Operating Agreement discussed in
Note 12) will be sufficient to fund its capital expenditures, working capital
requirements and other cash requirements through June 30, 2000 and that the
Company will be successful in resolving its contingent liabilities.
There is no assurance, however, that the Company will be able to successfully
resolve its contingent liabilities, effect its proposed mergers and obtain
sufficient additional funds when needed, or that such funds, if available, will
be obtainable on terms satisfactory to the Company. The financial statements do
not include any adjustments relating to the recoverability and classification of
asset carrying amounts (including the realizability of long-lived assets under
SFAS No. 121) or the amount and classification of liabilities that might result
from the outcome of this uncertainty.
NOTE 5 - NOTES PAYABLE
On November 18, 1999, the Company entered into a payment agreement with an
unrelated party for the satisfaction of the remaining amounts owed for
development of the Company's web site as well as additional services related to
the web site. The note is secured by all equipment purchased from the unrelated
party. Under the payment agreement, the Company will pay $1,775,000 plus
interest at a rate of 13.5% per annum beginning November 1, 1999, to be paid in
twelve equal monthly payments of principal and interest totaling $162,552, with
the first payment due on January 31, 2000. The Company has withheld payments
beginning March 2000 under this agreement pending resolution with the unrelated
party of product quality and repair issues regarding the Company's web site.
During the quarter ended March 31, 2000, the Company recorded interest of
$86,864 related to this note.
10
2THEMART.COM, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO UNAUDITED FINANCIAL STATEMENTS
MARCH 31, 2000
- --------------------------------------------------------------------------------
NOTE 6 - STOCKHOLDERS' EQUITY
Common Stock
The Company's Articles of Incorporation authorizes the issuance of 50,000,000
shares of common stock, $0.0001 par value per share, of which 30,221,350 shares
were outstanding as of March 31, 2000. Holders of shares of common stock are
entitled to one vote for each share on all matters to be voted on by the
stockholders. Holders of shares of common stock have no cumulative voting
rights. Holders of shares of common stock are entitled to share ratably in
dividends, if any, as may be declared, from time to time by the Board of
Directors in its discretion, from funds legally available therefore. In the
event of a liquidation, dissolution or winding up of the Company, the holders of
shares of common stock are entitled to share pro rata in all assets remaining
after payment in full of all liabilities. Holders of shares of common stock
have no preemptive rights to purchase the Company's common stock. There are no
conversion rights or redemption or sinking fund provisions with respect to the
common stock. All of the outstanding shares of common stock are fully paid and
non-assessable.
During the three months ended March 31, 2000, the Company has received proceeds
of $625,834 from sales of 625,834 shares of common stock at a price of $1.00 per
share. This cash has been used to pay ongoing operating expenses.
In addition, the Company issued 87,500 shares of "restricted" (as that term is
defined under Rule 144 of the Securities Act of 1933) common stock in
consideration for services, valued at $87,500.
NOTE 7 - LOSS PER SHARE
The following table sets forth the computation of basic and diluted loss per
share:
FROM DECEMBER 22,
1998 (DATE OF FOR THE THREE
INCEPTION TO MARCH MONTHS ENDED
31, 1999 MARCH 31, 2000
------------------ --------------
Numerator:
Numerator for basic and diluted
earnings per share - net loss $ 567,129 $ 4,266,727
================== ==============
Denominator:
Denominator for basic and diluted
earnings per share - weighted
average shares outstanding $ 21,119,697 29,578,866
================== ==============
Options and warrants to purchase 4,717,900 shares of common stock ranging from
$2.375 to $14.375 per share per share were outstanding at March 31, 2000. Such
options and warrants were not included in the computation of diluted earnings
per common share because they were antidilutive.
11
2THEMART.COM, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO UNAUDITED FINANCIAL STATEMENTS
MARCH 31, 2000
- --------------------------------------------------------------------------------
NOTE 8 - STOCK OPTIONS AND WARRANTS
The Company accounts for its stock options in accordance with the provisions of
APB Opinion No. 25, Accounting for Stock Issued to Employees ("APB 25"). Under
APB 25, the Company amortized previously deferred compensation expense of
$95,124 related to employee options vesting in fiscal 2000 for the three-month
period ended March 31, 2000.
On February 14, 2000, the Company's Board of Directors approved the 2000 Stock
Incentive Plan (the "Plan"). Under the terms of the Plan, a Committee
established by the Board of Directors (the "Committee") has the sole authority
to determine which of the eligible persons shall receive awards pursuant to the
Plan. Under the Plan, the number of shares underlying such awards, and other
terms and conditions of the awards granted under the Plan are subject to the
sole discretion of the Committee to the extent they do not conflict with the
terms of the Plan. Up to 20% of the common stock of the Company outstanding as
of February 14, 2000 and increasing 20% of any subsequent additional increases
in the outstanding common stock of the Company up to a maximum of 15,000,000
shares, are reserved for issuance under the Plan. As of March 31, 2000, the
Company had issued options for the purchase of an aggregate of 1,743,270 shares
of the Company's common stock under the Plan to 75 employees of the Company.
Pursuant to the Plan, in the event of an acquisition, merger, or other change in
the Company's control, all awards issued under the Plan automatically vest as to
existing and recently terminated employees except where otherwise determined by
the Company's Board of Directors. With regards to the Company's proposed merger
(see Note 12), the Company's Board of Directors has determined to vest 25% of
the 2000 Plan options. Options granted in 1999 contained no such provisions and
thus, in general, have no accelerated vesting as a result of the proposed
merger.
Approval and ratification of the Plan will require approval of the Company's
stockholders.
A summary of the status of the Company's options as of March 31, 2000 is
presented below:
WEIGHTED
AVERAGE EXERCISE
OPTIONS PRICE
--------- ---------------
Outstanding, beginning of period 2,974,630 $ 3.42
Granted 1,743,270 4.75
Exercised - -
Expired/Forfeited - -
--------- ---------------
Outstanding, end of period 4,717,900 $ 3.91
========= ===============
12
2THEMART.COM, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO UNAUDITED FINANCIAL STATEMENTS
MARCH 31, 2000
- --------------------------------------------------------------------------------
NOTE 9 - INCOME TAXES
As of March 31, 2000, the Company had net deferred tax assets of approximately
$5.4 million, which has been offset in full by a valuation allowance as the
Company is still in the development stage. This deferred tax asset is comprised
primarily of expenses recognized for stock options for book purposes and unused
federal and state net operating losses and credits that can be used to reduce
taxes through 2019 for federal and 2004 for state purposes.
NOTE 10 - CONTINGENCIES
Litigation
On September 13, 1999 and October 11, 1999, the Company was served with class
action lawsuits which allege that the Company and certain of its officers
engaged in a plan to defraud the market and purchasers of the Company's common
stock by failing to disclose material facts or making material misstatements of
fact regarding the status of the Company's Web site. Additionally, the Company
has been informed and believes there may be additional purported class action
lawsuits filed against the Company based upon similar alleged facts and claims.
The Company believes that such lawsuits or claims are without merit and they
have meritorious defenses to the actions. As these lawsuits were recently
filed, neither the Company nor the Company's legal counsel can estimate the
amount of loss, if any, which may result from the outcome of these actions. The
Company has tendered these actions to its insurers and believes that they have
adequate insurance to meet any potential losses from these claims, subject to a
$250,000 deductible. At March 31, 2000, the Company has paid or accrued
$250,000 relating to its insurance deductible in these cases. However, failure
to successfully defend these actions which results in an award greater than the
Company's insurance coverage, could have a material adverse effect on the
Company's results of operations, liquidity and financial condition.
Stock Offering
Beginning October 1999 through December 31, 1999, the Company issued 4,182,202
"restricted" (as that term is defined under Rule 144 of the Securities Act of
1933) shares of its common stock pursuant to a private placement of the
Company's common stock at a prices of $1.50 per share, plus 295,186 shares for
offering costs, resulting in net proceeds of $6,273,303 (the "October
Offering"). The issuances were offered without general solicitation or
advertising under Rule 506 of Regulation D and Section 4(2) of the Securities
Act of 1933. Subsequent to the sale, the Company discovered that some
purchasers of the October Offering resold their shares in possible violation of
the Securities Act of 1933, as amended, and other applicable securities laws
("Securities Laws"). As a result, certain purchasers voluntarily returned
shares (totaling 1,173,574 shares) to the Company. The Company has made every
effort to insure that
13
2THEMART.COM, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO UNAUDITED FINANCIAL STATEMENTS
MARCH 31, 2000
- --------------------------------------------------------------------------------
NOTE 10 - CONTINGENCIES, CONTINUED
it complied with all applicable Securities Laws and that all purchasers of the
Company's October Offering received full and adequate disclosure regarding the
Company's operations. However, in the event that portions of the October
Offering may be deemed to have been made in contradiction of the Securities
Laws, the Company may face certain contingent liabilities, including certain
administrative action as well as reimbursement of certain investors' investment
amounts.
The accompanying financial statements do not reflect the potential effects of
these contingencies, which could be material (see Note 4).
NOTE 11 - MANAGEMENT
The Company's president/chief financial officer (and one of the two founders)
resigned in March, 2000. The Company anticipates that the contemplated merger
(see Note 12) will address some of its management vacancies; if not, the Company
intends to recruit individuals with the appropriate amount of management and
industry experience.
NOTE 12 - SUBSEQUENT EVENTS
On April 13, 2000, the Company entered into an Agreement and Plan of
Reorganization between the Company, its wholly owned subsidiary, 2TheMart.com,
Inc., a Delaware Corporation ("2TMD"), GoToWorld.com, Inc., a Delaware
Corporation ("GTW"), and GTW's parent company, Languageforce, Inc., a
Colorado Corporation ("LanguageForce"), whereby the Company will merge with and
into 2TMD, with 2TMD being the surviving Company. Pursuant to the agreement,
all of the Company's common stock will be exchanged for shares of 2TMD on a one
for one basis. As a result, the Company will effectuate a reincorporation from
an Oklahoma corporation into a Delaware corporation. Immediately subsequent to
the Company's merger with 2TMD, GTW will merge with and into the subsequent
combined company, now 2TMD. Pursuant to the agreement, all of the shares of GTW
will be exchanged for 52,930,931 shares of the common stock of 2TMD in a
transaction accounted for as a reverse acquisition for accounting purposes
(i.e., an acquisition by GTW of 2TMD). Subsequent to the merger of GTW into
2TMD, 2TMD will change its name to "GotoWorld.com, Inc."
Under the terms of the agreement, Ian S. Simpson will become the President,
Chief Executive Officer and Chairman of the Board of the surviving corporation;
Steven W. Rebeil, the Company's current Chairman of the Board, will relinquish
all of his management positions with the Company and remain a director.
The closing of the agreement and effectiveness of the proposed mergers is
subject to shareholder approval of both the Company and GTW.
14
2THEMART.COM, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO UNAUDITED FINANCIAL STATEMENTS
MARCH 31, 2000
- --------------------------------------------------------------------------------
NOTE 12 - SUBSEQUENT EVENTS, CONTINUED
The Company has entered into an Interim Operating Agreement with GTW effective
April 19, 2000. Pursuant to the agreement GTW has agreed to fund the Company's
daily operating expenses pending completion of the proposed merger discussed
above.
As a result of the proposed merger, the Company has terminated employment of
several employees in May 2000, resulting in severance payments of approximately
$72,500 and cancellation of options.
On May 15, 2000, the Company agreed to vest all of an employee's unvested
options (resulting in 500,000 options being vested) and to adjust the exercise
price of all 500,000 options to $.01 per share, resulting in a charge to
compensation expense of approximately $870,000. As a result of the repricing,
the value of these options will be adjusted each reporting period based on the
fair value of the underlying stock at that date.
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
During the three month period ended March 31, 2000, the Company had no
substantive revenues from its operations because it was in the development
stages and recently launched its e-commerce Web site. However, the Company
earned approximately $13,629 on interest on short-term investments from cash
raised during the three month period ended March 31, 2000. The Company incurred
expenses of approximately $4,306,356 consisting primarily of payroll and related
compensation, non-cash stock and option issuances and professional fees.
Plan of Operations for the Twelve Months Ending December 31, 2000.
On April 13, 2000, the Company entered into an Agreement and Plan of
Reorganization between the Company, its wholly owned subsidiary, 2TheMart.com,
Inc., a Delaware Corporation formed solely for the purpose of reincorporating
the Company in the state of Delaware ("2TMD"), GoToWorld.com, Inc., a Delaware
Corporation ("GTW"), and GTW's parent company Languageforce, Inc., a
Colorado Corporation ("LanguageForce"), whereby the Company will merge with and
into 2TMD, with 2TMD being the surviving Company. Pursuant to the agreement,
all of the Company's common stock will be exchanged for shares of 2TMD on a one
for one basis. As a result, the Company will effectuate a reincorporation from
an Oklahoma corporation into a Delaware corporation. Immediately subsequent to
the Company's merger with 2TMD, GTW will merge with and into the subsequent
combined company, now 2TMD. Pursuant to the agreement, all of the shares of GTW
will be exchanged for 52,930,931 shares of the common stock of 2TMD in a
business combination described as a "reverse merger." Subsequent to the merger
of GTW into 2TMD, 2TMD will change its name to "GotoWorld.com, Inc." Under the
terms of the agreement, Ian S. Simpson shall become the President, Chief
Executive Officer and Chairman of the Board of the surviving corporation; Steven
W. Rebeil, the Company's current Chairman of the Board, will relinquish all of
his positions with the Company. The closing of the agreement and effectiveness
of the proposed mergers is subject to shareholder approval of both Company and
GTW.
In contemplation of the proposed merger with GTW, the Company plans to integrate
GTW's and 2TM's business plans. GTW is a global communications and commerce
super portal. Its plan of operations is to become the gateway to the
business-to-business world markets. GTW's business solutions and services to be
provided will include the ability to instantly communicate between over 14
different languages with its Universal Translator technology licensed from
LanguageForce, Inc., GTW's former parent company. This technology allows total
access to the world's products and services without language barriers.
GTW's innovative advertising vehicles of Get Paid to Surf , Get Paid to Shop ,
and Get Paid to Chat , currently bring millions of visitors and members to its
global super portal. These visitors and members have access to the global
markets through new services to be provided as a result of the acquisition.
Those services are expected to include a worldwide business-to-business and
business-to-consumer directory-in localized languages; B2B and B2C auction
services; B2B and B2C e-commerce store front hosting and services; as well as
additional business solutions.
GTW plans to aggressively roll out its international expansion of localized
content specific super portals in over 10 countries utilizing its instant
translation capabilities in Chinese, Japanese, French, German, Korean, Spanish,
Italian, Portugese, Swedish and Danish.
Complete details regarding the Company's proposed merger and the business
operations of GTW will be disclosed in the Company's Schedule 14A Proxy
Statement ("Proxy Statement") to be filed shortly. Upon clearance by the
Securities and Exchange Commission, the Proxy Statement will be forwarded to all
shareholders of the Company. All eligible shareholders of the Company as of a
record date (to be determined in the Proxy Statement) will be given the
opportunity to vote on the proposed merger at the Company's upcoming annual
shareholder's meeting.
16
In the event that the Company's proposed merger with GTW is not accomplished as
planned, the Company intends on continuing with the development of its current
e-commerce Web site.
Liquidity
Net cash used in operating activities for the three months ended March 31, 2000,
was $2,324,994, due primarily to the net loss of $4,292,727 offset by non-cash
compensation expense for stock and options, depreciation and an increase in
accounts payable and accrued liabilities totaling $208,624, 1,750,000 and
$1,214,085 respectively.
Net Cash provided by financing activities during the three month period ended
March 31, 2000 was $625,834 due to the sale of common stock, less $238,240
spent on note payable payments.
On November 18, 1999, the Company entered into a payment agreement for the
satisfaction of the remaining amounts owed for the Company's Web site as well as
additional services provided by IBM relating to the Web site. The Company will
pay IBM approximately $1.8 million plus interest at a rate of 13.5% per annum
compounded monthly beginning November 1, 1999, to be paid in twelve equal
monthly payments of principal and interest totaling $162,552, with the first
payment due on January 31, 2000. The Company has withheld payments to IBM
beginning March 2000 pending resolution of product quality and repair issues
regarding the Company's Web site.
Lack of Profitability, Potential Losses
From its inception in December 1998, through March 31, 2000, the Company has
experienced aggregate losses of $13,948,449. Results of operations in the
future will be influenced by numerous factors including, among others,
expansion, the Company's ability to complete its planned merger with
GoToWorld.com, Inc., as previously discussed, drive traffic to the combined
company's web site, provide superior customer service and retain qualified
personnel. The Company may incur problems, delays, expenses, and difficulties
during this stage, any of which may be beyond the Company's control. These
include, but are not limited to, unanticipated regulatory compliance, marketing
problems and intense competition that may exceed current estimates. There is no
assurance that the Company will ever operate profitably.
Additionally, the Company's financial statements have been prepared on the basis
of a going concern, which contemplates the realization of assets and liquidation
of liabilities in the normal course of business. The Company had not yet
generated revenues from Web site operations and, at March 31, 2000, had
accumulated a deficit from its operating activities. Continuation of the
Company as a going concern is dependent upon, among other things, obtaining
additional capital, meeting other obligations under various agreements and
achieving satisfactory levels of profitable operations. These factors raise
substantial doubt about the Company's ability to continue as a going concern.
As of March 31, 2000, the Company had $250,918 in cash and cash equivalents.
However, $220,224 is "restricted" cash in the form of certificates of deposits
securing existing lines of credit. The Company does not currently have
sufficient funds to meet its operating expenses. In contemplation of its
proposed merger, the Company has ceased its capital raising efforts and has
temporarily taken its Web site off line. Pursuant to an Interim Operating
Agreement between the Company and GTW effective April 19, 2000, GTW has
agreed to fund the Company's daily operating expenses pending completion of
the merger, as previously discussed.
Capital Expenditures
The Company contracted with IBM to acquire hardware and software for its Web
site operations and corporate infrastructure and the development of its Web site
in the amount of approximately $11.0 million of which $7.9 million is for
hardware and software and $3.1 million is for Web site development. As of
November 19, 1999 the Company has paid $9.2 million of its obligation. On
November 18, 1999, the Company entered into a payment agreement with IBM whereby
the Company will pay the remaining amounts owed for its Web site in 12 monthly
payments beginning January 31, 2000. The Company has withheld payments to IBM
beginning March 2000 pending resolution of product quality and repair issues
regarding the Company's Web site.
17
The Company is also required to pay for the space that it has secured with
Exodus at Exodus' Sterling, Virginia data center for the Company's Internet
connectivity. The Company's minimum expected monthly obligation to Exodus
pursuant to its contract is approximately $78,000, which may increase depending
on the Company's bandwidth usage. At March 31, 2000, the Company owes Exodus
approximately $450,000. The Company has also contracted with Ciber for the
implementation and specific coding projects of the Company's back-end accounting
and billing software. The Company currently owes Ciber approximately $332,000
for the completion of its work. Additionally, the Company has contracted with
Lawson to license the use of Lawson's accounting software system. Under the
terms of the agreement with Lawson, the Company paid Lawson approximately
$129,000 with $300,000 due in monthly payments of $100,000 beginning January
2000, and has the option of either paying a one time flat fee to Lawson on May
1, 2000 in the amount of $573,070 or a fee based on a percentage of the
Company's revenue. Under the terms of the agreement, the Company is required to
pay Lawson $30,000 upon the Company reaching $50 million in revenue.
The Company is currently in discussions with IBM, Exodus, Ciber, and Lawson for
the satisfaction of the amounts due IBM, Exodus, Ciber, and Lawson. The Company
does not currently have sufficient funds to meet those commitments. Failure to
successfully negotiate a reduction of the amounts due or failure to raise
additional funding to meet those expenditures would have a materially adverse
effect on the Company's operations.
Results of Operations
The Company has not realized any material operating revenue to date.
Additionally, the Company does not expect any material increase in operating
revenues until after the Company begins aggressively marketing the Web site.
Since the Company has no historical operating revenues to gauge future operating
revenues upon, it is uncertain as to what level of revenues, if any, the Company
may achieve from its Web operations.
As a result of the development stage nature of the Company's prior operations,
the Company is not reporting any impact on its operations from inflation or
changing prices.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company is not exposed to material risk based on interest rate fluctuation,
exchange rate fluctuation, or commodity price fluctuation.
18
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
The Company may from time to time be involved in various claims, lawsuits,
disputes with third parties, actions involving allegations of discrimination or
breach of contract actions incidental to the operation of its business. On
September 13, 1999 and October 11, 1999, two putative class action lawsuits were
filed in the United States District Court, Central District of California,
Southern Division, against the Company and its then principal officers, Steven
W. Rebeil and Dominic J. Magliarditi entitled Mary Ellen Harrington, On Behalf
of Herself and All Others Similarly Situated v. 2TheMart.com, Inc., Steven W.
Rebeil, and Dominic J. Magliarditi (No. SACV99-1127 DOC (ANX)) and Vinh D. Diep,
On Behalf of Herself and All Others Similarly Situated v. 2TheMart.com, Inc.,
Steven W. Rebeil, and Dominic J. Magliariditi (No. SACV99-1255 DOC (EEX). In
December 1999, the complaints were consolidated into a consolidated complaint
(the "Complaint"). The Complaint alleges, on behalf of a class of individuals
who purchased shares of the Company's common stock between January 19, 1999 and
August 26, 1999, that the defendants engaged in a plan to defraud the market and
purchasers of the Company's common stock in violation of section 10(b) of the
Exchange Act, SEC Rule 10b-5 and Section 20(a) of the Exchange Act (as against
Mr. Rebeil and Mr. Magliarditi) by failing to disclose material facts or making
material misstatements of fact regarding the status of the Company's Web site.
The Complaint seeks compensatory damages for themselves and for the class
The Company and its defendant officers and directors believe that the lawsuits
are without merit and that they have meritorious defenses to the above actions.
The Company has tendered the action to its insurers and plans on vigorously
defending the litigation. The Company believes that it has adequate insurance
coverage to meet any potential losses, subject to a $250,000 deductible.
However, failure to successfully defend the action which results in an award
greater than the Company's insurance coverage, could have a material adverse
effect on the Company's results of operations, liquidity and financial
condition.
In March 2000, the defendants filed a motion to dismiss with prejudice all
claims made in the Complaint for failure to state a claim. A decision on such
motion is expected in 2000.
ITEM 2 - CHANGES IN SECURITIES
Beginning October 1999 through January 2000, the Company issued 4,182,202
"restricted" (as that term is defined under Rule 144 of the Securities Act of
1933) shares of its Common Stock pursuant to a private placement of the
Company's common stock at a price of $1.50 per share, plus 295,186 shares for
offering costs, resulting in net proceeds of $6,273,303 (the "October
Offering"). The issuances were offered without general solicitation or
advertising under Rule 506 of Regulation D and Section 4(2) of the Securities
Act of 1933. Subsequent to the sale, the Company discovered that some
purchasers of the October Offering resold their shares in possible violation of
the Securities Laws. As a result, certain purchasers voluntarily returned
shares (totaling 1,173,574 shares) to the Company. The Company has made every
effort to insure that it complied with all applicable securities laws and that
all purchasers of the Company's October Offering received full and adequate
disclosure regarding the Company's operations. However, in the event that
portions of the October Offering were deemed to have been made in contradiction
of the Securities Act of 1933, as amended, the Company may face certain
contingent liabilities.
In March 2000, the Company initiated a private offering of up to 7,500,000
shares of the Company's "restricted" Common Stock. As of April 15, 2000, the
Company has sold 580,000 shares resulting in net proceeds of $580,000. The
issuances were offered without general solicitation or advertising to unrelated
accredited investors under Rule 506 of Regulation D and Section 4(2) of the
Securities Act of 1933.
On March 8, 2000, the Company issued 12,500 shares of "restricted" (as that term
is defined under Rule 144 of the Securities Act of 1933) Common Stock to the
Company's securities counsel, in consideration for legal services valued at
$12,500. The issuance was an isolated transaction not involving a public
offering and consequently conducted under an exemption under Section 4(2) of the
Securities Act of 1933.
19
On March 22, 2000, the Company issued 75,000 shares of "restricted" (as that
term is defined under Rule 144 of the Securities Act of 1933) Common Stock to
the Company's securities counsel, in consideration for legal services valued at
$75,000. The issuance was an isolated transaction not involving a public
offering and consequently conducted under an exemption under Section 4(2) of the
Securities Act of 1933.
On May 15, 2000, the Company agreed to vest all of Thomas N. Benjamin, the
Company's former Vice President of Strategic Planning & Analysis's unvested
options (resulting in 500,000 options being vested and to adjust the exercise
price of all 500,000 options to $0.01 per share, resulting in a charge to
compensation expense of approximately $870,000. As a result of the repricing,
the value of these options will be adjusted each reporting period based on the
fair value of the underlying stock at that date.
In June 2000, the Company issued 26,000 shares of "restricted" (as that term is
defined under Rule 144 of the Securities Act of 1933) Common Stock to an
"accredited" individual, in consideration for consulting services valued at
$26,000. The issuance was an isolated transaction not involving a public
offering and consequently conducted under an exemption under Section 4(2) of the
Securities Act of 1933.
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to the security holders for a vote during the period
covered by this report
ITEM 5 - OTHER INFORMATION
On May 15, 2000, Thomas N. Benjamin, the Company's Vice President of Strategic
Planning & Analysis, resigned his position as an officer of the Company but
remained employed by the Company. The Company accepted his resignation as an
officer and agreed to keep all other provisions of Mr. Benjamin's Employment
Offer Letter dated September 3, 1999, in full force and effect.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
27.1 Financial Data Schedule
(B) REPORTS ON FORM 8-K
On March 29, 2000, the Company filed a Report on Form 8-K regarding the
resignation of its then independent accountants Grant Thornton.
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
2TheMart.com, Inc.
Date: June 7, 2000 By: /s/ Steven W. Rebeil
Steven W. Rebeil
Chairman of the Board
20