SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB/A
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002.
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ________________ to ___________________
Commission File Number: 000-29441
EXOTICS.COM, INC.
------------------------------------------------------
(Exact name of Registrant as specified in its Charter)
Nevada 87-0640430
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Suite 411-12000 West Pender Street
Vancouver, B.C. V6E 2S9
(Address of principal executive offices)
604-684-2004
(Registrant's telephone number)
(Former Name, Former Address and Former Fiscal Year, if changed since last
Report)
Check whether the registrant (1) has 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[ ]
As of September 30, 2002, there were 7,809,837 shares of the issuer's common
stock were outstanding.
Transitional Small Business Disclosure Format (check one): Yes[ ] No[X]
1
Table of Contents
Part I Financial Information Page
Item 1. Financial Statements:
Consolidated Balance Sheets ............................................ 3-4
Consolidated Statements of Operations .................................... 5
Consolidated Statements of Cash Flows .................................... 6
Notes to the Consolidated Financial Statements ........................ 7-20
Part II Other Information
Item 1. Legal Proceedings ................................................... 21
Item 2. Changes in Securities ............................................... 21
Item 6. Exhibits and Reports on Form 8-K .................................... 21
Signatures .................................................................. 21
2
The accompanying notes are an integral part of these consolidated financial
statements.
Part I Financial Information
Item 1. Financial Statements:
Exotics.com, Inc.
Consolidated Balance Sheets
(expressed in US dollars)
<table>
<caption>
September 30, December 31,
2002 2001
$ $
(unaudited) (audited)
Assets
Current Assets
Cash 9,584 2,514
Accounts receivable 14,253 27,500
- --------------------------------------------------------------------------------
Total Current Assets 23,837 30,014
Property, Plant and Equipment (Note 4) 10,888 15,889
Website Development Costs (Note 5) 38,080 50,000
- --------------------------------------------------------------------------------
Total Assets 72,805 95,903
================================================================================
Liabilities and Stockholders' Deficit
Current Liabilities
Accounts payable 490,240 882,424
Accrued liabilities 245,081 -
Capitalized leases payable (Note 10) 19,450 19,450
Deferred revenue (Note 6) 25,881 25,881
Note payable (Note 7) 100,000 100,000
Due to related parties (Note 8) 940,705 641,925
Convertible debenture (Note 9) 75,000 -
- --------------------------------------------------------------------------------
Total Current Liabilities 1,896,357 1,669,680
Deferred Revenue (Note 6) 135,873 155,283
- --------------------------------------------------------------------------------
Total Liabilities 2,032,230 1,824,963
- --------------------------------------------------------------------------------
3
Consolidated Balance Sheets Continued
Commitments and Contingencies (Note 10)
Minority Interest (Note 11)
Subsequent Event (Note 15)
Stockholders' Deficit
Common stock, $0.001 par value; 20,000,000 shares
authorized; 7,899,837 and 7,809,837 issued
and outstanding respectively 7,900 7,810
Common stock to be issued; 21,256 shares 21 21
Additional Paid-in Capital 4,303,640 4,263,731
Stock Subscriptions Received 35,000 -
Donated Capital - Imputed Interest (Note 8) 62,700 -
Accumulated Deficit (6,368,686) (6,000,622)
- --------------------------------------------------------------------------------
Total Stockholders' Deficit (1,959,425) (1,729,060)
- --------------------------------------------------------------------------------
Total Liabilities and Stockholders' Deficit 72,805 95,903
================================================================================
</table>
4
Exotics.com, Inc.
Consolidated Statements of Operations
(expressed in US dollars)
(unaudited)
<table>
<caption>
Three Months Ended Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
$ $ $ $
Revenue 103,112 174,119 300,667 548,849
Direct Costs 24,476 62,172 157,334 149,798
- ----------------------------------------------------------------------------------------------------------
Gross Profit 78,636 111,947 143,333 399,051
- ----------------------------------------------------------------------------------------------------------
Operating Expenses
Bad debts 29,336 - 90,334 -
General and administrative 12,126 47,863 42,722 335,346
Imputed interest (Note 8) 23,600 - 62,700 -
Interest 9,714 18,057 20,987 47,065
Interest and penalties on convertible debenture 39,158 - 42,705 -
Professional and other consulting fees (Note 8) 72,847 59,475 174,698 2,491,778
Salaries and employee benefits 25,538 (34,351) 69,162 123,956
Travel and entertainment 2,465 39,889 8,089 181,299
- ----------------------------------------------------------------------------------------------------------
Total Operating Expenses 214,784 130,933 511,397 3,179,444
- ----------------------------------------------------------------------------------------------------------
Net Loss for the Period (136,148) (18,986) (368,064) (2,780,393)
==========================================================================================================
Net Loss Per Share - Basic (0.02) (0.01) (0.05) (1.39)
==========================================================================================================
Weighted Average Shares Outstanding 7,900,000 2,006,000 7,895,000 2,006,000
==========================================================================================================
(Diluted loss per share has not been presented as the result is anti-dilutive)
</table>
5
Exotics.com, Inc.
Consolidated Statements of Cash Flows
(expressed in US dollars)
(unaudited)
<table>
<caption>
Nine Months Ended
September 30,
2002 2001
$ $
Cash Flows to Operating Activities
Net loss (368,064) (2,780,394)
Adjustments to reconcile net loss to cash
Amortization 19,124 77,322
Imputed interest 62,700 -
Stock based compensation - 2,276,500
Changes in non-cash working capital items
(Increase) decrease in accounts receivable 13,247 (54,706)
Increase (decrease) in accounts payable and accrued liabilities (107,105) 275,374
Decrease in deferred revenue (19,410) (19,410)
- ---------------------------------------------------------------------------------------------
Net Cash Used by Operating Activities (399,508) (225,314)
- ---------------------------------------------------------------------------------------------
Cash Flows From Financing Activities
Net increase in due to related parties 298,780 209,841
Issuance of debenture 75,000 -
Stock subscriptions received 35,000 -
- ---------------------------------------------------------------------------------------------
Net Cash Provided by Financing Activities 408,780 209,841
- ---------------------------------------------------------------------------------------------
Cash Flows to Investing Activities
Purchase of property, plant and equipment (1,477) -
Website development costs (725) (23,579)
- ---------------------------------------------------------------------------------------------
Net Cash Used by Investing Activities (2,202) (23,579)
- ---------------------------------------------------------------------------------------------
Increase (Decrease) in Cash 7,070 (39,052)
Cash (Deficiency) - Beginning of Period 2,514 (50,328)
- ---------------------------------------------------------------------------------------------
Cash (Deficiency) - End of Period 9,584 (89,380)
=============================================================================================
Non-cash Financing Activities
Shares issued to settle accounts payable 40,000 329,426
=============================================================================================
Supplemental Disclosures
Interest paid 3,304 -
Income tax paid - -
</table>
6
Exotics.com, Inc.
Notes to the Consolidated Financial Statements
(expressed in US dollars)
1. Nature of Operations and Continuance of Business
Exotics.com, Inc. (the "Company"), formerly known as Hard Rock Mines, Inc.
("Hardrock") was organized under the laws of the State of Nevada on June
14, 1982 and its subsidiary, Exotics.com, Inc. ("Exotics Delaware"), was
organized under the laws of the State of Delaware on May 25, 1999 (owned
90.29% by the Company).
On February 13, 2001, the shareholders of Exotics Acquisition Corp.
("Acquisition"), an inactive company, organized under the laws of the State
of Nevada on February 13, 2001, acquired 7,567,410 shares or 95.15% of
Hardrock's issued and outstanding common stock held by certain
shareholders. Through this transaction, there was a change in control of
Hardrock.
On July 10, 2001, Hardrock finalized the Share Exchange Agreement with
Exotics Delaware whereby Hardrock acquired 10,392,462 shares or
approximately 90.15% of Exotics Delaware's outstanding common stock for the
issuance of 1,385,662 (6,928,308 pre reverse stock split) shares of
Hardrock's common stock (see Note 3). This Share Purchase Agreement was
entered into in March 2001, but was not finalized until the closing on July
10, 2001.
As discussed in Note 3, 159,420 shares of Exotics Delaware stock were never
issued by Exotics Delaware. These shares will be issued and subsequently
exchanged for 21,256 or 106,280 pre reverse stock split shares of the
Company's common stock.
As a result of this transaction, the former shareholders of Exotics
Delaware acquired or exercised control over a majority of the shares of
Hardrock. Accordingly, the transaction was treated for accounting purposes
as a recapitalization of Exotics Delaware and accounted for as a reverse
acquisition; therefore, these consolidated financial statements represent a
continuation of Exotics Delaware from inception.
The Company has one operating business segment, an adult entertainment and
exotic-related service delivered over the Internet. The Company is
developing a website which shall provide luxury goods and services over the
Internet specifically tailored to affluent men and women. Its selective
categories will include luxury automobiles, estates, yachts, exotic travel,
five-star restaurants, premier golf courses and fine gifts, wines and
accessories.
The accompanying consolidated financial statements have been prepared in
conformity with accounting principles generally accepted in the United
States, which contemplate continuation of the Company as a going concern.
As at September 30, 2002, the Company has a working capital deficit of
$1,873,000 and has incurred substantial losses since inception. The Company
is also the subject of a formal review by the Securities and Exchange
Commission and, subsequent to March 31, 2002, the Company's stock was
removed from Nasdaq's Over-The-Counter Bulletin Board exchange and is
currently being traded on the Pink Sheets.
7
In view of the matters described in the preceding paragraph, recoverability
of a major portion of the recorded asset amounts shown in the accompanying
consolidated balance sheet is dependent upon continued operations of the
Company, which, in turn, is dependent upon the Company's ability to
continue to raise capital and generate positive cash flows from operations.
If the Company is unable to reclaim certain URL's improperly registered in
the name of a former officer and director of the Company or obtain
significant additional financing, the Company will be forced to scale back
operations, which could have an adverse effect on the Company's financial
condition and results of operations. These factors raise substantial doubt
about the Company's ability to continue as a going concern. The
consolidated financial statements do not include any adjustments relating
to the recoverability and classification of recorded asset amounts or
amounts and classifications of liabilities that might be necessary should
the Company be unable to continue its existence.
Management plans to take, or has taken, the following steps that it
believes will be sufficient to provide the Company with the ability to
continue operations in the future:
i) The Company is seeking significant additional equity or debt
financing. There can be no assurances that sufficient financing will
be available on terms acceptable to the Company.
ii) The Company is currently co-operating with the SEC regarding their
review.
iii) The Company is also seeking out acquisition opportunities that would
be complimentary to its business and that will provide common
synergies for the future.
Management believes that actions presently being taken to revise the
Company's operating and financial requirements provide the opportunity for
the Company to continue as a going concern.
2. Summary of Significant Accounting Policies
a) Basis of Presentation
These consolidated financial statements represent the consolidation of
the Company and its two subsidiaries Exotics.com, Inc. and Exotics
USA, LLC. In order to facilitate the comparison of financial
information, certain amounts reported in prior periods have been
reclassified to conform with the current period presentation.
b) Fiscal Year
The Company's fiscal year end is December 31.
c) Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with
original maturities of three months or less to be cash equivalents.
d) Concentration of Credit Risk
The Company places its cash in what it believes to be credit-worthy
financial institutions. However, cash balances may have exceeded FDIC
8
insured levels at various times during the year. The Company has not
experienced any losses in such accounts and believes it is not exposed
to any significant credit risk on cash and cash equivalents.
e) Property, Plant and Equipment
Property, plant and equipment is stated at cost. Amortization is
computed using the straight-line method based upon the estimated
useful lives of the various classes of assets.
f) Website Development Costs
Website development costs are stated at cost. Amortization is computed
using the straight-line method over a period of five years. Should
events or circumstances occur which bring into question the realizable
value or impairment of the related website development costs, the
Company will evaluate the remaining useful life and balance of website
development costs and make adjustments, if required. The Company's
principal consideration in determining impairment includes the
strategic benefit to the Company of the particular assets as measured
by undiscounted current and expected future operating income of that
specified group of assets and expected undiscounted future cash flows.
The Company determined that an impairment of its website development
costs had occurred and recognized an impairment loss of $241,593 in
fiscal 2001.
g) Long-Lived Assets
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed of," requires that long-lived
assets be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. The Company determined that an impairment loss needed to
be recognized as at December 31, 2001 relating to website development
costs. The Company has adopted SFAS No. 144, which replaces SFAS No.
121, on January 1, 2002. See Note 2(r).
h) Deferred Revenue
Deferred license fee revenue represents the amount paid by licensees
for the exclusive right to sell local adult related advertising
located within a certain agreed upon territory. The deferred license
fee revenue is being amortized over the life of the license
agreements, which are ten years in duration.
i) Offering Costs
Offering costs consist primarily of commissions paid relating to
additional equity financing. These costs are charged against the
proceeds of the sale of common stock in the periods in which they
occur.
j) Revenue Recognition
The Company's main source of revenue is derived from monthly license
fees from license contracts with licensees for the use of the Exotics
website to advertise adult related services within the licensee's
territory. An initial fee is charged to each licensee and deferred
over the license contract. Monthly license fees, which consist
9
primarily of website hosting and content changes, are recognized in
the month the fees and services are performed. Revenue from national
and pop-up banner advertising is recognized in the period the
advertising is displayed.
k) Comprehensive Income
SFAS No. 130, "Reporting Comprehensive Income," establishes standards
for the reporting and display of comprehensive income and its
components in the financial statements. As at September 30, 2002 and
2001, the Company has no items that represent comprehensive income
and, therefore, has not included a schedule of comprehensive income in
the consolidated financial statements.
l) Segment Disclosure
SFAS No. 131, "Disclosure about Segments of an Enterprise and Related
Information," was issued, which changes the way public companies
report information about segments. SFAS No. 131, which is based on the
selected segment information, requires quarterly and entity-wide
disclosures about products and services, major customers, and the
material countries in which the entity holds assets and reports
revenues. The Company has determined that there is only one reportable
segment as at September 30, 2002 and 2001.
m) Advertising Costs
Advertising costs are charged to operations as incurred and included
in other, general and administrative expenses. For the nine months
ended September 30, 2002 and 2001, advertising expense amounted to
$(5,871) and $10,400, respectively.
n) Stock-Based Compensation
SFAS No. 123, "Accounting for Stock-Based Compensation," encourages,
but does not require, companies to record compensation cost for
stock-based employee compensation plans at fair value. The Company has
chosen to continue to account for stock-based compensation using the
intrinsic value method prescribed in Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees," and
related Interpretations. Accordingly, compensation cost for stock
options is measured as the excess, if any, of the quoted market price
of the Company's stock at the date of the grant over the amount an
employee must pay to acquire the stock. For equity instruments issued
to non-employees, compensation cost is accounted for based on the fair
value of the consideration received or the fair value of the equity
instruments issued, whichever is more reliably measurable.
Compensation expense is recognized in the consolidated financial
statements for equity instruments granted to non-employees in the
period in which the consideration is obtained from the non-employee.
o) Basic and Diluted Per Share Information
SFAS No. 128, "Earnings Per Share," requires presentation of basic
loss per share ("Basic LPS") and diluted loss per share ("Diluted
LPS"). The computation of basic loss per share is computed by dividing
loss available to common stockholders by the weighted average number
of outstanding common shares during the period. Diluted loss per share
gives effect to all dilutive potential common shares outstanding
10
during the period. The computation of diluted LPS does not assume
conversion, exercise or contingent exercise of securities that would
have an anti-dilutive effect on losses. As at September 30, 2002, the
Company has 135,387 potentially dilutive common shares that are not
included in diluted LPS (see Notes 13 and 14).
p) Financial Instruments
The carrying value of cash and cash equivalents, accounts receivable,
accounts payable, accrued liabilities, capitalized leases payable,
note payable, related party payables, and convertible debenture
approximate fair value due to the relatively short maturity of these
instruments.
q) Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management
to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenue and expenses during the periods presented. Actual
results could differ from those estimates.
r) Recent Accounting Pronouncements
On June 29, 2001, SFAS No. 141, "Business Combinations," was approved
by the Financial Accounting Standards Board ("FASB"). SFAS No. 141
requires that the purchase method of accounting be used for all
business combinations initiated after June 30, 2001. Goodwill and
certain intangible assets will remain on the balance sheet and not be
amortized. On an annual basis, and when there is reason to suspect
that their values have been diminished or impaired, these assets must
be tested for impairment, and write-downs may be necessary. The
Company implemented SFAS No. 141 on July 1, 2001 and its impact is not
expected to be material on its financial position or results of
operations.
On June 29, 2001, SFAS No. 142, "Goodwill and Other Intangible
Assets," was approved by FASB. SFAS No. 142 changes the accounting for
goodwill from an amortization method to an impairment-only approach.
SFAS No. 142 is effective for fiscal years beginning after December
15, 2001. Amortization of goodwill, including goodwill recorded in
past business combinations, will cease upon adoption of this
statement. The Company adopted SFAS No. 142 on January 1, 2002 and its
impact is not expected to have a material effect on its financial
position or results of operations.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligation." SFAS No. 143 is effective for fiscal years
beginning after June 15, 2002, and will require companies to record a
liability for asset retirement obligations in the period in which they
are incurred, which typically could be upon completion or shortly
thereafter. The FASB decided to limit the scope to legal obligations
and the liability will be recorded at fair value. The effect of
adoption of this standard on the Company's results of operations and
financial positions is being evaluated.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 is
effective for fiscal years beginning after December 15, 2001. It
11
provides a single accounting model for long-lived assets to be
disposed of and replaces SFAS No. 121 "Accounting for the Impairment
of Long-Lived Assets and Long-Lived Assets to Be Disposed Of." The
Company adopted SFAS No. 144 on January 1, 2002. The effect of
adoption of this standard on the Company's results of operations and
financial position is not expected to be material.
In June, 2002, FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities". The provisions of this
Statement are effective for exit or disposal activities that are
initiated after December 31, 2002, with early application encouraged.
This Statement addresses financial accounting and reporting for costs
associated with exit or disposal activities and nullifies Emerging
Issues Task Force (EITF) Issue No. 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)". This
Statement requires that a liability for a cost associated with an exit
or disposal activity be recognized when the liability is incurred. The
Company will adopt SFAS No. 146 on January 1, 2003. The effect of
adoption of this standard on the Company's results of operations and
financial position is being evaluated.
FASB has also issued SFAS No. 145 and 147 but they will not have any
relationship to the operations of the Company therefore a description
of each and their respective impact on the Company's operations have
not been disclosed.
s) Interim Financial Statements
These interim unaudited financial statements have been prepared on the
same basis as the annual financial statements and in the opinion of
management, reflect all adjustments, which include only normal
recurring adjustments, necessary to present fairly the Company's
financial position, results of operations and cash flows for the
periods shown. The results of operations for such periods are not
necessarily indicative of the results expected for a full year or for
any future period.
3. Corporate Reorganization and Merger
Pursuant to a Share Exchange Agreement (the "Agreement"), Exotics.com, Inc.
(formerly Hardrock Mines, Inc.), a Nevada corporation was to acquire up to
100% of all the outstanding shares of common stock of Exotics Delaware.
Through the Share Purchase Agreement, Hardrock agreed to issue up to an
aggregate of 8,241,762 pre reverse stock split shares of its common stock
for shares of capital stock of Exotics Delaware at a ratio of two shares of
Hardrock's common stock for three shares of Exotics Delaware's common
stock. This Share Purchase Agreement was entered into during March 2001,
but was not finalized until the closing on July 10, 2001, at which time a
total of 90.15% of the shares of Exotics Delaware were purchased by the
issuance of 1,385,661 (6,928,308 pre reverse stock split shares) of
Hardrock's common stock.
Subsequently, Exotics Delaware discovered that 159,420 shares of its common
stock were never issued. Per an amended stock subscription agreement,
166,667 shares of common stock was subscribed at $1.80 per share and
amended to approximately $0.93 per share. Therefore, the Company has common
stock to be issued totalling 21,256 (106,280 pre-reverse stock split)
shares relating to the Agreement.
12
As a result of this transaction, the former shareholders of Exotics
Delaware acquired or exercised control over a majority of the shares of
Hardrock. Accordingly, the transaction has been treated for accounting
purposes as a recapitalization of Exotics Delaware and accounted for in the
consolidated financial statements as a reverse acquisition; therefore,
these consolidated financial statements represent a continuation of Exotics
Delaware, not Hardrock. Because the historical financial statements are
presented in this manner, proforma financial statements are not required.
In accounting for this transaction:
i) Exotics Delaware is deemed to be the purchaser and surviving company
for accounting purposes. Accordingly, its net assets are included in
the balance sheet at their historical book values.
ii) Control of the net assets and business of Hardrock was acquired
effective on July 10, 2001. This transaction has been accounted for as
a purchase of the net assets and liabilities of Hardrock by Exotics
Delaware at their net book value, which consisted of accrued
miscellaneous expenses totalling $1,700.
4. Property, Plant and Equipment
September 30, December 31,
2002 2001
$ $
(unaudited) (audited)
Computer and other equipment 32,400 30,923
Less: Accumulated amortization (21,512) (15,034)
---------------------------------------------------------------------------
Net carrying value 10,888 15,889
---------------------------------------------------------------------------
Amortization expense for the nine months ended September 30, 2002 and the
year ended December 31, 2001 was $6,478 and $8,052, respectively.
As at September 30, 2002, the Company has $28,955 of equipment at cost
under capital leases with a net carrying value of $8,313 (as at December
31, 2001 - $21,958).
5. Website Development Costs
Website development costs consist of costs related to the design and
creation of a website, and configuration of its hardware and software. The
Company capitalized these costs in accordance with Financial Accounting
Standards Board EITF 00-2. Total website development costs are as follows:
September 30, December 31,
2002 2001
$ $
(unaudited) (audited)
Website Development Costs 50,725 497,231
Less: Accumulated Amortization (12,645) (205,638)
---------------------------------------------------------------------------
38,080 291,593
Impairment Loss - (241,593)
---------------------------------------------------------------------------
Website Development Costs, net 38,080 50,000
---------------------------------------------------------------------------
13
Amortization expense for the nine months ended September 30, 2002 and the
year ended December 31, 2001 was $12,645 and $97,150, respectively.
As at December 31, 2001, the Company determined an impairment of the
website development costs had occurred. As discussed in Note 1, the Company
recognized an impairment expense of $241,593 in fiscal 2001.
6. Deferred Revenue
Deferred revenue represents deferred license fee revenue consisting of the
amounts paid by the licensee for the exclusive right to sell local adult
related advertising located within a certain agreed upon territory.
As at December 31, 1999, the Company collected license fees relating to
these rights totalling $258,805. The license fee revenue is being amortized
over the life of the license agreements, which are ten years in duration.
The Company did not enter into any new license agreements subsequent to
December 31, 1999. As at September 30, 2002 and December 31, 2001, the
Company had deferred revenue remaining totalling $161,754 and $181,164,
respectively, of which $25,881 was current.
7. Note Payable
As at December 31, 1999, the Company had a note payable to E. Scott Crist
("Crist") totalling $100,000 bearing interest at the rate of 12% per annum,
due on April 1, 2000. As consideration for the note, the Company issued
warrants to purchase 13,333 shares of the Company's Common Stock for a
purchase price of $3.08 per share (as restated for the reverse merger and
reverse stock split).
On April 1, 2000, the Company entered into an assignment agreement with
Crist and Venture Bridge L.P. ("Venture") whereby the note payable to Crist
was assigned to Venture and, concurrently, Venture agreed to an extension
of the note for sixty days to June 1, 2000. As additional consideration for
the assignment of the note and the extension of the payment terms of the
original note, Venture received warrants to purchase 13,333 shares of the
Company's common stock exercisable at $3.08 per warrant (as restated for
the reverse merger and reverse stock split) (see Note 13).
On June 7, 2000, the Company entered into an agreement with Venture to
extend the note for another sixty days to August 1, 2000. As consideration
for the extension, Venture received additional warrants to purchase another
13,333 shares of the Company's common stock exercisable at $3.08 per
warrant (as restated for the reverse merger and reverse stock split).
The Company also agreed to make a payment of $20,000 on, or prior to, June
15, 2000.
Subsequently, the Company agreed to modify the terms and issue additional
warrants to purchase another 6,667 shares of the Company's common stock,
20,000 shares in total, exercisable at $3.08 per warrant (as restated for
the reverse merger and reverse stock split).
The note was payable in full, including interest and principal, on August
1, 2000. As at September 30, 2002, this note is in default. The Company has
accrued interest totalling $28,433 as at September 30, 2002.
14
8. Related Party Transactions/Balances
The Company has related party transactions with several officers, directors
and other related parties.
a) The following summarizes related party payables:
September 30, December 31,
2002 2001
$ $
(unaudited) (audited)
i) Due to stockholder (former officer) 150,000 150,000
ii) Due to former stockholder 149,700 149,700
iii) Due to stockholder (former officer) 322,651 256,754
iv) St. George Capital Corp. ("St. George") 186,105 59,714
v) Other 132,249 25,757
-----------------------------------------------------------------------
Total Due to Related Parties 940,705 641,925
-----------------------------------------------------------------------
i) The amount due to a stockholder and former officer represents
accrued consulting fees. As at December 31, 2001, the Company
converted this payable to a note bearing interest at the rate of
7% per annum, due upon demand.
ii) The amount due to a former stockholder represents accrued
consulting fees. The amount is non-interest bearing and payable
upon demand. See Note 8(e) for imputed interest.
iii) The amount due to a stockholder and former officer of the Company
relates to consulting fees and cash advances. These amounts are
non-interest bearing and due upon demand. See Note 8(e) for
imputed interest.
iv) The amount due to St. George, a company controlled by a director,
relates to various consulting and commissions amounts, which are
non-interest bearing and due upon demand. See Note 8(e) for
imputed interest.
v) The amounts due to stockholders and officers of the Company
relate to consulting fees and advances which are non-interest
bearing and due upon demand. See Note 8(e) for imputed interest.
The following summarizes related party transactions:
b) Related Licensees
i) LA Exotics is 25 1/2% owned by Gary Thomas who is a stockholder
in the Company. Mr. Thomas was the CEO of Exotics Delaware prior
to September 15, 2001.
ii) New York and London Exotics are owned by a member of Red Rock,
LLC ("Red Rock") a shareholder of Exotics Delaware.
c) Other Related Party/Transactions
EAWN is a company that is partially owned by St. George. On September
28, 2001, St. George purchased the 50% interest in EAWN held by the
15
Company. The transaction was satisfied by offsetting $50,000 of debt,
which was due from the Company to St. George pursuant to a Master
Promissory Note dated May 1, 2000. The Company had no cost basis
control or revenue from EAWN.
d) Payments to Related Parties
During the nine months ended September 30, 2002, the Company made
payments to St. George totalling $135,000 for consulting services
performed (see Note 10 for Consulting Services Agreement).
e) Imputed Interest
Imputed interest of $62,700 calculated at a rate of 12% per annum on
amounts owing to related parties, was charged to operations during the
nine months ended September 30, 2002 and treated as donated capital in
stockholders' deficit.
9. Convertible Debenture
The Company issued a two-year convertible debenture with a face value of
$75,000 bearing interest at 9.75% per annum, which matures on February 22,
2004. After a Registration Statement, to be filed with the SEC, is declared
effective the debenture holder can convert the debenture into common stock,
either in whole or in part, up to the full principal amount (in increments
of $1,000) plus any accrued interest divided by the conversion price. The
conversion price shall be equal to the lesser of 125% of the market price
on the trading day immediately prior to February 22, 2002 or 80% of the
lowest market price during the 15 trading days prior to the holder's
election to convert, but not less than $0.20. The Company also issued a
warrant to purchase common stock expiring on February 22, 2005. The
exercise price of the warrant shall be the lesser of 125% of the market
price on the trading day immediately prior to the closing date or 80% of
the lowest market price during the 15 trading days prior to the holder's
election to exercise, but not less than $0.20.
The Registration Statement for the convertible debenture had not been
declared effective by the SEC by the deadline, which was June 22, 2002. On
September 10, 2002, the debenture holder exercised its right to accelerate
the debenture and demand repayment of 140% of the principal amount of the
debenture plus unpaid interest in cash. In addition, the Company is
obligated to immediately issue the debenture holder 30,000 shares of common
stock and pay $10,000 for each 30 day period, or portion thereof, during
which the principal amount plus unpaid interest remains unpaid. The monthly
payment amount increases to $15,000 for each 30-day period, or portion
thereof, after the first 90-day period. As at the date of these
consolidated financial statements, the Company has not made any repayments
and $36,667 in penalties and $1,652 in interest have been set up in accrued
liabilities. The Company has not yet issued 30,000 shares of common stock
to the debenture holder.
a) The Company is obligated under capital leases totalling $19,450 as at
September 30, 2002; the payment terms are in default.
b) The Company entered into an agreement with QL Media Inc. ("QL Media")
on March 1, 2001. QL Media was engaged to provide the Company with
consulting services including, but not limited to, providing
information, evaluation, and analysis with regard to the online
16
marketing of World Wide Web portions of the Internet and consulting
with the Company related to increasing traffic to the Company's
network of websites. The Company, as consideration, issued QL Media
500,000 shares of its common stock. On January 2, 2002, the Company
contacted its attorneys to have the shares cancelled for failure to
deliver any of the services under the contract. These shares have not
been shown as issued or outstanding in these consolidated financial
statements.
c) The Company was party to one lawsuit. The Company was served on
November 20, 2001 by LA Exotics, LLC, a Georgia limited company ("LA
Exotics"), Andrew Maltin, an ex-director of Exotics Delaware and a
current LA Exotics shareholder, and Lea Hastings aka Lea Conkey, an
individual and a current LA Exotics shareholder. The lawsuit named the
Company as a co-defendant together with Gary Thomas aka Gary Vojtesak,
an ex-director of Exotics Delaware and an LA Exotics shareholder, and
Klaudia Jesmanowicz, an employee of Exotics Delaware. Among other
things, the plaintiffs alleged that the Company together with Thomas
and Jesmanowicz usurped LA Exotics's opportunities for the benefit of
Thomas and the Company; caused LA Exotics to pay or reimburse Thomas
for expenses solely related to the business of the Company; caused LA
Exotics to pay money directly to the Company's creditors; created
websites which directly compete with LA Exotics, LLC; and interfered
with the day to day operations of LA Exotics by intimidation and
harassment of its employees. The Company vehemently denied any
wrongdoing. The plaintiffs sought $59,889 in specific damages, a
temporary and permanent restraining order preventing the defendants
from allegedly interfering in the business of LA Exotics, and
accounting of all LA Exotics monies wrongfully diverted, converted and
appropriated by the defendants, and to have such monies held and
retained as trustees of a constructive trust for the benefit of the
plaintiffs and accompanying damages in such sum as may be found due
and owing to the plaintiffs, and finally costs.
On June 15, 2002, the plaintiff dropped the lawsuit against the
Company.
d) The Company has satisfactory title to all owned assets, (it believes
it also has the title to its URL's, which have been improperly
registered in the name of an Ex Officer and Director of the
corporation. On February 10, 2003 the Company filed a lawsuit to
regain possession of its URL's and there are no liens or encumbrances
on such assets nor has any asset been pledged.
e) The Company is subject to a formal inquiry from the United States
Securities and Exchange Commission ("SEC"). The Company is in the
process of cooperating with this inquiry.
f) The Company entered into a consulting services agreement dated March
16, 2001 with St. George. St. George agrees to provide consulting
services and all secretarial, phone and copying services to the
Company. In consideration, the Company will pay a fee of $15,000
through March 15, 2003.
11. Minority Interest
Minority interest represents a 9.85% ownership interest held by others in
the Company's subsidiary, Exotics Delaware. As at September 30, 2002 and
December 31, 2001, no minority adjustment was made due to losses in excess
of the minority stockholders' basis.
17
12. Common Stock
a) Issuance of common stock for legal services
On January 17, 2002, the Company issued 90,000 shares of its common
stock at a fair value of $0.45 per share for legal services provided
to the Company.
b) Common stock to be issued
As at December 31, 2001, Exotics Delaware discovered that 159,420
shares of its common stock were never issued. Per an amended stock
subscription agreement during the year ended December 31, 2000,
166,667 shares of their common stock was subscribed for at $1.80 per
share and amended to approximately $0.93 per share. Therefore, the
Company has common stock to be issued totalling 21,256 (106,280
pre-reverse stock split) shares relating to the Share Exchange
Agreement.
c) Reverse stock split
On November 8, 2001, the Company announced the approval of a reverse
stock split effective at the opening of business on November 8, 2001,
whereby one new share of common stock of the Company was issued in
exchange for every five outstanding shares of common stock. The
Exotics board approved the reverse split under Nevada law, reducing
the Company's authorized common stock five-fold from 100 million to 20
million shares. The Company's stock symbol effective November 8, 2001,
changed from EXTS to EXIC.
d) Issuances of common stock relating to reverse merger
As discussed in Notes 1 and 3, the Company issued 1,385,661 (6,928,308
pre reverse stock split) shares of its common stock relating to the
agreement and plan of merger. The Company also has common stock to be
issued totalling 21,256 (106,280 pre-reverse stock split) shares
relating to the merger.
e) Issuances of common stock for cash
i) During the year ended December 31, 2001, the Company issued
131,775 (658,873 pre-reverse stock split) shares of common stock
totalling $329,436.
ii) During the year ended December 31, 2000, the Exotics Delaware
issued 557,663 (74,355 post-reverse split) merger and stock split
shares of its common stock for $515,750. As at December 31, 2001,
these shares are shown as follows: 53,099 shares of common stock
issued and 21,256 shares of common stock to be issued, giving
effect to the reverse stock split and three for two exchange of
Hardrock's common stock.
13. Stock Warrants
Warrants consisted of the following as at September 30, 2002 and December
31, 2001, and have been adjusted to reflect the 3 for 2 share exchange
Agreement between Exotics Delaware and Hardrock and the 5 for 1 reverse
stock split (see Notes 1, 3 and 12).
18
September 30, December 31,
2002 2001
$ $
(unaudited) (audited)
E. Scott Crist 13,333 13,333
La Jolla Cove Investors, Inc. 1 -
Venture Bridge L.P. 33,333 33,333
---------------------------------------------------------------------------
Total Outstanding Warrants 46,667 46,666
---------------------------------------------------------------------------
The La Jolla warrant expires on February 22, 2005 while the remaining
warrants expire on June 7, 2010.
14. Stock Options
a) Stock Option Agreements
During 1999 the Company entered into two option agreements. One with a
shareholder and the Company's former Chief Executive Officer, and
another with a shareholder and former officer of the Company to issue
options to purchase 54,054 shares of the Company's common stock (as
adjusted for the reverse merger and reverse stock split), as
consideration for extending payment terms of unpaid services. The
options vested immediately and are exercisable at $2.78 per share, any
time on or prior to September 8, 2006. During fiscal 2001, 54,054 of
the shareholder and former officer's options were cancelled.
b) Stock Incentive Stock Option Plan
During 2000, the Company adopted a Stock Incentive Stock Option Plan
(the "Plan"). Under terms of the Plan, selected employees,
non-employee members of the Board or the Board of Directors, Parent or
Subsidiary and consultants and other independent advisors in the
service of the Company may be granted options to purchase the
Company's common stock at terms specified in a grant notice. Options
become exercisable in one or more instalments as specified in the
grant notice, and have a maximum term of ten years.
Exotics Delaware's incentive stock option plan provides for the
acceleration of exerciseability of the options upon the occurrence of
certain events relating to a change in control, merger, sale of assets
or liquidation of the Company (Accelerated Events) (see Note 12).
As at September 30, 2002 and December 31, 2001, Exotics Delaware had
granted 34,666 and 36,000, respectively, options under this plan, (as
adjusted for the reverse merger and reverse stock split) and these
options have an exercise price in excess of the fair value of the
common stock, as determined by a private placement memo at the time of
issuance. These options vest over a period of three years.
All stock options issued to employees have an exercise price not less
than the fair market value of the Company's common stock on the date
of grant. In accordance with accounting for such options utilizing the
intrinsic value method, there is no related compensation expense
19
recorded in the Company's financial statements for the nine months
ended September 30, 2002 and 2001. Had compensation cost for
stock-based compensation been recorded based on the fair value of the
options at the grant dates consistent with the method of SFAS No. 123,
the Company's net loss and net loss per share for the nine months
ended September 30, 2002 and 2001 would have been as follows:
September 30,
2002 2001
$ $
(unaudited) (unaudited)
Net loss
As reported (368,064) (2,780,393)
Proforma (406,290) (2,811,722)
Basic net loss per share
As reported (0.05) (1.39)
Proforma (0.05) (1.40)
The weighted average option price and remaining life is as follows:
<table>
<caption>
Weighted Weighted Average
Shares Average Remaining Life
Under Option of Options
Option Price (Months)
# $
Balance, December 31, 2001 (audited) 90,054 5.75 71
--------------
Granted - -
Exercised - -
Cancelled (1,334) -
Lapsed - -
---------------
Balance, September 30, 2002 (unaudited) 88,720 5.75 62
--------------- ----------- --------------
</table>
The fair value of option grants is estimated as of the date of grant utilizing
the Black-Scholes model.
15. Subsequent Event
On February 10, 2003, the Company initiated a lawsuit against Andrew
Maltin, a former director and director of the Company, to regain possession
of its URL's improperly registered in the name of Andrew Maltin.
20
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits - Exhibit 99.1 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
No Form 8-K was filed during the reporting period
SIGNATURES
Pursuant to 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.
Dated: March 20, 2003
EXOTICS.COM, INC.
By: /s/ Firoz Jinnah
- ---------------------
Firoz Jinnah
President
Exhibit 99.1 CERTIFICATE PURSUANT TO
THE SECURITIES EXCHANGE ACT OF 1934,
RULES 13a-14 AND 15d-14
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Firoz Jinnah, Chief Executive Officer of Exotics.com Inc., certify that:
(1) I have reviewed the report on Form 10-QSB of Exotics.com Inc.;
(2) Based on my knowledge, this quarterly 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 quarterly report;
(3) Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
Dated: March 20, 2003
/s/ Firoz Jinnah
- ----------------
Firoz Jinnah
President
21