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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _______________ TO ___________________.
COMMISSION FILE NUMBER: 000-25129
MAREX.COM, INC.
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(Exact name of registrant as specified in its charter)
FLORIDA 65-0354269
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2701 SOUTH BAYSHORE DRIVE, 5TH FLOOR
MIAMI, FL 33133
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(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (305) 285-2003
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 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 [ ]
The number of shares outstanding of the registrant's Common Stock as of November
3, 2000 was 7,339,780.
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MAREX.COM, INC.
TABLE OF CONTENTS
<TABLE>
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PAGE
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of September 30, 2000
and December 31, 1999............................................................. 2
Condensed Consolidated Statements of Operations for the three months
and nine months ended September 30, 2000 and 1999................................. 3
Condensed Consolidated Statements of Cash Flows for the nine months
ended September 30, 2000 and 1999................................................. 4
Notes to Condensed Consolidated Financial Statements.............................. 5
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................................. 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk........................ 17
PART II - OTHER INFORMATION
Item 1. Legal Proceedings................................................................. 17
Item 2. Changes in Securities and Use of Proceeds......................................... 17
Item 3. Defaults Upon Senior Securities................................................... 18
Item 4. Submission of Matters to a Vote of Security Holders............................... 18
Item 5. Other Information................................................................. 18
Item 6. Exhibits and Reports on Form 8-K.................................................. 19
Signatures........................................................................ 20
</TABLE>
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MAREX.COM, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
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(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 27,296,083 $ 3,434,036
Accounts receivable 5,755 --
Prepaid expenses and other current assets 1,152,955 70,602
Loan to shareholder -- 22,200
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Total current assets 28,454,793 3,526,838
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Property and equipment, net 2,114,796 692,335
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Other assets:
Trademark, net 10,833 23,021
Software development costs, net 6,530,459 71,668
Deposits 43,498 1,596
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Total other assets 6,584,790 96,285
------------ ------------
Total assets $ 37,154,379 $ 4,315,458
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Capital lease obligations $ 93,978 $ 6,845
Accounts payable and accrued expenses 6,044,480 534,552
Customer deposits 58,753 63,223
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Total current liabilities 6,197,211 604,620
Long-term liabilities:
Capital lease obligations, net of current portion 174,458 6,734
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Total liabilities 6,371,669 611,354
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Shareholders' equity:
Preferred Stock, par value $.01 per share, 1,000,000 shares
authorized, 420,000 and 304,693 shares of Series A1
Convertible Preferred Stock issued and outstanding as
of September 30, 2000, respectively, none issued
at December 31, 1999 30,469,300 --
Common Stock, par value $.01 per share,
25,000,000 shares authorized, 7,337,080 and
6,396,806 shares issued and outstanding as
of September 30, 2000 and December 31, 1999, respectively 73,371 63,968
Additional paid-in capital 42,574,753 9,530,079
Accumulated deficit (42,334,714) (5,889,943)
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Total shareholders' equity 30,782,710 3,704,104
------------ ------------
Total liabilities and shareholders' equity $ 37,154,379 $ 4,315,458
============ ============
</TABLE>
See Notes to Condensed Consolidated Financial Statements
2
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MAREX.COM, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------- -------------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues $ 6,856 $ 2,112 $ 11,468 $ 4,573
------------ ------------ ------------ ------------
Operating expenses:
Product development 2,758,838 388,419 5,923,540 578,153
Selling and marketing 2,301,493 219,022 5,081,093 661,794
General and administrative 1,342,353 186,195 3,986,904 776,348
Stock-based compensation 120,013 -- 727,906 --
Fair value of warrants -- -- 21,746,581 --
------------ ------------ ------------ ------------
Total operating expenses 6,522,697 793,636 37,466,024 2,016,295
------------ ------------ ------------ ------------
Loss from operations (6,515,841) (791,524) (37,454,556) (2,011,722)
------------ ------------ ------------ ------------
Other income (expense):
Interest income 486,246 51,834 1,021,620 61,844
Interest expense (2,495) (245) (5,322) (6,297)
Other (3,306) -- (6,513) --
------------ ------------ ------------ ------------
Total other income 480,445 51,589 1,009,785 55,547
------------ ------------ ------------ ------------
Loss from continuing operations (6,035,396) (739,935) (36,444,771) (1,956,175)
------------ ------------ ------------ ------------
Discontinued operations:
Loss from discontinued operations -- (17,573) -- (100,167)
Loss on disposal, including $11,869
for operating losses during the
phase out period -- (40,200) -- (40,200)
------------ ------------ ------------ ------------
Total discontinued operations -- (57,773) -- (140,367)
------------ ------------ ------------ ------------
Net loss $ (6,035,396) $ (797,708) $(36,444,771) $ (2,096,542)
============ ============ ============ ============
Net loss per share, basic and diluted:
Continuing operations $ (0.87) $ (0.12) $ (5.51) $ (0.36)
Discontinued operations -- (0.01) -- (0.02)
------------ ------------ ------------ ------------
Net loss $ (0.87) $ (0.13) $ (5.51) $ (0.38)
============ ============ ============ ============
Weighted average shares of Common Stock
outstanding 6,951,011 6,308,931 6,617,272 5,477,963
============ ============ ============ ============
</TABLE>
See Notes to Condensed Consolidated Financial Statements
3
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MAREX.COM, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30,
-------------------------------
2000 1999
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CASH FLOWS FROM OPERATING ACTIVITIES:
Loss from continuing operations $(36,444,771) $ (1,956,175)
Adjustments to reconcile loss from continuing operations to
net cash used in continuing operations
Depreciation 305,288 29,693
Amortization 489,013 19,131
Stock-based compensation 727,906 --
Fair value of warrants 21,746,581 --
Loss on disposal of property and equipment 3,207 --
Increase in accounts receivable (5,755) --
Increase in prepaid expenses and other current assets (1,082,353) (138,571)
Increase in deposits (41,902) --
Increase in accounts payable and accrued expenses 5,509,928 148,648
Decrease in customer deposits (4,470) (13,074)
------------ ------------
Net cash used in operating activities (8,797,328) (1,910,348)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (1,455,462) (298,775)
Acquisition of trademark -- (32,500)
Additions to software development costs (6,935,616) --
Decrease (increase) in loan to shareholder 22,200 (22,200)
------------ ------------
Net cash used in investing activities (8,368,878) (353,475)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on due to related party -- (260,301)
Proceeds from related party borrowings -- 224,551
Principal payments on notes payable -- (139,727)
Principal payments on capital lease obligations (20,637) (9,265)
Proceeds from exercise of stock options and warrants 147,885 48,250
Proceeds from issuance of Common Stock -- 6,892,465
Proceeds from issuance of Preferred Stock 40,901,005 --
------------ ------------
Net cash provided by financing activities 41,028,253 6,755,973
------------ ------------
Net cash provided by continuing operations 23,862,047 4,492,150
Net cash used in discontinued operations -- (151,002)
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Net increase in cash and cash equivalents 23,862,047 4,341,148
CASH AND CASH EQUIVALENTS, beginning of period 3,434,036 350,042
------------ ------------
CASH AND CASH EQUIVALENTS, end of period $ 27,296,083 $ 4,691,190
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during each period for interest $ 5,322 $ 4,535
============ ============
</TABLE>
See Notes to Condensed Consolidated Financial Statements
4
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MAREX.COM, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) BASIS OF FINANCIAL STATEMENT PRESENTATION
In management's opinion, the accompanying unaudited condensed consolidated
financial statements of Marex.com, Inc. and subsidiary (the "Company") contain
all adjustments (consisting of only normal recurring adjustments) necessary to
present fairly the Company's financial position, results of operations and cash
flows for each period shown. The results of operations for the 2000 interim
periods presented are not necessarily indicative of the results to be expected
for the subsequent quarter or for the entire year ending December 31, 2000.
The accompanying unaudited interim condensed consolidated financial statements
have been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission for reporting on Form 10-Q. Certain information and footnote
disclosures normally included in the financial statements prepared in accordance
with accounting principles generally accepted in the United States have been
condensed or omitted. The condensed consolidated financial statements should be
read in conjunction with the consolidated financial statements and the notes to
consolidated financial statements included in the Company's Annual Report on
Form 10-K for the year ended December 31, 1999.
The accounting policies followed for interim financial reporting are the same as
those disclosed in the notes to consolidated financial statements included in
the Company's Annual Report on Form 10-K for the year ended December 31, 1999.
(2) DISCONTINUED OPERATIONS
On August 24, 1999, the Company's Board of Directors approved a plan to
discontinue the operations of its non-core business subsidiary, Sovereign
Financial Information Services, Inc. ("Sovereign"), in order to focus its
business towards its Internet-based services and products for the marine
industry. Sovereign was engaged in the publishing of research reports, stock
handbooks and global industry guides. Sovereign ceased operations on September
30, 1999. Accordingly, Sovereign is reported as a discontinued operation in the
accompanying unaudited condensed consolidated financial statements. The loss on
the disposal of Sovereign was $40,200, consisting of a write-down of Sovereign
assets totaling $28,331 and a provision of $11,869 for operating losses until
the date of disposal. The losses of Sovereign prior to August 24, 1999, are
included in the unaudited condensed consolidated statements of operations as
"Loss from discontinued operations."
(3) NET LOSS PER SHARE
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per
Share," requires two presentations of earnings per share--"basic" and "diluted".
Basic earnings per share is computed by dividing income available to common
stockholders (the numerator) by the weighted average number of common shares
(the denominator) for the period. The computation of diluted earnings per share
is similar to basic earnings per share, except that the denominator is increased
to include the number of additional common shares that would have been
outstanding if the potentially dilutive common shares had been issued.
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The following options and warrants to purchase shares of Common Stock were
outstanding at the end of each period, but were not included in the computation
of diluted earnings per share because the Company reported a net loss for each
of the quarters presented and, therefore, the effect would be antidilutive:
September 30,
--------------------------------
2000 1999
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OPTIONS
Outstanding 2,764,150 2,511,500
Weighted average exercise prices $ 6.87 $ 3.95
WARRANTS
Outstanding 1,852,052 386,971
Weighted average exercise prices $ 3.57 $ 8.83
In addition, the Company had 304,693 shares of Preferred Stock outstanding as of
September 30, 2000 that were convertible into 2,343,792 shares of Common Stock.
(4) SOFTWARE DEVELOPMENT COSTS
Statement of Position 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use,"("SOP 98-1") establishes the accounting
for costs of software products developed or purchased for internal use,
including when such costs of software products developed or purchased for
internal use should be capitalized. In accordance with SOP 98-1, the Company has
capitalized $6.9 million of software development costs associated with
development of its e-commerce solutions during the nine months ended September
30, 2000.
(5) ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company accounts for stock-based compensation using the intrinsic value
method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," ("APB No. 25") and related Interpretations. Under
APB No. 25, compensation cost is measured as the excess, if any, of the quoted
market price of the Company's Common Stock at the date of grant over the
exercise price of the option granted. Compensation cost for stock options, if
any, is recognized ratably over the vesting period. In March 2000, the Company
granted options to a director at an exercise price below the quoted market price
which resulted in total non-cash compensation of $2,382,000. During the three
months and nine months ended September 30, 2000, compensation expense related to
the stock options granted to the director totaled $120,000 and $728,000,
respectively, and is included in the unaudited condensed consolidated statements
of operations as "Stock-based compensation."
(6) WARRANTS
On April 26, 2000, the Company entered into a Strategic Relationship Agreement
(the "Strategic Relationship Agreement") with Genmar Holdings, Inc. ("Genmar").
The Strategic Relationship Agreement provides that Genmar will utilize the
Company as its exclusive provider of an online procurement system. In connection
with the Strategic Relationship Agreement, the Company entered into a Warrant
Agreement (the "Warrant Agreement") pursuant to which the Company issued to
Genmar warrants to purchase 1,442,081 shares of Common Stock upon execution of
the Warrant Agreement. Each warrant was exercisable at the date of grant and has
an exercise price of $1.83. Additional warrants to purchase 1,495,256 shares of
Common Stock may be issued in the future dependent upon the occurrence of
certain events.
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As required by SFAS No. 123, "Accounting for Stock-Based Compensation," the
Company accounts for warrants issued to non-employees not issued in conjunction
with debt by amortizing the Black-Scholes value of such warrants over the
vesting period. The Black-Scholes value of the warrants issued was calculated
using the following assumptions: Volatility, 80%; Risk-free Interest Rate,
6.42%; Expected Dividends, $0; and Expected Term, 3 years. Based on these
assumptions, the computed fair value of the warrants issued on April 26, 2000
was $21.7 million, and is charged to expense in the accompanying unaudited
condensed consolidated statements of operations.
(7) INCOME TAXES
The Company did not record a benefit for income taxes due to the full valuation
allowance that has been recorded given the uncertainty of the realization of its
deferred income tax assets.
(8) PREFERRED STOCK
The Company has authorized 1,000,000 shares of Preferred Stock of $.01 par value
with preferences to be determined by the Board of Directors. On March 2, 2000,
the Board of Directors designated 430,000 shares as Series A1 Convertible
Preferred Stock ("Series A1 Preferred Stock").
In March 2000, the Company received net proceeds of $20.4 million in connection
with the sale of 210,000 shares of Series A1 Preferred Stock at $100 per share.
In May 2000, the Company completed the private placement through the sale of an
additional 210,000 shares of Series A1 Preferred Stock at $100 per share. Total
net proceeds from the private placement were $40.9 million.
Each share of the Series A1 Preferred Stock is convertible into 7.69 shares of
Common Stock at the option of the holder at any time. Automatic conversion
occurs upon either of the following: completion by the Company of a public
offering which raises gross proceeds of at least $50 million, at an effective
price per share to the public of at least $26.00 as adjusted for stock splits,
stock dividends or other similar transactions; or, upon the event that the
market price per share of the Company's Common Stock exceeds $26.00, subject to
adjustments for stock splits, stock dividends, or other similar transactions,
for a consecutive twenty day period following the one-year anniversary of the
effective date of a registration statement covering the Common Stock underlying
the Series A1 Preferred Stock.
The holders of the Series A1 Preferred Stock are entitled to the number of votes
equal to the number of shares of Common Stock into which such Preferred Stock is
convertible.
Upon declaration by the Board of Directors, holders of Series A1 Preferred Stock
shall be entitled to receive dividends ratably in an amount per share equal to
that which the holders would have been entitled had they converted their Series
A1 Preferred Stock into shares of Common Stock.
Upon any liquidation of the Company, holders of record of the Series A1
Preferred Stock shall be entitled to receive, out of the assets of the Company
and before any distribution or payment is made upon any class of security of
lesser rank, an amount per share equal to the lesser of $100 per share or the
assets of the Company available for distribution to its stockholders,
distributed ratably among holders of the outstanding Series A1 Preferred Stock.
After the distribution to the holders of Series A1 Preferred Stock has been
made, the remaining assets of the Company available for distribution to
shareholders shall be distributed pro rata solely among the holders of Common
Stock.
Holders may redeem shares of Series A1 Preferred Stock in the event that the
Company does not honor a conversion. In such a case, the redemption amount is
equal to, at the option of the holder, the market value of the Common Stock that
the shares of Series A1 Preferred Stock would otherwise have been convertible
into or $100 per share.
7
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(9) RELATED PARTY TRANSACTIONS
In March 2000, the Company made a payment of $435,000 to a consultant, who is
also a shareholder of the Company, for strategic business consulting. Under the
arrangement, the consultant is obligated to provide consulting services to the
Company through December 31, 2000. Consulting expense related to the agreement
totaled $109,000 and $326,000 for the three months and nine months ended
September 30, 2000, respectively, and is included in the accompanying unaudited
condensed consolidated statements of operations as a component of "General and
administrative" expenses.
8
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the condensed
consolidated financial statements and the notes to the condensed consolidated
financial statements, which are included elsewhere in this Form 10-Q. It
contains forward-looking statements within the meaning of Section 21E of the
Securities Exchange Act of 1934, as amended, which relate to such matters as
anticipated financial performance, business prospects, technological
developments, and similar matters. Such forward-looking statements involve known
and unknown risks, uncertainties, and other factors which may cause the actual
results, performance, or achievements of the Company to be materially different
from those expressed or implied by such forward-looking statements. Factors
include, but are not limited to, those discussed elsewhere in this report in the
section entitled "Risk Factors" and the risks discussed in our other Securities
and Exchange Commission filings.
OVERVIEW
Marex.com is a provider of e-commerce solutions for the marine industry. The
products that we currently have available to the marine industry include
Classifieds and Auctions, MarExpress!, and MarexPO!. The Exchange, the first
procurement tool that we developed, was an Internet-based trading exchange for
the marine industry. The Exchange allowed buyers to solicit quotes online from
sellers for specific equipment, parts and supplies. Buyers were displayed the
best prices available, which were updated on a real-time basis as bids were
posted. In April 2000, we launched Classifieds and Auctions, an updated version
of the Exchange which offers increased functionality. Through Classifieds and
Auctions, buyers and sellers are able to choose between a fixed price listing
environment ("Classifieds") and an auction environment ("Auctions"). Classifieds
and Auctions provides sellers the opportunity to dispose of their overstocked
inventory and resell slow moving inventory. Since Classifieds and Auctions
supplements our main products, MarExpress! and MarexPO!, the revenues generated
from Classifieds & Auctions will not represent a significant portion of our
future revenues. In June 2000, we launched MarExpress! and MarexPO!. MarExpress!
provides boat builders and other marine industry buyers with a comprehensive and
integrated e-procurement capability that enables them to buy new parts,
supplies, components, and equipment through a web-based transaction system.
Buyers can obtain product information, conduct e-procurement to support business
workflows and controls, track orders, and complete product returns through a
single, automated, online hub. MarexPO! is a comprehensive and integrated
e-commerce capability for marine industry suppliers and distributors that
provides worldwide exposure and enables them to sell new parts, supplies,
components and equipment to marine businesses through a web-based transaction
system. By utilizing a thorough registration and outfitting process for
suppliers and buyers, the system recognizes the unique relationships between
each buyer and supplier and only provides the supplier's product information and
pricing that is appropriate for each buyer.
DISCONTINUED OPERATIONS
On August 24, 1999, our Board of Directors approved a plan to discontinue the
operations of our non-core business subsidiary, Sovereign Financial Information
Services, Inc. ("Sovereign"), in order to focus our business towards
Internet-based services and products for the marine industry. Sovereign was
engaged in the publishing of research reports, stock handbooks and global
industry guides. Sovereign ceased operations on September 30, 1999. The
estimated loss on the disposal of Sovereign was $40,000, consisting of a
write-down of Sovereign assets totaling $28,000 and a provision of $12,000 for
the operating losses until the date of disposal. During the three months and
nine months ended September 30, 1999, our loss from discontinued operations was
$18,000 and $100,000, respectively. There was no loss from discontinued
operations during the three months and nine months ended September 30, 2000. The
financial information in "Management's Discussion and Analysis of Financial
Condition and Results of Operations" refers to our continuing operations and
excludes the operations of Sovereign.
9
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RESULTS OF OPERATIONS
COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
REVENUES
For the three months ended September 30, 2000, we recorded revenues of $7,000,
compared to $2,000 during the same period in 1999. The increase was due to the
launch of MarExpress! and MarexPO! in June 2000.
MarExpress! and MarexPO! generate revenues by charging a transaction fee which
is based on the gross transaction price. The transaction fee is recognized as
revenue when our customers' right to receive a refund for the transaction fee
expires. For the three months ended September 30, 2000, we recorded revenues of
$6,000 generated from $323,000 of transactions. As of September 30, 2000,
products ordered through MarexPO! and MarExpress!, for which revenue had not yet
been recognized, totaled $675,000. MarExpress! and MarexPO! were not launched
until June 2000, therefore no revenue was recognized from these products during
1999.
In the future, we expect revenues from MarExpress! and MarexPO! to increase as a
result of the increase in the number of customers online and the increased use
of the system by our existing customers. As of September 30, 2000, we had
entered into agreements with 29 boat builders and 75 suppliers. Combined, the
aforementioned boat builders generate over $1 billion in annual sales. We expect
to increase our average transaction fee as we phase out of our initial
promotional period.
Classifieds and Auctions generates revenues by charging listing and transaction
fees. Listing fees, which generally range from $2.50 to $10.00 per transaction
listing, are collected from members when a listing becomes active, and are
recognized as revenue ratably over the listing period or when the products are
sold, if earlier. Transaction fees ranging from 4% to 7% of the gross
transaction price are collected from the seller and recognized as revenue upon
the completion of a Classifieds and Auctions transaction. A Classifieds and
Auctions transaction is considered completed when a buyer and seller have
committed to a sale. For the three months ended September 30, 2000, we recorded
revenues of $900 generated from $6,000 of completed transactions through
Classifieds and Auctions. For the same period in 1999, we recorded revenues of
$2,000 generated from $68,000 of completed transactions through the Exchange.
The decrease resulted primarily from the change to the Classifieds and Auctions
pricing structure.
PRODUCT DEVELOPMENT
Product development expenses consist primarily of compensation for product
development personnel, cost of outside contractors, amortization of software
development costs, and other costs associated with the operations and
enhancements of the website. Product development expenses increased to $2.8
million for the three months ended September 30, 2000, compared to $388,000 for
the same period in 1999. The change related primarily to increases of $860,000
in personnel and personnel related costs, $523,000 in outside contractor costs,
and $328,000 in amortization of software development costs. The balance was
comprised of overhead and operating costs directly associated with the
development and maintenance of the website and e-commerce products.
SELLING AND MARKETING
Selling and marketing expenses consist primarily of compensation for sales and
marketing personnel, cost of outside contractors, advertising, trade shows, and
related marketing costs. Selling and marketing expenses increased to $2.3
million for the three months ended September 30, 2000, compared to $219,000 for
the same period in 1999. The change is primarily due to increases of $646,000 in
personnel and
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personnel related costs, $364,000 in advertising and marketing costs, and
$414,000 in outside contractor costs. The balance was comprised of overhead and
operating costs directly associated with selling and marketing activities.
GENERAL AND ADMINISTRATIVE
General and administrative expenses consist primarily of compensation for
administrative personnel, facilities expenses, professional fees, and general
corporate expenses. General and administrative expenses increased to $1.3
million for the three months ended September 30, 2000, compared to $186,000 for
the same period in 1999. The change related primarily to increases of $353,000
in personnel and personnel related costs and $386,000 in professional fees,
which includes $109,000 for strategic business consulting services provided by a
consultant who is also a shareholder. The balance was comprised of corporate
charges directly associated with the administrative functions of our company.
STOCK-BASED COMPENSATION
For the three months ended September 30, 2000, we recorded non-cash compensation
expense of $120,000 relating to stock options granted to a director. We did not
incur any stock-based compensation expense in 1999.
OTHER INCOME AND EXPENSE
We recorded $486,000 of interest income for the three months ended September 30,
2000, compared to $52,000 for the three months ended September 30, 1999. The
increase was a result of higher balances of marketable securities derived from
the net proceeds of our private placements. Interest expense for the three
months ended September 30, 2000 was $2,000, compared to $200 for the three
months ended September 30, 1999, as a result of increased capital lease
obligations.
LOSS FROM CONTINUING OPERATIONS
Our loss from continuing operations increased to $6.0 million for the three
months ended September 30, 2000, compared to $740,000 for the three months ended
September 30, 1999. The change resulted from the increase in costs, as described
above, associated with the development and launch of our products.
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
REVENUES
For the nine months ended September 30, 2000, we recorded revenues of $11,000,
compared to $5,000 during the same period in 1999. The increase was primarily
due to the launch of MarExpress! and MarexPO! in June 2000.
For the nine months ended September 30, 2000, we recorded revenues of $6,000
generated from $323,000 of transactions through MarExpress! and MarexPO!. As of
September 30, 2000, products ordered through MarExpress! and MarexPO!, for which
revenue had not yet been recognized, totaled $675,000. MarExpress! and MarexPO!
were not launched until June 2000, therefore no revenue was recognized from
these products during 1999. In the future, we expect revenues from MarExpress!
and MarexPO! to increase as a result of the increase in the number of customers
online and the increased use of the system by our existing customers.
For the nine months ended September 30, 2000, we recorded revenues of $6,000
generated from $114,000 of completed transactions through the Exchange and
Classifieds and Auctions. For the same period in 1999, we recorded revenues of
$5,000 generated from $128,000 of completed transactions through the
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Exchange. The increase resulted primarily from the increased use of the Exchange
by our customers during the first quarter of 2000. We experienced a decrease in
revenues during the second and third quarters of 2000 resulting from the change
to the Classifieds and Auctions pricing structure.
PRODUCT DEVELOPMENT
Product development expenses consist primarily of compensation for product
development personnel, cost of outside contractors, amortization of software
development costs, and other costs associated with the operations and
enhancements of the website. Product development expenses increased to $5.9
million for the nine months ended September 30, 2000, compared to $578,000 for
the same period in 1999. The change related primarily to increases of $2.1
million in personnel and personnel related costs, $1.6 million in outside
contractor costs and $412,000 in amortization of software development costs. The
balance was comprised of overhead and operating costs directly associated with
the development and maintenance of the website and e-commerce products.
SELLING AND MARKETING
Selling and marketing expenses consist primarily of compensation for sales and
marketing personnel, cost of outside contractors, advertising, trade shows and
related marketing costs. Selling and marketing expenses increased to $5.1
million for the nine months ended September 30, 2000, compared to $662,000 for
the same period in 1999. The change is primarily due to increases of $1.3
million in personnel and personnel related costs, $1.2 million in advertising
and marketing costs, and $687,000 in outside contractor costs. The balance was
comprised of overhead and operating costs directly associated with selling and
marketing activities.
GENERAL AND ADMINISTRATIVE
General and administrative expenses consist primarily of compensation for
administrative personnel, facilities expenses, professional fees, and general
corporate expenses. General and administrative expenses increased to $4.0
million for the nine months ended September 30, 2000, compared to $776,000 for
the same period in 1999. The change related primarily to increases of $1.5
million in personnel and personnel related costs, which include a total of
$840,000 in performance-based payments made to the Chief Executive Officer, and
$899,000 in professional fees, which include $326,000 for strategic business
consulting services provided by a consultant who is also a shareholder. The
balance was comprised of corporate charges directly associated with the
administrative functions of our company.
STOCK-BASED COMPENSATION
For the nine months ended September 30, 2000, we recorded non-cash compensation
expense of $728,000 relating to options granted to a director. We did not incur
any stock-based compensation expense in 1999.
FAIR VALUE OF WARRANTS
For the nine months ended September 30, 2000, we recorded an expense of $21.7
million relating to the fair value of warrants issued in connection with a
strategic relationship agreement. We did not incur any expense related to the
fair value of warrants during the nine months ended September 30, 1999.
OTHER INCOME AND EXPENSE
We recorded $1.0 million of interest income for the nine months ended September
30, 2000, compared to $62,000 for the nine months ended September 30, 1999. The
increase was a result of higher balances of marketable securities derived from
the net proceeds of our private placements. Interest expense for the nine months
ended September 30, 2000 was $5,000, compared to $6,000 for the nine months
ended
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September 30, 1999. The decrease was primarily due to the decrease in our notes
payable and loan from related party balances and was partially offset by the
increase in capital lease obligations.
LOSS FROM CONTINUING OPERATIONS
Our loss from continuing operations increased to $36.4 million for the nine
months ended September 30, 2000, from $2.0 million for the nine months ended
September 30, 1999. The change resulted from the increase in costs, as described
above, associated with the development and launch of our products and the
charges relating to the stock based compensation and fair value of warrants.
LIQUIDITY AND CAPITAL RESOURCES
Since our inception, we have financed our operations primarily through the
private sales of Common Stock, Preferred Stock, short-term borrowings from
banks, and borrowings from our Chief Executive Officer, who is also President,
Chairman of the Board of Directors and a shareholder.
Net cash used in operating activities was $8.8 million for the nine months ended
September 30, 2000, primarily as a result of a net loss from continuing
operations of $36.4 million and an increase of $1.1 million in prepaid expenses
and other current assets. The net loss was offset by an increase of $5.5 million
in accounts payable and accrued expenses, a non-cash stock-based compensation
charge of $728,000, and the non-cash expense of $21.7 million reflecting the
fair value of warrants issued.
Net cash used in investing activities was $8.4 million for the nine months ended
September 30, 2000, primarily due to $6.9 million of software development costs
related to the development of our e-commerce solutions and $1.5 million relating
to leasehold improvements to the new office, the purchase of computer and office
equipment, and the purchase of furniture and fixtures.
Net cash provided by financing activities was $41.0 million for the nine months
ended September 30, 2000, which was primarily due to the sale of 420,000 shares
of Series A1 Preferred Stock, resulting in net proceeds of $40.9 million.
At September 30, 2000, cash and cash equivalents totaled $27.3 million, while
our working capital was $22.3 million. In comparison, as of December 31, 1999,
cash and cash equivalents totaled $3.4 million, while our working capital was
$2.9 million. The increase was primarily due to the sale of Series A1 Preferred
Stock in 2000. To date, our primary uses of cash have been in operating
activities to fund the development and promotion of our e-commerce solutions.
We expect to continue or increase our operating expenses during the foreseeable
future. We anticipate that such operating expenses, as well as planned capital
expenditures, will constitute a material use of our cash resources. We believe
that the net proceeds from our sale of Series A1 Preferred Stock will be
sufficient to meet our working capital and operating resources requirements for
at least the next twelve months. In the event that our working capital and
operating resources requirements during the next twelve months exceed the cash
proceeds from our sale of Series A1 Preferred Stock, we may not be able to raise
additional capital on acceptable terms or at all.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1999, the Financial Accounting Standards Board ("FASB") issued SFAS No.
137, "Accounting for Derivative Instruments and Hedging Activities-Deferral of
Effective Date of FASB Statement No. 133." SFAS No. 137 defers for one year the
effective date of SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities." SFAS No. 133 will require us to recognize all derivatives
on the balance sheet at fair value. Derivatives that are not hedges must be
adjusted to fair value through income. We will adopt SFAS No. 133 as required
for our first quarterly filing in 2001. We believe the adoption of
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this statement will not have a material effect on our consolidated results of
operations and financial position.
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial Statements." SAB
101 provides guidance on applying accounting principles generally accepted in
the United States to revenue recognition issues in financial statements. We
adopted SAB 101 in the second quarter of 2000. The adoption of SAB 101 did not
have a material impact on our consolidated results of operations and financial
position.
RISK FACTORS
WE HAVE A LIMITED OPERATING HISTORY
Marex.com, Inc. was founded in 1992 but did not launch the Exchange until
November 1998 and Classifieds and Auctions, MarExpress!, and MarexPO! until the
current year. Thus, we have a limited operating history on which to base an
evaluation of our e-commerce business and prospects. Our prospects must be
considered in light of the risks, uncertainties, expenses and difficulties
frequently encountered by companies in their early stages of development,
particularly companies in new and rapidly evolving markets such as Business to
Business ("B2B") e-commerce. Many of these risks are described in this "Risk
Factors" section. There can be no assurance that we will be able to address
these risks.
WE HAVE A HISTORY OF LOSSES
We have incurred losses from operations in each period since our inception. We
expect to incur substantial operating losses and have continued negative cash
flows from operations for the foreseeable future. We expect to continue, or
increase, our spending on sales and marketing, product development, and general
and administrative expenses. In addition, we have no material revenues to date.
If our revenue does not increase substantially or if our expenses increase
further than we expect, we may not become profitable.
OUR QUARTERLY OPERATING RESULTS ARE VOLATILE AND DIFFICULT TO PREDICT
Due to our limited operating history, we believe that period-to-period
comparisons of revenues and results of operations are not meaningful. The
fluctuations in our operating results may fall below the expectations of
investors and securities analysts. Our failure to meet these expectations will
likely cause a significant decline in the market price of our stock.
THE B2B E-COMMERCE MODEL IS NOT PROVEN
Our B2B e-commerce model is based on the expansion of MarExpress! and MarexPO!
within the marine industry. This business model is new and not proven and
depends upon our ability to, among other things: sell purchasing solutions to
marine industry participants; achieve high rates of adoption by customers; and
generate significant revenues from the use of our Internet-based solutions. We
cannot be certain that the business model will be successful, that it can
achieve or sustain revenue growth, or that it can generate any profits. The
success of this business model will require, among other things, that we develop
and market solutions with broad market acceptance by users and strategic
partners. We cannot be certain that B2B e-commerce on the Internet, our
e-commerce solution, or our services and brand in particular, will achieve broad
market acceptance.
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IF WE FAIL TO RELEASE NEW E-COMMERCE SOLUTIONS ON A TIMELY BASIS, OUR BUSINESS
WOULD BE ADVERSELY AFFECTED
We plan to introduce new e-commerce solutions to service the requirements of
marine industry participants and to increase the potential transaction volumes.
If we fail to introduce new products on a timely basis, we may experience
supplier and buyer dissatisfaction which will adversely affect our business. In
addition, any new product that does not achieve market acceptance may cause
damage to our reputation or brand name.
WE FACE INTENSE COMPETITION
We perceive competition to be intense and we expect it to increase significantly
in the future. We face competition from other companies with e-commerce
offerings, traditional suppliers, distributors of marine products, and marine
companies that have or may develop their own online solutions. In addition,
providers of online marketplaces and online auction services that currently
focus on other industries may expand their services to include marine products.
Our competitors and potential competitors may develop superior Internet
solutions that achieve greater market acceptance than the Marex solution. In
addition, substantially all of our prospective customers have established
long-standing relationships with some competitors and potential competitors. We
cannot be certain that we can compete successfully against current and future
competitors.
OUR SOLUTION AND SERVICES ARE NEW AND FACE RAPID TECHNOLOGICAL CHANGES
The Internet market for the Marex solution is characterized by rapid
technological advances, evolving standards in the Internet and software markets,
changes in customer requirements and frequent new product and service
introductions and enhancements. As a result, we believe that our future success
depends upon our ability to enhance current Internet-based solutions and
services, to develop and introduce new solutions and services that will achieve
market acceptance, and where necessary, to integrate Internet-based solutions
with customers' systems. If we do not adequately respond to the need to develop
and introduce new solutions or services, then our business will be negatively
affected. Further, we may incur significant expense to integrate purchasing
solutions with customers' systems and to maintain this integration as customers'
systems evolve. Failure to provide this integration may delay or altogether
dissuade the marine market or a particular customer from adopting our
Internet-based solutions.
WE WILL NEED TO MANAGE OUR EXPANDING BUSINESS
Our growth has placed, and is expected to continue to place, a significant
demand on our sales, marketing, managerial, operational, information technology
and other resources. If we cannot manage our growth effectively, our business
will be adversely affected. We expect to need a significant number of new
employees to expand our business. Our current information systems, procedures
and controls may not support expanded operations and may hinder our ability to
take advantage of the market for e-commerce purchasing solutions to the marine
industry.
WE DEPEND ON KEY PERSONNEL
Our performance is substantially dependent on the performance of the executive
officers and other key employees. Failure to successfully manage personnel
requirements would have a negative effect on the business. We have experienced
difficulty from time to time in hiring the personnel necessary to support the
growth of our business, and we may experience similar difficulty in hiring and
retaining personnel in the future. Competition for senior management,
experienced sales and marketing personnel, software developers, and other
employees is intense, and we cannot be certain that we will be successful in
attracting and retaining personnel. The loss of the services of any executive
officer or key employee could have a negative effect on the business. Failure to
obtain or retain the services of necessary executive
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officers or key employees may not support existing or expanded operations, and
may hinder our ability to take advantage of the market for e-commerce purchasing
solutions to the marine industry.
WE EXPECT THE PRICE OF OUR COMMON STOCK TO BE VOLATILE
The market price of our Common Stock may fluctuate significantly in response to
a number of factors, some which are beyond our control, including the following:
quarterly variations in operating results; changes in market valuation of
Internet commerce companies; announcements of significant contracts,
acquisitions, strategic partnerships, joint ventures or capital commitments;
loss of a major customer or strategic partner, or failure to complete a sale to
a significant customer; additions or departures of any key personnel; future
sales of our Common Stock; and stock market price and volume fluctuations, which
are particularly common among highly volatile securities of Internet companies.
SECURITY PROBLEMS MAY INHIBIT THE GROWTH OF INTERNET-BASED PURCHASING SOLUTIONS
A significant barrier to the adoption of e-commerce is the secure transmission
of confidential information over public networks. Users generally are concerned
with security and privacy on the Internet and any publicized security problems
could inhibit the growth of the Internet, and therefore inhibit the Marex
solution as a means of conducting transactions. If there is a breach in our
security system, we may be required to make significant expenditures to protect
against security breaches and to alleviate problems caused by such breaches.
SYSTEM FAILURE MAY CAUSE INTERRUPTION OF SERVICES
The performance of our server and networking hardware and software
infrastructure is critical to our business and reputation, and affects our
ability to process transactions, provide high quality customer service and
attract and retain customers, suppliers, users and strategic partners. Any
disruption to this infrastructure resulting from a natural disaster or other
event could result in an interruption in service, fewer transactions and, if
sustained or repeated, could impair our reputation and the attractiveness of the
services.
WE WILL REQUIRE ADDITIONAL CAPITAL FOR OPERATIONS
We currently anticipate that current available funds will be sufficient to meet
anticipated needs for working capital and capital expenditures for at least the
next 12 months. We will need to raise additional funds in the future in order to
fund rapid expansion, to develop new or enhanced solutions and services, to
respond to competitive pressures or to acquire complementary businesses,
technologies or services.
WE DEPEND ON INTELLECTUAL PROPERTY RIGHTS
Our intellectual property is important to us. We seek to protect intellectual
property through copyrights, trademarks, trade secrets, confidentiality
provisions in customer, supplier and strategic relationship agreements, and
nondisclosure agreements with third parties, employees and contractors. We
cannot assure that measures we take to protect intellectual property will be
successful or that third parties will not develop alternative purchasing
solutions that do not infringe upon our intellectual property. In addition, we
could be subject to intellectual property infringement claims by others. Failure
to protect against misappropriation of intellectual property, or claims that we
are infringing the intellectual property of third parties, could have a negative
effect on our business.
REGULATION OR TAXATION OF THE INTERNET OR TRANSACTING BUSINESS OVER THE INTERNET
Due to the increasing popularity and use of e-commerce, it is possible that a
number of taxes, laws and regulations may be adopted in the U.S. and abroad with
particular applicability to the Internet and
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e-commerce transactions. It is possible that governments will adopt taxes and
enact legislation that may be applicable in areas such as content, product
distribution, network security, encryption and the use of key escrow, data and
privacy protection, electronic authentication or "digital" signatures, illegal
and harmful content, access charges and re-transmission activities. Moreover,
the applicability to the Internet of existing laws governing issues such as
property ownership, content, taxation, defamation and personal privacy is
uncertain. Taxes, laws or regulations may limit the growth of the Internet,
dampen e-commerce and reduce the number of transactions, increase the cost of
doing business or increase legal exposure. Any of these factors could have a
negative effect on our business.
SEASONALITY
Our business is seasonal due to the impact of the buying and selling patterns of
the members that utilize our system. We believe that the second and third
quarters are the peak periods for the recreational marine industry. In addition,
the recreational marine industry is highly cyclical and is highly affected by a
number of factors. Some of those factors are: (i) economic conditions, (ii)
consumer confidence levels, and (iii) weather conditions.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We do not hold any market risk sensitive instruments. As a result, this item is
not applicable to the Company's consolidated balance sheet as of September 30,
2000.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are currently not involved in, or aware of, any material litigation.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On March 2, 2000, the Board of Directors designated 430,000 shares of Preferred
Stock as Series A1 Preferred Stock. Each share of the Series A1 Preferred Stock
is convertible into 7.69 shares of Common Stock at the option of the holder at
any time. Automatic conversion occurs upon either of the following: our
completion of a public offering which raises gross proceeds of at least $50
million, at an effective price per share to the public of at least $26.00 as
adjusted for stock splits, stock dividends or other similar transactions; or,
upon the event that the market price per share of our Common Stock exceeds $26,
subject to adjustments for stock splits, stock dividends, or other similar
transactions, for a consecutive twenty day period following the one-year
anniversary of the effective date of a registration statement covering the
Common Stock underlying the Series A1 Preferred Stock.
The holders of the Series A1 Preferred Stock are entitled to the number of votes
equal to the number of shares of Common Stock into which such Preferred Stock is
convertible.
Upon declaration by the Board of Directors, holders of Series A1 Preferred Stock
shall be entitled to receive dividends ratably in an amount per share equal to
that which the holders would have been entitled had they converted their Series
A1 Preferred Stock into shares of Common Stock.
Upon any liquidation of our company, holders of record of the Series A1
Preferred Stock shall be entitled to receive, out of our assets and before any
distribution or payment is made upon any class of security of lesser rank, an
amount per share equal to the lesser of $100 per share or our remaining assets
available for distribution to our stockholders, distributed ratably among
holders of the outstanding Series A1 Preferred Stock. After the distribution to
the holders of Series A1 Preferred Stock has been made, our remaining
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assets available for distribution to shareholders shall be distributed pro rata
solely among the holders of Common Stock.
Holders may redeem shares of Series A1 Preferred Stock in the event that we do
not honor a conversion. In such a case, the redemption amount is equal to, at
the option of the holder, the market value of the Common Stock that the shares
of Series A1 Preferred Stock would otherwise have been convertible into or $100
per share.
We completed a $42 million private placement from the sale of Series A1
Preferred Stock. The sale consisted of two installments that occurred on March
2, 2000 and May 3, 2000. Through each installment, the Company sold 210,000
shares at $100 per share. After deducting the costs of the sale of Series A1
Preferred Stock, our estimated net proceeds were $40.9 million. The net proceeds
have been used for general corporate purposes, development of products and to
expand our operations. Funds that have not been used have been primarily
invested in marketable securities. We also may use a portion of the net proceeds
to acquire or invest in businesses, technologies, products or services.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBITS DESCRIPTION OF DOCUMENT
-------- -----------------------
<S> <C> <C>
3.1 -- Form of Amended and Restated Articles of Incorporation of the Company (1)
3.2 -- Form of Amended and Restated Bylaws of the Company (1)
3.3 -- Articles of Amendment to Amended and Restated Articles of Incorporation of Affiliated Networks, Inc. (4)
4.1 -- Certificate of Designation for the Series A1 Convertible Preferred Stock, par value $.01 (4)
4.2 -- Securities Purchase Agreement among Marex.com, Inc. and Certain Purchasers, dated March 2, 2000 (4)
4.3 -- Registration Rights Agreement among Marex.com, Inc. and Certain Purchasers, dated March 2, 2000 (4)
4.4 -- Warrant Agreement, dated April 26, 2000, between the Company and Genmar (5)
10.1 -- 1996 Incentive Stock Option Plan, as amended (1)
10.2 -- 1997 Incentive Stock Option Plan, as amended (1)
10.3 -- Amended and Restated 1997 Stock Option Plan (3)
10.4 -- Company's Office Lease, as amended (6)
10.5 -- Employment Agreement of David A. Schwedel (6)
21 -- Subsidiary of the Small Business Issuer (2)
27.1 -- Financial Data Schedule (7)
</TABLE>
----------
(1) Previously filed as an exhibit to the Company's Form 10-SB and Amendment
No. 1 to Form 10-SB.
(2) Previously filed as an exhibit to the Company's Form 10-KSB for the year
ended December 31, 1998.
(3) Previously filed as part of the Company's Form DEFS14A filed on October 19,
1999.
(4) Previously filed as an exhibit to the Company's Form 8-K filed on March 8,
2000.
(5) Previously filed as an exhibit to the Company's Form 8-K filed on April 27,
2000.
(6) Previously filed as an exhibit to the Company's Form 10-K for the year
ended December 31, 1999.
(7) Filed herewith.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the three months ended September
30, 2000.
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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.
MAREX.COM, INC.
November 14, 2000 BY: /s/ DAVID A. SCHWEDEL
---------------------------------------
David A. Schwedel
Chairman of the Board of Directors,
President and Chief Executive Officer
November 14, 2000 BY: /S/ KENBIAN A. NG
---------------------------------------
Kenbian A. Ng
Chief Financial Officer
(Principal Financial and Accounting
Officer)
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