<PAGE> 1
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 JUNE 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.
(Exact name of registrant as specified in its charter)
FLORIDA 65-0354269
----------------------------- -------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2701 SOUTH BAYSHORE DRIVE, 5TH FLOOR, MIAMI, FL 33133
----------------------------------------------- -----
(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 August
10, 2000 was 6,850,281.
<PAGE> 2
MAREX.COM, INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
PART I - FINANCIAL INFORMATION
<S> <C> <C>
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of June 30, 2000
and December 31, 1999........................................................ 2
Condensed Consolidated Statements of Operations for the three months
and six months ended June 30, 2000 and 1999.................................. 3
Condensed Consolidated Statements of Cash Flows for the six months
ended June 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>
<PAGE> 3
MAREX.COM, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
------------ ------------
(unaudited)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 35,700,759 $ 3,434,036
Prepaid expenses and other current assets 876,773 70,602
Loan to shareholder -- 22,200
------------ ------------
Total current assets 36,577,532 3,526,838
------------ ------------
Property and equipment, net 1,578,598 692,335
------------ ------------
Other assets:
Trademark, net 14,896 23,021
Software development costs, net 2,688,826 71,668
Deposits -- 1,596
------------ ------------
Total other assets 2,703,722 96,285
------------ ------------
Total assets $ 40,859,852 $ 4,315,458
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Capital lease obligations $ 19,508 $ 6,845
Accounts payable and accrued expenses 4,128,860 534,552
Customer deposits 58,753 63,223
------------ ------------
Total current liabilities 4,207,121 604,620
------------ ------------
Long-term liabilities:
Capital lease obligations, net of current portion 53,113 6,734
------------ ------------
Total liabilities 4,260,234 611,354
------------ ------------
Shareholders' equity:
Preferred Stock, par value $.01 per share, 1,000,000
shares authorized, 420,000 and 376,140 shares of
Series A1 Convertible Preferred Stock issued and
outstanding as of June 30, 2000, respectively, none
issued at December 31, 1999 37,614,021 --
Common Stock, par value $.01 per share, 25,000,000
shares authorized, 6,761,189 and 6,396,806 shares
issued and outstanding as of June 30, 2000 and
December 31, 1999, respectively 67,612 63,968
Additional paid-in capital 35,217,303 9,530,079
Accumulated deficit (36,299,318) (5,889,943)
------------ ------------
Total shareholders' equity 36,599,618 3,704,104
------------ ------------
Total liabilities and shareholders' equity $ 40,859,852 $ 4,315,458
============ ============
</TABLE>
See Notes to Condensed Consolidated Financial Statements
2
<PAGE> 4
MAREX.COM, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------------- --------------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues $ 1,165 $ 1,818 $ 4,612 $ 2,461
------------ ------------ ------------ ------------
Operating expenses:
Product development 2,427,018 114,653 3,164,702 189,734
Selling and marketing 1,850,035 229,962 2,779,600 442,772
General and administrative 1,600,691 345,146 2,644,551 590,152
Stock-based compensation 118,709 -- 607,893 --
Fair value of warrants 21,746,581 -- 21,746,581 --
------------ ------------ ------------ ------------
Total operating expenses 27,743,034 689,761 30,943,327 1,222,658
------------ ------------ ------------ ------------
Loss from operations (27,741,869) (687,943) (30,938,715) (1,220,197)
------------ ------------ ------------ ------------
Other income (expense):
Interest income 444,703 9,931 535,374 10,010
Interest expense (1,922) (3,341) (2,827) (6,053)
Other (1,723) -- (3,207) --
------------ ------------ ------------ ------------
Total other income (expense) 441,058 6,590 529,340 3,957
------------ ------------ ------------ ------------
Loss from continuing operations (27,300,811) (681,353) (30,409,375) (1,216,240)
Loss from discontinued operations -- (39,050) -- (82,594)
------------ ------------ ------------ ------------
Net loss $(27,300,811) $ (720,403) $(30,409,375) $ (1,298,834)
============ ============ ============ ============
Net loss per share, basic and diluted:
Continuing operations $ (4.21) $ (0.13) $ (4.72) $ (0.24)
Discontinued operations -- (0.01) -- (0.02)
------------ ------------ ------------ ------------
Net loss $ (4.21) $ (0.14) $ (4.72) $ (0.26)
============ ============ ============ ============
Weighted average shares of Common Stock
outstanding 6,490,541 5,181,605 6,448,569 5,055,593
============ ============ ============ ============
</TABLE>
See Notes to Condensed Consolidated Financial Statements
3
<PAGE> 5
MAREX.COM, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
JUNE 30,
------------------------------------
2000 1999
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Loss from continuing operations $(30,409,375) $ (1,216,240)
Adjustments to reconcile loss from continuing operations to
net cash used in continuing operations
Depreciation 159,585 14,755
Amortization 137,111 10,496
Stock-based compensation 607,893 --
Fair value of warrants 21,746,581 --
Loss on disposal of property and equipment 3,207 --
Increase in prepaid expenses and other current assets (806,171) (134,903)
Decrease in deposits 1,596 --
Increase in accounts payable and accrued expenses 3,594,308 449,713
Decrease in customer deposits (4,470) (9,560)
------------ ------------
Net cash used in operating activities (4,969,735) (885,739)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (976,565) (40,851)
Acquisition of trademark -- (32,500)
Additions to software development costs (2,746,144) --
Decrease in loan to shareholder 22,200 --
------------ ------------
Net cash used in investing activities (3,700,509) (73,351)
------------ ------------
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 (13,448) (5,860)
Proceeds from exercise of stock options and warrants 49,410 3,000
Proceeds from issuance of Common Stock -- 5,679,470
Proceeds from issuance of Preferred Stock 40,901,005 --
------------ ------------
Net cash provided by financing activities 40,936,967 5,501,133
------------ ------------
Net cash provided by continuing operations 32,266,723 4,542,043
Net cash used in discontinued operations -- (133,001)
------------ ------------
Net increase in cash and cash equivalents 32,266,723 4,409,042
CASH AND CASH EQUIVALENTS, beginning of period 3,434,036 350,042
------------ ------------
CASH AND CASH EQUIVALENTS, end of period $ 35,700,759 $ 4,759,084
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during each period for interest $ 2,827 $ 5,132
============ ============
</TABLE>
See Notes to Condensed Consolidated Financial Statements
4
<PAGE> 6
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 any 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 losses
of Sovereign prior to August 24, 1999, are included in the unaudited condensed
consolidated statements of operations under "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.
5
<PAGE> 7
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:
June 30,
--------------------------------
2000 1999
------------- -------------
OPTIONS
Outstanding 2,699,700 2,272,000
Weighted average exercise prices $ 6.52 $ 2.80
WARRANTS
Outstanding 1,852,052 236,971
Weighted average exercise prices $ 3.57 $ 9.36
(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 $2.7 million of software development costs associated with
development of its e-commerce solutions during the six months ended June 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 six months ended June 30, 2000, compensation expense related to the
stock options granted to the director totaled $119,000 and $608,000,
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.
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
6
<PAGE> 8
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, 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
<PAGE> 9
(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 $218,000 for the three months and six months ended June 30,
2000, respectively, and is included in the accompanying unaudited condensed
consolidated statements of operations as a component of "General and
administrative" expenses.
8
<PAGE> 10
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
Exchange ("Exchange"), the first procurement tool that we developed, was an
Internet-based trading exchange for the marine industry. We began registering
members for the Exchange in November 1998. 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 ("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 a lowest price forum for buyers to take advantage of sellers'
overstocked and available inventory. Sellers utilizing Classifieds and Auctions
will gain access to an expanded wholesale customer base and have greater
opportunity to resell slow moving inventory.
In addition to Classifieds and Auctions, we are developing e-commerce solutions
that will automate the procurement process of marine businesses. We expect our
solutions to offer increased procurement efficiency and access to Internet
distribution channels.
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. During the
three months and six months ended June 30, 1999, our loss from discontinued
operations was $39,000 and $83,000, respectively. There was no loss from
discontinued operations during the three months and six months ended June 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.
RESULTS OF OPERATIONS
COMPARISON OF THREE MONTHS ENDED JUNE 30, 2000 AND 1999
REVENUES
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
9
<PAGE> 11
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 or Auctions transaction. A
Classifieds or Auctions transaction is considered completed when a buyer and
seller have committed to a sale. For the three months ended June 30, 2000, we
recorded revenues of $1,000 generated from $22,000 of completed transactions
through Classifieds and Auctions. For the same period in 1999, we recorded
revenues of $2,000 generated from $45,000 of completed transactions through the
Exchange. The decrease resulted primarily from the introduction of Classifieds
and Auctions and the time required for members to become accustomed to its
pricing structure. We expect revenues to increase with the introduction of our
e-commerce solutions that will automate the procurement process of marine
businesses.
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 $2.4
million for the three months ended June 30, 2000, compared to $115,000 for the
same period in 1999. The change related primarily to increases of $780,000 in
personnel and personnel related costs, and $985,000 in outside contractor costs.
The balance was comprised of overhead and operating costs directly associated
with the development and maintenance of the website and e-commerce products. We
expect product development expenses to continue to increase as we develop and
enhance the functionality 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 $1.9
million for the three months ended June 30, 2000, compared to $230,000 for the
same period in 1999. The change is primarily due to increases of $369,000 in
personnel and personnel related costs, $537,000 in advertising and marketing
costs, and $132,000 in outside contractor costs. The balance was comprised of
overhead and operating costs directly associated with selling and marketing
activities. We expect selling and marketing expenses to continue to increase as
we increase awareness about our company, improve our positioning within the
market and launch new e-commerce products.
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 $1.6
million for the three months ended June 30, 2000, compared to $345,000 for the
same period in 1999. The change related primarily to increases of $541,000 in
personnel and personnel related costs, which includes a performance-based
payment of $420,000 to the Chief Executive Officer, and $224,000 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. We expect general and administrative expenses to continue to increase
as we add personnel and incur additional corporate expenses associated with the
evolution of our business.
STOCK-BASED COMPENSATION
For the three months ended June 30, 2000, we recorded non-cash compensation
expense of $119,000 relating to stock options granted to a director. We did not
incur any stock-based compensation expense in 1999.
10
<PAGE> 12
FAIR VALUE OF WARRANTS
For the three months ended June 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 three months ended June 30, 1999.
OTHER INCOME AND EXPENSE
We recorded $445,000 of interest income for the three months ended June 30,
2000, compared to $10,000 for the three months ended June 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
June 30, 2000 was $2,000, compared to $3,000 for the three months ended June 30,
1999, as a result of the decrease in our notes payable and loan from related
party balances.
LOSS FROM CONTINUING OPERATIONS
Our loss from continuing operations increased to $27.3 million for the three
months ended June 30, 2000, compared to $681,000 for the three months ended June
30, 1999. The change resulted from the increase in costs, as described above,
associated with the launch of Classifieds and Auctions and the development of
other e-commerce solutions.
COMPARISON OF SIX MONTHS ENDED JUNE 30, 2000 AND 1999
REVENUES
For the six months ended June 30, 2000, we recorded revenues of $5,000 generated
from $108,000 of completed transactions through the Exchange and Classifieds and
Auctions. For the same period in 1999, we recorded revenues of $2,000 generated
from $61,000 of completed transactions through the Exchange. The increase
resulted primarily from increased usage of the Exchange by our members during
the three months ended March 31, 2000. We experienced a decrease in revenues
during the three months ended June 30, 2000, resulting from the introduction of
Classifieds and Auctions and the time required for members to become accustomed
to its pricing structure. We expect revenues to increase with the introduction
of our e-commerce solutions that will automate the procurement process of marine
businesses.
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 $3.2
million for the six months ended June 30, 2000, compared to $190,000 for the
same period in 1999. The change related primarily to increases of $1.2 million
in personnel and personnel related costs, and $1.1 million in outside contractor
costs. The balance was comprised of overhead and operating costs directly
associated with the development and maintenance of the website and e-commerce
products. We expect product development expenses to continue to increase as we
develop and enhance the functionality 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 $2.8
million for the six months ended June 30, 2000, compared to $443,000 for the
same period in 1999. The change is primarily due to increases of $603,000 in
personnel and personnel
11
<PAGE> 13
related costs, $845,000 in advertising and marketing costs, and $132,000 in
outside contractor costs. The balance was comprised of overhead and operating
costs directly associated with selling and marketing activities. We expect
selling and marketing expenses to continue to increase as we increase awareness
about our company, improve our positioning within the market and launch new
e-commerce products.
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 $2.6
million for the six months ended June 30, 2000, compared to $590,000 for the
same period in 1999. The change related primarily to increases of $1.1 million
in personnel and personnel related costs, which includes a total of $840,000 in
performance-based payments made to the Chief Executive Officer, and $347,000 in
professional fees, which includes $218,000 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. We expect general and administrative expenses to
continue to increase as we add personnel and incur additional corporate expenses
associated with the evolution of our business.
STOCK-BASED COMPENSATION
For the six months ended June 30, 2000, we recorded non-cash compensation
expense of $608,000 relating to options granted to a director. We did not incur
any stock-based compensation expense in 1999.
FAIR VALUE OF WARRANTS
For the six months ended June 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 six months ended June 30, 1999.
OTHER INCOME AND EXPENSE
We recorded $535,000 of interest income for the six months ended June 30, 2000,
compared to $10,000 for the six months ended June 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 six months ended June 30,
2000 was $3,000, compared to $6,000 for the six months ended June 30, 1999, as a
result of the decrease in our notes payable and loan from related party
balances.
LOSS FROM CONTINUING OPERATIONS
Our loss from continuing operations increased to $30.4 million for the six
months ended June 30, 2000, from $1.2 million for the six months ended June 30,
1999. The change resulted from the increase in costs, as described above,
associated with the launch of Classifieds and Auctions and the development of
other e-commerce solutions.
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 $5.0 million for the six months ended
June 30, 2000, primarily as a result of a net loss from continuing operations of
$30.4 million and an increase of $806,000 in prepaid expenses and other current
assets. The net loss was offset by an increase of $3.6 million in accounts
12
<PAGE> 14
payable and accrued expenses, a non-cash stock-based compensation charge of
$608,000, and the non-cash expense of $21.7 million reflecting the fair value of
warrants issued.
Net cash used in investing activities was $3.7 million for the six months ended
June 30, 2000, primarily due to $2.7 million of software development costs
related to the development of our e-commerce solutions and $977,000 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 $40.9 million for the six months
ended June 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 June 30, 2000, cash and cash equivalents totaled $35.7 million, while our
working capital was $32.4 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
during the six months ended June 30, 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 experience significant growth in 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 PRONOUNCEMENT
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 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 as required 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. 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
13
<PAGE> 15
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 significantly
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 BUSINESS TO BUSINESS E-COMMERCE MODEL IS NOT PROVEN
Our B2B e-commerce model is based on the expansion of Classifieds and Auctions
and the launch of our other procurement solutions for B2B e-commerce 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.
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 as well as traditional suppliers and 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.
14
<PAGE> 16
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 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 the 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
15
<PAGE> 17
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,
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 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.
16
<PAGE> 18
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 June 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 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.
17
<PAGE> 19
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 25, 2000, the Company held an annual meeting in Miami, Florida. The
matters voted upon and their results were as follows:
PROPOSAL 1
To elect directors of the Company, each to serve until the 2001 Annual Meeting
or until his successor has been duly elected and qualified.
All nominees were elected based on the following voting results:
<TABLE>
<CAPTION>
Director For Against Abstain
----------------------------------------- -------------------- -------------------- --------------------
<S> <C> <C> <C>
David A. Schwedel 5,664,410 0 555
Daniel F. Gallagher 5,664,440 0 525
George Glazer 5,664,440 0 525
Robert C. Harris, Jr. 5,664,440 0 525
Roger Trombino 5,664,440 0 525
</TABLE>
PROPOSAL 2
To ratify the appointment of Arthur Andersen LLP as independent certified public
accountants of the Company for the year ending December 31, 2000.
Proposal 2 was approved based on the following voting results:
For Against Abstain
----------------------- -------------------- --------------------
5,661,765 2,750 450
ITEM 5. OTHER INFORMATION
Not applicable.
18
<PAGE> 20
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)
(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.
</TABLE>
(b) Reports on Form 8-K
On April 27, 2000, the Company filed a report on Form 8-K for the
Warrant Agreement between the Company and Genmar Holdings, Inc.
19
<PAGE> 21
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.
August 11, 2000 BY: /s/ DAVID A. SCHWEDEL
-------------------------
David A. Schwedel
Chairman of the Board of Directors, President
and Chief Executive Officer
August 11, 2000 BY: /s/ KENBIAN A. NG
---------------------
Kenbian A. Ng
Chief Financial Officer
(Principal Financial and Accounting Officer)
20
