U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
AMENDMENT NO. 1 TO FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR QUARTERLY PERIOD ENDED: APRIL 30, 2000
[ ] 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: 0-22607
MERCHANTONLINE.COM, INC.
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(Exact name of small business issuer as specified in its charter)
Florida
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(State or other jurisdiction of incorporation or organization)
84-1233073
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(IRS Employer Identification No.)
902 Clint Moore Road Suite 144,
Boca Raton, Florida 33487
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(Address of principal executive offices)
(561) 864-6000
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(Issuer's Telephone Number)
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(Former name, former address and former fiscal year,
if changed since last report)
CHECK WHETHER THE ISSUER (1) FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION
13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PAST 12 MONTHS (OR
FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS),
AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS: YES
[X] NO [].
THE NUMBER OF SHARES OF THE REGISTRANT'S COMMON STOCK ISSUED AND OUTSTANDING, AS
OF MAY 31, 2000, WAS APPROXIMATELY 59,303,000 SHARES.
RESTATEMENT OF FINANCIAL STATEMENTS AND CHANGES TO CERTAIN INFORMATION
This Quarterly Report on Form 10-Q/A is being filed by
MerchantOnline.com, Inc. (the "Company") to amend and restate Items 1 and 2 of
the Company's Quarterly Report on Form 10-Q for the quarter ended April 30,
2000. The 10-Q/A reflects an adjustment to the purchase price of the Web
Financial Services Corporation acquisition on April 19, 2000 resulting from the
guarantee of the future stock price as more fully described in Note 5 to the
condensed financial statements. The purchase price has been increased from
$8,086,154 to $25,882,053, and the related amortization expense for the
three-month period ended April 30, 2000 has increased from $224,615 to $717,474.
<PAGE>
PART I
ITEM 1. CONDENSED FINANCIAL STATEMENTS.
MERCHANTONLINE.COM, INC.
CONDENSED BALANCE SHEET
APRIL 30, 2000
(unaudited)
ASSETS
CURRENT ASSETS:
Cash $ 1,146,603
Accounts receivable 23,894
Accounts receivable from related party 7,525
Due from shareholder 8,723
Prepaid services 672,525
Prepaid advertising 464,166
Deferred advertising 50,834
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Total Current Assets 2,374,270
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Property and Equipment, net 1,153,956
Purchase price to be allocated, net of amortization 30,974,036
Other assets 29,077
Deferred advertising 250,000
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Total Assets $ 34,781,339
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LIABILITIES and STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 869,543
Accrued expenses and other 353,011
Other liabilities 215,600
Notes payable 25,000
Deferred revenue 16,496
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Total Current Liabilities 1,479,650
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Note payable to shareholder 270,000
Commitments and Contingencies
SHAREHOLDERS' EQUITY:
Common Stock -Par Value is $.001
100,000,000 shares authorized
51,537,240 issued and outstanding 51,537
Additional paid in capital 39,767,251
Accumulated deficit (6,762,099)
Subscription receivable (25,000)
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Total shareholders' equity 33,031,689
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Total liabilities and shareholders 'equity $ 34,781,339
============
See accompanying notes to condensed financial statements.
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MERCHANTONLINE.COM, INC.
CONDENSED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
April 30, April 30,
---------------------------- ----------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues $ 76,382 $ 69,734 $ 97,770 $ 164,809
Cost and Expenses
Cost of Sales 24,155 21,550 36,699 90,254
General and Administrative 3,049,100 164,230 4,157,510 336,976
------------ ------------ ------------ ------------
Total Costs and Expenses 3,073,255 185,780 4,194,209 427,230
------------ ------------ ------------ ------------
Net loss $ (2,996,873) $ (116,046) $ (4,096,439) $ (262,421)
============ ============ ============ ============
Net loss per share--basic and diluted $ (.06) $ (.00) $ (.09) $ (.01)
============ ============ ============ ============
Weighted shares outstanding 48,920,104 34,363,636 46,827,685 32,900,000
============ ============ ============ ============
</TABLE>
See accompanying notes to condensed financial statements
3
<PAGE>
<TABLE>
<CAPTION>
MERCHANTONLINE.COM, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(unaudited)
Six Months Ended
April 30,
2000 1999
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(4,096,439) $ (262,421)
Adjustments to reconcile net loss to net
cash used in operating activities, net of acquisitions:
Depreciation and amortization 71,777 16,297
Amortization of purchase price to be allocated 1,450,281 --
Issuance of stock for goods and services 825,475 --
Issuance of stock options 566,383 --
Accounts receivable (10,927) 4,048
Employee advances -- (300)
Deferred advertising 275,416 --
Prepaid advertising (275,416) --
Other assets (11,779) --
Accounts payable (108) 128,308
Accrued expenses and other (36,234) --
Deferred revenue 22,264 --
Other liabilities (10,964) 2,917
Advertising payable (800,833) --
----------- -----------
Net Cash used in Operating Activities (2,031,104) (111,151)
----------- -----------
Cash Flows from Investing Activities:
Purchase of property and equipment (172,943) (82,874)
Deposit on Innovonics acquisition (50,000) --
Cash received in Approve.net acquisition 3,314 --
Payments for Web Financial Services acquisition (140,000) --
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Net Cash used in Investing Activities (359,629) (82,874)
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Cash Flows from Financing Activities:
Increase in short term debt -- 241,243
Proceeds from private placements 3,650,000 --
Payments on note to shareholder (4,560) --
Advance to shareholder (3,252) --
Payments on note payable (110,000) --
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Net Cash provided by Financing Activities 3,532,188 241,243
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Net increase in cash $ 1,141,455 $ 47,218
Cash at beginning of period 5,148 2,499
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Cash at end of period $ 1,146,603 $ 49,717
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</TABLE>
See accompanying notes to condensed financial statements
4
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MERCHANTONLINE.COM, INC.
Notes to Condensed Financial Statements (unaudited)
April 30, 2000
Note 1. Basis of Presentation
The accompanying unaudited condensed financial statements have been prepared in
accordance with the instructions for Form 10-QSB and do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all
adjustments, consisting only of normal recurring adjustments considered
necessary for a fair presentation, have been included. Operating results for any
quarter are not necessarily indicative of the results for any other quarter or
for the full year. These interim financial statements should be read in
conjunction with MerchantOnline.com, Inc.'s (the "Company") audited financial
statements and accompanying footnotes included on Form 10-KSB for the fiscal
year ended October 31, 1999.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the consolidated financial statements and
accompanying notes. Management believes that the estimates utilized in preparing
its financial statements are reasonable and prudent; however, actual results
could differ from these estimates.
Loss per share
Loss per share is computed by dividing net loss by the weighted average number
of shares of common stock outstanding during each period. Common equivalent
shares consist of the incremental common shares issuable upon exercise of stock
options and warrants. These options and warrants have not been included in the
computation of diluted earnings per share because such instruments would have
been antidilutive for all periods presented.
Stock-Based Compensation
SFAS No. 123, Accounting for Stock-Based Compensation, defines a fair value
method of accounting for issuance of stock options and other equity investments.
Under the fair value method, compensation cost is measured at the grant date
based on the fair value of the award and is recognized over the service period,
which is usually the vesting period. Pursuant to SFAS No. 123, companies are
encouraged, but not required, to adopt the fair value method of accounting for
employee stock-based transactions. Companies are also permitted to continue to
account for such transactions under Accounting Principles Board (APB) Opinion
NO. 25, Accounting for Stock Issued to Employees, but are required to disclose
in a note to the financial statements pro forma net income amounts as if the
Company had applied the new method of accounting.
The Company accounts for employee stock-based compensation under APB No. 25.
Advertising Expense
Advertising production costs which benefit periods within the fiscal year beyond
the interim period in which the expenditure is incurred are deferred and
amortized over the interim periods benefited.
Note 2. Management's Plans and Issues Affecting Liquidity
The Company's financial statements have been prepared assuming that the Company
will continue as a going concern. The Company has a limited operating history
and had sustained losses since inception. In addition the Company had negative
cash flow from operations of approximately $2,031,104 during the six-month
period ended April 30, 2000. As a result, the Company had to rely principally on
private equity funding to continue its activities to date. The Company intends
5
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MERCHANTONLINE.COM, INC.
Notes to Condensed Financial Statements (unaudited)
April 30, 2000
(continued)
to continue to increase its operational expenses to expand its product offering
and sales and marketing.
On January 5, 2000, the Company entered into an investment agreement for the
sale of up to $35 million of common stock upon the exercise of certain Put
Rights. The Put Rights become available upon the effectiveness of a registration
statement to be filed with the Securities and Exchange Commission to register
the stock that will be sold under the Agreement.
Management intends to file the registration statement in the upcoming fiscal
quarter. Also, subsequent to April 30, 2000, the Company has received
approximately $285,000 in connection with private placements of its common stock
and has borrowed $1,300,000 of a $3,000,000 note from its chief executive
officer. Management intends to continue to use these proceeds to fund its
operations and expansion.
Note 3. Revenue Recognition
In December 1999, the Securities and Exchange Commission staff issued Staff
Accounting Bulletin (SAB) No. 101, Revenue Recognition in Financial Statements.
The SAB establishes certain criteria for net versus gross recording of sales
transactions and requires companies to comply with the SAB no later than the
first fiscal quarter of the fiscal year beginning after December 15, 1999 and to
retroactively reclassify for all periods presented. The Company has decided to
early adopt the SAB. Prior to implementation of the SAB, the Company recorded
gross revenues from customers that used its merchant accounts and recorded
corresponding expenses, net of its fees, for distribution to its customers. The
1999 quarterly information have been reclassified to comply with this SAB.
Note 4. Acquisition of Approve.net, Inc.
On January 7, 2000, the Company issued 4,000,000 shares of its common stock in
exchange for all of the outstanding shares of Approve.net, Inc. Approve.net,
Inc.'s primary business is to provide charge card processing solutions to
Internet merchants by hosting a server that allows businesses to execute
transactions such as online processing of credit cards, debit cards and online
checks. The shares issued in the acquisition were valued at $1.665 per share, as
determined by an independent appraiser. This transaction was accounted for as a
purchase, and accordingly, the results of the operations of Approve.net, Inc.
were included with the Company's results from the date of acquisition. The
purchase price, net of cash received of $3,314, has been allocated to fixed
assets of $61,425 and "purchase price to be allocated" of $6,595,261 which are
included on the accompanying balance sheet. The Company is currently in the
process of re-evaluating the fair values of assets acquired, including
identifiable intangible assets, if any. The Company amortized $732,808 and
$183,202 of the related purchase price to be allocated as of April 30, 2000 and
January 31, 2000, respectively, based on an overall estimated life of three
years.
Note 5. Acquisition of Web Financial Services Corporation
On April 19, 2000, the Company issued 2,500,000 shares of its common stock and
either paid or committed to pay $420,000 of cash and assumed certain net
liabilities in connection with a reverse triangular merger with Web Financial
Services Corporation and Web Financial Acquisition Corp., a wholly owned
subsidiary. In connection therewith, the Company agreed to issue additional
shares within one year from the anniversary date if the stock price per share,
as determined by calculating the average stock price for a specific period of
time, does not equal or exceed $10 per share. Web Financial Services Corporation
has pending patents on an internally developed software program to provide
charge card processing solutions through secure ATM/debit cards to online
consumers.
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MERCHANTONLINE.COM, INC.
Notes to Condensed Financial Statements (unaudited)
April 30, 2000
(continued)
This transaction was accounted for as a purchase, and accordingly, the results
of the operations of Web Financial Services Corporation were included with the
Company's results from the date of acquisition.
The purchase price ($25,882,053) consists of the cash paid ($140,000), a note
payable to shareholders ($280,000), the fair value of the shares issued, as
determined by an independent appraiser, adjusted by the guarantee on the share
price ($25,165,938) and the assumption of a note payable and other liabilities
($296,115). The purchase price has been allocated to fixed assets and deposits
($52,997) and "purchase price to be allocated" ($25,829,056), which are included
on the accompanying condensed balance sheet. In connection with the purchase,
the Company, as noted above, also assumed a note payable of $270,000 and related
accrued interest of $18,225.
The note matures in 2003 and bears interest of 9% per annum. The Company is
currently in the process of re-evaluating the fair values of assets acquired,
including identifiable intangible assets, if any. The Company has amortized
$717,474 of this amount as of April 30, 2000 based on an overall estimated life
of three years.
The following unaudited pro forma financial information reflects the results of
operations for the three-month periods ended April 30, 2000 and April 30, 1999,
as if the acquisition had occurred at the beginning of the respective periods
presented, and after giving effect to purchase accounting adjustments. This
unaudited pro forma information is presented for illustrative purposes only and
is not necessarily indicative of the results of operations in future periods or
results that would have been achieved had the Company and Web Financial Services
Corporation been combined during the specified periods.
Three Months Ended
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April 30, 2000 April 30, 1999
---------------- -----------------
Net revenues $ 39,437 $ 69,734
Loss from operations (5,760,098) (2,343,923)
Net loss (5,760,098) (2,343,923)
Net loss per share $ (.11) $ (.07)
Note 6. Common Stock
The Company received $3,650,000 of cash from private placements for the period
ended April 30, 2000, $2,745,000 of which relates to stock issued during the
six-month period ended April 30, 2000 and $405,000 relates to collections on
subscription receivable at October 31, 1999. At April 30, 2000, the Company had
subscription receivables of $25,000.
On May 8, 2000, the Company effected a two-for-one stock split to stockholders
of record as of May 1, 2000. This stock split has been reflected in the
condensed financial statements and footnote disclosures for all periods
presented.
Note 7. Stock Warrants
On November 30, 1999, the Company entered into a six-month service agreement
with an unrelated party. In connection therewith, the Company issued three
warrants to purchase 100,000 shares each of common stock at $1.125, $1.375 and
$1.625, respectively, per share. Management has accounted for the warrants under
FAS 123 using the Black Scholes method and determined that the fair value of
each warrant was $105,500, $105,500, and $105,000, respectively. The term of the
warrants is four years from the date of issuance, which was determined to be
November 30, 1999. The charge to expense will be recognized ratably over the
life of the agreement. As of April 30, 2000, the Company recognized $263,333 of
expenses related to this agreement.
In connection with the negotiations on the investment agreement for the sale of
common stock (see Note 2), the Company delivered a warrant to the investor to
purchase 980,000 shares of common stock at a price of $.965 per share. The
7
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MERCHANTONLINE.COM, INC.
Notes to Condensed Financial Statements (unaudited)
April 30, 2000
(continued)
warrants have a reset provision whereby the price of the shares will be reset
every six months if the warrants are not exercised. Management has accounted for
these warrants as a cost of the equity.
In April 2000, the Company issued 120,000 common stock purchase warrants with an
exercise price of $4.75, to a third party who provided services to the Company.
The Company is amortizing the consulting expense of ratably over the four year
vesting period.
Note 8. Stock Option Plans
On February 21, 2000, the Company adopted an Equity Incentive Plan (the "Plan")
which provides for granting of incentive options to employees, consultants and
directors of the Company. The plan will be administered and interpreted under
Section 422 of the Tax Code. The maximum number of shares of common stock issued
or subject to awards granted shall not exceed 10,000,000 shares. As of April 30,
2000, the Company has issued 4,948,800 options in connection with Plan.
Options granted under the Plan are generally for periods not to exceed ten years
and are granted at prices not less than 100% of the fair market value on the
date of grant. Incentive stock options granted to shareholders who own greater
than 10% of the outstanding stock are for periods not to exceed five years and
must be issued at prices not less than 110% of the fair market value of the
stock on the date of grant.
During the six month period ended April 30, 2000, the Company granted stock
options under the Plan for the purchase of 5,776,000 shares of common stock to
employees as well as one director, at exercise prices ranging from $2.00 to
$4.75 per share. The exercise prices are equal to or in excess of the market
values at the dates of grant and accordingly, no compensation expense is
recognized.
Note 9. Commitments and Contingencies
The Company may be subject to other lawsuits and claims arising in the ordinary
course of business. In the Company's opinion, as of April 30, 2000, there are no
such matters that would have a material adverse effect on the Company's
financial position or its results of operations.
Note 10. Subsequent Event
On May 15, 2000, the Company consummated a reverse triangular merger, thereby
acquiring 90.1% of Innovonics, Inc. Innovonics, Inc. developed and patented a
proprietary hardware device called PcPay(R), for internet online authentication.
The Company issued 8,976,488 shares of common stock and granted 1,023,512 stock
options in order to transact the merger.
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
Company's unaudited financial statements and notes thereto included herein. In
connection with, and because it desires to take advantage of, the "safe harbor"
provisions of the Private Securities Litigation Reform Act of 1995, the Company
cautions readers regarding certain forward looking statements in the following
discussion and elsewhere in this report and in any other statement made by, or
on the behalf of the Company, whether or not in future filings with the
Securities and Exchange Commission. Forward looking statements are statements
not based on historical information and which relate to future operations,
strategies, financial results or other developments. Forward looking statements
are necessarily based upon estimates and assumptions that are inherently subject
to significant business, economic and competitive uncertainties and
contingencies, many of which are beyond the Company's control and many of which,
with respect to future business decisions, are subject to change. These
uncertainties and contingencies can affect actual results and could cause actual
results to differ materially from those expressed in any forward looking
statements made by, or on behalf of, the Company. The Company disclaims any
obligation to update forward looking statements.
OVERVIEW
MerchantOnline.com, Inc., f/k/a Tarcyn Corporation, was incorporated in
the State of Colorado on March 19, 1993. On February 16, 1999, pursuant to the
terms of an Agreement and Plan of Reorganization, the Company undertook a
forward split of its issued and outstanding common stock whereby 3.5 shares of
common stock were exchanged for every share then issued and outstanding and
thereafter, the Company acquired all of the issued and outstanding securities of
CreditCo, Inc., a Delaware corporation, in exchange for 31,500,000 (post forward
split) "restricted" common shares of the Company. As a result, the Company was
the surviving entity. As part of the terms of the aforesaid transaction, the
Company amended its Articles of Incorporation, changing its name to its present
name, as well as reincorporating in the State of Florida.
MerchantOnline.com is a developer and provider of a real-time eCommerce
transaction network for the virtual and real world marketplace. The Company
offers products that support any combination of transactions between companies,
consumers and the government anywhere in the world. It's products include
proprietary real-time credit card processing programs, a proprietary hardware
device called PcPay(R), and a proprietary ATM/Debit network for the Internet.
The Company believes its network of products exceeds the capabilities of all
suppliers of these services in the industry. Its goal is to provide merchants
with a single vendor that furnishes everything needed to offer transaction
products that allow multiple methods of payments and deal with the various
marketing and business issues facing any company. From affinity programs that
provide "stickiness" to escrow services for buyers and sellers to
consumer-to-consumer payments, MerchantOnline.com has developed products that
support an ever-changing transaction platform. MerchantOnline.com's PcPay(R)
device offers a low cost ATM approved computer peripheral that encrypts
sensitive financial data (via a card swipe) before it enters the
computer/Internet. It is capable of reading and writing to a smart card, and
provides a unique gateway for any system that requires card present
authorization: for transactions of funds or information.
On January 7, 2000, MOL completed the merger with Approve.net and its
subsidiary, Charge Solutions. Approve.net provides technical support and back
office operations for MOL's client base. In April 2000, MerchantOnline.com
completed the acquisition of Web Financial Services Corporation and in May 2000
completed the acquisition of 90.1% of Innovonics, Inc. Web Financial has pending
patents on an internally developed software program to provide charge card
processing solutions through secure ATM/debit cards to online consumers.
Innovonics developed and patented the PcPay device for online authentication.
The Company will incur amortization of the "purchase price to be allocated"
related to these acquisitions of approximately $4,000,000 per quarter. This
amount may be adjusted at fiscal year-end based on an independent appraisal of
the intangible assets acquired.
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The following information is intended to highlight developments in the
Company's operations to present the results of operations of the Company, to
identify key trends affecting the Company's businesses and to identify other
factors affecting the Company's results of operations for the six month periods
ended April 30, 2000 and 1999.
RESULTS OF OPERATIONS
Three months ended April 30, 2000 and 1999
During the three month period ended April 30, 2000, the Company's
revenues were $76,382, compared to $69,734 for the similar period in 1999. This
increase of $6,648 was attributable to the growth of the Company's business, as
the Company's customer base increased during this period from the prior period
in 1999. Costs of sales were $24,155 for the three-month period ended April 30,
2000, compared to $21,550 for the three month period ended April 30, 1999, an
increase of $2,605. As the Company starts to sell its PcPay device and receive
transaction fees, it believes that its current business products will become a
less material portion of its business. This shift in product mix is expected to
substantially affect the revenues and costs reflected in the Company's future
financial statements.
General and administrative expenses for the three-month period ended
April 30, 2000 were $3,049,100 compared to $164,230 for the three month period
ended April 30, 1999, as the Company substantially increased its infrastructure
in anticipation of its expected growth. The 2000 amount included $339,217 of
investor relation expense, $470,781 for business consultants and amortization of
the prepaid expenses described below and contractors, $379,391 for salaries and
wages, $493,999 for legal, accounting and other professional expense and
$1,285,214 of depreciation and amortization primarily relating to the completed
acquisitions. General and administrative expense increased during the three
month period ended April 30, 2000 compared to the similar period in 1999 as a
result of the substantial increase in business activities and the increase in
employees. It is expected that these expenses will increase in the foreseeable
future by reason of anticipated expanded volume of transactions processed by the
Company. As a result, the Company generated a net loss of $(2,996,873) during
the three month period ended April 30, 2000 ($.06 per share), compared to a net
loss of $(116,046) for the similar period in 1999.
Six months ended April 30, 2000 and 1999
During the six month period ended April 30, 2000, the Company's
revenues were $97,770, compared to $164,809 for the similar period in 1999. This
decrease of $67,039 was attributable to the Company's decision to terminate
certain product lines. Costs of sales were $36,699 for the six-month period
ended April 30, 2000, compared to $90,254 for the six month period ended April
30, 1998, a decrease of $53,555. For the six month period ended April 30, 2000,
the portion of sales revenues that relate to these product lines was $0 compared
to $147,400 for the six months ended April 30, 1999.
During the six month period ended April 30, 2000, general and
administrative expense totaled $4,157,510. Approximately $1,438,614 of this
expense related to Approve.net and Web Financial Services, which were acquired
during the 2000 period. The 2000 amount included $820,807 of investor relation
expense, $504,238 for business consultants and amortization of the prepaid
expenses described below and contractors, $438,762 for wages and $501,999 for
legal, accounting and other professional expense. General and administrative
expense in the six month period ended April 30, 1999 was $336,976, including
$125,853 in independent contractor expense. The 2000 amount also included
approximately $1,764,498 in noncash compensation through the issuance of stock
and $1,522,058 of depreciation and amortization. General and administrative
expense increased during the six month period ended April 30, 2000 compared to
the similar period in 1999 as a result of the Company moving its principal place
of business to a larger facility in order to accommodate the growth of the
business and salaries of the Company's increased number of employees. As a
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<PAGE>
result, the Company had a net loss of $(4,096,439) during the six month period
ended April 30, 2000 ($.09 per share), compared to a net loss of $(262,421) for
the similar period in 1999 ($.01 per share).
LIQUIDITY AND CAPITAL RESOURCES
At April 30, 2000, the Company had $1,146,603 in cash and $31,419 in
accounts receivable. The Company also had $672,525 of prepaid services and
$464,166 of prepaid advertising relating to Pagan Lewis Motors Inc. ("PLM")
described below. Current liabilities were $1,479,650, of which $869,543 were
accounts payable, $353,011 were accrued expenses and other liabilities of
$215,600 relating to resale of the PLM advertising. Payables decreased during
the period due to the increase in cash during the period. As a result of the
Approve.net and Web Financial Services acquisition, there was $32,424,317 of
unamortized purchase price to be allocated among tangible and intangible assets,
much of which is likely to be allocated to goodwill and will be amortized in
future periods. MerchantOnline.com also had $1,153,956 in property and
equipment, net of depreciation. As a result, MerchantOnline.com had working
capital of $894,620.
In May 1999, MerchantOnline.com entered into an agreement with PLM to
purchase Internet advertising blocks and to sponsor a car-racing team with
Yahoo!. MerchantOnline.com was required to make bi-weekly payments but did not
have sufficient cash. An agreement was reached with PLM to pay this amount in 12
monthly installments, starting in September 1999, and PLM would release the
advertising on Yahoo! in amounts equal to what MerchantOnline.com has paid to
PLM. At January 31, 2000, MerchantOnline.com was not current with these payments
and had a verbal agreement to restructure the arrangement. During the April 2000
quarter it made payments of $675,833 and full payment will be made by August 31,
2000. MerchantOnline.com sold approximately $306,000 of this advertising in May
1999 and has collected $215,600 of this amount. The $306,000 of sold advertising
may not be used until the buyer makes all of its payments and MerchantOnline.com
has accordingly recorded this amount as a liability since the buyer has filed
for bankruptcy and the amount may have to be repaid.
During the six months ended April 30, 2000, MerchantOnline.com used
$2,031,104 of cash in operating activities. Net cash provided by financing
activities was $3,532,188, consisting primarily of proceeds from stock issued in
private placements. Approximately $2,831,000 of this amount occurred during the
April quarter.
Management has recognized the Company's need for additional operating
capital. In March 2000, the Company commenced a private offering of its common
stock wherein it is offering shares of its common stock at a price of $5.00 per
share for aggregate gross proceeds of up to $10 million. As of the date of this
report, the Company had sold an aggregate of 432,000 shares of its common stock
for gross proceeds of $2,160,000 pursuant to the offering. While no assurance of
closing the maximum dollar amount proposed to be raised can be provided, it is
anticipated that this offering will continue through the end of June 2000. There
can be no assurance that all of the shares of common stock currently being
offered will be sold, or that the Company will generate sufficient interest in
this offering to solve its cash shortage. It is expected that the proceeds of
this offering will be utilized primarily for producing PcPay devices,
advertising the Company's services using electronic banners on the major
internet services, attendance of the Company at trade shows, research and
development and repayment of debt.
In May 2000, the Company executed a note to Tarek Kirschen, the
Company's chief executive officer, pursuant to which it has the ability to
borrow up to $3 million. Approximately $1,300,000 has been borrowed to date. The
note bears interest at 13.5% and the principal is due on the earlier of December
31, 2000 or the first draw down under the Company's equity agreement.
In addition, in January 2000 MerchantOnline.com entered into a
investment agreement with Swartz Private Equity LLC to provide up to $35 million
of equity, as described in our Form 10-KSB.
MerchantOnline.com has incurred operating losses for all periods from
inception through January 31, 2000, and therefore has not recorded a provision
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for income taxes. A valuation allowance has been recorded for the full amount of
the net deferred tax assets, as the reliability of the deferred tax assets is
not currently predictable.
Since MerchantOnline.com did not have a definitive alternate financing
arrangement in place in the event the proceeds from private equity financings
were not sufficient to fund its working capital needs through the date that cash
proceeds would be available under the Swartz investment agreement, our outside
auditors report issued for the year ended October 31, 1999 stated that there is
substantial doubt about MerchantOnline.com's ability to continue as a going
concern. MerchantOnline.com believes that its current financing arrangements
will provide it with sufficient funds for its planned operations for at least
the remainder of calendar 2000.
TRENDS
Management believes that the Company will continue to operate the
Company's business at a loss for the remainder of 2000, but is optimistic that
the Company will begin generating profits from its operations in 2001. The
Company expects to realize revenues from its PCPay devices in the next quarter
as well as from its Newcash products. This is based upon numerous opportunities
for expansion of the services offered by the Company with major internet
companies, as well as establishing strategic alliances with existing internet
companies. Further, there can be no assurance that the Company will become
profitable within the time parameters described herein, or at all. The Company
is currently processing approximately 20,000 transactions per month. Once
additional cash becomes available to the Company from the private offering
referenced above (of which there can be no assurance), it is anticipated that
the Company's sales campaign will be enhanced.
INFLATION
Although the operations of the Company are influenced by general
economic conditions, the Company does not believe that inflation had a material
effect on the results of operations during the six month period ended April 30,
2000.
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities and
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
MERCHANTONLINE.COM, INC.
Dated: August 03, 2000
By: /s/ TAREK S. KIRSCHEN
---------------------------------
Tarek S. Kirschen, President
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