U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB/A
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR QUARTERLY PERIOD ENDED: JULY 31, 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)
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 SEPTEMBER
11, 2000, WAS APPROXIMATELY 60,192,711 SHARES.
<PAGE>
PART I
ITEM 1. CONDENSED FINANCIAL STATEMENTS.
MERCHANTONLINE.COM, INC.
CONDENSED BALANCE SHEET
JULY 31, 2000
(unaudited)
ASSETS
CURRENT ASSETS:
Cash $ 574,618
Accounts receivable 9,531
Inventory 58,079
Prepaid services 190,671
Prepaid advertising 559,160
Prepaid expenses 253,968
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Total Current Assets 1,646,027
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Property and Equipment, net 1,519,022
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Purchase price to be allocated, net of amortization 52,038,767
Other assets 23,551
Deferred advertising 150,417
Deferred compensation 93,680
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Total Assets $ 55,471,464
============
LIABILITIES and STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 830,493
Accrued expenses and other 316,881
Other liabilities 222,750
Due to shareholders 1,518,017
Deferred revenue 89,435
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Total Current Liabilities 2,977,576
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Note payable to shareholder 270,000
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Commitments and Contingencies
SHAREHOLDERS' EQUITY:
Common Stock - par value $.001 per share
100,000,000 shares authorized
60,097,332 issued and outstanding 60,097
Additional paid in capital 65,564,480
Accumulated deficit (13,400,689)
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Total shareholders' equity 52,279,310
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Total liabilities and shareholders' equity $ 55,471,464
============
See accompanying notes to condensed financial statements.
2
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MERCHANTONLINE.COM, INC.
CONDENSED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
July 31, July 31,
---------------------------- ----------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues $ 72,360 $ 38,011 $ 170,130 $ 202,820
Cost and Expenses
Cost of sales 69,201 11,955 105,900 102,209
Depreciation and amortization 3,967,919 9,055 5,489,977 25,352
General and administrative 2,673,830 845,605 5,309,282 1,161,852
------------ ------------ ------------ ------------
Total Costs and Expenses 6,710,950 866,615 10,905,159 1,289,413
------------ ------------ ------------ ------------
Net Loss $ (6,638,590) $ (828,604) $(10,735,029) $ (1,086,593)
============ ============ ============ ============
Net loss per share--basic and diluted $ (.11) $ (.02) $ (.22) $ (.03)
============ ============ ============ ============
Weighted shares outstanding 57,767,973 35,030,834 49,893,465 35,013,704
============ ============ ============ ============
</TABLE>
See accompanying notes to condensed financial statements
3
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MERCHANTONLINE.COM, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
July 31,
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2000 1999
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(10,735,029) $ (1,086,593)
Adjustments to reconcile net loss to net
cash used in operating activities,
net of acquisitions:
Depreciation and amortization 5,489,147 25,352
Issuance of stock for goods and services 1,332,830 --
Issuance of stock options 639,771 --
Conversion of Innovonics stock options and warrants 251,791 --
Accounts receivable 19,684 (177,103)
Inventory (30,439) --
Employee advances -- (300)
Deferred advertising 425,833 (955,000)
Prepaid advertising (370,411) --
Prepaid expenses (223,968) --
Other assets 6,792 --
Accounts payable 159,141 265,433
Accrued expenses and other (508,797) --
Deferred revenue 22,938 --
Other liabilities (3,814) 167,417
Advertising payable (1,101,669) 1,530,000
------------ ------------
Net Cash used in Operating Activities (4,626,200) (230,794)
------------ ------------
Cash Flows from Investing Activities:
Purchase of property and equipment (588,344) (83,849)
Security deposits -- (2,442)
Deposits on acquisitions (80,000) --
Cash received in acquisitions 35,154 --
Payments for Web Financial Services acquisition (174,375) --
------------ ------------
Net Cash used in Investing Activities (807,565) (86,291)
------------ ------------
Cash Flows from Financing Activities:
Increase in short term debt -- 285,674
Proceeds from private placements 4,628,030 25,000
Payments on note to shareholder (4,560) --
Advance to shareholder (3,252) --
Payments on note payable (110,000) --
Proceeds from note payable to shareholder 1,493,017 --
------------ ------------
Net Cash provided by Financing Activities 6,003,235 310,674
------------ ------------
Net increase (decrease) in cash $ 569,470 $ (6,411)
Cash at beginning of period 5,148 2,499
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Cash at end of period $ 574,618 $ (3,912)
============ ============
</TABLE>
See accompanying notes to condensed financial statements
4
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MERCHANTONLINE.COM, INC.
Notes to Condensed Financial Statements (unaudited)
July 31, 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.
Restatement
During the third quarter ended July 31, 1999, the Company recorded $170,400 of
other income related to the proceeds received under an advertising agreement.
The amount was reclassified to other liabilities during the fourth quarter ended
October 31, 1999, in connection with the year-end audit, to reflect the
Company's obligation to provide advertising to a third party. Accordingly, the
Company has restated the revenues for the three and nine-month periods ended
July 31, 1999 to reflect this adjustment.
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.
5
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MERCHANTONLINE.COM, INC.
Notes to Condensed Financial Statements (unaudited)
July 31, 2000
(continued)
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 has sustained losses since inception. In addition the Company had negative
cash flow from operations of $4,626,200 during the nine-month period ended July
31, 2000.
As a result, the Company had to rely principally on private equity funding to
fund its activities to date. The Company intends to continue to increase its
operational expenses to expand its product offerings 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 with Swartz Private Equity LLC. The Put Rights become available upon the
effectiveness of a registration statement, which was filed with the Securities
and Exchange Commission on September 11, 2000 to register the stock that will be
sold under the Agreement.
During the three months ended July 31, 2000, the Company borrowed $1,493,017 of
a $3,000,000 line-of-credit from its chief executive officer. Subsequent to July
31, 2000 and through September 11, 2000, the Company borrowed $351,454 of
additional funds under this agreement. 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 investment agreement with Swartz.
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 servers that allows businesses to execute
transactions such as online processing of credit cards and debit cards. 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 $6,629,636, which are included
on the accompanying balance sheet. The Company is currently in the process of
re-evaluating the fair values of assets
6
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MERCHANTONLINE.COM, INC.
Notes to Condensed Financial Statements (unaudited)
July 31, 2000
(continued)
acquired, including identifiable intangible assets, if any. The Company
amortized $1,289,096 and $556,288 of the purchase price to be allocated for the
nine-months and three months ended July 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 in a
reverse triangular merger with Web Financial Services Corporation. The Company
agreed to issue additional shares to Web Financial Services Corporation if on
the first anniversary date of the transaction, the fair value of the shares
issued in the Merger, as determined by the trading price of the stock for a
specific period of time, is less than $25,000,000. Web Financial Services
Corporation has pending patents on internally developed software programs to
provide charge card processing solutions through secure ATM/debit cards to
online consumers.
The Merger was accounted for using the purchase method of accounting. The
purchase price ($25,882,053) consists of $420,000 paid to the shareholders of
Web Financial Services to satisfy liabilities, of which $140,000 was paid in
connection with the closing, 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 assumption of a note payable and other liabilities of
$296,115. The purchase price has been allocated to fixed assets and deposits
($52,997) and "purchase price to be allocated" ($25,829,056).
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 $2,869,896 and $2,152,422 of this amount for the nine months and
three months ended July 31, 2000 respectively, based on an overall estimated
life of three years.
Note 6. Acquisition of Innovonics, Inc.
On May 15, 2000, the Company issued 8,976,488 shares of common stock for 90.1
percent of the outstanding shares and issued stock options and warrants to
purchase 1,023,512 shares of common stock in exchange for all of the outstanding
stock options and warrants of Innovonics, Inc. in a reverse triangular merger
with Innovonics, Inc. Additionally, the Company agreed to issue additional
shares to former shareholders of Innovonics, Inc. if on the first anniversary
date of the transaction, the fair value of the shares issued in the Merger, as
determined by the trading price of the stock for a specific period of time, is
less than $25,000,000.
The merger was accounted for using the purchase method of accounting. The
Company has determined the purchase price to be $24,988,491, which consists of
the fair value of the issued common stock, adjusted by the guarantee of the
future stock price ($22,441,220), the fair value of stock options and warrants
issued to employees and non-employees ($2,004,137) and the assumption of
$543,134 of net liabilities. The Company also recognized $251,791 in
compensation expense related to options and warrants issued to non-employees.
The purchase price has been allocated to "purchase price to be
allocated"($24,988,491).
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 $1,249,425 of this amount for the three months ended July 31, 2000
based on an overall estimated life of five years.
7
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MERCHANTONLINE.COM, INC.
Notes to Condensed Financial Statements (unaudited)
July 31, 2000
(continued)
The acquisition agreement with Innovonics required the Company to place $1.5
million in escrow for Innovonics' working capital. In September 2000 an
agreement was reached with Innovonics' president who is also one of the
Company's directors, pursuant to which $200,000 was paid and an additional
$300,000 is to be paid by September 15, 2000 and $200,000 per month from October
2000 until April 2000. If these funds are not paid according to this schedule,
then the former Innovonics shareholders have the right to unwind the
acquisition.
The acquisition agreement also gives the Innovonics president and his wife, who
own the outstanding 9.9%, the right to put these shares to the Company for stock
or cash until May 2003. The former Innovonics shareholders also have the right
to unwind the acquisition if the Company, files bankruptcy, ceases operations,
has its stock delisted, there is an event which materially adversely affects
Innovonics or the Company and which would significantly adversely affect
Innovonics' business, or certain covenants contained in the agreement are not
complied with.
Note 7. Pro Forma Information
The following unaudited pro forma financial information reflects the results of
operations for the nine-month periods ended July 31, 2000 and July 31, 1999, as
if the acquisitions 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, Innovonics, Inc., Web
Financial Services Corporation and Approve.net, Inc. been combined during the
specified periods.
Nine Months Ended
--------------------------------------
July 31, 2000 July 31, 1999
----------------- -----------------
Net revenues $ 296,610 $ 451,407
Loss from operations (19,175,360) (13,837,175)
Net loss (19,175,360) (13,837,175)
Net loss per share $ (.33) $ (.27)
Note 8. Common Stock
The Company received $5,818,896 of cash from private placements for 1,860,000
shares of common stock issued of which $975,000 of cash and 250,000 shares of
common stock were related to the three months ended July 31, 2000.
On July 5, 2000, the Company received $3,030 for the exercise of 5,022 warrants
issued in the Innovonics, Inc. acquisition.
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.
In addition to the share issuances described in Notes 4, 5, 6 and 9, for the
nine months ended July 31, 2000, the Company issued 402,240 shares for loan
settlements amounting to $242,677 and 62,508 shares for consulting services
valued at $165,938.
Note 9. 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. The Company 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. The charge to expense will
be recognized ratably over the life of the agreement. As of June 28, 2000, the
Company recognized $316,000 of expenses related to this agreement. On June 28,
2000, all of the warrants were converted into 241,075 shares of stock in a
non-cash transaction.
In connection with the negotiations on the investment agreement for the sale of
8
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MERCHANTONLINE.COM, INC.
Notes to Condensed Financial Statements (unaudited)
July 31, 2000
(continued)
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
warrants have a reset provision whereby the price of the shares will be reset to
the market price of the common stock if such price is less than the then
exercise price every six months if the warrants are not exercised. The Company
has accounted for these warrants as a cost of the equity.
In April 2000, the Company issued a warrant to purchase 120,000 common stock
with an exercise price of $4.75, to a third party who is providing services to
the Company. The Company has accounted for the warrant under FAS 123 using the
Black Scholes method and determined that the fair value of the warrant was
$2.52. The term of the warrant is four years from the date of issuance. The
Company is amortizing the consulting expense of $302,200 ratably over the
four-year vesting period.
On July 12, 2000, the Company issued a warrant to purchase 25,000 shares of
common stock at $6.375 per share to a third party consultant. The Company has
accounted for the warrant under FAS 123 using the Black Scholes method and
determined that the fair value of the warrant was $1.78. The term of the warrant
is three years from the date of issuance, which was determined to be July 12,
2003. The charge to expense will be recognized immediately, as the services have
been completed. The Company recognized $44,500 of expenses related to this
agreement.
Note 10. Stock Options
On February 21, 2000, the Company adopted its 2000 Equity Incentive Plan (the
"Plan"), which provides for granting of incentive and nonqualified 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 July 31, 2000, the Company had outstanding
8,067,800 options under the 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 nine-month period ended July 31, 2000, the Company granted stock
options under the Plan for the purchase of 8,137,800 shares of common stock
(70,000 of which are no longer outstanding due to terminations) to employees as
well as two directors, at exercise prices ranging from $2.75 to $7.00 per share.
During this period, the Company also granted options prior to the adoption of
the Plan for the purchase of 5,600,000 shares of common stock to employees, at
exercise prices ranging from $.94 to $2.00, all of which were outstanding at
July 31, 2000. The exercise prices were equal to or in excess of the market
values at the dates of grant and accordingly, no compensation expense has been
recognized.
Note 11. Commitments and Contingencies
In July 2000, the Company entered into a letter of intent with a third party to
acquire the source code for a state of the art software platform to interface
with all of the leading processing platforms. If the transaction is consummated,
50,000 shares of common stock will be issued at closing, and an aggregate of
450,000 shares of common stock will be placed in escrow, and will be released as
each of up to 15 platforms are certified. The Company will guarantee that the
shares issued will have an aggregate value of $5 million on the first
anniversary of the first delivery. If the share price does not meet the
guarantee on the anniversary date, the Company will be required to issue
additional shares to meet the guarantee. As of July 31, 2000, the Company paid a
$30,000 non-refundable advance for expenses related to the software development.
9
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MERCHANTONLINE.COM, INC.
Notes to Condensed Financial Statements (unaudited)
July 31, 2000
(continued)
The Company may be subject to lawsuits and claims arising in the ordinary course
of business. In the Company's opinion, as of July 31, 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 12. Subsequent Events
In September 2000, the Company entered into a five-year agreement with Trade
Exchange Network, Inc., an online barter exchange ("TRADE TEN"), pursuant to
which TRADE TEN agreed to license and private label MerchantOnline's NewCash
system and purchase PC Pay units and the Company will provide processing
services for all TRADE TEN transactions. The agreement provides for TRADE TEN to
pay MerchantOnline development fees, a one-time license fee, ongoing transaction
fees and to purchase a specified number of PC Pay units over the next year.
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 acquired all of
the issued and outstanding securities of CreditCo, Inc., a Delaware corporation,
in exchange for 31,500,000 "restricted" common shares of the Company. As a
result, the Company was the surviving entity. As part of the terms of this
transaction, the Company amended its Articles of Incorporation, changing its
name to its present name, as well as reincorporating in the State of Florida.
The Company 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. Its products include
proprietary real-time credit card processing programs, a proprietary hardware
device called PC Pay(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, the Company has developed products that
10
<PAGE>
support an ever-changing transaction platform. The Company's PC Pay(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.
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 three and nine
month periods ended July 31, 2000 and 1999.
RESULTS OF OPERATIONS
Three months ended July 31, 2000 and 1999
During the three-month period ended July 31, 2000, the Company's
revenues were $72,360, compared to $38,011 for the similar period in 1999. This
increase of $34,349 was attributable to an increase in monthly fees and
additional Merchant accounts. Costs of sales were $69,201 for the three-month
period ended July 31, 2000, compared to $11,955 for the three month period ended
July 31, 1999, an increase of $57,246, which is due to the addition of the PC
Pay(R) device. As the Company starts to sell its PC Pay(R) device, license its
NewCash system and receive additional 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
July 31, 2000 were $2,673,830 compared to $845,605 for the three-month period
ended July 31, 1999, as the Company substantially increased its infrastructure
in anticipation of its expected growth. The 2000 amount included $143,742 of
investor relation expense, $478,145 for business consultants and amortization of
the prepaid expenses described below, $879,238 for salaries and wages, $366,435
for legal, accounting and other professional expense. It is expected that these
expenses will increase in the foreseeable future due to anticipated increased
volume of transactions processed by the Company. General and administrative
expense increased during the three-month period ended July 31, 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 well as
the addition of the Phoenix location (Innovonics, Inc.). Depreciation and
amortization for the three-month period ended July 31, 2000 was $3,967,919
compared to $9,055 for the three-month period ended July 31, 1999 primarily
relating to amortization of the purchase prices to be allocated for the
completed acquisitions. As a result, the Company generated a net loss of
$6,638,590 during the three month period ended July 31, 2000 ($.11 per share),
compared to a net loss of $828,604 for the similar period in 1999 ($.02 per
share).
Nine months ended July 31, 2000 and 1999
During the nine-month period ended July 31, 2000, the Company's
revenues were $170,130, compared to $202,820 for the similar period in 1999.
This decrease of $32,690 was attributable to the Company's decision to terminate
certain product lines at in fiscal 1999. Costs of sales were $105,900 for the
nine-month period ended July 31, 2000, compared to $102,209 for the nine-month
period ended July 31, 1999, an increase of $3,691.
During the nine-month period ended July 31, 2000, general and
administrative expense totaled $5,309,282. The 2000 amount included $897,610 of
investor relation expense, $982,384 for business consultants and amortization of
the prepaid expenses described below and contractors, $1,330,089 for wages and
$731,933 for legal, accounting and other professional expense. General and
administrative expense in the nine-month period ended July 31, 1999 was
$1,161,852, including $257,025 in wage expense and $575,000 of advertising
expense. The 2000 amount also included approximately $2,224,392 in noncash
compensation through the issuance of stock for services. General and
administrative expense increased during the nine-
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month period ended July 31, 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 well as the addition of the Phoenix
location (Innovonics, Inc.). Depreciation and amortization for the nine-month
period ended July 31, 2000 was $5,489,977 compared to $25,352 for the nine-month
period ended July 31, 1999 primarily relating to the amortization of the
purchase prices to be allocated from the Approve.net, Web Financial Services
Corp. and Innovonics, Inc. acquisitions, which were acquired during the 2000
period. As a result, the Company had a net loss of $10,679,607 during the
nine-month period ended July 31, 2000 ($.22 per share), compared to a net loss
of $1,086,593 for the similar period in 1999 ($.03 per share).
LIQUIDITY AND CAPITAL RESOURCES
At July 31, 2000, the Company had $574,618 in cash, $9,531 in accounts
receivable and $58,079 in inventory. The Company also had $190,671 of prepaid
services, $253,968 of prepaid expenses and $559,160 of prepaid advertising
relating to Pagan Lewis Motors Inc. ("PLM") described below. Current liabilities
were $2,977,576, of which $830,493 were accounts payable, $316,881 were accrued
expenses, $1,518,017 were notes payable to shareholders, deferred revenue of
$89,435 and other liabilities of $222,750 relating primarily 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, Web Financial Services
Corp. and Innovonics, Inc. acquisitions, there was $57,447,183 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. The Company also had $1,519,022 in property and equipment, net of
depreciation. As a result, the Company had negative working capital of
$1,331,549.
In May 1999, MerchantOnline entered into an agreement to pay PLM
$1,530,000 in exchange for Internet advertising blocks and to sponsor a
car-racing team with Yahoo!. The Company 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. PLM agreed to
release the advertising blocks on Yahoo! as the payments were made; however the
liability to pay the entire $1,530,000 remains irrespective of the receipt
and/or use of the advertising blocks. In January 2000, the Company was not
current with these payments and had a verbal agreement to restructure the
arrangement. During the July 2000 quarter it made payments of $300,833, with the
balance of $124,000 to be paid in September 2000. The Company used $55,422 of
this advertising in July 2000. The Company 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 the Company has accordingly recorded $215,600 as a liability since the buyer
has filed for bankruptcy and the amount may have to be repaid.
During the nine-months ended July 31, 2000, the Company used $4,626,200
of cash in operating activities. Net cash provided by financing activities was
$6,003,235, consisting primarily of proceeds from stock issued in private
placements. Approximately $978,030 of this amount occurred during the three
months ended July 31, 2000.
The Company has an outstanding note payable of $270,000, acquired in
the Web Financial Services Corp. acquisition, to Lee Goldstein, Vice President
and Director. Mr. Goldstein's note accrues interest at the rate of 9% per annum
and is due in full on April 30, 2003.
In January 2000 MerchantOnline entered into an investment agreement
with Swartz Private Equity LLC to provide up to $35 million of equity, as
described in the notes to the Form 10-KSB. A registration statement relating to
this offering was filed on September 11, 2000 and a portion of the proceeds are
expected to become available by the end of 2000, assuming that the registration
statement becomes effective.
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
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million. Approximately $1,900,000 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 investment agreement with Swartz.
The Company has incurred operating losses for all periods from
inception through July 31, 2000, and therefore has not recorded a provision 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 the Company 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 the Company's ability to continue as a going concern.
The Company believes that when the registration statement filed in September
2000 becomes effective it may have sufficient funds for its planned operations
through fiscal year 2001.
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 cash flow from its operations in 2001. The
Company expects to realize increased revenues from its PC Pay(R) devices in the
last quarter of 2000 as well as from its NewCash products. However, there can be
no assurance that the Company will become profitable within the time parameters
described herein, or at all.
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 nine-month period ended July 31,
2000.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS None
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On May 8, 2000, the Company effected a two-for-one stock split to
stockholders of record as of May 1, 2000.
During the three months ended July 31, 2000, MerchantOnline issued an
aggregate of 9,582,584 shares of common stock. Of that total, 8,976,487 were
issued to the former shareholders of Innovonics as consideration for the
acquisition, 241,075 shares were issued upon the cashless exercise of 300,000
outstanding warrants issued in 1999 for services to a consultant, 260,000 shares
were issued in a private placement to accredited investors for net proceeds of
$950,000 and 5,022 shares were issued to one investor upon exercise of employee
stock options for proceeds of $3,030.
The private placement involved the issuance of 140,000 shares at $2.50
per share to two individual accredited investors, both of which were existing
shareholders, and 120,000 shares at $5.00 per share to one accredited
institutional investor which was also an existing shareholder. These issuances
were exempt from registration pursuant to Section 4(2) of the Securities Act of
1933.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None
ITEM 5. OTHER INFORMATION
The following persons have recently joined the Company:
Michael D. Karsch became Vice President, General Counsel and Secretary
in June 2000. He has 15 years experience representing public companies. He was
most recently affiliated with the law firm of Broad and Cassel in Miami and Boca
Raton, Florida, as partner and counsel. He was also a partner in two New
York-based law firms and was Executive Vice President of US Diagnostic, Inc., a
public company owning and operating diagnostic imaging centers. He was an
associate at Skadden, Arps, Slate, Meagher & Flom in New York.
Susan Tedesco became a director in August 2000. She has been associated
with Citibank since 1986 and is currently vice president and regional
distribution head for Citibank International Latin American Consumer Bank. She
was also a vice president for Citicorp Services, Inc. from 1992 to 1998 in the
information
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management and financial areas.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K -
(a) Exhibits
10.11* Employment Agreement between the Company and James Gitney
10.12* Employment Agreement between the Company and Thomas Walker
10.13* Employment Agreement between the Company and Michael Karsch
27* Financial Data Schedule
* Previously filed.
(b) Reports on Form 8-K
The following Reports on Form 8-K were filed during the three months
ended July 31,2000:
May 5, 2000 reporting the acquisition of Web Financial Services Corporation May
30, 2000 reporting the acquisition of Innovonics, Inc.
June 30, 2000 8-K/A filing the audited and pro forma financial information
relating to Web Financial Services Corporation. July 31, 2000 8-K/A filing the
audited and pro forma financial information relating to Innovonics, Inc. August
3, 2000 8-K/A restating pro forma financial information relating to Web
Financial Services Corporation. August 3, 2000 8-K/A restating pro forma
financial information relating to Innovonics, Inc. August 29, 2000 8-K/A
restating pro forma financial information relating to Innovonics, Inc.
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: November 17, 2000
By: /s/ TAREK S. KIRSCHEN
---------------------------------
Tarek S. Kirschen, President
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