U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
Quarterly Report Under the Securities Exchange Act of 1934
For the Three Months Ended: January 31, 2000
Commission File Number: 0-22607
MERCHANTONLINE.COM, INC.
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(Exact name of small business issuer as specified in its charter)
Florida
--------------------------------------------------------------
(State or other jurisdiction of incorporation or organization)
84-1233073
(IRS Employer Identification No.)
1600 S. Dixie Highway
Boca Raton, FL 33432
---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(561) 395-3585
---------------------------
(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 only class of common stock
issued and outstanding, as of January 31, 2000, was 23,933,620 shares.
<PAGE>
PART I
ITEM 1. FINANCIAL STATEMENTS.
MerchantOnline.com, Inc.
Balance Sheet
January 31, 2000
(unaudited)
CURRENT ASSETS
Cash $ 112,540
Accounts receivable 22,068
Accounts Receivable from related party 7,525
Due from related party 5,471
Prepaid services 1,046,875
Prepaid advertising 126,250
Deferred advertising 388,750
---------------
TOTAL CURRENT ASSETS 1,709,479
PROPERTY AND EQUIPMENT
Property and equipment, net 1,005,487
Purchase price to be allocated, net of amortization 6,412,059
Security deposits 13,923
Deferred advertising 250,000
---------------
TOTAL ASSETS $ 9,390,948
===============
CURRENT LIABILITIES
Accounts payable $ 1,381,260
Accrued expenses and other 58,953
Other liabilities 215,600
Notes payable 135,586
---------------
Total Current Liabilities 1,791,399
COMMITMENTS AND CONTINGENCES
SHAREHOLDERS' EQUITY
Common Stock -Par Value is .001
100,000,000 shares authorized
23,933,620 issued and outstanding 23,934
Additional paid in capital 12,085,841
Accumulated deficit (3,765,226)
Subscription receivable (745,000)
---------------
Total shareholders' equity 7,599,549
---------------
Total liabilities and shareholders'equity $ 9,390,948
===============
See accompanying notes to condensed financial statements.
2
<PAGE>
MerchantOnline.com, Inc.
Statements of Operations
(unaudited)
Three Months Ended
January 31,
-----------------------------------
2000 1999
--------------- ---------------
REVENUES $ 21,388 $ 95,075
COST & EXPENSES
Cost of Sales 12,544 68,704
Labor 93,371 102,652
General & Administrative 1,015,039 70,094
--------------- ---------------
Total Cost & Expenses 1,120,954 241,450
--------------- ---------------
NET LOSS $ (1,099,566) $ (146,375)
=============== ===============
Net loss per share $ (.05) $ (.01)
=============== ===============
Weighted shares outstanding 22,116,123 17,500,000
=============== ===============
See accompanying notes to condensed financial statements
3
<PAGE>
<TABLE>
<CAPTION>
MerchantOnline.com, Inc.
Statements of Cash Flows
Three Months Ended
January 31,
2000 1999
-------------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss $ (1,099,566) (146,375)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 53,642 7,117
Amortization of purchase price to be allocated 183,202 --
Issuance of stock for goods and services 425,625 --
Issuance of stock options 248,808 --
Account receivable (9,101) 4,793
Deferred advertising (62,500) --
Prepaid advertising 62,500 --
Other assets (4,654) (6,521)
Accounts payable (164,224) 75,350
Accrued expenses (24,177) --
Deferred revenue 5,768 --
Other liabilities (10,964) 52,916
Advertising payable (125,000) --
-------------- -----------
Net Cash used in Operating Activities (520,641) (12,720)
-------------- -----------
Cash Flows from Investing Activities:
Purchase of Property and Equipment (51,307) (13,417)
Deposit on acquisition (50,000) --
Cash received in acquisition 3,314 --
-------------- -----------
Net Cash used in Investing Activities (97,993) (13,417)
-------------- -----------
Cash Flows from Financing Activities:
Proceeds from private placements 730,000 --
Payments on note to shareholder (3,974) (34,026)
Proceeds from notes payable -- 57,664
Net Cash provided by Financing Activities 726,026 23,638
-------------- -----------
Net increase in cash 107,392 (2,499)
Cash at beginning of period 5,148 2,499
-------------- -----------
Cash at end of period $ 112,540 --
============== ===========
</TABLE>
See accompanying notes to condensed financial statements
4
<PAGE>
MerchantOnline.com, Inc.
Notes to Financial Statements (unaudited)
January 31, 2000
Note 1. Basis of Presentation
The accompanying unaudited 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.
Advertising Expense
The Company accounts for its advertising expense in accordance with SOP 93-7,
Reporting on Advertising Costs, which requires advertising costs to be expensed
as incurred or at the time of first showing.
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 $521,000 during the three-month
period ended January 31, 2000. As a result, the Company had to rely principally
on private equity funding to continue its activities to date. The Company
intends to significantly increase its operational expenses in fiscal year 2000
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. Additionally, the same investor
has entered into a letter of intent to purchase up to $3 million of common stock
in a private placement upon the request by the Company, until such time as the
registration statement is effective. Also, subsequent to January 31, 2000, the
Company has received approximately $845,000 in connection with private
placements of its common stock. Management intends 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
5
<PAGE>
reclassify for all periods presented. The Company adopted the SAB for its year
ended October 31, 1999. 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
Company has reclassified its results from operations for the three-month period
ended January 31, 1999.
Note 4. Acquisition of Approve.net, Inc.
On January 7, 2000, the Company issued 2,000,000 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 eBusinesses to execute
transactions such as online processing of credit cards, debit cards and online
checks. The shares issued in the acquisition were valued at $3.33 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 is
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 has amortized $183,202 of
this amount as of January 31, 2000 based on an overall estimated life of three
years.
The following unaudited pro forma consolidated financial information reflects
the results of operations for the three-month periods ended January 31, 2000 and
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 Approve.net, Inc.
been combined during the specified periods.
Three Months Ended
----------------------------------
January 31, 2000 January 31, 1999
---------------- ----------------
Net revenues $ 21,388 $ 98,697
Loss from operations (1,704,172) (777,249)
Net loss applicable to common stockholders (1,704,172) (777,249)
Net loss per share $ (.10) $ (.04)
Note 5. Common Stock
The Company received $730,000 of cash from private placements for the period
ended January 31, 2000, $325,000 of which relates to stock issued during the
three-month period ended January 31, 2000 and $405,000 relates to collections on
subscription receivable at October 31, 1999. At January 31, 2000, the Company
had subscription receivables of $745,000.
During the three month period ended January 31, 2000, the Company issued 201,120
shares of common stock in settlement of approximately $242,000 of outstanding
notes payable.
Note 6. Commitments and Contingencies
At October 31, 1999, the Company was involved in a litigation regarding an
outstanding notes payable. Subsequent to January 31, 2000, the Company settled
the litigation by entering into an agreement to pay $155,000 in three
installments over a sixty day period.
The Company may be subject to other lawsuits and claims arising in the ordinary
course of business. In the Company's opinion, as of January 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 7. Subsequent Event
On January 12, 2000, the Company entered into a letter of intent with a company
to purchase approximately 90% of its net assets. On March 9, 2000, the Company
and the seller agreed upon the terms of the transaction, which provide for
5,000,000 shares of common stock and assumption of certain liabilities. The
transaction is subject to approval of the shareholders of the seller.
6
<PAGE>
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 (the "Company" or
"MOL"), was incorporated under the laws of 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 15,750,000 (post forward split) "restricted" common
shares of the Company. As a result, the Company was the surviving entity. As
part of the terms of this 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.
The Company's principal business is to provide a diverse selection of
services, which it has developed to allow Internet merchants to quickly and
easily establish a method of conducting business on the Internet with a minimal
initial investment and with low transaction costs. MOL intends to attempt to
take advantage of the anticipated enormous growth of the Internet by providing
an electronic payment solution for merchants that market and sell their products
and services on the Internet as well as business to business and consumer
applications. The current electronic commerce services ("E-commerce") provided
by MOL include allowing merchants to accept credit cards and debit cards from
customers in a secure, technologically advanced environment. MOL is currently a
single source of customer service which offers a variety of Internet services
including electronic shopping carts, web site development and hosting, merchant
accounts and real-time credit card processing in a single package for one
installation fee and only one, combined monthly billing. To date, most of MOL's
revenues have been generated from credit card transactions. It charges an
installation fee, as well as a transaction/service fee, depending upon the
nature of the product and/or service provided.
MOL has developed proprietary real-time credit card processing programs
which it calls MOLcharge, which management believes meets or exceeds the
capabilities of all currently available software. It intends to provide small
and medium sized merchants with a single vendor that furnishes everything needed
to begin participating in E-commerce. Its proposed client base includes
merchants that already have merchant bankcard accounts that require real-time
processing only.
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.
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 month period
ended January 31, 2000.
7
<PAGE>
RESULTS OF OPERATIONS
THREE MONTHS ENDED JANUARY 31, 2000 COMPARED TO THREE MONTHS ENDED JANUARY 31,
1999
During the three months ended January 31, 2000, MerchantOnline.com's
revenues were $21,388, compared to $95,075 for three months ended January 31,
1999. This decrease was attributable to an ongoing reorganization of our sales
efforts to more efficiently handle expected future growth as well as
interruptions in service due to moving our back office equipment to San Diego
from Florida. Costs of sales were $12,544 for the 2000 period, compared to
$68,704 for the 1999 period and costs of labor, primarily outside contractors,
were $93,371 compared to $102,652 in the 1999 period.
General and administrative expenses for the three months ended January
31, 2000 was $1,015,039 compared to $70,094 for the period ended January 31,
1999. The 2000 amount included noncash charges of $425,625 for the issuance of
stock for goods and services, $248,808 for the issuance of stock options and
depreciation and amortization of $236,844. General and administrative expense
also increased compared to the prior period as a result of additional employees
hired to accommodate the anticipated growth of the business. It is expected that
these expenses will continue to increase in the foreseeable future due to
anticipated expanded volume of transactions processed by MerchantOnline.com and
development of the swipe card and other new businesses.
As a result, MerchantOnline.com generated a net loss of $(1,099,566)
during the three months ended January 31, 2000 ($.05 per share) compared to a
net loss of $(146,375) for the period ended January 31, 1999 ($.01 per share).
LIQUIDITY AND CAPITAL RESOURCES
At January 31, 2000, MerchantOnline.com had current assets of
$1,833,229, primarily consisting of $112,540 in cash, $1,046,875 in prepaid
technology and financial consulting services, and $638,750 in deferred
advertising relating to Pagan Lewis Motors Inc. ("PLM") described below. As a
result of the Approve.net acquisition, there was $6,412,059 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 $1,005,487 in property and equipment, net
of depreciation. Current liabilities included accounts payable of $1,381,260,
primarily $1,277,500 to PLM, accrued interest and expenses of $53,185, other
liabilities of $215,600 relating to resale of the PLM advertising and notes
payable of $135,586. The note payable will be satisfied by May 1, 2000. As a
result, MerchantOnline.com had working capital of $41,830.
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 currently has a verbal agreement to restructure the arrangement. In February
2000 it made payments of $375,000, will make an additional payment on March 31,
2000 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 three months ended January 31, 2000, MerchantOnline.com used
$520,641 of cash in operating activities. Net cash provided by financing
activities was $726,026, consisting primarily of proceeds from stock issued in
private placements.
8
<PAGE>
MerchantOnline.com has operated with limited cash flow for the last 12
months and has recognized the need for additional operating capital. During the
year ended October 31, 1999, MerchantOnline.com raised $525,000 in private
offerings of its common stock, during the three months ended January 31, 2000
raised $730,000 and through March 20, 2000 received an additional $800,000. An
ongoing private offering at $10.00 per share may raise additional funds. It is
expected that these proceeds will be utilized primarily for funding the
Innonvonics acquisition, other potential acquisitions and operations,
advertising MerchantOnline.com's services using electronic banners on the major
internet services, attendance of MerchantOnline.com at trade shows, research and
development, and repayment of debt. The Company entered into an agreement to
purchase 90.1% of the net assets of Innovonics for common stock and the
assumption of certain liabilities. 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.
We have incurred operating losses for all periods from inception
through January 31, 2000, and therefore have not recorded a provision for income
taxes. We have recorded a valuation allowance for the full amount of our net
deferred tax assets, as the reliability of the deferred tax assets is not
currently predictable.
Since MerchantOnline.com does not have a definitive alternate financing
arrangement in place in the event the proceeds from private equity financings,
described above, are 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 next several months, but is optimistic that
the Company will begin generating profits from its operations beginning
thereafter. 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. Discussions
have already commenced in this regard, but as of the date of this report no
definitive agreements have been made and there can be no assurances that such
agreements will be consummated in the future. Further, there can be no
assurances 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
affect on the results of operations during the three month period ended January
31, 2000.
9
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS - On February 28, 2000, the Company settled the
lawsuit with Global Guarantee Corporation for $155,000. Merchantonline.com, Inc.
is not a party to any other material legal proceedings.
ITEM 2. CHANGES IN SECURITIES - During the three months ended January 31, 2000,
the Company issued an aggregate of 2,201,120 shares of common stock allocated as
follows: (i) 201,120 shares for conversion of loans to equity, (ii) 2,000,000
shares issued for the Approve.net acquisition.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES - NONE
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - NONE
ITEM 5. OTHER INFORMATION -
On March 9, 2000, the Company announced that it agreed to acquire 90.1%
of Phoenix-based Innovonics Inc. in exchange for five million shares of
MerchantOnline.com common stock and assumption of certain liabilities.
Innovonics invented, developed and manufactures the PC Pay(r) card-swiping
device that plugs into personal computers. The acquisition is subject to final
approval by Innovonics' board of directors and stockholders. PC Pay(r), which
accepts ATM, debit, credit and smart cards, incorporates a patented "next
generation" encryption technology to make shopping online more secure for
consumers, merchants and banks.
In March 2000, Robert G. Hildreth, Jr. was appointed as a new member of
the Board of Directors. Mr. Hildreth has an extensive background in the
financial and investment banking fields and is Chairman of the Board of Intraco,
a company specializing in data and voice systems designs for large and mid-sized
corporations. Mr. Hildreth spent his entire working career on Wall Street. For
25 years, he was senior investment banker and managing director of Merrill Lynch
International Bank of London. He also served as senior utility advisor to
Goldman Sachs & Co., as international director for LeBoeuf, Lamb, Leiby &
MacRae, one of the nation's leading law firms, and as international director for
Deloitte & Touche, a leading world wide accounting firm. Mr. Hildreth also
served as senior international advisor for the United States Department of State
in Eastern Europe.
In March 2000, Robert Hausman joined the company as chief
administrative officer. Prior to joining MerchantOnline.com, from 1978 to 1994,
Mr. Hausman was a principal in a specialty textile manufacturing company in New
York. After relocating to Florida in 1994, he started a fire protection
distribution and supply company. In 1997, the fire protection company was
acquired by Coventry Industries Corp. a public company, where Mr. Hausman served
as president until December 1999.
In March 2000, MerchantOnline.com announced it received permission from
the Deutsche Boerse AG to begin trading on the Frankfurt Stock Exchange's Third
Segment Market.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K -
(a) Exhibits
EX-27 Financial Data Schedule
(b) Reports on Form 8-K
On January 19, 2000 the Company filed a report on Form 8-K, advising of
the closing of the merger with Approve.net and the recission of the conversion
by two principal stockholders of the company from common stock to Series A
Preferred stock.
On January 24, 2000, the Company filed a report on Form 8-K advising
the change of independent accountants from Millward & Co. to Ernst & Young LLP.
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.
(Registrant)
March 21, 2000
By: /s/ TAREK S. KIRSCHEN
--------------------------------
Tarek S. Kirschen,
President
10
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