================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------------------------
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 the quarterly period ended December 31, 1999
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ------------ to ------------ .
Commission file number 0-27215
PAWNBROKER.COM, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 33-0794473
- --------------------------------- ------------------------------------
(State or Other Jurisdiction (I.R.S. Employer Identification No.)
of Incorporation or Organization)
85 Keystone, Suite F
Reno, Nevada
89503
- --------------------------------------------------------------------------------
(Address of principal executive offices)
(775) 332-5048
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes No ------ -------
The number of outstanding common shares, no par value, of the Registrant
at December 31, 1999 was 16,914,750
================================================================================
<PAGE>
PAWNBROKER.COM, INC.
INDEX TO THE FORM 10-Q
For the quarterly period ended December 31, 1999
<TABLE>
Page
----
<S> <C>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets..............................................................F-2
Consolidated Statements of Operations....................................................F-3
Consolidated Statements of Cash Flows....................................................F-4
Consolidated Statements of Changes in Stockholder's Equity ..............................F-5
Notes to the Consolidated Financial Statements...........................................F-6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS........................................................3
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.................................12
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS ........................................................................12
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.................................................12
ITEM 3. DEFAULTS UPON SENIOR SECURITIES ..........................................................12
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.......................................12
ITEM 5. OTHER INFORMATION.........................................................................12
ITEM 6. Exhibits and Reports on Form 8-K..........................................................12
SIGNATURES ..........................................................................................13
</TABLE>
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PAWNBROKER.COM, INC.
(formerly Digital Sign Corporation)
(A Development Stage Company)
CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited - Prepared by Management)
DECEMBER 31, 1999
F-1
<PAGE>
PAWNBROKER.COM, INC.
(formerly Digital Sign Corporation)
(A Development Stage Company)
CONSOLIDATED BALANCE SHEET
(Unaudited - Prepared by Management)
AS AT DECEMBER 31, 1999
================================================================================
<TABLE>
<S> <C>
ASSETS
Current
Cash $ 917,367
Employee advances 900
Prepaid expenses 2,206
--------------
920,473
Deposit 1,313
Capital assets (Note 4) 379,327
Domain name (Note 5) 100,695
--------------
$ 1,401,808
=======================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued liabilities $ 176,123
--------------
Stockholders' equity
Capital stock (Note 7)
Authorized
20,000,000 preferred stock with a par value of $0.00001
50,000,000 common stock with a par value of $0.00001
Issued and outstanding
December 31, 1999 - 16,914,750 common shares 170
Additional paid-in capital 3,086,149
Deficit accumulated during the development stage (1,860,634)
--------------
1,225,685
$ 1,401,808
=======================================================================================================
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
F-2
<PAGE>
PAWNBROKER.COM, INC.
(formerly Digital Sign Corporation)
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited - Prepared by Management)
================================================================================
<TABLE>
Cumulative
Amounts From
February 5,
1999 Nine Month Three Month
(Incorporation) Period Ended Period Ended
to December 31, December 31, December 31,
1999 1999 1999
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING EXPENSES
Amortization $ 151,026 $ 151,026 $ 80,901
Contract services 158,868 158,868 75,136
Consulting 9,709 9,709 -
General and administrative 121,215 121,215 82,146
Management salaries and wages 223,129 223,129 140,330
Marketing and related expenses 213,635 213,635 50,985
Meals and entertainment 19,841 19,841 14,571
Professional fees 114,998 114,998 80,213
Promotion 72,677 72,677 36,851
Rent 110,646 110,646 76,268
Salary and wages 321,840 321,840 227,483
Advertising and related expense 116,162 116,162 104,646
Shareholder information and transfer agent fees 17,298 17,298 183
Telephone 41,771 41,771 24,950
Travel and related 205,566 205,566 139,807
----------------- -------------- --------------
(1,898,381) (1,898,381) (1,134,470)
OTHER ITEM
Interest income 37,747 37,747 15,517
----------------- -------------- --------------
Loss for the period $ (1,860,634) $ (1,860,634) $ (1,118,953)
=============================================================================================================================
Basic and diluted loss per common share (Note 3) $ - $ (0.13) $ (0.07)
=============================================================================================================================
Weighted average shares outstanding - 14,866,445 16,914,750
=============================================================================================================================
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
F-3
<PAGE>
PAWNBROKER.COM, INC.
(formerly Digital Sign Corporation)
(A Development Stage Company)
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited - Prepared by Management)
================================================================================
<TABLE>
Cumulative
Amounts From
February 5,
1999 Nine Month
(Incorporation) Period Ended
to December 31, December 31,
1999 1999
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Loss for the period $ (1,860,634) $ (1,860,634)
Item not affecting cash:
Amortization 151,026 151,026
Net change in non-cash working capital items:
Increase in employee advances (900) (900)
Increase in prepaid expenses (2,206) (2,206)
Increase in deposit (1,313) (1,313)
Increase in accounts payable and accrued liabilities 170,935 170,935
--------------- ---------------
Net cash used in operating activities (1,543,092) (1,543,092)
--------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of capital assets (506,048) (506,048)
Purchase of domain name (125,000) (125,000)
Acquisition of cash on purchase of subsidiary 8,007 8,007
--------------- ---------------
Net cash used in investing activities (623,041) (623,041)
--------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock 3,083,500 3,003,000
--------------- ---------------
Net cash provided by financing activities 3,083,500 3,003,000
--------------- ---------------
Change in cash position for the period 917,367 836,867
Cash position, beginning of period - 80,500
--------------- ---------------
Cash position, end of period $ 917,367 $ 917,367
================================================================================================================
</TABLE>
Supplemental disclosure with respect to cash flows (Note 8)
The accompanying notes are an integral part of
these consolidated financial statements.
F-4
<PAGE>
PAWNBROKER.COM, INC.
(formerly Digital Sign Corporation)
(A Development Stage Company)
(Unaudited - Prepared by Management)
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
================================================================================
<TABLE>
Deficit
Accumulated
Common Stock Additional During the Total
-------------- ------------- Paid-in Development Stockholders'
Shares Amount Capital Stage Equity
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, February 5, 1999 - $ - $ - $ - $ -
Common stock issued for cash 8,500,000 85 80,415 - 80,500
------------- ------------ ------------- ------------- -------------
Balance, March 31, 1999 8,500,000 85 80,415 - 80,500
Capital stock of Pawnbroker.com, Inc. at
April 6, 1999 1,124,750 12 26,256 - 26,268
Deficit of Pawnbroker.com, Inc. at
April 6, 1999 - - (23,261) - (23,261)
Common stock issued pursuant to the
acquisition of Pawnbroker.com, Inc.
(Nevada) (Note 6) 6,240,000 62 - - 62
Common stock issued for cash 1,300,000 13 3,002,987 - 3,003,000
Share cancellation (250,000) (2) (248) - (250)
Loss for the period - - - (1,860,634) (1,860,634)
------------- ------------ ------------- ------------- -------------
Balance, December 31, 1999 16,914,750 $ 170 $3,086,149 $(1,860,634) $ 1,225,685
==============================================================================================================================
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
F-5
<PAGE>
PAWNBROKER.COM, INC.
(formerly Digital Sign Corporation)
(A Development Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited - Prepared by Management)
DECEMBER 31, 1999
================================================================================
1. ORGANIZATION OF THE COMPANY
Digital Sign Corporation ("the Company"), a Delaware corporation, was
incorporated on February 13, 1998. On February 14, 1998, the Company issued
100,000 (25,000 post-consolidation) common shares at par value for all of
the issued and outstanding shares of Digital Signs, Inc. On April 6, 1999,
the Company acquired all of the issued and outstanding shares of Eriko
Internet Inc. in exchange for 34,000,000 (8,500,000 post-consolidation)
common shares of the Company. On September 10, 1999, the Company
consolidated its issued and outstanding shares of common stock on a four to
one basis, from 38,499,000 issued and outstanding to 9,624,750 issued and
outstanding. Effective June 14, 1999, the Company acquired all of the
issued and outstanding shares of Pawnbroker.com, Inc. (a Nevada
corporation), in exchange for 6,240,000 common shares of the Company. On
June 10, 1999, the Company changed its name to Pawnbroker.com, Inc.
These financial statements contain the financial statements of Eriko
Internet Inc. ("Eriko"), Pawnbroker.com, Inc., Digital Signs, Inc. and
Pawnbroker.com, Inc. (a Nevada Corporation) presented on a consolidated
basis. On April 6, 1999, Pawnbroker.com, Inc. acquired all of the issued
and outstanding share capital of Eriko by issuing 8,500,000 common shares
(Note 6). As a result of the share exchange, control of the combined
companies passed to the former shareholders of Eriko. This type of share
exchange has been accounted for as a capital transaction accompanied by a
recapitalization of Eriko. Recapitalization accounting results in
consolidated financial statements being issued under the name of
Pawnbroker.com, Inc., but are considered a continuation of Eriko. As a
result, the financial statements presented represent the consolidated
financial position of the above Companies as at December 31, 1999 and the
results of operations of Eriko for the nine month period ended December 31,
1999 and the period from February 5, 1999 (incorporation) to December 31,
1999 and the results of operations and cash flows of Pawnbroker.com, Inc.,
Pawnbroker.com, Inc. (Nevada) and Digital Signs Inc. from their deemed
dates of acquisition during the period. The number of shares outstanding at
December 31, 1999 as presented are those of Pawnbroker.com, Inc.
The Company is a development stage electronic-commerce company created to
provide retail customers with the ability to search for and acquire, via
the Internet, merchandise in inventories of pawnshops throughout North
America.
In the opinion of management, the accompanying consolidated financial
statements contain all adjustments necessary (consisting only of normal
recurring accruals) to present fairly the financial information contained
therein. These statements do not include all disclosures required by
generally accepted accounting principles and should be read in conjunction
with the audited financial statements of the Company for the year ended
March 31, 1999. The results of operations for the nine month period ended
December 31, 1999 are not necessarily indicative of the results to be
expected for the year ending March 31, 2000.
2. GOING CONCERN
The Company's financial statements are prepared using the generally
accepted accounting principles applicable to a going concern, which
contemplates the realization of assets and liquidation of liabilities in
the normal course of business. However, the Company has no current source
of revenue. Without realization of additional capital, it would be unlikely
for the Company to continue as a going concern. It is management's plan in
this regard to obtain additional working capital through equity financings.
==========================================================================
December 31,
1999
--------------------------------------------------------------------------
Deficit accumulated during the development stage $ (1,860,634)
Working capital 744,350
==========================================================================
F-6
<PAGE>
PAWNBROKER.COM, INC.
(formerly Digital Sign Corporation)
(A Development Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited - Prepared by Management)
DECEMBER 31, 1999
================================================================================
3. SIGNIFICANT ACCOUNTING POLICIES
Principles of consolidation
The consolidated financial statements include Pawnbroker.com, Inc.
(formerly Digital Sign Corporation) and its wholly-owned subsidiaries,
Digital Signs, Inc., Eriko Internet Inc. and Pawnbroker.com, Inc. (a Nevada
corporation). All significant inter-company balances and transactions have
been eliminated in consolidation.
Revenue recognition
The Company will recognize revenue from transaction fees charged to pawn
shops when completion of the sale of the related item has occurred and the
Company has received its portion of the sales proceeds released from
escrow.
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 reported amount of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amount of revenues and expenses
during the period. Actual results could differ from these estimates.
Cash and cash equivalents
The Company considers all investments with a maturity of three months or
less to be cash equivalents.
Loss per share
Earnings per share are provided in accordance with Statement of Financial
Accounting Standards No. 128, "Earnings Per Share". Due to the Company's
simple capital structure, with only common stock outstanding, only basic
loss per share must be presented. Basic loss per share is computed by
dividing losses available to common stockholders by the weighted average
number of common shares outstanding during the period.
Income taxes
Income taxes are provided in accordance with Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes". A deferred tax
asset or liability is recorded for all temporary differences between
financial and tax reporting and net operating loss carryforwards. Deferred
tax expenses (benefit) results from the net change during the year of
deferred tax assets and liabilities.
Deferred tax assets are reduced by a valuation allowance when, in the
opinion of management, it is more likely than not that some portion or all
of the deferred tax assets will not be realized. Deferred tax assets and
liabilities are adjusted for the effects of changes in tax laws and rates
on the date of enactment.
F-7
<PAGE>
PAWNBROKER.COM, INC.
(formerly Digital Sign Corporation)
(A Development Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited - Prepared by Management)
DECEMBER 31, 1999
================================================================================
3. SIGNIFICANT ACCOUNTING POLICIES (cont'd...)
Accounting for derivative instruments and hedging activities
In September 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133 ("SFAS 133"),
"Accounting for Derivative Instruments and Hedging Activities" which
establishes accounting and reporting standards for derivative instruments
and for hedging activities. SFAS 133 is effective for all fiscal quarters
of fiscal years beginning after June 15, 1999. In June 1999, the FASB
issued SFAS 137 to defer the effective date of SFAS 133 to fiscal quarters
of fiscal years beginning after June 15, 2000. The Company does not
anticipate that the adoption of the statement will have a significant
impact on its financial statements.
Stock-based compensation
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation," encourages, but does not require, companies to
record compensation cost for stock-based employee compensation plans at
fair value. The Company has chosen to account for stock-based compensation
using Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees." Accordingly, compensation cost for stock options is
measured as the excess, if any, of the quoted market price of the Company's
stock at the date of the grant over the amount an employee is required to
pay for the stock.
Comprehensive income
The Company has adopted Statement of Financial Accounting Standards No. 130
("SFAS 130"), "Reporting Comprehensive Income." This statement establishes
rules for the reporting of comprehensive income and its components. The
adoption of SFAS 130 had no impact on total stockholders' equity as of
December 31, 1999.
Software development
The Company has adopted Statement of Position 98-1 ("SOP 98-1"),
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use," as its accounting policy for internally developed computer
software costs. Under SOP 98-1, computer software costs incurred in the
preliminary development stage are expensed as incurred. Computer software
costs incurred during the application development stage are capitalized and
amortized over the software's estimated useful life.
Capital assets
Capital assets will be recorded at cost less accumulated depreciation. The
cost of capital assets is depreciated over the estimated useful lives of
the related assets. Depreciation is computed on the Modified Accelerated
Cost Recovery System (MACRS) method for both financial reporting and income
tax purposes.
Domain names
The cost of domain name rights will be amortized over 3 years from the date
of commencement of operations.
Advertising costs
The Company recognizes advertising expenses in accordance with Statement of
Position 98-7, "Reporting on Advertising Costs". As such, the Company
expenses the cost of communicating advertising in the period in which the
advertising space or airtime is used.
F-8
<PAGE>
PAWNBROKER.COM, INC.
(formerly Digital Sign Corporation)
(A Development Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited - Prepared by Management)
DECEMBER 31, 1999
================================================================================
4. CAPITAL ASSETS
<TABLE>
=========================================================================================
Accumulated Net
Cost Depreciation Book Value
-----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Furniture and fixtures $ 49,978 $ 4,238 $ 45,740
Equipment and software 456,070 122,483 333,587
------------ ----------- -----------
$ 506,048 $ 126,721 $ 379,327
=========================================================================================
</TABLE>
5. DOMAIN NAME
===================================================================
December 31,
1999
-------------------------------------------------------------------
Domain name $ 125,000
Accumulated amortization 24,305
--------------
$ 100,695
===================================================================
6. BUSINESS COMBINATIONS
Eriko Internet Inc.
On April 6, 1999, Pawnbroker.com, Inc. ("Pawnbroker") acquired all of the
issued and outstanding share capital of Eriko Internet Inc. ("Eriko"). As
consideration, Pawnbroker issued 8,500,000 shares. Legally, Pawnbroker is
the parent of Eriko. However, as a result of the share exchange described
above, control of the combined companies passed to the former shareholders
of Eriko. This type of share exchange, has been accounted for as a capital
transaction accompanied by a recapitalization of Eriko rather than a
business combination. Accordingly, the net assets of Eriko are included in
the balance sheet at book values, with the net assets of Pawnbroker
recorded at fair market value at the date of acquisition. The revenues and
expenses and assets and liabilities reflected in the financial statements
prior to the date of acquisition are those of Eriko. Revenue and expenses
or assets and liabilities incurred subsequent to the date of acquisition
include the accounts of Pawnbroker.
The cost of an acquisition should be based on the fair value of the
consideration given, except where the fair value of the consideration given
is not clearly evident. In such a case, the fair value of the net assets
acquired is used.
At April 6, 1999, Pawnbroker was inactive with a thin market for its
shares, making it impossible to estimate the actual market value of the
8,500,000 common shares. Therefore, the cost of the acquisition, $3,007,
has been determined by the fair value of Pawnbroker 's net assets.
The total purchase price of $3,007 was allocated as follows:
Current assets $ 8,007
Accounts payable and accrued liabilities (5,000)
-------------
$ 3,007
F-9
<PAGE>
PAWNBROKER.COM, INC.
(formerly Digital Sign Corporation)
(A Development Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited - Prepared by Management)
DECEMBER 31, 1999
================================================================================
6. BUSINESS COMBINATIONS (cont'd...)
Pawnbroker.com, Inc. (Nevada)
On June 14, 1999, Pawnbroker acquired all of the issued and outstanding
share capital of Pawnbroker.com, Inc., a Nevada corporation ("Pawnbroker
-Nevada"). As consideration, Pawnbroker issued 6,240,000 common shares at a
deemed value of $62, equal to the par value of the shares issued. As the
acquisition of Nevada was deemed to be from a promoter of Pawnbroker, the
purchase has been recorded at the historical cost of the net assets of
Nevada, which approximate the par value of the shares issued.
7. CAPITAL STOCK
On May 19, 1999, a shareholder of Pawnbroker surrendered 250,000 shares of
common stock which were initially issued as a part of the total shares
issued for the acquisition of Eriko Internet Inc. Capital stock and
contributed surplus have been reduced by $2 and $248 respectively to
eliminate the values initially recorded on issuance.
During the nine month period ended December 31, 1999, the Company issued
1,300,000 units through a private placement at a price of $2.31 per unit,
for total proceeds of $3,003,000. Each unit consists of one common share
and one-half of a share purchase warrant. One full share purchase warrant
entitles the holder to acquire one additional common share at a price of
$2.31 per share until June 23, 2000 and at a price of $2.90 per share until
June 23, 2001.
8. SUPPLEMENTAL DISCLOSURE WITH RESPECT TO CASH FLOWS
========================================================================
December 31,
1999
------------------------------------------------------------------------
Cash paid for income taxes $ -
Cash paid for interest -
========================================================================
Non-cash investing and financing transactions during the period from
February 5, 1999 to December 31, 1999 were as follows:
a) The Company issued 8,500,000 shares of common stock at a deemed value
of $3,007 to acquire 100% of the outstanding of shares of Eriko
Internet Inc.
b) The Company issued 6,240,000 shares of common stock at a deemed value
of $62 to acquire 100% of the outstanding shares of
Pawnbroker.com-Nevada.
c) The Company received 250,000 shares of common stock for cancellation
at a deemed value of $250, of which amount is included in accounts
payable.
F-10
<PAGE>
PAWNBROKER.COM, INC.
(formerly Digital Sign Corporation)
(A Development Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited - Prepared by Management)
DECEMBER 31, 1999
================================================================================
9. COMMITMENTS
a) On June 25, 1999, the Company entered into a one-year consulting
agreement commencing on July 1, 1999, whereby the Company is obligated
to pay $20,000 per month. The first month's fee was due and payable
upon execution of the agreement. The Company further agreed to pay the
consultant $100,000 (paid) upon execution of the agreement. In
addition, the consultant will be granted 400,000 options to purchase
common shares of the Company, exercisable at the market price, post
reverse stock split on the first day of trading of the newly
consolidated shares, for a period of one year from the date of
execution of the agreement. Of these options, 250,000 will vest
immediately upon board approval, the remaining 150,000 options will
vest in equal amounts of 50,000 for each successful financing of
$5,000,000.
b) The Company has formed a stock option plan under which it may grant
stock options to acquire up to a total of 2,000,000 shares of the
Company's common stock, at a price to be determined by the plan
administrator. To date, no options have been granted under the plan.
10. SHARE PURCHASE WARRANTS
As of December 31, 1999, there were 650,000 share purchase warrants
outstanding to acquire one additional common share at a price of $2.31 per
share until June 23, 2000 and at a price of $2.90 per share until June 23,
2001. See "Note 12. Subsequent Events."
11. RELATED PARTY TRANSACTION
During the nine month period ended December 31, 1999, the Company paid
management salaries and wages of $223,129 to officers and directors of the
Company.
12. SUBSEQUENT EVENTS
In February 2000, the Company issued 650,000 shares of common stock
pursuant to the exercise of share purchase warrants at a price of $2.31 per
share for gross proceeds to the Company of $1,501,500.
F-11
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Certain statements and information contained in this Report constitute
forward-looking statements within the meaning of Section 21E of the Securities
Exchange Act of 1934. Such forward-looking statements involve known and unknown
risks, uncertainties and other factors that may cause our actual results,
performance or achievements, or developments in our industry, to differ
materially from the anticipated results, performance or achievements expressed
or implied by such forward-looking statements. Such factors include, but are not
limited to: our limited operating history, history of losses, risks associated
with the development of technologies, risks involving the management of growth,
risks associated with the Internet, competition, product development risks and
risks of technological change, dependence on selected vertical markets and
third-party marketing relationships, our ability to protect its intellectual
property rights and the other risks and uncertainties detailed in our Securities
and Exchange Commission filings, including our Registration Statement on Form 10
filed with the Securities and Exchange Commission on November 3, 1999. "We,"
"our," "us" and the "Company" refer to Pawnbroker.com, Inc. and our
subsidiaries.
Overview
We, Pawnbroker.com, Inc., were incorporated in the State of Delaware on February
13, 1998 under the name "Digital Sign Corporation" with an authorized share
capital of 70,000,000 shares consisting of 20,000,000 Preferred shares of a par
value of $0.00001 each and 50,000,000 Common shares of a par value of $0.0001
each.
On April 6, 1999, we acquired all of the issued and outstanding shares of common
stock of Eriko Internet Inc., a Washington corporation engaged in the business
of developing Internet technologies, pursuant to a statutory share exchange
under the laws of the state of Washington. Our transaction with Eriko Internet
Inc. was considered a merger of non-operating entities with nominal assets and
Eriko Internet Inc. is deemed to be the surviving entity for accounting
purposes.
On May 14, 1999, we acquired all of the issued and outstanding shares of
Pawnbroker (Nevada). Pawnbroker (Nevada) was a shell company with no assets,
liabilities, revenues or expenses. After we acquired Pawnbroker (Nevada), we
undertook the process of designing, building and operating an Internet-based
electronic-commerce Web site to provide retail customers with the ability to
search for and acquire, via the Internet, merchandise in inventories of
pawnshops throughout North America. At the time we acquired Pawnbroker (Nevada),
our operations were insignificant.
The financial statements filed with our quarterly report on Form 10-Q and our
management's discussion and analysis of financial condition and results of
operation are for the period from April 1, 1999 to December 31, 1999.
Our Business
We are in the development stage, which means we are in the process of developing
our business and have no revenues from our operations and have not generated any
profits. We intend to launch a web site designed to facilitate two distinct, yet
related, types of transactions activities over the Internet:
o Business-to-Consumer: We intend to facilitate the sale of items owned
by pawnshops to retail consumers by providing online retail customers
with a fundamentally new way to search for and buy merchandise from
the inventories of pawnshops throughout North America.
o Business-to-Business: We intend to facilitate transactions between
pawnbrokers and other businesses, such as jewelers, merchandise
brokers, dealers, supply wholesales and others, who wish to directly
trade with our network of participating pawnbrokers.
Our web site is located at www.pawnbroker.com.
3
<PAGE>
Our Business-to-Consumer Concept
We are presenting our planned business-to-consumer services to pawnshops in the
U.S. to create awareness and interest in Pawnbroker.com. We intend to enter into
agreements with "brick-and-mortar" pawnshops with existing physical locations
under which each participating pawnshop will agree to make certain items or all
of their inventory available for purchase through Pawnbroker.com at prices
established by the pawnshop or on a "make an offer" basis. Based on our
discussion with potential participants, we believe that our Pawnbroker.com web
site services will be particularly attractive to independent pawnshops and small
pawnshop chains, who sell their merchandise exclusively through their physical
locations and may be limited by the scope of their geographic market. We intend
to generate revenues by charging pawnshops a transaction fee, ranging between 5%
to 10% of the purchase price, on successfully completed transactions. Additional
sources of revenue, such as advertising fees, are also contemplated.
We are currently in the process of completing the development of the software
and technology related to our business. We are continuing to beta test our web
site in December 1999 with approximately 30 beta test pawnshops who are assisted
us with the testing of our software and web site by listing on average 250-500
items of merchandise on our web site. We are testing our software and website by
facilitating mock transactions in which we (i) make offers for items of
merchandise listed by the beta test pawnshops; (ii) facilitate mock
counter-offers by the beta test pawnshop; (iii) facilitate mock acceptance of
the order; (iv) adjust the inventory of listed merchandise and (v) track and
measure the timing of the transaction. We are soliciting feedback from our beta
test pawnshops to adjust our systems for the next phases of our testing.
While we complete beta tests and debug our software, we plan to launch our site
to the general public in two phases:
1. Soft Launch: Our soft launch, which began at the end of January 2000,
featured 10 pawnbrokers representing approximately 30 pawnshops. We expect
it to grow to between 65 and 100 participating pawnshops by the end of
February 2000. The general public is allowed to access general information
about (i) the pawn industry, (ii) our web site, (iii) our participating
pawnshops, (iv) our policies related to purchasing merchandise on our web
site and our Pawnbroker.com Satisfaction Program and (iv) the schedule for
our hard launch when they will be able to purchase merchandise on our web
site. Pawnshops are able to (i) use Pawnbroker.com email; (ii) complete
applications to become a participating pawnshop; (iii) upload inventory
lists of merchandise to sell on our web site when we complete the hard
launch of our web site; and (iv) access information specifically designed
for pawnshops, including pawnshop regulatory information, instructions and
guidelines related to listing merchandise for sale on our web site, our
policies and procedures related to participating pawnshops and information
posted on our web site by our participating pawnshops. Visitors are not
able to purchase merchandise on our web site during our soft launch.
2. Hard Launch: Our hard launch is scheduled for March 2000 and is anticipated
to feature between 150 and 250 participating pawnshops. At hard launch, our
web site will facilitate transactions between visitors and our
participating pawnshops, however, all planned services may not be
operational. We anticipate that each participating pawnshop will feature
approximately 250 to 500 items for sale on our pawnbroker.com web site. We
cannot assure you that the hard launch will not be delayed. Nor can we be
certain that features and functionality that pawnbrokers, consumers or we
need to manage the business will be in place when the hard launch occurs.
Our goal is to have a total of up to 2,000 participating pawnshops offering an
average of 200-500 items each by December 2000.
We have presented our web site concept to over 3,000 pawnshops at conventions
and tradeshows and have oral expressions of interest or requests for additional
information from approximately 2,000 pawnshops. We do not intend to enter into
any definitive agreements with pawnshops until we have completed the beta
testing of our web site and the further refining of our technologies. We cannot
assure you that we will successfully complete the development of the technology
required to launch our web site or enter into any definitive agreements with
pawnshops as planned, if at all, or that we will generate sufficient revenues to
become profitable.
4
<PAGE>
Our Business-to-Consumer Technology
Participating pawnbrokers will be able to run our Pawnbroker.com software on any
PC with a web browser. We will recommend the use of a digital camera to display
pictures of merchandise on our web site.
Our web site will include an automated, easy-to-use search and retrieval system
that is designed to make purchasing merchandise on our Pawnbroker.com web site
easy and popular. We plan to incorporate visual displays on our web site that
permit a visitor to view pictures of merchandise and interactive capabilities
that allow buyers to make offers on merchandise at any point in their visit.
Our Business-to-Consumer Marketing Strategy
We believe that our Pawnbroker.com web site will be attractive to consumers of
merchandise typically offered at pawnshops, such as jewelry, consumer
electronics, tools, collectibles, coins, cameras and musical instruments. We
intend to attract buyers by offering consumers an opportunity to locate and
purchase merchandise from an inventory that we anticipate will be larger than
any single pawnshop or pawnshop chain. We do not intend to post firearms, adult
materials or other potentially illegal merchandise for sale on our web site. Our
web site is designed to facilitate seamless, secure transactions, unlike other
existing systems that require buyers to visit other web sites or contact the
pawnshop directly to complete a secure transaction. We intend to create buyer
confidence by offering a unique 10-day Pawnbroker.com Satisfaction Program that
is intended to reduce the risk and uncertainty of purchasing merchandise from
independent pawnshops.
We intend to increase repeat purchases and build loyalty to our service by using
post-sale marketing techniques including follow-up email messages to remind
customers of our web site and personalized services that will allow visitors to
(i) request merchandise that is not listed for sale on our web site, (ii)
notification by email when a particular item of merchandise is available on our
web site, and (iii) automatic email reminders of specific occasions like
birthdays, holidays or anniversaries. Our planned consumer marketing strategy
consists of both online and offline (radio, print, billboards, etc.) marketing
campaigns that is planned to commence with the hard launch of our web site, and
are targeted to reach demographic segments of consumers who we believe are most
likely to visit our site. The goal of our consumer marketing strategy is to
build brand recognition, build traffic to our site, and encourage visitors to
purchase items on the site. By establishing a strong business-to-consumer
marketing campaign, we believe we can attract additional pawnshops to list items
for sale on our web site.
We have implemented a marketing strategy directed at pawnbrokers, which includes
the use of telemarketing, CD-ROM presentations and presentations of our
Pawnbroker.com concept to pawnshops by our Industry Council members. We plan to
make marketing presentations to approximately 285 pawnbrokers representing
approximately 620 stores.
Anticipated Business-to-Consumer Revenues
Our revenues will depend on transaction fees, ranging from 5% to 10% of the
purchase price, paid by pawnshops for successful transactions completed with
purchasers. We anticipate that the number of transactions facilitated on
Pawnbroker.com will increase and decrease during certain times of the year,
similar to the sales fluctuations experienced by physical pawnshops in their
retail sales. Based on our management's experience in the pawnshop industry, we
anticipate our sales will be higher during the periods immediately prior to
Christmas, Valentine's Day, Mother's Day and Father's Day than during other
times of the year. We cannot assure you that we will generate sufficient
revenues from transaction fees to achieve commercial viability.
Our Business-to-Business Concept
We believe that our daily interaction with our participating pawnshops will
create a unique opportunity for us to facilitate transactions between
businesses, such as jewelers, merchandise brokers, dealers, supply wholesales
and others, and our network of participating pawnbrokers. We intend to develop a
non-public area on our web site designed exclusively for the pawnbroker industry
to facilitate business-to-business transactions between businesses that desire
to target market their products or services to the pawnbroker industry and our
participating pawnshops. We believe that our business-to-business strategy will
allow us to generate additional revenues. Our business-to-
5
<PAGE>
business concept is in the conceptual stage. We anticipate we will generate
revenues from access fees, listing fees and commissions on transactions.
Based on our discussions with more than 50 potential advertisers, including
insurance companies and pawnbroker industry suppliers, we believe that we may be
able to earn additional revenues by selling banner ads, promotional
opportunities, and achievement of transactional fees from suppliers selling to
pawnbrokers. We cannot assure you that our web site will generate sufficient
traffic to allow us to sell any advertising or that if we sell advertising, we
will generate any material revenues from such sales.
In addition, we plan to license a point-of-sale & inventory management
application that will be designed to allow participating pawnshops to seamlessly
post items in their inventory database for sale on our web site and to manage
their in-store and online inventory in an effective, efficient manner.
Our Operating Plan
We have no revenues from our operations and we have a history of losses. As of
December 31, 1999, we had an accumulated deficit of $1,860,634. Subsequent to
December 31, 1999, on February 11, 2000, we received $1,501,500 from the
issuance of 650,000 shares of our common stock at $2.31 per share pursuant to
the exercise of special warrants. See "Liquidity and Capital Resources -
Subsequent Events."
We anticipate that we will continue to incur substantial losses for the
foreseeable future. We estimate that we will require additional financing of at
least $5 million to meet our cash requirements through the fiscal quarter ending
June 30, 2000. Our ability to fully implement our business strategy will depend
on our ability to raise future financing. Factors that will affect our ability
to raise such financing may include, among other things:
o the market acceptance of our Pawnbroker.com web site by buyers of
pawnshop merchandise;
o traffic on our web site;
o our ability to obtain participating member pawnshops; and
o the revenues generated from our operations.
We anticipate we will raise additional financing through private placements of
our equity or debt during the second quarter of calendar 2000. We have engaged
Jefferies and Company to advise us on financial matters. We cannot assure you
that we will successfully complete any private placements or that we will obtain
additional financing to implement our business plans on acceptable terms, if at
all.
We intend to compete in the highly competitive Internet commerce industry. Many
of our competitors have substantially greater financial, technical and other
resources than us. Several competitors already have established web sites, brand
names, strategic relationships with advertisers and other web sites and user
loyalty, all of which create a competitive advantage over us. We have not
launched our web site or begun the process of developing our brand name or
promoting our web site. We cannot guarantee that we will be able to compete
effectively or that we will ever generate sufficient revenues from our
operations to make our business commercially viable.
6
<PAGE>
Summary of Financial Data
The following table sets forth, for the periods indicated, certain
components of the selected financial data of the Company:
<TABLE>
Three-month period Nine-month period
ended December 31, 1999 ended December 31, 1999
---------------------------- -------------------------
(Unaudited) (Unaudited)
---------------------------- -------------------------
<S> <C> <C>
Revenue $ -- $ --
Operating expenses
Consulting fees, salaries and wages, etc.... 442,949 713,546
General and administrative/Overhead......... 288,810 384,348
Sales and marketing ........................ 241,414 517,165
Shareholder communication and transfer
agent fees.................................. 183 17,298
Professional fees........................... 80,213 114,998
Amortization of intangible assets........... 80,901 151,026
---------------------------- -------------------------
1,134,470 1,898,381
---------------------------- -------------------------
Operating income (loss)...................... $ (1,134,470) $ (1,898,381)
Other income ................................
Interest.................................... $ 15,517 $ 37,747
Net income (loss).............................. $ (1,118,953) $ (1,860,634)
============================ =========================
</TABLE>
Results of Operations
We expect expenses related to research and development and administrative
expenses to continue to be a material component of our expenses during the
start-up phase of our development. We also anticipate that expenses related to
marketing and sales will increase substantially during our fourth fiscal quarter
ending March 31, 2000 and continuing thereafter as we begin an extensive
campaign to market and promote our Pawnbroker.com Web site and develop strategic
alliances with participating pawnshops.
During the three month period ended December 31, 1999, we began staffing our own
in-house development team to further develop our technologies and software.
Prior to this, we had relied upon Banshee, Inc to develop the software and the
e-commerce architecture for the in-store item listing component, the
Pawnbroker.com database and our pawnbroker.com web site. Our management
evaluated our relationship with Banshee and determined that it was in the
company's best interest to terminate the relationship.
We hired Mr. Vahid Rafizadeh as our Chief Technical Officer in September 1999
whereupon he began to develop both a technology plan and a staff to develop of
our web site and related technologies. We intend to use currently available
technology and products and to contract out most technical services required for
customization. We also intend to retain proprietary rights to the property
embodied in our technology including, wherever possible, source code, and to
maintain a continual right to use the system for our purposes. Delays in the
implementation of our technology plan are possible, which would have an adverse
impact on our business plan.
7
<PAGE>
Three Months Ended December 31, 1999
Revenues. We had no revenues from operations. Our loss during our three
month period ended December 31, 1999 of $1,118,953 was as a result of costs
associated with developing our business plan, research and development
expenditures related to the development of our Pawnbroker.com web site and
technologies and general overhead and administrative expenses. We anticipate
that our expenses and losses will increase as we increase our web site
development and marketing efforts.
Consulting Fees, Contract Services, Salaries and Wages. Our expenses
related to consulting fees, contract services, salaries and wages during our
three-month period ended December 31, 1999 was $442,949. Specifically, we paid
consultant and contract service fees of $75,136 for assistance related to the
evaluation and development of our Internet business strategies. We also paid
salaries and wages in the amount of $227,483 to our regular employees and
$140,330 to our management. We anticipate that expenses related to compensation
to personnel and consultants will increase substantially during the remainder of
our fiscal year and through December 2001, as we hire additional employee to
provide services in the areas of technology development, customer service,
sales, marketing, administration and systems maintenance. We intend to continue
committing a significant portion of our working capital to completing the
development and the soft launch of our web site in January 2000 and the hard
launch of our web site in March 2000. Thereafter, we intend to commit a
significant portion to enhance existing products and develop new products,
resulting in an anticipated increase in the dollar amounts of research and
development expenses for future periods.
General and Administrative/Overhead. General and administrative and
overhead expenses were $288,810 for the three-month period ended December 31,
1999. During the period we expanded administrative activity to support the
development of our business, including general expenses of $82,146, travel and
entertainment expense of $90,875, meals and entertainment expense of $14,571,
rent expense of $76,268 and telephone expenses of $24,950. We hired Mr. Neil
McElwee as our Chief Executive Officer. We opened our research and development
office in Pennsylvania and, in January 2000, opened our new corporate
headquarters in the Silicon Valley area of California. The new California office
will increase monthly rent expense by approximately $7,000; we believe the lease
rate is competitive for that region. We expect that the dollar amounts spent on
overhead will continue to increase as we expand our customer service operations
and other administrative requirements increase to support our business growth
Sales and Marketing. Sales and marketing expenses were $241,414 for the
three months ended December 31, 1999. Marketing, sales and technical support
personnel supported our increased marketing activities by attending Pawnbroker
industry tradeshows and marketing our Web based marketing concept to the
pawnbroker industry. We hired Mr. Dan McElwee, the brother of Neil McElwee, our
CEO, as our Senior Vice President of Sales and Marketing. Our sales and
marketing expenses included expenses related to general marketing expenses of
$50,985, promotion expenses of $36,851 were incurred to increase awareness, and
advertising and related of $104,646. Travel expense of $48,932 were generally
related to presentations of the Pawnbroker.com concept to pawnbrokers throughout
the USA in order to recruit pawnbrokers to our site and to encourage them to
list their inventory items on our site prior to, and after, launch. During the
quarter ended December 31, 1999, we participated in trade shows and held several
off-site meetings with staff and industry advisers. Marketing expenses, in
general, are related to the early development of creative concepts for a
consumer advertising campaign, including the conducting of focus group research
on the concepts around the country with selected consumer groups.
We anticipate that our sales and marketing expenses will increase
substantially after we launch our web site and begin promotional campaigns
targeted at buyers of merchandise. In addition, our efforts prior to our hard
launch are anticipated to increase substantially as we continue our marketing
efforts to the pawnbroker industry. These efforts will accelerate rapidly as we
grow closer to our launch date so that we can be assured of having adequate
inventory listed by pawnbrokers to meet the anticipated consumer demand.
Professional Fees. During the three months ended December 31, 1999, we paid
professional fees of $80,213 related to legal and accounting services,
principally in connection with the filing of our Form 10 registration statement
with the Securities and Exchange Commission.
Other Income. During the three months ended December 31, 1999, we earned
interest income on short-term deposits of $15,517.
8
<PAGE>
The Nine-month Period from April 1, 1999 to December 31, 1999
Revenues. We had no revenues from operations. Our loss during the
nine-month period from April 1, 1999 to December 31, 1999 of $1,860,634 was as a
result of costs associated with corporate acquisition expenses, developing our
business plan, research and development expenditures related to the development
of our Pawnbroker.com web site and technologies and general overhead and
administrative expenses. We anticipate that our expenses and losses will
increase as we increase our web site development and marketing efforts.
Consulting Fees, Contract Services, Salaries and Wages. Our expenses
related to consulting fees, contract services, management fees, salaries and
wages during the nine-month period ended December 31, 1999 was $713,546. During
this period, we paid consultants fees of $9,709 and contract service fees of
$158,868 to outside consultants for assistance related to the evaluation and
development of our Internet business strategies. We paid salaries and wages in
the amount of $321,840 to our employees and $223,129 to our management. We
anticipate that expenses related to compensation to personnel and consultants
will increase substantially during the remainder of our fiscal year and through
December 31, 2001, as we hire additional employee to provide services in the
areas of technology development, customer service, sales, marketing and systems
maintenance. We intend to continue committing a significant portion of our
working capital to completing the development and the soft launch of our web
site in January 2000 and the hard launch of our web site in March 2000.
Thereafter, we intent to commit a significant portion of enhance existing
products and develop new products, resulting in an anticipated increase in the
dollar amounts of research and development expenses for future periods.
General and Administrative/Overhead. General and administrative and
overhead expenses were $384,348 for the nine-month period ended December 31,
1999. During the period we expanded administrative activity to support the
development of our business, including general expenses of $121,215, travel
expense of $90,875, meals and entertainment expense of $19,841, rent expense of
$110,646 and telephone expenses of $41,771. The amount spent on general and
administrative expense will increase as the Company expands its customer service
operations, establishes new corporate headquarters in the Silicon Valley area of
California (office leased rented in January 2000), expands its research and
development office in Pennsylvania and other administrative requirements
increase to support projected growth.
Sales and Marketing. Sales and marketing expenses were $517,165 for the
nine-month period ended December 31, 1999. The increase was primarily due to an
increase in marketing, sales and technical support personnel supporting our
increased marketing activities related to attending Pawnbroker industry
tradeshows and marketing our Web based marketing concept to the pawnbroker
industry. Our sales and marketing expenses included expenses related to general
marketing expenses of $213,635, promotion expenses of $72,677, advertising and
related expenses of $116,162 and travel costs of $114,691. We anticipate that
our sales and marketing expenses will increase substantially after we launch our
web site and begin promotional campaigns targeted at buyers of merchandise. In
addition, our efforts prior to our hard launch scheduled for March 2000 are
anticipated to increase substantially as we continue our marketing efforts to
the pawnbroker industry.
Shareholder Communications and Transfer Agent Fees. During the nine-month
period ended December 31, 1999, expenses related to providing shareholder
communication and expenses related to transfer agent fees were $17,298.
Professional Fees. During the nine-month period ended December 31, 1999, we
paid professional fees of $114,988 related to legal and accounting services in
connection with our acquisition of Pawnbroker (Nevada), corporate matters,
preparing an audit and the filing of our Form 10 registration statement with the
Securities and Exchange Commission.
Other Income. During the nine-month period ended December 31, 1999, we
earned interest income $37,747 on short-term deposits.
9
<PAGE>
Liquidity and Capital Resources
As at December 31, 1999, we had $917,367 in cash or term deposits. We will need
to raise additional financing to fund our operations and intend to raise such
financing through private equity or debt offerings during the next fiscal
quarter; however, we cannot assure you that we will acquire this financing on
acceptable terms, if at all.
Since our inception on February 5, 1999, we raised net cash from financing of
$3,083,500 through private placements of our common stock. Since our inception
on February 5, 1999 to December 31, 1999, we used net cash of $2,166,133. We
received no cash from our operations during these periods, and our use of cash
during such periods were primarily as a result of expenses related to research
and development of our web site, expenses related to marketing and promotion,
salary expenses, professional fees and expenses related to general
administrative expenses and overhead.
Subsequent to December 31, 1999, on February 11, 2000, we issued 650,000 new
shares of our common stock at $2.31 per share, to generate an aggregate amount
of $1,501,500 in cash. The share issuance resulted from the exercise of share
purchase warrants that were issued and outstanding in December 1999. The terms
of the warrants allowed holders to acquire one common share at a price of $2.31
per share until June 23, 2000 and at a price of $2.90 per share until June 23,
2001. No warrants remain outstanding after the February 2000 exercise.
During the period from our inception on February 5, 1999 to June 30, 1999, we
applied cash of $414,618 towards the purchase of capital assets and $125,000
towards the purchase of the domain names "pawnbroker.com" and "pawnbrokers.com".
We are preparing an operating budget in connection with our efforts to raise
additional equity capital. We cannot assure you that our actual expenditures
will not exceed our estimated operating budget. Actual expenditures will depend
on a number of factors, some of which are beyond our control, including, among
other things:
(i) timing of the development and testing of our software and web
site,
(ii) our ability to attract visitors to our web site,
(iii) our ability to attract pawnshops to use our services,
(iv) our ability to launch our web site in a timely manner,
(v) our ability to successfully complete transactions,
(vi) the availability of financing on acceptable terms,
(vii) reliability of the assumptions of management in estimating cost
and timing,
(viii) the time spent by consultants and professionals developing our
web site,
(ix) competition; and
(x) other factors that may be beyond our control.
We estimate that we will be required to raise approximately $5 million in
additional capital during the first calendar quarter 2000 to meet our
anticipated cash needs during the first two calendar quarters of 2000. In their
independent auditor's report dated November 2, 1999, Davidson & Co., our
auditors, expressed substantial doubt about our ability to continue as a going
concern due to our lack of working capital for our planned business activities.
The $1.5 million in cash we received as a result of the February 2000 exercise
of warrants is not sufficient, in and of itself, to address concerns of adequate
capital, given our present and expected levels of expenditures.
We intend to raise additional financing through private placements of our equity
or debt by our fourth fiscal quarter, which ends March 31, 2000. We engaged
Investor Relations Group to assist us in develop a strategy to raise additional
financing and to provide investor relations services. Our relationship with IRG
has been as follows:
o IRG assisted in defining our investor relations goals and objectives;
o IRG assisted us in preparing a corporate fact sheet for distribution
to targeted investment professionals and certain accredited investors;
o IRG arranged periodic meetings with interested retail brokers, fund
managers and investment advisers;
10
<PAGE>
o IRG provided potential investors with certain company approved due
diligence/investor relations kits; and
o IRG agreed to assist us in developing relationships with merchant and
investment banks, private placement professionals and other
intermediaries which could provide us with additional private
placement financing;
We anticipate we will require approximately $16 million to meet our cash
requirements for the period from July 1, 2000 through December 31, 2000, and
approximately $42 million to meet our cash requirements for the calendar year
2001. Our cash requirements for these periods will primarily be to satisfy
expenses related to marketing our web site and web site and data base
development costs. Our marketing costs are expected to constitute approximately
65% - 75% of our total budget for these periods. We intend to meet our cash
requirements through revenues generated from our operations and private or
public placements of our equity or debt. We have not had any discussions related
to raising additional financing beyond our planned private placement in the in
the first half of calendar 2000 and have no definitive plan to raise such
financing. Our auditors expressed substantial doubt about our ability to
continue as a going concern due to our lack of working capital for our planned
business activities. We estimate that our minimum cash requirement to remove the
going concern threat raised by our auditor is approximately $7.5 million for the
18 month period from July 1, 2000 through December 31, 2001, primarily for
expenses related to general over head and administration, web site maintenance,
web site and data base development, server maintenance and costs associated with
facilitating transactions between our customers and participating pawnshops.
In November 1999, we engaged Jefferies & Company, Inc., the principal operating
subsidiary of Jefferies Group, Inc., as our financial advisor.
We cannot assure you that we will successfully obtain additional financing on
acceptable terms, if at all. If we are unable to secure additional financing, we
intend to concentrate our resources on developing our web site and intend to
reduce the amount of resources we have budgeted for marketing our web site. Such
a reduction may have a material adverse affect on our business and results of
operations.
Subsequent Events
Subsequent to December 31, 1999, on February 11, 2000, we issued 650,000 shares
of our common stock at $2.31 per share, for an aggregate amount of $1,501,500 in
cash. The share issuance resulted from the exercise of share purchase warrants
that were issued and outstanding in December 1999. The terms of the warrants
allowed holders to acquire one common share at a price of $2.31 per share until
June 23, 2000 and at a price of $2.90 per share until June 23, 2001. No warrants
remain outstanding after the February 2000 exercise.
As a result of the February 11, 2000 the warrant exercise, we had a working
capital of approximately $1.2 million on February 11, 1999. We believe our
working capital position is sufficient to support our capital requirements of
our hard launch, scheduled for March 2000. However, until we are able to raise
additional working capital, we may be required to delay the implementation of
important elements of our growth plan, including the marketing our web site
prior to its launch.
Year 2000
The Year 2000 issue arises with the change in century and the potential
inability of information systems to correctly "rollover" dates to the new
century. To save on computer storage space, many systems were programmed with a
two-digit century (i.e. December 31, 1999 would appear as 12/31/99) assuming
that all years would be part of the 20th century. On January 1, 2000, systems
with this programming will default to 01/01/1900 instead of 01/01/2000, and
calculations using or reporting the date will not be correct and errors will
arise (the "Year 2000 Issue"). To prevent this from occurring, information
systems need to be updated to ensure they recognize dates during and after the
Year 2000.
The potential exists that we and each of our subsidiaries are exposed to a risk
that certain aspects of their businesses will fail or suffer impairment as a
result of internally operated or externally contracted hardware or software
systems
11
<PAGE>
and services not being able to correctly "rollover" dates to the new century.
The risk stems from our reliance on certain hardware, software and services to
carry out the daily operation of our proposed respective businesses. The
exposure may result from, amongst other things, the use of computers, general
software and servers for office purposes and data storage; connections to and
use of the services of Internet Service Providers and telephone companies for
office purposes and customer and investor relations; the software underlying the
operation of the Web site web site and the online business operations and our
servers.
We completed a review of our systems on January 3, 2000, and determined that our
systems were Year 2000 compliant. We have continued to monitor our systems and
do not anticipate we will experience any material Year 2000 problems. We have
not received any reports from any of our third party vendors related to Year
2000 that will affect our business. However, we cannot assure you that no Year
2000 problems will occur in the future. In the event that we incur expenses
associated with resolving Year 2000 compliance issues, we intend to expense the
operating costs as they are incurred and capitalize the capital costs as they
are incurred.
ITEM 3: QUANTITIATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company believes that it does not have any material exposure to interest or
commodity risks. The Company is exposed to economic and political changes in
international markets where the Company competes, such as inflation rates,
recession, foreign ownership restrictions, domestic and foreign government
spending, budgetary and trade policies and other external factors over which the
Company has no control.
Part II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As of the date hereof, there is no material litigation pending against the
Company. From time to time, the Company is a party to litigation and claims
incident to the ordinary course of business. While the results of litigation and
claims cannot be predicted with certainty, the Company believes that the final
outcome of such matters will not have a material adverse effect on the Company's
business, financial condition, results of operations and cash flows.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
27.1 Financial Data Schedule
12
<PAGE>
b) Reports on Form 8-K
None.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PAWNBROKER.COM, INC.
Date: February 16, 2000 By: /s/ NEIL MCELWEE
-------------------------------------------
Name: Neil McElwee
Title: Chief Executive Officer
(Principal Financial and Accounting
Officer)
13
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-END> DEC-30-1999
<CASH> 917,367
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