================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------------------------
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 June 30, 2000
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ------------ to ------------ .
Commission file number 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 [X] No [ ]
The number of outstanding common shares, no par value, of the Registrant
at June 30, 2000 was 17,564,750
================================================================================
<PAGE>
PAWNBROKER.COM, INC.
INDEX TO THE FORM 10-Q
For the quarterly period ended June 30, 2000
<TABLE>
Page
----
<S> <C>
Part I - FINANCIAL INFORMATION ...................................................................1
ITEM 1. FINANCIAL STATEMENTS .................................................................1
CONSOLIDATED BALANCE SHEETS...........................................................1
CONSOLIDATED STATEMENTS OF OPERATIONS.................................................1
CONSOLIDATED STATEMENTS OF CASH FLOWS.................................................3
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY ...........................4
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS........................................5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS............................................6
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK...........................17
Part II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS ..................................................................22
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS...........................................22
ITEM 3. DEFAULTS UPON SENIOR SECURITIES ....................................................22
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.................................22
ITEM 5. OTHER INFORMATION...................................................................23
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K....................................................23
SIGNATURES
</TABLE>
<PAGE>
Part I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PAWNBROKER.COM, INC.
(formerly Digital Sign Corporation)
(A Development Stage Company)
CONSOLIDATED BALANCE SHEETS
(Unaudited)
================================================================================
June 30, March 31,
2000 2000
--------------------------------------------------------------------------------
ASSETS
Current
Cash and cash equivalents $ - $ 424,678
Prepaid expenses 6,018 6,018
------------- ---------------
6,018 430,696
Deposits 226,012 205,741
Capital assets (Note 4) 800,773 370,770
Domain name (Note 5) 79,862 90,279
------------- ---------------
Total assets $ 1,112,665 $ 1,097,486
================================================================================
- continued -
The accompanying notes are an integral part of these
consolidated financial statements.
1
<PAGE>
PAWNBROKER.COM, INC.
(formerly Digital Sign Corporation)
(A Development Stage Company)
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
===============================================================================================================
June 30, March 31,
2000 2000
---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Continued...
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Bank overdraft $ 79,656 $ -
Accounts payable and accrued liabilities 1,563,961 1,122,159
Note payable (Note 7) 1,000,000 -
Current portion of capital obligations (Note 9) 159,007 -
------------- -------------
2,802,624 1,122,159
Convertible debenture (Note 8) 500,000 -
Capital lease obligation (Note 9) 111,873 -
------------- -------------
3,414,497 1,122,159
Stockholders' equity
Capital stock (Note 10)
Authorized
20,000,000 preferred shares with a par value of $0.00001
50,000,000 common shares with a par value of $0.00001
Issued and outstanding
June 30, 2000 - 17,564,750 common shares
March 31, 2000 - 17,564,750 common shares 176 176
Additional paid-in capital 4,681,260 4,681,260
Deficit accumulated during the development stage (6,983,268) (4,706,109)
------------- -------------
Total stockholders' equity (2,301,832) (24,673)
------------- -------------
Total liabilities and stockholders' equity $ 1,112,665 $ 1,097,486
===============================================================================================================
</TABLE>
History and organization of the Company (Note 1)
Commitments (Note 14)
Subsequent events (Note 17)
The accompanying notes are an integral part of these
consolidated financial statements.
2
<PAGE>
PAWNBROKER.COM, INC.
(formerly Digital Sign Corporation)
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
=====================================================================================================================
Cumulative
Amounts From
February 5, Three Months Three Months
1999 Period Ended Period Ended
to June 30, June 30, June 30,
2000 2000 1999
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING EXPENSES
Amortization $ 210,489 $ 104,505 $ -
Contract services 542,709 65,810 -
Consulting 430,214 52,773 -
Finders fee 65,000 65,000 -
General and administrative 2,005,742 348,492 -
Marketing and related expenses 768,387 467,681 -
Professional fees 593,746 206,807 -
Rent 256,936 78,052 -
Salary and wages 1,386,222 494,282 -
Stock-based compensation 93,617 - -
Telephone 242,412 183,374 -
Travel and related 443,811 215,835 -
-------------- ------------- -----------
7,039,185 2,282,611 -
OTHER ITEM
Interest income 55,917 5,452 -
-------------- ------------- -----------
Loss for the period $ 6,983,268 $ 2,277,159 $ -
=====================================================================================================================
Basic and diluted loss per common share (Note 3) $ (0.13) $ -
=====================================================================================================================
Weighted average number of shares of common stock outstanding 17,564,750 1,124,750
=====================================================================================================================
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
3
<PAGE>
PAWNBROKER.COM, INC.
(formerly Digital Sign Corporation)
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
====================================================================================================================
Cumulative
Amounts From
February 5, Three Months Three Months
1999 Period Ended Period Ended
to June 30, June 30, June 30,
2000 2000 1999
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Loss for the period $ (6,983,268) $ (2,277,159) $ -
Items not affecting cash:
Amortization 210,489 104,505 -
Stock-based compensation 93,617 - -
Net change in non-cash working capital items:
Increase in prepaid expenses (6,018) - -
Increase in accounts payable and accrued liabilities 1,558,773 441,802 -
Increase in notes payable 1,000,000 1,000,000 -
-------------- ------------- -----------
Net cash used in operating activities (4,126,407) (730,852) -
-------------- ------------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of capital assets (639,468) (197,435) -
Purchase of domain name (125,000) - -
Acquisition of cash on purchase of subsidiary 8,007 - -
(Increase) decrease in deposits (226,012) (20,271) -
-------------- ------------- -----------
Net cash used in investing activities (982,473) (217,706) -
-------------- ------------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock 4,585,000 - -
Proceeds from convertible debenture 500,000 500,000 -
Capital lease obligations (55,776) (55,776) -
-------------- ------------- -----------
Net cash provided by financing activities 5,029,224 444,224 -
-------------- ------------- -----------
Change in cash position for the period (79,656) (504,334) -
Cash and cash equivalents, beginning of period - 424,678 -
-------------- ------------- -----------
Cash and cash equivalents, end of period $ (79,656) $ (79,656) $ -
====================================================================================================================
</TABLE>
Supplemental disclosure with respect to cash flows (Note 13)
The accompanying notes are an integral part of these
consolidated financial statements.
4
<PAGE>
PAWNBROKER.COM, INC.
(formerly Digital Sign Corporation)
(A Development Stage Company)
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(Unaudited)
<TABLE>
=============================================================================================================================
Deficit
Accumulated
Common Stock Additional During the Total
----------------------------- Paid-in Development Stockholders'
Shares Amount Stage 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)
Common stock issued on exercise of
share purchase warrants 650,000 6 1,501,494 - 1,501,500
Stock-based compensation for options
issued to consultants and non-
employees - - 93,617 - 93,617
Loss for the year - - - (4,706,109) (4,706,109)
------------ ----------- ------------ ------------ ------------
Balance, March 31, 2000 17,564,750 176 4,681,260 (4,706,109) (24,673)
Loss for the period - - - (2,277,159) (2,277,159)
------------ ----------- ------------ ------------ ------------
Balance, June 30, 2000 17,564,750 $ 176 $ 4,681,260 $ (6,983,268) $ (2,301,832)
=============================================================================================================================
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
5
<PAGE>
PAWNBROKER.COM, INC.
(formerly Digital Sign Corporation)
(A Development Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
JUNE 30, 2000
================================================================================
1. HISTORY AND 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 present the financial position of Eriko as
at March 31, 1999 and its results of operations from February 5, 1999 to
March 31, 1999 and the consolidated financial position of the companies as
at June 30, 2000, the results of operations of Eriko for the year ended
June 30, 2000 and the results of operations of Pawnbroker.com, Inc.,
(Nevada) and Digital Signs Inc. from their respective dates of acquisition
during the year. The number of shares outstanding at June 30, 2000 and 1999
as presented are those of Pawnbroker.com, Inc.
The Company is a development stage online provider of previously-owned,
higher value merchandise available for immediate purchase and provides an
online network of pawnbrokers to trade and sell in the global marketplace.
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.
<TABLE>
================================================================================================
June 30, March 31,
2000 2000
-------------------------------------------------------------------------------- ---------------
<S> <C> <C>
Deficit accumulated during the development stage $ (6,983,268) $ (4,706,109)
Working capital (deficiency) (2,796,606) (691,463)
================================================================================================
</TABLE>
6
<PAGE>
PAWNBROKER.COM, INC.
(formerly Digital Sign Corporation)
(A Development Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
JUNE 30, 2000
================================================================================
3. SIGNIFICANT ACCOUNTING POLICIES (cont'd.....)
Principles of consolidation
These 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 upon consolidation.
Revenue recognition
The Company recognizes 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 year. 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
Statement of Financial Accounting Standards No. 128, "Earnings Per Share"
requires basic and diluted earnings per share to be presented. Basic
earnings per share is computed by dividing income available to common
shareholders by the weighted average number of shares of common stock
outstanding during the period. Diluted earnings per share takes into
consideration shares of common stock outstanding (computed under basic
earnings per share) and potentially dilutive shares of common stock.
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.
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.
7
<PAGE>
PAWNBROKER.COM, INC.
(formerly Digital Sign Corporation)
(A Development Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
JUNE 30, 2000
================================================================================
3. SIGNIFICANT ACCOUNTING POLICIES (cont'd.....)
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.
The Company accounts for stock-based compensation issued to non-employees
in accordance with the provisions of SFAS 123 and the Emerging Issues Task
Force consensus in Issue No. 96-18 ("EITF 96-18"), "Accounting for Equity
Instruments that are Issued to Other Than Employees for Acquiring or in
Conjunction with Selling, Goods or Services".
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 June
30, 2000.
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 amortization. The
cost of capital assets is amortized using the straight-line method over the
following estimated useful lives of the related assets:
Furniture and fixtures 5 years
Computer equipment 3 years
Computer software 1.5 years
Leasehold improvements 2 years
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.
8
<PAGE>
PAWNBROKER.COM, INC.
(formerly Digital Sign Corporation)
(A Development Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
JUNE 30, 2000
================================================================================
3. SIGNIFICANT ACCOUNTING POLICIES (cont'd.....)
Financial instruments
The Company's financial instruments consists of cash and cash equivalents,
deposits, accounts payable and accrued liabilities. Unless otherwise noted,
it is management's opinion that the Company is not exposed to significant
interest, currency or credit risks arising from these financial
instruments. The fair value of these financial instruments approximate
their carry values, unless otherwise noted.
4. CAPITAL ASSETS
<TABLE>
==================================================================================================
Net Book Value
------------------------------
Cost Accumulated June 30, March 31,
Amortization 2000 2000
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Furniture and fixtures $ 64,379 $ 11,068 $ 53,311 $ 53,723
Computer equipment 604,940 36,053 568,887 133,883
Computer software 277,526 117,764 159,762 181,164
Leasehold improvements 19,279 466 18,813 2,000
---------- ---------- ---------- ---------
$ 966,124 $ 165,351 $ 800,773 $ 370,770
==================================================================================================
</TABLE>
5. DOMAIN NAME
========================================================================
June 30, March 31,
2000 2000
------------------------------------------------------------------------
Domain name $ 125,000 $ 125,000
Less: Accumulated amortization (45,138) (34,721)
----------- -----------
Net book value $ 79,862 $ 90,279
========================================================================
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.
9
<PAGE>
PAWNBROKER.COM, INC.
(formerly Digital Sign Corporation)
(A Development Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
JUNE 30, 2000
================================================================================
6. BUSINESS COMBINATIONS (cont'd.....)
Eriko Internet Inc. (cont'd.....)
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 difficult 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
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. NOTE PAYABLE
<TABLE>
=====================================================================================================================
2000 1999
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Line of credit from BWI Avionics Ltd., bearing interest at 12% per annum. The
note is due and payable on May 1, 2001. The note is personally guaranteed
by two directors of the Company up to $500,000. $ 1,000,000 $ -
=====================================================================================================================
</TABLE>
8. CONVERTIBLE DEBENTURE
On June 7, 2000, the Company issued a convertible debenture in the
aggregate principal amount of $500,000. The debenture bears interest at 9%
per annum and is due and payable on December 7, 2001. The debenture, at the
holder's option, is convertible into common shares of the Company at any
time commencing one hundred and twenty (120) days after the closing date of
June 7, 2000 at a conversion price equal to the lesser of:
a) 115% of the closing bid price of the common share on the principal
market on the closing date,
b) and 85% of the market price on the conversion date.
10
<PAGE>
PAWNBROKER.COM, INC.
(formerly Digital Sign Corporation)
(A Development Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
JUNE 30, 2000
================================================================================
8. CONVERTIBLE DEBENTURE (cont'd...)
The Company has at its option and subject to certain circumstances, the
right to convert the convertible debenture to common shares at a price of:
a) if after the closing date and on or before the 90th date after the
closing date, 110% of the outstanding principal balance, plus all
accrued but unpaid interest,
b) if after the 90th day after the closing date and on or before the
180th day after the closing date, 115% of the outstanding principal
balance, plus all accrued but unpaid interest and
c) if after the 180th day after the closing date, 120% of the outstanding
principal balance, plus all accrued but unpaid interest.
The debenture holder received warrants to purchase 58,824 common stocks of
the Company at $4.89 per share at any time prior to June 7, 2003.
A finder's fee of $65,000 was paid.
9. CAPITAL LEASE OBLIGATION
Future minimum lease payments under the capital lease are as follows:
<TABLE>
================================================================================
2000 1999
--------------------------------------------------------------------------------
<S> <C> <C>
Total minimum lease payments $ 286,537 $ -
Less: amount representing interest (15,657) -
------------ ----------
Balance of obligation 270,880 -
Less: due within one year (159,007) -
------------ ----------
$ 111,873 $ -
================================================================================
</TABLE>
10. CAPITAL STOCK
On April 6, 1999, Pawnbroker acquired all of the issued and outstanding
share capital of Eriko Internet Inc. As consideration, Pawnbroker issued
34,000,000 (8,500,0000 post-consolidation) common shares for cash proceeds
of $80,500.
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.
On June 14, 1999, Pawnbroker acquired all of the issued and outstanding
share capital of Pawnbroker.com, Inc., a Nevada Corporation. As
consideration, Pawnbroker issued 6,240,000 common shares at a deemed value
of $62, equal to the par value of the shares issued.
<
11
<PAGE>
PAWNBROKER.COM, INC.
(formerly Digital Sign Corporation)
(A Development Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
JUNE 30, 2000
================================================================================
10. CAPITAL STOCK (cont'd...)
On June 23, 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 consisted of one common share and one-half of a share purchase
warrant. One full share purchase warrant entitled 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. These share purchase
warrants were exercised during the year for total proceeds of $1,501,500.
On September 10, 1999, the Company consolidated its issued and outstanding
shares of common stock on a four to one basis. The consolidated statement
of changes in stockholders' equity has been restated to give retroactive
recognition of the share consolidation for all periods presented. In
addition, all references to number of shares and per share amounts of
common stock have been restated to reflect the share consolidation.
11. STOCK OPTIONS AND WARRANTS
At June 30, 2000, incentive stock options were outstanding enabling the
optionee to acquire the following number of common shares:
<TABLE>
===================================================================================================================
Number Exercise
of Shares Price Expiry Date
------------- --------------------------- -------------------------------------------------------------------------
<S> <C> <C>
250,000 $ 6.75 November 1, 2002
150,000 6.75 3 years from the date when the Company receives a specified amount
of financing in private or public offerings after November 1, 1999.
82,000 6.75 September 1, 2002
2,894,665 ranging from 4.63 to 7.94 3 years from the initial vesting dates of the stock options, over
periods ranging from June 13, 2002 to March 15, 2003.
===================================================================================================================
</TABLE>
The following warrants were outstanding at June 30, 2000:
===============================================================
Number Exercise
of Shares Price Expiry Date
------------- ----------------------- -------------------------
72,000 $ 6.75 May 10, 2003
58,824 4.89 June 7, 2003
===============================================================
12. STOCK BASED COMPENSATION EXPENSE
SFAS 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 quoted market price
of the Company's stock at the date of grant over the option price.
12
<PAGE>
PAWNBROKER.COM, INC.
(formerly Digital Sign Corporation)
(A Development Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
JUNE 30, 2000
================================================================================
12. STOCK BASED COMPENSATION EXPENSE (cont'd.....)
The Company accounts for stock issued to non-employees in accordance with
the provisions of SFAS 123 and the Emerging Issues Task Force consensus in
Issue No. 96-18, "Accounting for Equity Instruments that are Issued to
Other Than Employees for Acquiring or in Conjunction with Selling, Goods or
Services".
Following is a summary of the stock option activity:
===========================================================================
Weighted
Average
Number Exercise
of Shares Price
---------------------------------------------------------------------------
Outstanding at March 31, 1999 - $ -
Granted 400,000 6.75
Forfeited - -
Exercised - -
----------
Outstanding at March 31, 2000 400,000 6.75
Granted 2,976,665 6.67
Forfeited - -
Exercised - -
----------
Outstanding at June 30, 2000 3,376,665 $ 6.68
===========================================================================
The weighted average fair value of options granted during the current
period was $6.17 per share.
Following is a summary of the status of options outstanding at June 30,
2000:
<TABLE>
=====================================================================================================================
Outstanding Options Exercisable Options
------------------------------------------- -------------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Contractual Exercise Exercise
Exercise Price Number Life Price Number Price
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 6.75 400,000 2.67 $ 6.75 250,000 $ 6.75
Range from $4.63 to $7.94 2,894,665 2.29 6.67 183,334 6.87
$6.75 82,000 2.17 6.75 - -
=====================================================================================================================
</TABLE>
13
<PAGE>
PAWNBROKER.COM, INC.
(formerly Digital Sign Corporation)
(A Development Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
JUNE 30, 2000
================================================================================
12. STOCK BASED COMPENSATION EXPENSE (cont'd.....)
Compensation
The Company granted 2,976,665 options to employees during the current
period, which are accounted for using Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees". Had compensation
expense relating the 2,976,665 options granted to employees been recognized
on the basis of fair value pursuant to Statement of Financial Accounting
Standard No. 123, net loss and loss per share would have been adjusted as
follows:
<TABLE>
=======================================================================================
Three Month
Period Ended Year Ended
June 30, March 31,
2000 2000
---------------------------------------------------------------------------------------
<S> <C> <C>
Loss for the period
As reported $ (2,277,159) $ (4,706,109)
============== ==============
Pro-forma $ (7,296,552) $ (4,706,109)
============== ==============
Basic and diluted loss per share
As reported $ (0.13) $ (0.31)
============== ==============
Pro-forma $ (0.42) $ (0.31)
=======================================================================================
</TABLE>
The fair value of each option granted is estimated using the Black Scholes
Model. The assumptions used in calculating fair values are as follows:
==========================================================================
2000 1999
--------------------------------------------------------------------------
Risk-free interest rate 6.67% -
Expected life of the options 3 -
Expected volatility 179.68% -
Expected dividend yield - -
==========================================================================
13. SUPPLEMENTAL DISCLOSURE WITH RESPECT TO CASH FLOWS
============================================================================
June 30, March 31,
2000 2000
----------------------------------------------------------------------------
Cash paid for income taxes $ - $ -
Cash paid for interest - -
============================================================================
14
<PAGE>
PAWNBROKER.COM, INC.
(formerly Digital Sign Corporation)
(A Development Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
JUNE 30, 2000
================================================================================
13. SUPPLEMENTAL DISCLOSURE WITH RESPECT TO CASH FLOWS (cont'd.....)
Non-cash investing and financing transactions during the period from
February 5, 1999 to June 30, 2000 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 shares of Eriko.
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-Nevada.
c) The Company received 250,000 shares of common stock for cancellation
at a deemed value of $250.
14. COMMITMENTS
a) The Company leases office and production premises and certain office
equipment pursuant to operating leases which expire in 2003 and 2004:
Future annual lease payments are as follows:
2001 $ 233,030
2002 225,074
2003 159,739
2004 103,710
b) 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 was 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 has vested
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.
15. RELATED PARTY TRANSACTION
There were no related party transactions for the three month period ended
June 30, 2000.
16. INCOME TAXES
Subject to certain restrictions, the Company has certain operating losses
available to reduce taxable income of future years. Future tax benefits
which may arise as a result of these losses and resource deductions have
not been recognized in these financial statements.
The Company has not recorded potential future income tax benefits of
$2,374,311 in operating losses which expire as follows:
2020 $ 2,374,311
===============
15
<PAGE>
PAWNBROKER.COM, INC.
(formerly Digital Sign Corporation)
(A Development Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
JUNE 30, 2000
================================================================================
16. INCOME TAXES (cont'd.....)
A reconciliation of the U.S. statutory federal income tax rate to the
effective rate is as follows:
<TABLE>
======================================================================================================
June 30, March 31,
2000 2000
------------------------------------------------------------------------------------------------------
<S> <C> <C>
U.S. federal statutory graduated rate 15.00% 15.00%
State income tax rate, net of federal benefit 7.00% 7.00%
Net operating loss for which no tax benefit is currently available (22.00)% (22.00)%
--------- ---------
0.00% 0.00%
======================================================================================================
</TABLE>
At June 30, 2000, deferred taxes consisted of a net tax asset of $2,374,311
due to operating loss carryforwards of $6,983,268, which was fully allowed
for in the valuation allowance of $2,374,311. The valuation allowance
offsets the net deferred asset for which there is no assurance of recovery.
The change in the valuation allowance for the three month period ended June
30, 2000 was $2,374,311. Net operating loss carryforwards will expire in
2020.
The valuation allowance will be evaluated at the end of each year,
considering positive and negative evidence about whether the asset will be
realized. At that time, the allowance will either be increased or reduced;
reduction could result in the complete elimination of the allowance if
positive evidence indicates that the value of the deferred tax asset is no
longer impaired and the allowance is no longer required.
17. SUBSEQUENT EVENTS
The following are events which occurred subsequent to June 30, 2000:
a) The Company will effect a change in the Company's fiscal year to
December 31, effective December 31, 2000.
b) The Company has offered a private placement of 1,000,000 units at
$2.00 per unit. Each unit consists of one share of common stock with a
par value of $0.00001 and one non-transferable share purchase warrant.
Each warrant will entitle the subscriber for one additional common
share at a price of $3.00 per share.
c) The Company entered into a common stock purchase agreement with
Gestrow Investments Limited ("Gestrow") to sell up to $24,000,000 of
the Company's common stock, no par value per share, based on up to
twelve draw downs of up to $2,000,000 per draw down, and to issue
warrants entitling Gestrow to purchase certain amounts of common stock
of the Company.
16
<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, as amended. 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, 2000 through June 30, 2000.
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.
We intend to compete in the highly competitive Internet commerce industry.
Several 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
begun the process of developing our brand name or promoting
17
<PAGE>
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.
Our web site is located at www.pawnbroker.com.
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 through December 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.
Three Months Ended June 30, 2000 Compared to June 30, 1999
Revenues/Losses. We had no revenues from operations. Our loss during our
three month period ended June 30, 2000 of $2,277,189 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 June 30, 2000 was $677,865. Specifically, we paid
consultant fees of $52,773 for assistance related to the evaluation and
development of our Internet business strategies and contract service fees of
$65,810 for investor relations and market research related to business
development. We also paid salaries and wages in the amount of $494,282 to our
regular employees and management. We anticipate that expenses related to
compensation to personnel and consultants will remain steady during the
remainder of our fiscal year and through December 2001, as we intend to rely on
our current staff and management to implement our business plan. We may hire
additional employees after we are able to generate revenues from transactions
and membership fees.
General and Administrative/Overhead. General and administrative expenses
were $348,492 for the three-month period ended June 30, 2000, as a result of
increased business activities and the costs associated with our Santa Clara
office. Rent expense during the three month period was $78,052, which included
rent expense of approximately $19,640 related to our Santa Clara office, $13,800
related to our Reno office and $8,000 related to our Philadelphia office.
Additionally, we had approximately $44,000 of Internet related rental equipment.
Telephone expenses were $183,374 for the three month period ended June 30, 2000,
which consists primarily of $151,481 of Internet related services. We expect
that the dollar amounts spent on overhead and general administration will remain
steady as we consolidate our office customer service operations in our Reno
office and we concentrate our efforts on customer service and revenue producing
opportunities.
Sales and Marketing. Sales and marketing expenses were $467,681 for the
three months ended June 30, 2000. 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. Our sales and marketing expenses included expenses related
to a promotional launch in the Chicago area and promotional campaigns to
increase membership of participating pawnbrokers and to develop strategic
alliances with business partners. Marketing costs also included 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. Travel and entertainment expenses were $215,835, 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. During the quarter ended June 30, 2000,
we participated in trade shows and held several off-site meetings with staff and
industry advisers.
We anticipate that our sales and marketing expenses will increase during
the remainder of 2000 begin promotional campaigns targeted at buyers of
merchandise.
18
<PAGE>
Professional Fees. During the three months ended June 30, 2000, we paid
professional fees of $206,807 related to legal and accounting services,
principally in connection with the preparation and filing of our periodic
reports with the Securities and Exchange Commission, preparation of materials
related to a special meeting of shareholders held on May 3, 2000, contract
negotiation and intellectual property protection.
Other Income. During the three months ended June 30, 2000, we earned
interest income on short-term deposits of $5,452.
Liquidity and Capital Resources
Since our inception on February 5, 1999, we raised net cash from financing of
$4,585,000 through private placements of our common stock, and $500,000 through
the issuance of a convertible debenture. During the fiscal quarter ended June
30, 2000, we raised $1,500,000 in the following transactions:
Line of Credit - $1 million
We obtained a one million dollar ($1,000,000) line of credit from BWI
Avionics Ltd. that the Company has completely drawn down as of June 30,
2000. The line of credit has interest payable at the rate of twelve percent
(12%) per annum. The Note is due and payable May 1, 2001, with the option
of extending the term upon the agreement of BWI Avionics Ltd., William
Galine, and Joseph Schlader. Each of William Galine and Joseph Schlader and
their entity Pacific Pawnbroker guaranteed $500,000 of the line of credit.
The Company drew down the loan for the purpose of purchasing certain
equipment.
9% convertible debenture - $500,000
On June 7, 2000, we issued a 9% convertible debenture and warrants to
Lamothe Investing Corp. pursuant to a loan agreement dated June 7, 2000 to
raise gross proceeds of $500,000. The convertible debenture is convertible
into common shares at the lesser of lesser of $4.89 or (ii) 85% of the
average five (5) lowest closing bid prices for our shares on the OTCBB or
other principal market during the twenty-two trading day period prior to
the conversion date. The warrants are exercisable to acquire 58,824 shares
of our common stock at $4.89 per share. We issued the 9% convertible
debenture and warrants pursuant to an exemption from registration under
Rule 506 of Regulation D promulgated under the Securities Act. The offering
was otherwise in compliance with Rules 501 and 502 promulgated under the
Securities Act. We paid a loan fee to of Lamothe Investing Corp. equal to
10% of the gross proceeds of the offering.
Under the terms of the loan agreement with Lamothe Investing Corp., we were
required to file a resale registration statement to register under the
Securities Exchange Act of 1933, as amended, the shares of common stock
acquirable by Lamothe upon conversion of the convertible debenture and
exercise of the warrant. On July 31, 2000, we filed a registration
statement on Form S-1 to register such common shares and an amendment to
the registration statement on August 8, 2000. The registration was declared
effective on the close of business, August 11, 2000.
Subsequent to June 30, 2000, we completed the following financing transactions:
Equity Line - Gestrow Investments Limited
We entered into a common stock purchase agreement with Gestrow Investments
Limited, a British Virgin Islands corporation, on July 7, 2000, for the
future issuance and purchase of shares of our common stock. The stock
purchase agreement establishes what is sometimes termed an equity line of
credit or an equity drawdown facility. We were required to file a resale
registration statement to register under the Securities Exchange Act of
1933, as amended, the shares of common stock issuable to Gestrow under the
stock purchase agreement. On July 31, 2000, we filed a registration
statement on Form S-1 to register such common shares and an amendment to
the registration statement on August 8, 2000. The registration was declared
effective on the close of business, August 11, 2000.
In general, the drawdown facility operates like this: the investor,
Gestrow, has committed to provide us up to $24 million as we request it
over a 12 month period, in return for common stock we issue to Gestrow.
19
<PAGE>
Once every 22 trading days, we may request a draw of up to $2,000,000 of
that money, subject to a maximum of 12 draws. The maximum amount we
actually can draw down upon each request will be determined by the
volume-weighted average daily price of our common stock for the 22 trading
days prior to our request and the average trading volume for the 45 trading
days prior to our request. Each draw down must be for at least $250,000. At
the end of a 22 day trading period following the drawdown request, the
final drawdown amount is determined based on the volume-weighted average
stock price during that 22 day period. We then use the formulas in the
common stock purchase agreement to determine the number of shares we will
issue to Gestrow in return for that money.
Under the Agreement, the maximum we may drawdown in each draw is equal to
the lesser of:
- $2,000,000; or
- 20% of the weighted average trading price of our common stock on
the OTCBB during the 22 trading days prior to the drawdown,
multiplied by the average number of shares traded per day on the
OTCBB during the 45 days prior to the drawdown, multiplied by 22,
less a 5% cash placement fee payable to its placement agent, Ladenburg
Thalmann & Co. Inc., and $1,500 in escrow fees and expenses per drawdown.
We may make up to a maximum of 12 draws; however, the aggregate total of
all draws cannot exceed $24 million and no single draw can exceed $2
million. We are under no obligation to request a draw for any period.
The average market price for our common stock for the 22 trading days prior
to July 24, 2000 was $3.17 and the average daily trading volume for the 45
trading days ended July 21, 2000 was 66,459. If our market price on July
24, 2000 and the 45-day average trading volume preceding July 24, 2000 each
remained constant over the 12 month period of the common stock purchase
agreement and we requested the maximum amount available to us under the
common stock purchase agreement, each draw would be capped at approximately
$926,970 and we could make 12 draws for a total amount drawn of
$11,123,641. As the example shows, if our stock price stays at current
levels, we will not be able to draw down all $24 million under the common
stock purchase agreement.
In connection with the common stock purchase agreement, we issued to
Gestrow a warrant exercisable to acquire 334,262 shares of common stock at
$3.59 per share in lieu of any minimum drawdown commitment by us. We also
issued to Ladenburg a warrant exercisable to acquire 334,262 shares of
common stock at $3.59 per share. The shares acquirable upon exercise of
these warrants were registered for resale under the Form S-1 registration
statement.
Unit Private Placement - $2 Million
On August 11, 2000, we completed a private placement of 1 million units at
$1.00 per unit, each unit consisting of one share of common stock and one
warrant exercisable to acquire one additional share of common stock at
$3.00 per share for one year. We received gross proceeds of $2 million from
the private placement. The units were issued to Annapolis Properties Ltd.
We issued the units, consisting of the common stock and warrants, pursuant
to an exemption from registration under Regulation S promulgated under the
Securities Act.
As at June 30, 2000, we had $nil in cash or term deposits. We had accounts
payable and accrued liabilities of $1,563,961 and short-term notes of
$1,000,000. We had a working capital deficit of $2,796,606 at June 30, 2000. In
connection with the audit of our audited financial statements for our fiscal
year ended March 31, 2000, 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 $10
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
20
<PAGE>
our customers and participating pawnshops. Subsequent to June 30, 2000, we
completed a private placement of units for proceeds of $2 million and arranged
an equity line, which will allow us to make monthly draws beginning in
September, 2000. We believe that the equity line provided by Gestrow will
provide us with sufficient financing to meet our working capital needs through
the third calendar quarter 2001. However, we cannot assure you that we will be
able to draw sufficient capital under our equity line to fund our working
capital needs or in the event such draws are not sufficient to fund our working
capital needs that we will acquire additional financing on acceptable terms, if
at all.
We anticipate that we will continue to incur substantial losses until we can
generate revenues from transactions and membership fees and from business to
business revenue opportunities.
During the fiscal quarter ended June 30, 2000, we received no cash from our
operations and we used net cash of $1,733,852. 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. We anticipate that our working capital needs will
decrease during the remainder of 2000, as we intend to consolidate our
operations in our Reno office and to take steps to improve reduce the cost of
implementing our business strategy.
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 cannot assure you that we will generate sufficient revenues from our
operation to earn a profit or that our web site will be commercially successful.
Our inability to successful market our website or generate revenues from
transactions on our web site will have a material adverse affect on our business
and results of operations.
Employees
At June 30, 2000, we had 29 employees. In addition to management, we employ
marketing, sales, product development and technical personnel. We expect to hire
a customer service manager, database administrator, a developer/IT specialist,
customer service representatives, technical support representatives and a
Producer/HTML code developer.
Subsequent Events
Subsequent to June 30, 2000, Neil McElwee was terminated as our Chief
Executive Officer. Pursuant to the terms of his agreement, Mr. McElwee resigned
as a director of Pawnbroker.com. On July 31, 2000, we hired Dino Querze as our
Chief Operating Officer. On August 11, 2000, we hired Glenn Spiro to replace Mr.
McElwee as our Chief Executive Officer.
21
<PAGE>
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
Sales of Unregistered Securities.
During the fiscal quarter ended June 30, 2000, we completed the following sales
of unregistered securities:
On June 7, 2000, we issued a 9% convertible debenture and warrants to
Lamothe Investing Corp. pursuant to a loan agreement dated June 7, 2000 to
raise gross proceeds of $500,000. The convertible debenture is convertible
into common shares at the lesser of lesser of $4.89 or (ii) 85% of the
average five (5) lowest closing bid prices for our shares on the OTCBB or
other principal market during the twenty-two trading day period prior to
the conversion date. The warrants are exercisable to acquire 58,824 shares
of our common stock at $4.89 per share. We issued the 9% convertible
debenture and warrants pursuant to an exemption from registration under
Rule 506 of Regulation D promulgated under the Securities Act. The offering
was otherwise in compliance with Rules 501 and 502 promulgated under the
Securities Act. We paid a loan fee to of Lamothe Investing Corp. equal to
10% of the gross proceeds of the offering.
Under the terms of the loan agreement with Lamothe Investing Corp., we were
required to file a resale registration statement to register under the
Securities Exchange Act of 1933, as amended, the shares of common stock
acquirable by Lamothe upon conversion of the convertible debenture and
exercise of the warrant. On July 31, 2000, we filed a registration
statement on Form S-1 to register such common shares and an amendment to
the registration statement on August 8, 2000. The registration was declared
effective on the close of business, August 11, 2000.
RedTagOutlet.com - Warrant
On May 19, 2000, we issued RedTagOutlet.com a warrant exercisable to
acquire 72,000 shares of our common stock at $6.72 per share. We issued the
warrant pursuant to an exemption from registration under Rule 506 of
Regulation D promulgated under the Securities Act. The offering was
otherwise in compliance with Rules 501 and 502 promulgated under the
Securities Act. No fees or commissions were paid in connection with the
transaction.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
A special meeting of shareholders was held May 3, 2000. A total of
9,874,820 common shares of Pawnbroker.com, Inc. were represented in person or by
proxy at the meeting, consisting of 55.43% of the total number of common shares
of the Company outstanding on March 30, 2000, the record date for the meeting.
22
<PAGE>
At the meeting, the following proposals were presented:
A proposal to increase the number of shares authorized to be issued by the
Company to 100,000,000 shares of common stock and 50,000,000 shares of preferred
stock. The following table sets forth the information regarding the voting on
the proposal:
Votes Cast For Votes Cast Votes Withheld Abstentions Not Voted
Against
--------------- ---------- -------------- ----------- ---------
9,874,320 500 - -
A proposal to an amendment to the Pawnbroker.com 1999 Stock Option Plan to
increase the number of shares authorized to be issued by the Company under to
8,000,000 shares of common stock.
Votes Cast For Votes Cast Votes Withheld Abstentions Not Voted
Against
--------------- ---------- -------------- ----------- ---------
9,874,320 500 - -
A proposal to amend and restate the Company's bylaws to, among other
things, (i) reduce the quorum requirement for meetings of shareholders to
one-third of shares entitled to vote at such meeting; (ii) create a staggered
board of directors consisting of three classes of directors, each class to be
elected for a term of three years after an initial period; and (iii) to effect a
change in the Company's fiscal year to December 31, effective December 31, 2000.
Votes Cast For Votes Cast Votes Withheld Abstentions Not Voted
Against
--------------- ---------- -------------- ----------- ---------
9,874,320 500 - -
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
Exhibit
Number Description
------ -----------
27.1 Financial Data Schedule
b) Reports on Form 8-K
None.
23
<PAGE>
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: August 25, 2000 By: /s/ Greigory Park
---------------------------------------
Name: Greigory Park
Title: Chief Financial Officer
(Principal Financial and
Accounting Officer)
24
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description
------ -----------
27.1 Financial Data Schedule
