================================================================================
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 September 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 September 30, 2000 were 18,833,567
<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.................................................3
CONSOLIDATED STATEMENTS OF CASH FLOWS.................................................4
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY ...........................5
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS........................................6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS...............................................................17
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK...........................23
Part II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS ..................................................................24
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS...........................................24
ITEM 3. DEFAULTS UPON SENIOR SECURITIES ....................................................24
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.................................24
ITEM 5. OTHER INFORMATION...................................................................24
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K....................................................24
SIGNATURES........................................................................................25
</TABLE>
i
<PAGE>
Part I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PAWNBROKER.COM, INC.
(A Development Stage Company)
CONSOLIDATED BALANCE SHEETS
(Unaudited)
================================================================================
<TABLE>
September 30, March 31,
2000 2000
--------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current
Cash and cash equivalents $ 1,050,007 $ 424,678
Prepaid expenses 1,000 6,018
------------ ------------
1,051,007 430,696
Deposits 176,018 205,741
Capital assets (Note 4) 678,553 370,770
Domain name (Note 5) 59,029 90,279
------------ ------------
Total assets $ 1,964,607 $ 1,097,486
============================================================================================
</TABLE>
- continued -
The accompanying notes are an integral part of
these consolidated financial statements
1
<PAGE>
PAWNBROKER.COM, INC.
(A Development Stage Company)
CONSOLIDATED BALANCE SHEETS
(Unaudited)
================================================================================
<TABLE>
September 30, 2000 March 31, 2000
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued liabilities $ 911,790 $1,122,159
Notes payable (Note 7) 1,500,000 -
Current portion of capital lease obligation (Note 9) 161,603 -
------------ ------------
2,573,393 1,122,159
Capital lease obligation (Note 9) 70,488 -
------------ ------------
2,643,881 1,122,159
------------ ------------
Stockholders' equity
Capital stock (Note 10)
Authorized
50,000,000 preferred shares with a par value of $0.00001
1,000,000,000 common shares with a par value of $0.00001
Issued and outstanding
September 30, 2000 - 18,833,567 common shares
March 31, 2000 - 17,564,750 common shares 186 176
Additional paid-in capital 7,181,250 4,681,260
Deficit accumulated during the development stage (7,860,710) (4,706,109)
------------ ------------
Total stockholders' equity (679,274) (24,673)
------------ ------------
Total liabilities and stockholders' equity $ 1,964,607 $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.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
================================================================================
<TABLE>
Cumulative
Amounts From
February 5, Three Month Six Month Six Month
1999 to Period Ended Period Ended Period Ended
September 30, September 30, September 30, September 30,
2000 2000 2000 1999
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OPERATING EXPENSES
Amortization $ 430,197 $ 219,708 $ 324,213 $ 70,126
Contract services 702,843 160,134 225,944 83,732
Consulting 501,300 71,086 123,859 9,709
Finder's fee 65,000 - 65,000 -
General and administrative 2,096,778 91,036 439,528 144,931
Marketing and related expenses 823,050 54,663 522,344 198,476
Professional fees 581,907 (11,839) 194,968 35,602
Rent 312,089 55,253 133,305 34,377
Salary and wages 1,645,843 259,621 753,903 94,397
Stock-based compensation 93,617 - - -
Telephone 296,598 54,186 237,560 16,822
Travel and related 299,205 (144,606) 71,229 71,029
------------ ------------ ------------ ------------
7,848,427 809,242 3,091,853 759,201
------------ ------------ ------------ ------------
OTHER ITEMS
Interest expense 75,991 75,991 75,991 -
Interest income (63,708) (7,791) (13,243) (22,229)
------------ ------------ ------------ ------------
12,283 68,200 62,748 (22,229)
------------ ------------ ------------ ------------
Loss for the period $ 7,860,710 $ 877,442 $ 3,154,601 $ 736,972
===============================================================================================================================
Basic and diluted loss per common share (Note 3) $ (0.05) $ (0.18) $ (0.06)
===============================================================================================================================
Weighted average number of shares of common
stock outstanding 18,185,366 17,845,905 11,873,212
===============================================================================================================================
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements
3
<PAGE>
PAWNBROKER.COM, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
================================================================================
<TABLE>
Cumulative Amounts
Amounts From Six Month Six Month
February 5, 1999 Period Ended Period Ended
to September 30, September 30, September 30,
2000 2000 1999
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Loss for the period $(7,860,710) $(3,154,601) $ (736,972)
Items not affecting cash:
Amortization 430,197 324,213 70,126
Stock-based compensation 93,617 - -
Net change in non-cash working capital items:
(Increase) decrease in prepaid expenses (1,000) 5,018 (6,018)
Increase (decrease) in accounts payable and accrued
liabilities 906,602 (210,369) 38,279
------------ ------------ ------------
Net cash used in operating activities (6,431,294) (3,035,739) (634,585)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of capital assets (716,120) (274,087) (414,618)
Purchase of domain name (125,000) - (125,000)
Acquisition of cash on purchase of subsidiary 8,007 - 8,007
(Increase) decrease in deposits (176,018) 29,723 (1,313)
------------ ------------ ------------
Net cash used in investing activities (1,009,131) (244,364) (532,924)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock 6,585,000 2,000,000 3,003,000
Proceeds from convertible debenture 500,000 500,000 -
Capital lease obligations (94,568) (94,568) -
Proceeds from notes payable 1,500,000 1,500,000 -
------------ ------------ ------------
Net cash provided by financing activities 8,490,432 3,905,432 3,003,000
------------ ------------ ------------
Change in cash position for the period 1,050,007 625,329 1,835,491
Cash and cash equivalents, beginning of period - 424,678 80,500
------------ ------------ ------------
Cash and cash equivalents, end of period $ 1,050,007 $ 1,050,007 $ 1,915,991
============================================================================================================================
</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.
(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 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. 1,124,750 12 26,256 - 26,268
at April 6, 1999
Deficit of Pawnbroker.com, Inc. at - - (23,261) - (23,261)
April 6, 1999
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)
Common stock issued for conversion of 268,817 - 500,000 - 500,000
convertible debenture
Common stock issued for cash 1,000,000 10 1,999,990 - 2,000,000
Loss for the period - - - (3,154,601) (3,154,601)
------------ ------------ ------------ ------------ ------------
Balance, September 30, 2000 18,833,567 $ 186 $7,181,250 $(7,860,710) $ (679,274)
==============================================================================================================================
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements
5
<PAGE>
PAWNBROKER.COM, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
SEPTEMBER 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.
On May 17, 2000, the Company amended its certificate of incorporation
increase its authorized capital to consist of 100,000,000 shares of common
stock, with $0.0001 par value, and 50,000,000 shares of preferred stock,
with $0.0001 par value.
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 consolidated financial
position of the companies as at September 30, 2000, the results of
operations of Eriko from February 5, 1999 to September 30, 2000 and the
results of operations of Pawnbroker.com, Inc., (Nevada) and Digital Signs
Inc. from their respective dates of acquisition to September 30, 2000. The
number of shares outstanding at September 30, 2000 and March 31, 2000 as
presented is 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>
=======================================================================================
September 30, March 31,
2000 2000
---------------------------------------------------------------------------------------
<S> <C> <C>
Deficit accumulated during the development stage $(7,860,710) $(4,706,109)
Working capital (deficiency) (1,522,386) (691,463)
=======================================================================================
</TABLE>
6
<PAGE>
PAWNBROKER.COM, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
SEPTEMBER 30, 2000
================================================================================
3. SIGNIFICANT ACCOUNTING POLICIES
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 take 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 expense (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
7
<PAGE>
PAWNBROKER.COM, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
SEPTEMBER 30, 2000
================================================================================
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.
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
September 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.
8
<PAGE>
PAWNBROKER.COM, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
SEPTEMBER 30, 2000
================================================================================
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 advertising in the period in which the advertising
space or airtime is used.
Financial instruments
The Company's financial instruments consist of cash and cash equivalents,
deposits, accounts payable and accrued liabilities, note payable and
capital lease obligation. 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 September 30, March 31,
Amortization 2000 2000
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Furniture and fixtures $ 64,973 $ 17,538 $ 47,435 $ 53,723
Computer equipment 670,098 131,248 538,850 133,883
Computer software 302,716 214,315 88,401 181,164
Leasehold improvements 4,991 1,124 3,867 2,000
---------- --------- ---------- ----------
$1,042,778 $364,225 $678,553 $370,770
==========================================================================================
</TABLE>
5. DOMAIN NAME
===========================================================================
September 30, March 31,
2000 2000
---------------------------------------------------------------------------
Domain name $125,000 $125,000
Less: Accumulated amortization (65,971) (34,721)
Net book value $ 59,029 $ 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.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
SEPTEMBER 30, 2000
================================================================================
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 Pawnbroker-Nevada was deemed to be from a promoter of
Pawnbroker, the purchase has been recorded at the historical cost of the
net assets of Pawnbroker-Nevada, which approximate the par value of the
shares issued.
7. NOTES PAYABLE
<TABLE>
=======================================================================================================================
September 30, March 31,
2000 2000
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Line of credit from BWI Avionics Ltd., bearing interest at 12% per annum, due
and payable on May 1, 2001. The note is personally guaranteed by two
directors of the Company up to $500,000 each. $1,000,000 $ -
Promissory note from Granite Communications Inc., bearing interest at 10% per
annum, payable on July 15, 2001. The note is secured by the Company's assets. 300,000 -
Loan payable from BWI Avionic Ltd., bearing interest at 12% per annum, payable
on July 15, 2001. 200,000 -
---------- ----------
$1,500,000 $ -
=======================================================================================================================
</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:
10
<PAGE>
PAWNBROKER.COM, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
SEPTEMBER 30, 2000
================================================================================
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.
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 shares of
the Company at $4.89 per share at any time prior to September 7, 2003. A
finder's fee of $65,000 was paid. On September 7, 2000, the total
convertible debenture was converted into 268,817 common shares of the
Company. Interest expense of $9,625 was accrued and paid.
9. CAPITAL LEASE OBLIGATION
Future minimum lease payments under the capital lease are as follows:
<TABLE>
======================================================================================
September 30, 2000 March 31, 2000
--------------------------------------------------------------------------------------
<S> <C> <C>
Total minimum lease payments $ 243,557 $ -
Less: amount representing interest (11,466) -
----------- -----------
Balance of obligation 232,091 -
Less: due within one year (161,603) -
----------- -----------
$ 70,488 $ -
======================================================================================
</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.
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
11
<PAGE>
PAWNBROKER.COM, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
SEPTEMBER 30, 2000
================================================================================
share at a price of $2.31 per share until September 23, 2000 and at a price
of $2.90 per share until September 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 to 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.
On August 17, 2000, the Company issued 1,000,000 units through a private
placement at a price of $2.00 per unit, for total proceeds of $2,000,000.
Each unit consisted of one common share and one non-transferable share
purchase warrant. One purchase warrant entitles the holder to acquire one
additional common share at a price of $3.00 per share until August 10,
2001.
On September 7, 2000, the holder of the 9% convertible debenture issued on
June 7, 2000 converted the aggregate principal amount of the debenture
($500,000) into 268,817 common shares of the Company at a price of $1.86
per share.
11. STOCK OPTIONS AND WARRANTS
At September 30, 2000, incentive stock options were outstanding enabling
the optionee to acquire the following number of common shares:
<TABLE>
====================================================================================================
Number of
Shares Exercise Price Expiry Date
----------------------------------------------------------------------------------------------------
<S> <C> <C>
250,000 $ 6.75 November 1, 2002
3 years from the date when the Company receives a specified
amount of financing in private or public offerings after
150,000 6.75 November 1, 1999.
82,000 6.75 September 1, 2002
ranging from 4.63 3 years from the initial vesting dates of the stock options,
1,546,888 to 7.84 over periods ranging September 13, 2002 to March 15, 2003
50,000 1.53 September 25, 2003
====================================================================================================
</TABLE>
The following warrants were outstanding at September 30, 2000:
=============================================================
Number of Shares Exercise Price Expiry Date
-------------------------------------------------------------
1,000,000 $ 3.00 August 10, 2001
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,
12
<PAGE>
PAWNBROKER.COM, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
SEPTEMBER 30, 2000
================================================================================
"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.
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
Number of Average
Shares Exercise Price
----------------------------------------------------------------------
Outstanding at March 31, 1999 - $ -
Granted 400,000 6.75
Forfeited - -
Exercised - -
----------- -----------
Outstanding at March 31, 2000 400,000 6.75
Granted 3,026,665 6.59
Forfeited (1,347,777) 6.75
Exercised - -
----------- -----------
Outstanding at September 30, 2000 2,078,888 $ 6.52
======================================================================
The weighted average fair value of options granted during the current
period was $5.71 per share.
Following is a summary of the status of options outstanding at September
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 $1.50
to $7.94 1,546,888 2.05 6.71 318,432 6.64
$6.75 82,000 2.17 6.75 27,334 6.75
$1.53 50,000 2.98 1.53 - 1.53
=============================================================================================================
</TABLE>
Compensation
The Company granted 3,026,665 options to employees during the current
period, of which 1,347,777 were subsequently terminated. These options are
accounted for using Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees". Had compensation expense relating the
remaining
13
<PAGE>
PAWNBROKER.COM, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
SEPTEMBER 30, 2000
================================================================================
1,678,888 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>
Six Month Six Month
Period Ended Period Ended
September 30, September 30,
2000 1999
---------------------------------------------------------------------------------------------
<S> <C> <C>
Loss for the period
As reported $ (3,154,601) $ (736,972)
============= ============
Pro-forma $ (7,797,138) $ (736,972)
============= ============
Basic and diluted loss per share
As reported $ (0.18) $ (0.07)
============= ============
Pro-forma $ (0.42) $ (0.07)
=============================================================================================
</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:
<TABLE>
=======================================================================================
Six Month Six Month
Period Ended Period Ended
September 30, September 30,
2000 1999
---------------------------------------------------------------------------------------
<S> <C> <C>
Risk-free interest rate 6.51% -
Expected life of the options 3 -
Expected volatility 132.48% -
Expected dividend yield - -
=======================================================================================
</TABLE>
13. SUPPLEMENTAL DISCLOSURE WITH RESPECT TO CASH FLOWS
<TABLE>
=======================================================================================
Six Month Six Month
Period Ended Period Ended
September 30, September 30,
2000 1999
---------------------------------------------------------------------------------------
<S> <C> <C>
Cash paid for income taxes $ - $ -
Cash paid for interest 75,991 -
=======================================================================================
</TABLE>
Non-cash investing and financing transactions during the six month period
ended September 30, 2000 were as follows:
a) The Company acquired computer equipment totaling $326,657 through a
capital lease obligation for the same amount.
b) Non-cash investing and financing transactions during the six month
period ended September 30, 1999 were as follows:
c) 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.
14
<PAGE>
PAWNBROKER.COM, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
SEPTEMBER 30, 2000
================================================================================
d) 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 at September 30, 1999.
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 have 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.
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, at a share price calculated based on the
weighted average daily share price for a specified period of days. The
Company can make up to a maximum of 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.
15. RELATED PARTY TRANSACTION
The Company entered into the following related party transactions:
j) Included in notes payable is $300,000 (September 30, 1999 - $Nil) due
to a company controlled by two directors.
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
approximately $2,673,000 in operating losses which, if unutilized, expire
in 2020.
15
<PAGE>
PAWNBROKER.COM, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
SEPTEMBER 30, 2000
================================================================================
A reconciliation of the U.S. statutory federal income tax rate to the
effective rate is as follows:
<TABLE>
=======================================================================================
Six Month Six Month
Period Ended Period Ended
September 30, September 30,
2000 1999
---------------------------------------------------------------------------------------
<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 September 30, 2000, deferred taxes consisted of a net tax asset of
approximately $2,673,000 due to operating loss carryforwards of $7,860,710,
which was fully allowed for in the valuation allowance of $2,673,000. 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 September 30, 2000 was approximately $298,000. 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 September 30, 2000:
a) The Company will effect a change in the Company's fiscal year to
December 31, effective December 31, 2000.
b) On October 11, 2000, the Company entered into a strategic alliance
agreement with First Cash Financial Services, Inc. ("First Cash")
whereby First Cash will offer merchandise from its inventories for
sale on the Company's websites pursuant to a co-operative marketing
arrangement. As consideration for the co-operative marketing
arrangement, the Company agreed to issue First Cash up 3 classes of
warrants exercisable to acquire up to a total of 1,500,000 common
shares of the Company as follows: Class A warrants are exercisable to
acquire 500,000 shares until October 11, 2005; Class B warrants are
exercisable to acquire 500,000 share between October 11, 20001 to
October 11, 20006; and Class C warrants are exercisable between
October 11, 2002 to October 11, 2007. Each warrant will entitle the
holder to acquire 500,000 common shares of the Company at $2.00 per
share, subject to certain adjustments in the event the Company issues
shares of its common stock below the market price prior to the
exercise of the warrants. The Company granted First Cash resale
registration rights in connection with the issuance.
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. 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 offer or make arrangements
to offer additional business-to-business products and services to the pawnbroker
industry, our ability to protect our 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 shares of preferred stock
par value of $0.00001 per share, and 50,000,000 shares of Common stock par value
of $0.0001 per share.
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.
On May 17, 2000, we amended our certificate of incorporation to increase our
authorized capital to consist of 100,000,000 shares of common stock, with
$0.0001 par value, and 50,000,000 shares of preferred stock, with $0.0001 par
value.
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 July 1, 2000, to September 30, 2000.
Our Business
We are in the development stage, which means we are in the process of developing
our business and have no significant revenues from our operations and we have
not generated any profits. We launched 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.
17
<PAGE>
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. Information contained on our
website is not a part of this quarterly report.
We are in the process of evaluating the feasibility of providing financial
services to the pawnbroker industry through a subsidiary entity or entering into
a strategic arrangement with an existing company. We believe there is a business
opportunity to provide financial and other services to pawnbrokers online, which
could result in opportunities to us. There can be no assurance that this
business strategy will be successful. In order to obtain sufficient financial
resources to pursue this opportunity, we may be required to issue additional
common stock of Pawnbroker.com or its subsidiary, thereby diluting the interests
of the existing shareholders of Pawnbroker.com.
Results of Operations
Three Months Ended September 30, 2000 Compared to September 30, 1999
Revenue. The Company had no revenues from operations because it turned on the
commission module of our website on October 1, 2000. We will generate revenues
from commission fees of approximately 3% to 6% based on transactions facilitated
through our Pawnbroker.com web site during the fourth quarter 2000. The level of
revenues received from commission fees is anticipated to vary based on a number
of factors, including, among other things: (i) the willingness of pawnbrokers to
facilitate transactions through our website on a commission fee basis; (ii) the
inventory available for sale on our web site; (iii) the willingness of customers
to pay higher costs for merchandise reflecting pawnbrokers' mark-up for
commissions; (iv) volume of sales during the holiday season and (v) general
economic factors affecting the pawnbroker and retail industry. There can be no
assurance that we will generate any material revenues during the fourth quarter
2000 or in future periods.
Subsequent to September 30, 2000, we entered into a strategic alliance agreement
with First Cash Financial Services, Inc., a publicly traded company operating in
pawn shops and check cashing centers in the United States. Under the agreement,
first cash agreed to offer its web site inventory on Pawnbroker.com's Web site.
We will earn a commission fee of 4% on merchandise (except for certain specialty
merchandise such as watches, jewelry , diamonds, gemstones priced at $500 or
more, on which we will earn a 1% commission fee) sold through out website. The
First Cash strategic alliance is expected to increase our inventory by more than
200,000 items, during the fourth quarter of 2000. Under the terms of the
strategic alliance agreements, we issued First Cash warrants exercisable to
acquire up to 1,500,000 shares of our common stock at $2.00 per share, subject
to adjustment in the event we issue common stock at a price lower than the
exercise price. See "Subsequent Events."
Consulting Fees, Contract Services, Salaries and Wages. Our expenses related to
consulting fees, contract services, salaries and wages during the three-month
period ended September 30, 2000 were $555,841 compared to $137,130 for the
comparable period in 1999. Salaries and wages were $259,621 compared to $58,308
for the comparable period in 1999, which was due to increased expense associated
with sales, marketing and development personnel. We expect expenses related to
technology development to continue to be a material component of our total
expense as we execute our business plan. However, now that the website has been
developed and is operational, the Company expects the absolute dollars expended
to decrease substantially as we reduce the number of development personnel,
which we intend to replace with engineering personnel who will be taking more of
a maintenance role for the Company. During the third fiscal quarter 2000, the
Company closed its development office in Philadelphia and moved the necessary
maintenance functions to Reno, where the website will be hosted. The Company
intends to subcontract content loading on an as-needed basis to further reduce
salary and wage expenses.
General and Administrative/Overhead. General and administrative and overhead
expenses were $26,036 for the three-month period ended September 30, 2000
compared to $11,471 for the comparable period in 1999. Rent was $55,253, and
reflects the cost of Santa Clara and Philadelphia facilities, compared to
$12,512 for the comparable period in 1999,. Telephone expense was $54,186
compared to $16,822 for the comparable period in 1999, and reflects the costs
associated with running a fully operational web site. With the closure of the
Company's Philadelphia facility and the Company's Santa Clara office, and moving
the website to Reno, the
18
<PAGE>
Company expects a substantial reduction in general and administrative overhead
cost, associated with rent and facility maintenance and telephone and as a
result of our reduction in the development staff.
Sales and Marketing. Sales and marketing expenses were $54,662 for the three
months ended September 30, 2000, compared to $162,650. The decrease was
primarily a reduction in market research related expenses associated with
developing the Company's business plan. The Company anticipates that sales and
marketing expenses will decrease substantially as we move away from the more
costly traditional approaches to marketing and use less expensive Pawnbroker
industry-affiliated publications, direct marketing mailers and online banner and
exchange ads.
Losses. The loss during the three months ended September 30, 2000 was $877,441,
compared to $533,625 for the comparable period in 1999. The loss 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. The Company
expects that losses going forward will decrease due to the facility closures and
staff reductions associated with development.
Six Months Ended September 30, 2000 Compared to September 30, 1999
Revenues. We had no revenues from operations during the six-month period ended
September 30, 2000.
Consulting Fees, Contract Services, Salaries and Wages. For the six months ended
September 30, 2000 and 1999, our expense related to consulting fees, contract
services and salaries and wages were $1,103,756 and $187,838, respectively.
Salaries accounted for the greatest portion of our expenses at $753,903 compared
to $94,397 for the comparable period in 1999, which was due to increased expense
associated with sales, marketing and development personnel. We expect expenses
related to technology development, to continue to be a material component of our
total expense as we execute our business plan. However, now that the website has
been developed and is operational, the Company expects the absolute dollars
expended to decrease substantially as we reduce the number of development
personnel, which we intent to replace with engineering personnel who will be
taking more of a maintenance role for the Company. During the third fiscal
quarter 2000, the Company closed its development office in Philadelphia and
moved the necessary maintenance functions to Reno, where the website will be
hosted. The Company intends to subcontract content loading on an as needed
basis.
General and Administrative/Overhead. During the six months ended September 30,
2000 and 1999, our general, administrative and overhead expenses were $439,528,
which reflects costs associated with the Santa Clara office and the Philadelphia
Development Center, compared to $144,931 for the comparable period in 1999. Rent
was $133,305 during the six-month period ended September 30, 2000, compared to
$34,377 during the same period in 1999. Telephone expense increased to $237,560
in 2000, compared to $16,822 in 1999, reflecting the voice, cable and data costs
associated with running a fully operational web site. With the closure of
Philadelphia and moving the website server to Reno, the Company expects to see a
reduction in general and administrative overhead cost, associated with rent and
facility maintenance and telephone and expense related to development staff.
Sales and Marketing. For the six months ended September 30, 2000, sales and
marketing expenses were $522,344 compared to $198,476 for the comparable period
in 1999, which were primarily for marketing, sales and technical support
personnel to support 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 general marketing expenses, promotion expenses increase awareness, and
advertising. The Company anticipates that sales and marketing expenses will
decrease as we move away from the more costly traditional approaches to
marketing and use less expensive Pawnbroker industry-affiliated publications,
direct marketing mailers and online banner and exchange advertising.
19
<PAGE>
Professional Fees. During the six months ended September 30, 2000 professional
fees were $194,968 compared to $35,602 for the comparable period in 1999,
primarily associated with legal and accounting services, principally in
connection with our filings with the Securities and Exchange Commission and
preparation of legal documents related to strategic alliances, intellectual
property protection and financing. We expect that professional fees for
Pawnbroker.com will decrease as move from a development stage into a maintenance
stage. The Company could see an increase in professional services associated
with the formation of financial services subsidiary, and transactions related to
offering business-to-business products and services to the pawnbroker industry.
Other Income. During the six months ended September 30, 2000, the Company
incurred net interest expense of $62,748 compared to interest income of $22,229
for the comparable period in 1999. The expense was associated with a convertible
debenture and long term notes. The interest income is from short-term deposits.
Losses. For the six month period ended September 30, 2000, the Company's loss
was $3,154,601 compared to $736,972 for the comparable period in 1999. The
losses was as a result of costs associated with developing the Company's
business plan, research and development expenditures related to the development
of the Company's Pawnbroker.com web site and technologies and general overhead
and administrative expenses. Management expects that losses going forward will
substantially decrease due to the Company's facility closures and staff
reductions.
Liquidity and Capital Resources
Since our inception on February 5, 1999, we raised net cash from financing of
$8,490,432 through private placements of our common stock, and $500,000 through
the issuance of a convertible debenture. During the six month period ended
September 30, 2000, we entered into the following financing 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 on 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 Pacific Pawnbroker, an entity
owned by Mr. Galine and Mr. Schlader, 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 was 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.
20
<PAGE>
On August 23, 2000 Lamothe Investing Corp issued a conversion notice under the
terms of the debenture, and we issued 268,817 shares of common stock at the
conversion price of $1.86.
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 draw down 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 draw down 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.
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 draw down request, the final draw down 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 draw down in each draw is equal to the
lesser of:
o $2,000,000; or
o 20% of the weighted average trading price of our common stock on the
OTCBB during the 22 trading days prior to the draw down, multiplied by
the average number of shares traded per day on the OTCBB during the 45
days prior to the draw down, multiplied by 22, less a 5% cash
placement fee payable to its placement agent, Ladenburg Thurman & Co.
Inc., and $1,500 in escrow fees and expenses per draw down.
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 45 trading days prior to
November 7, 2000 was $1.15 and the average daily trading volume for the 45
trading days ended November 7, 2000 was 148,602. If our market price on November
7, 2000 and the 45-day average trading volume preceding November 7, 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 $753,700
and we could make 12 draws for a total amount drawn of $9,044,400. 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.
A draw down under the equity line may have a substantial dilutive effect on our
current shareholders. See "Liquidity and Capital Resources."
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 draw down 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.
21
<PAGE>
Unit Private Placement - $2 Million
On August 11, 2000, we completed a private placement of 1 million units at $2.00
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.
Bridge Loan -- $500,000
On July 15, 2000, we obtained bridge loans in the amounts of $300,000 and
$200,000, respectively. We issued a $300,000 note to Granite Communications,
Inc. bearing interest at 10% per annum, and a $200,000 note to BWI Avionic Ltd.
bearing interest at 12% per annum in connection with the bridge loans. The notes
are payable on July 15, 2001. The note issued to Granite Communications is
secured by the assets of Pawnbroker.com, Inc.
Liquidity
As at September 30, 2000, we had $1,050,007 in cash or term deposits. We had
accounts payable and accrued liabilities of $1,563,961 and short-term notes of
$1,500,000. We had a working capital deficit of $2,796,606 at September 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 $1.0 million for the 15 month period from October 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. We have working capital available to us
under the Gestrow equity line; however, a draw down at current market prices for
our common stock would have a material dilutive effect on our existing
shareholders.
Management is also evaluating alternative financing opportunities,
but has not entered into any arrangements for such financing. There can be no
assurance that alternative financing will be available to the Company in a
timely manner or on acceptable terms, if at all. In the event alternative
financing is unavailable, we may seek to issue a draw-down notice under the
Gestrow equity line. However, we cannot assure you that we will be able to draw
sufficient capital under the 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. We do not anticipate we will begin to generate
any significant revenues until we increase our inventory and effectively promote
our web site. We implemented the commission fee component of our web site on
October 1, 2000.
During the fiscal quarter ended September 30, 2000, we received no cash from our
operations and we used net cash of $1,304,888. 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 have consolidated our operations in
our Reno office and have taken steps to improve efficiency and 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) our ability to attract visitors to our web site,
(ii) our ability to attract pawnshops to use our services,
(iii) our ability to successfully complete transactions,
22
<PAGE>
(iv) the availability of financing on acceptable terms,
(v) reliability of the assumptions of management in estimating cost and
timing,
(vi) competition; and
(vii) 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 September 30, 2000, we had 22 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
On October 18, 2000 we entered in a strategic alliance agreement with First Cash
Financial Services, Inc. whereby Pawnbroker.com agreed to issue First Cash
Warrants, vesting subject to certain terms and conditions, exercisable to
acquire a total of 1,500,000 shares of Pawnbroker.com common stock as
consideration for listing merchandise for sale on the Pawnbroker Web Sites and
for agreeing to sell First Cash Products at a Minimum Price.
Pawnbroker.com issued to First Cash three warrants, Warrant A, Warrant B and
Warrant C, each warrant exercisable to acquire 500,000 shares of Pawnbroker.com
common stock at $2.00 per share, subject to certain adjustments in the event we
issue equity securities at a price lower than $2.00 per share. The exercise
price shall not reduced below $1.00 per share. We granted First Cash resale
registration rights related to the common stock acquirable upon exercise of the
warrants.
ITEM 3: QUANTITATIVE 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.
23
<PAGE>
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.
On July 7, 2000, 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 draw down 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 warrants were issued pursuant to an
exemption from registration under Section 4(2) of the Securities Act of 1933, as
amended.
On August 23, 2000, Lamothe investing Corp. issued a conversion notice per the
terms of the 9% convertible debenture issued on June 7, 2000. We issued 268,817
share of our common stock at the conversion price of $1.86. The 9% convertible
debenture was issued in reliance upon Rule 506 of Regulation D provided under
the Securities Act of 1933, as amended, and the issuance was exempt from the
registration requirements under Section 3(a)(9) of the Securities Act. The
common shares were registered for resale pursuant to a registration statement on
Form S-1 filed on August 8, 2000, and declared effective on August 11, 2000.
On August 11, 2000, we completed a private placement of 1 million units at $2.00
per unit for gross proceeds of $2 million. Each unit consisted of one share of
common stock and one non-transferable warrant exercisable to acquire one
additional common share at $3.00 per share for 1 year. The units were issued in
reliance upon an exemption from registration under Regulation S of the
Securities Act of 1933, as amended.
ITEM 3. Defaults Upon Senior Securities
None.
ITEM 4. Submission of Matters to a Vote of Security Holders
None.
ITEM 5. Other Information
None.
ITEM 6. Exhibits and Reports on Form 8-K
a) Exhibits
Exhibit
Number Description
------ -----------
10.1* Sales and Fulfillment Agreement dated September 2000, by and
between Jewelry Edge and Pawnbroker.com, Inc.
10.2* Subscription Agreement related to August 11, 2000 unit
private placement.
10.3* Strategic Alliance Agreement, dated October 18, 2000,
between First Cash Financial Services, Inc. and
Pawnbroker.com, Inc.
10.4* Form of Warrant issued to First Cash Financial Services,
Inc.
27.1 Financial Data Schedule
-----------
* Filed without schedules or exhibits. The Company will provide copies
of schedules and/or exhibits upon written request.
b) Reports on Form 8-K
None.
24
<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.
Date: November 14, 2000
PAWNBROKER.COM, INC.
By: /s/ Greigory Park
-----------------------------------
Name: Greigory Park
Title: Chief Financial Officer
(Principal Financial and
Accounting Officer)
25
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description
------ -----------
10.1* Sales and Fulfillment Agreement dated September 2000, by and
between Jewelry Edge and Pawnbroker.com, Inc.
10.2* Subscription Agreement related to August 11, 2000 unit
private placement.
10.3* Strategic Alliance Agreement, dated October 18, 2000,
between First Cash Financial Services, Inc. and
Pawnbroker.com, Inc.
10.4* Form of Warrant issued to First Cash Financial Services,
Inc.
27.1 Financial Data Schedule
-----------
* Filed without schedules or exhibits. The Company will provide copies of
schedules and/or exhibits upon written request.
