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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
Amendment No. 1 to Form 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Quarterly Period Ended SEPTEMBER 30, 1999.
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ___________________ to _________________.
Commission File Number: 0-27151
2THEMART.COM, INC.
- --------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Oklahoma 33-0544320
- ------------------------ ----------------------
(State of Incorporation) (I.R.S. Employer
Identification Number)
18301 Von Karman Avenue, 7th Floor, Irvine, California, 92612
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(Address of principal executive offices)
(949) 477-1200
- --------------------------------------------------------------------------------
(Registrants' telephone number, including area code)
Not Applicable
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrants (1) have 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 time as
required), and (2) have been subject to such filing requirements for the past 90
days.
2TheMart.com, Inc.: Yes No X
--- ---
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practical date. 2TheMart.com, Inc.:
Common Stock, $0.0001 par value, 25,741,640 shares outstanding as of October
31, 1999.
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2THEMART.COM
INDEX
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements:
- Balance Sheet as of September 30, 1999 (unaudited) 3
- Statements of Operations for the Three Months Ended
September 30, 1999 and for the Period December 22, 1998
(inception) to September 30, 1999 (unaudited) 4
- Statement of Changes in Stockholders' Equity for the
Period December 22, 1998 (inception) to September 30, 1999
(unaudited) 5
- Statement of Cash Flows for the Period December 22, 1998
(inception) to September 30, 1999 (unaudited) 6
Notes to Financial Statements 7 to 10
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 11 to 13
Item 3. Quantitative and Qualitative Disclosures About Market Risk 13
PART II OTHER INFORMATION
Item 1. Legal Proceedings 14
Item 2. Changes in Securities and Use of Proceeds 14
Item 3. Defaults Upon Senior Securities 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURES 16
</TABLE>
2
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2THEMART.COM, INC.
(a Development Stage Enterprise)
BALANCE SHEET
September 30, 1999
(unaudited)
<TABLE>
<CAPTION>
<S> <C>
ASSETS
Cash and cash equivalents $ 170,295
-----------
Total current assets 170,295
Property and equipment
Computer hardware and software 6,454,019
Furniture, fixtures and other office equipment 350,344
Tenant improvements 288,718
Less: accumulated depreciation (45,930)
-----------
7,047,151
Restricted cash 124,448
Prepaids and other assets 240,280
-----------
Total other assets 364,728
Total Assets $ 7,582,174
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ 668,449
Accrued liabilities 559,425
-----------
Total current liabilities 1,227,874
Note payable to shareholder 500,000
Notes payable to officers 2,250,000
-----------
2,750,000
Stockholders' Equity
Preferred stock, par value $0.0001;
25,000,000 shares authorized;
none issued and outstanding --
Common stock, par value $0.0001;
50,000,000 shares authorized;
25,300,430 issued and outstanding 2,530
Additional paid-in capital 8,961,591
Deferred compensation expense (1,250,789)
Deficit accumulated during the development stage (4,109,032)
-----------
3,604,300
Total Liabilities and Stockholders' Equity $ 7,582,174
===========
</TABLE>
See accompanying notes.
3
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2THEMART.COM, INC.
(a Development Stage Enterprise)
STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
For the Period
For the Three December 22, 1998
Months Ended (inception) to
September 30, 1999 September 30, 1999
------------------ ------------------
<S> <C> <C>
Interest income $ 12,321 $ 99,047
General and administrative
Employee compensation 551,155 999,923
Compensatory stock and option issuances 527,904 1,337,832
Professional fees 409,963 642,338
Rent 101,725 188,777
Write-off of impaired asset -- 40,000
Other 617,303 999,209
------------ ------------
2,208,050 4,208,079
------------ ------------
Net loss $ (2,195,729) $ (4,109,032)
============ ============
Basic and diluted loss per common share $ (0.09) $ (0.17)
============ ============
Basic and diluted weighted average shares outstanding 25,145,946 24,140,917
============ ============
</TABLE>
See accompanying notes.
4
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2THEMART.COM, INC.
(A Development Stage Enterprise)
STATEMENT OF STOCKHOLDERS' EQUITY
For the Period December 22, 1998 (inception) to September 30, 1999
(unaudited)
<TABLE>
<CAPTION>
DEFERRED DEFICIT
COMPENSATION ACCUMULATED
COMMON STOCK ADDITIONAL RELATED TO DURING THE
--------------------------- PAID-IN OPTION DEVELOPMENT
SHARES AMOUNT CAPITAL ISSUANCES STAGE TOTAL
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Shares issued in conjunction
with merger 17,800,000 $1,780 $ -- $ -- $ -- $ 1,780
Common stock before merger 2,291,850 229 (229) --
Private placement offerings of
common stock:
Private placement issuance
under Ruling 504 917,500 93 979,909 980,002
Private placement issuance
under Ruling 506:
Shares issued at $1 per share 3,535,000 352 3,312,973 3,313,325
Shares issued at $5 per share 506,080 51 2,080,349 2,080,400
Issuances of common stock
for consulting services 210,000 21 250,407 250,428
Issuances of common stock for
2jauction.com 40,000 4 39,996 40,000
Net issuances and cancellation of
stock options for employee
compensation 2,298,186 (1,250,789) 1,047,397
Net loss (4,109,032) (4,109,032)
----------- ------ ----------- ----------- ----------- -----------
Balance, September 30, 1999 25,300,430 $2,530 $ 8,961,591 $(1,250,789) $(4,109,032) $ 3,604,300
=========== ====== =========== =========== =========== ===========
</TABLE>
See accompanying notes.
5
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2THEMART.COM, INC.
(A Development Stage Enterprise)
STATEMENT OF CASH FLOWS
For the Period December 22, 1998 (inception) to September 30, 1999
(unaudited)
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(4,109,032)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization 45,930
Write-off of impaired asset 40,000
Compensation expense - stock options 1,047,397
Issuances of common stock for services 250,428
(Decrease) increase in cash attributable to changes
in assets and liabilities:
Restricted cash (124,448)
Prepaids and other assets (240,280)
Accounts payable and accrued liabilites 1,227,874
-----------
Net cash used in operating activities (1,862,131)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (7,093,081)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuances of common stock 6,375,507
Proceeds from issuances of notes payable 2,750,000
-----------
Net cash provided by financing activities 9,125,507
NET INCREASE IN CASH AND CASH EQUIVALENTS 170,295
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD --
-----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 170,295
===========
</TABLE>
See accompanying notes.
6
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NOTE 1 - ORGANIZATION AND BASIS FOR PRESENTATION
THE COMPANY
2TheMart.com, Inc., an Oklahoma corporation ("2TheMart" or the "Company"), is a
development stage, internet-based, electronic commerce ("e-commerce") company.
The Company's year-end is December 31, 1999. The Company operates a
business-to-consumer and consumer-to-consumer trading community on the internet.
The Company launched its e-commerce Web site on November 18, 1999. The Company's
Web site brings together buyers and sellers to buy and sell a variety of goods
such as antiques, coins, collectibles, computers, electronics, memorabilia,
stamps, toys and more in both an auction and retail type format. The 2TheMart
service enables sellers to list items for sale, buyers to bid on and/or buy
those items and all users to browse through all items in a fully automated,
topically arranged online service.
REORGANIZATION
In December 1998, CD-Rom Yearbook Company, Inc. an Oklahoma corporation
("CD-Rom"), entered into a merger agreement to acquire all of the outstanding
common stock of 2TheMart-Nevada, a Nevada corporation formed on December 22,
1998, in a transaction described as a "reverse merger". The merger became
effective on January 8, 1999. Between December 22, 1998 and January 8, 1999,
2TheMart-Nevada had no capital transactions or operating activities of any
significance. The surviving entity, CD-Rom, changed its name to 2TheMart.com,
Inc. The transaction has been treated as a recapitalization of 2TheMart-Nevada.
Immediately prior to the merger, CD-Rom had 2,291,850 shares of common stock
outstanding. As part of the reorganization and stock purchase agreement, CD-Rom
issued an additional 17,800,000 shares to the shareholders of 2TheMart-Nevada in
exchange for all of the shares of 2TheMart-Nevada. In addition, options to
purchase 2.5 million shares of the Company's Common Stock at an exercise price
of $3.00 were issued to the previously controlling shareholder of CD-Rom.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES - The preparation of financial statements in conformity with
generally accepted accounting principles ("GAAP") requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities as of the date of the financial statements and the reported amounts
of revenue and expenses during the reporting periods. Actual results could
differ from these estimates.
CASH AND CASH EQUIVALENTS - Cash equivalents consist of money market funds whose
fair value approximates cost and are readily redeemable.
RESTRICTED CASH - Restricted cash consists of standby letters of credit with
vendors of the Company.
CONCENTRATION OF CREDIT RISK - Financial instruments that potentially subject
the Company to a concentration of credit risk consist of cash and cash
equivalents. Cash and cash equivalents are deposited with high credit, quality
financial institutions.
PROPERTY AND EQUIPMENT - Depreciation and amortization are provided for in
amounts sufficient to relate the cost of depreciable assets to operations over
their estimated service lives. Leasehold improvements are amortized over the
lives of the respective leases or the service lives of the improvements,
whichever is shorter. The straight-line method of depreciation is followed for
substantially all assets for financial reporting purposes, but accelerated
methods are used for tax purposes.
INCOME TAXES - Deferred tax assets and liabilities are recognized for the future
consequences of events that have been recognized in the Company's financial
statements or tax returns. The measurement of the deferred items is based on
enacted tax laws. A valuation allowance related to a deferred tax asset is
recorded when it is more likely than not that some portion or all of the
deferred tax asset will not be realized.
DEFERRED COMPENSATION RELATED TO STOCK OPTION ISSUANCES - The Company granted
certain options to officers and employees at exercise prices that were less than
the market price of the Company's Common Stock on the grant date. Amounts
recorded as deferred compensation are amortized over the appropriate service
period based upon the vesting schedule for such grants (generally four years).
7
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FAIR VALUE OF FINANCIAL INSTRUMENTS - The Company is required to estimate the
fair value of all financial instruments included on its balance sheet at
September 30, 1999. The Company considers the carrying value of such amounts in
the financial statements (cash and cash equivalents and notes payable) to
approximate their fair value due to the relatively short period of time between
origination of the instruments and their expected realization and interest
rates, which approximate current market rates.
EARNINGS PER SHARE - Basic net income per share is computed by dividing the net
income available to common stockholders for the period by the weighted average
number of common shares outstanding during the period. Incremental common shares
issuable upon the exercise of stock options and warrants, are included in the
computation of diluted net loss per common share to the extent such shares are
dilutive.
UNAUDITED FINANCIAL STATEMENT PRESENTATION - The accompanying unaudited
financial statements have been prepared in accordance with GAAP for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by GAAP for complete financial statements. In the opinion of
management, all adjustments considered necessary for a fair presentation have
been included. All such adjustments are of a normal, recurring nature. Operating
results for the three and nine months ended September 30, 1999 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1999. These financial statements should be read in conjunction with
the Financial Statements and Notes thereto included in the Company's Form 10 for
the period from December 22, 1998 (inception) through June 30, 1999.
NOTE 3 - DEVELOPMENT STAGE ENTERPRISE AND GOING CONCERN
Since December 22, 1998 (inception), the Company has been in the development
stage and its principal activities have consisted of raising capital and
developing its internet-based e-commerce Web site.
The accompanying financial statements have been prepared on the basis of a going
concern, which contemplates the realization of assets and liquidation of
liabilities in the normal course of business. The Company is not yet generating
revenues from Web site operations and, at September 30, 1999, had accumulated a
deficit from its operating activities. Continuation of the Company as a going
concern is dependent upon, among other things, obtaining additional capital,
meeting other obligations under various agreements and achieving satisfactory
levels of profitable operations. The financial statements do not include any
adjustments relating to the realization of assets and liquidation of liabilities
that might be necessary should the Company be unable to continue as a going
concern.
The Company has raised additional funds through private offerings (see Note 10).
Management intends to seek additional financing through equity offerings.
NOTE 4 - COMMITMENTS
The Company has entered into contracts with an unrelated party for the
acquisition of computer hardware and software and its electronic commerce site.
The total amounts of these contracts is $11.0 million of which $7.9 million is
for computer hardware and software and $3.1 million is for its electronic
commerce site. As of September 30, 1999, the Company had paid approximately $5.0
million for its hardware and software and $0.8 million for its electronic
commerce site.
In February 1999, the Company entered into separate five-year employment
agreements with its president and its chief executive officer. In October 1999,
the president and chief executive officer agreed to terminate their respective
employment agreements but continue to serve in their respective positions on an
"at-will" basis at the discretion of the Board of Directors.
NOTE 5 - NOTES PAYABLE
In August 1999, the Company received a short-term loan from a shareholder in the
amount of $500,000. The loan bears interest at 12% per annum and is due and
payable on or before October 18, 1999. The loan is collateralized by an
agreement to issue 100,000 shares of "restricted" Common Stock of the Company.
This note was subsequently converted into Common Stock of the Company (see Note
10).
On September 10, 1999, the Company entered into a short-term note (the "Note")
in the amount of $2,000,000 with the chief executive officer of the Company.
Under the terms of the Note, the Company is obligated to pay interest in the
amount of 12% per annum. Interest and principal is due on or before October 31,
1999. The Note is secured by 2,000,000 shares of "restricted" Common Stock of
the Company. The Note was forgiven subsequent to September 30, 1999 (see Note
10).
On September 10, 1999, the Company entered into a short-term note in the amount
of $250,000 with an officer of the Company. Under the terms of the note, the
Company is obligated to pay interest in the amount of 12% per annum. Interest
and principal is due on or before October 10, 1999. The note is secured by
250,000 shares of "restricted" Common Stock of the Company. This note was paid
off subsequent to September 30, 1999 (see Note 10).
8
<PAGE> 9
NOTE 6 - SHAREHOLDERS' EQUITY
In August 1999, the Company issued 53,000 shares of "restricted" Common Stock to
four accredited investors at a price of $10.00 per share pursuant to the July
12, 1999 Private Offering of the Company's Common Stock, resulting in net
proceeds of approximately $530,000 to the Company. In September 1999, the
Company elected to terminate the July 12, 1999 Private Offering and initiated a
private placement of 2.0 million shares of its Common Stock at a price of $5.00
per share. Investors of the Company's July 12, 1999 Private Offering were issued
additional shares of "restricted" Common Stock to reduce their purchase price
from $10.00 per share to $5.00 per share.
On September 1, 1999, the Company issued 5,000 "restricted" (as that term is
defined under Rule 144 of the Securities Act of 1933) shares of the Company's
Common Stock to the Company's securities counsel in exchange for legal services
rendered valued at $25,000.
On September 14, 1999, the Company issued 2,500 "restricted" (as that term is
defined under Rule 144 of the Securities Act of 1933) shares of the Company's
Common Stock to an unrelated consultant of the Company in exchange for certain
consultation services rendered valued at $26,250. The issuance was an isolated
transaction not involving a public offering and consequently conducted under an
exemption under Section 4(2) of the Securities Act of 1933.
NOTE 7 - STOCK OPTIONS
On September 24, 1999, the Company's Vice President of Marketing and Sales
resigned from the Company. The former officer had 112,500 unvested compensatory
stock options. These compensatory stock options resulted in $153,799 of
compensatory stock expense and approximately $2,209,000 of deferred
compensation, which were reflected in the six month period ending June 30, 1999
financial statements. Due to the voluntary termination of this former officer,
the stock options were cancelled and the Company reversed the aforementioned
charges and deferred compensation in the quarter ended September 30, 1999.
NOTE 8 - INCOME TAXES
As of September 30, 1999, the Company had net deferred tax assets of
approximately $1.4 million, which has been offset in full by a valuation
allowance as the Company is still in the development stage and has not generated
any revenue or income. This deferred tax asset is comprised of unused federal
and state net operating losses and credits that can be used to reduce taxes
through 2019 for federal and 2004 for state purposes.
NOTE 9 - LEGAL PROCEEDINGS
On September 13, 1999 and October 11, 1999, the Company was served with two
class action lawsuits which allege that the Company and certain of its officers
engaged in a plan to defraud the market and purchasers of the Company's Common
Stock by failing to disclose material facts or making material misstatements of
fact regarding the status of the Company's Web site. Additionally, the Company
has been informed and believes there may be additional purported class action
lawsuits filed against the Company based upon similar alleged facts and claims.
The Company believes that such lawsuits or claims are without merit and they
have meritorious defenses to the actions. As these lawsuits were recently filed,
have not been certified as class lawsuits, and have not stated any particular
amount demanded, neither the Company nor the Company's legal counsel can
estimate the amount of loss, if any, which may result from the outcome of these
actions.
NOTE 10 - SUBSEQUENT EVENTS
On October 1, 1999, the Company initiated a private placement of 7,000,000
shares of its Common Stock at a price of $1.50 per share. No shares of the
Company's Common Stock were sold under this private placement until October 28,
1999. As of November 18, 1999, the Company has sold 2,488,332 shares of
"restricted" Common Stock to 35 accredited investors, resulting in proceeds of
$3,732,498.
On October 8, 1999, the chief executive officer of the Company agreed to forgive
and cancel the Note (see Note 5) without receiving any consideration or shares
of the Company's Common Stock. The forgiveness of the Note will be accounted for
as a capital contribution to the Company.
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<PAGE> 10
On October 8, 1999, the officer agreed to extend the due date of the $250,000
note to November 19, 1999, at which time, the note was paid from proceeds from
the November 18, 1999 sale of "restricted" Common Stock as described below.
On October 8, 1999, the Company sold an additional 300,000 shares of the
"restricted" Common Stock of the Company to an unaffiliated accredited
shareholder of the Company at a price of $3.33 per share resulting in net
proceeds to the Company of approximately $999,000.
On October 18, 1999, the $500,000 short-term note entered into with an
unaffiliated accredited shareholder was converted into 291,429 shares of the
"restricted" Common Stock of the Company.
On October 25, 1999, the Company sold an additional 1.0 million shares of the
"restricted" Common Stock of the Company to an unaffiliated accredited
shareholder of the Company at a price of $1.00 per share resulting in proceeds
to the Company of approximately $1.0 million.
On November 18, 1999, the Company sold 2,000,000 shares of the "restricted"
Common Stock of the Company to an accredited shareholder of the Company at a
price of $1.50 per share resulting in proceeds to the Company of approximately
$3,000,000. This shareholder is now considered an "affiliate" of the Company.
On November 18, 1999, the president agreed to contribute 2.9 million shares of
Common Stock back to the Company.
As of November 19, 1999, the Company has paid in full its obligation of $7.9
million for its hardware and software. As of November 19, 1999, the Company has
paid $1.3 million for its Web site. On November 18, 1999, the Company
entered into a payment agreement for the satisfaction of the remaining amounts
owed for the Company's Web site as well as additional services being provided by
IBM relating to the Web site whereby the Company will pay to IBM $1,775,000 plus
interest at a rate of 13.5% per annum compounded monthly beginning November 1,
1999, to be paid in twelve equal monthly payments of principal and interest
totaling $162,552, with the first payment due on January 31, 2000.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following is a discussion of the activities of the Company for the three
months ended September 30, 1999 and the period December 22, 1998 (inception) to
September 30, 1999 (unaudited). The following discussion should be read in
conjunction with all the financial statements appearing elsewhere in this
report, as well as the information presented in the Company's Form 10 for the
period December 22, 1998 (inception) to June 30, 1999.
Certain information set forth below is forward looking and involves various
risks and uncertainties. Such information is based upon a number of estimates
and assumptions that inherently are subject to business, economic and
competitive uncertainties and contingencies, many of which are beyond the
Company's control.
RESULTS OF OPERATIONS
THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 1999
During the three months ended September 30, 1999 and the period December 22,
1998 (inception) to September 30, 1999, the Company had no revenues from its
operations because it was in the development stages of its electronic commerce
internet auction site. However, the Company earned approximately $12,321 and
$99,047, for the three months ended September 30, 1999 and the period December
22, 1998 (inception) to September 30, 1999, respectively, on short-term
investments from cash raised in 1999. The Company incurred general and
administrative expenses of approximately $2.2 million and $4.2 million, for the
three months ended September 30, 1999 and the period December 22, 1998
(inception) to September 30, 1999, respectively, consisting primarily of
compensation, rent and professional services fees.
LIQUIDITY
Net cash used in operating activities was $1.9 million for the period December
22, 1998 (inception) to September 30, 1999, which was due primarily to a net
loss of $4.1 million offset by compensation expense for stock options and an
increase in accounts payable totaling $1.0 million and $1.2 million,
respectively.
Cash used in investing activities was $7.1 million for the period December 22,
1998 (inception) to September 30, 1999, which was due to the purchase of
property and equipment.
Cash provided by financing activities was $9.1 million for the period December
22, 1998 (inception) to September 30, 1999, which was due to the sale of Common
Stock and issuance of notes payable totaling $6.4 million and $2.7 million,
respectively.
In 1999, the Company raised approximately $6.4 million through the sale of a
portion of its Common Stock to accredited investors. In addition, on July 12,
1999, the Company initiated a private placement of 1,000,000 shares of its
Common Stock at a price of $10.00 per share. The Company sold 53,000 shares of
its restricted Common Stock pursuant to the July 12, 1999 Private Offering,
resulting in net proceeds of $530,000 to the Company. On September 9, 1999, the
Company elected to terminate the July 12, 1999 Private Offering and initiated a
private placement of 2,000,000 shares of its Common Stock at a price of $5.00
per share (the "September 9, 1999 Private Offering"). Investors of the Company's
July 12, 1999 Private Offering were issued additional shares of "restricted"
Common Stock to reduce their purchase price from $10.00 per share to $5.00 per
share.
On August 18, 1999, the Company entered into a short-term note in the amount of
$500,000 with an unaffiliated accredited shareholder of the Company. Under the
terms of the note, the Company is obligated to pay interest in the amount of 12%
per annum. Interest and principal is due on or before October 18, 1999. The loan
was converted into 291,429 shares of the "restricted" Common Stock of the
Company on October 18, 1999.
On September 10, 1999, the Company entered into a short-term note in the amount
of $2,000,000 with the Chief Executive Officer of the Company. Under the terms
of the note, the Company is obligated to pay interest in the amount of 12% per
annum. Interest and principal is due on or before October 31, 1999 (the "Note").
The Note is secured by 2,000,000 shares of "restricted" Common Stock of the
Company. On October 8, 1999, the chief executive officer agreed to forgive and
cancel the Note without receiving any consideration or shares of the Company's
Common Stock.
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On September 10, 1999, the Company entered into a short-term note in the amount
of $250,000 with an officer of the Company. Under the terms of the note, the
Company is obligated to pay interest in the amount of 12% per annum. Interest
and principal is due on or before October 10, 1999. The note is secured by
250,000 shares of "restricted" Common Stock of the Company. On October 8, 1999,
the officer agreed to extend the due date of the note to November 19, 1999, at
which time, the note was paid from the November 18, 1999 sale of "restricted"
Common Stock as described below.
On October 1, 1999, the Company initiated a private placement of 7,000,000
shares of its Common Stock at a price of $1.50 per share. No shares of the
Company's Common Stock were sold under this private placement until October 28,
1999. As of November 18, 1999, the Company has sold 2,488,332 shares of
"restricted" Common Stock to 35 accredited investors, resulting in proceeds of
$3,732,498.
On October 8, 1999, the Company sold 300,000 shares of "restricted" Common Stock
of the Company to an unaffiliated accredited shareholder of the Company at a
price of $3.33 per share resulting in net proceeds to the Company of
approximately $999,000.
On October 25, 1999, the Company sold an additional 1.0 million shares of
"restricted" Common Stock of the Company to an unaffiliated accredited
shareholder of the Company at a price of $1.00 per share resulting in proceeds
to the Company of approximately $1.0 million.
On November 18, 1999, the Company sold 2,000,000 shares of "restricted" Common
Stock of the Company to an accredited shareholder of the Company at a price of
$1.50 per share resulting in proceeds to the Company of approximately
$3,000,000. This shareholder is now considered an "affiliate" of the Company
under the rules of the Securities and Exchange Commission.
On November 18, 1999, the Company entered into a Payment Agreement for the
satisfaction of the remaining amounts owed for the Company's Web site as well as
additional services being provided by IBM relating to the Web site whereby the
Company will pay to IBM approximately $1.8 million plus interest at a rate of
13.5% per annum compounding monthly beginning November 1, 1999, to be paid in
twelve equal monthly payments of principal and interest totaling $162,552, with
the first payment due on January 31, 2000.
The Company believes that with its recent fund raising efforts as described
above, the Company has sufficient funds to fulfill its material commitments as
described below in "Capital Expenditures".
The Company further believes that its existing capital resources together with
cash flow from operations and ongoing fund raising efforts will be sufficient to
meet its short-term operating expenses and capital requirements. However, the
Company's long-term capital requirements will depend upon many factors,
including, but not limited to, the rate of market acceptance of the Company's
Web site, the Company's ability to develop, maintain and expand its Web user
base, the level of resources required to expand the Company's marketing and
sales organization, information systems and development activities and other
factors, some of which are beyond the control of the Company.
A slower than expected rate of acceptance of the Company's Web site or lower
than expected revenues generated from the Company's Web site, would materially
adversely affect the Company's liquidity. The Company may need additional
capital sooner than anticipated. The Company has no commitments for additional
financing and there can be no assurances that any such additional financing
would be available in a timely manner or, if available, would be on terms
acceptable to the Company. Furthermore, any additional equity financing could be
dilutive to our then-existing shareholders and any debt financing could involve
restrictive covenants with respect to future capital raising activities and
other financial and operational matters.
CAPITAL EXPENDITURES
The Company has contracted with IBM to acquire hardware and software for its Web
site operations and corporate infrastructure and the development of its Web site
in the amount of approximately $11.0 million of which $7.9 million is for
hardware and software and $3.1 million is for Web site development. As of
November 19, 1999, the Company has paid its full obligation of $7.9 million for
its hardware and software. As of November 19, 1999, the
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Company had paid $1.3 million for its Web site. On November 18, 1999, the
Company entered into the Payment Agreement with IBM whereby the Company will pay
the remaining amounts owed for its Web site in 12 monthly payments beginning
January 31, 2000. The Company expects to fulfill the Payment Agreement from
recent sales of the Company's Common Stock, its cash flow from operations and
anticipated sales of Common Stock.
The Company is also required to pay for the space that it has secured with
Exodus Communications Inc. ("Exodus") at Exodus' Sterling, Virginia data center
at the time the hardware placed at that facility was connected to the internet.
The Company's minimum expected monthly obligation to Exodus pursuant to its
contract at the time the Company's hardware was connected to the internet is
approximately $78,000 which may increase depending on the Company's bandwidth
usage. Additionally, on June 16, 1999, the Company contracted with USWeb/CKS for
the development and implementation of its marketing programs and strategies.
Under the terms of its agreement with USWeb/CKS, the Company is obligated to pay
$86,000 per month. The USWeb/CKS contract is cancelable upon giving one month
notice. The Company has also contracted with Ciber Inc., formerly known as The
Summit Group, for the integration of the Company's back-end accounting and
billing software which is expected to cost the Company approximately $400,000 of
which the Company has paid approximately $290,000 as of November 18, 1999.
Additionally, the Company has contracted with Lawson Associates to license the
use of Lawson's accounting software system. Under the terms of the agreement
with Lawson, the Company paid Lawson approximately $127,000 and has the option
of either paying a one time flat fee to Lawson on March 10, 2000 in the amount
of $573,070 or a fee based on a percentage of the Company's revenue.
The Company expects to pay the above commitments, the anticipated increase in
corporate payroll expenditures and other operating expenses with the proceeds
from the recent sales of the Company's Common Stock, its cash flow from
operations and anticipated sales of Common Stock.
A slower than expected rate of acceptance of the Company's Web site or lower
than expected revenues generated from the Company's Web site, would materially
adversely affect the Company's liquidity. The Company may need additional
capital sooner than anticipated. The Company has no commitments for additional
financing and there can be no assurances that any such additional financing
would be available in a timely manner or, if available, would be on terms
acceptable to the Company. Furthermore, any additional equity financing could be
dilutive to our then-existing shareholders and any debt financing could involve
restrictive covenants with respect to future capital raising activities and
other financial and operational matters.
YEAR 2000 DISCLOSURE
The Company has completed a review of its computer systems to identify all
software applications and hardware that could be affected by the inability of
many existing computer systems to process time-sensitive data accurately beyond
the year 1999, referred to as the Year 2000 or Y2K issue. The Company is
dependent on third-party computer systems and applications, particularly with
respect to such critical tasks as the operation of its Web site. The Company
also relies on its own computer systems. As a result of its review, the Company
has discovered no problems with its computer systems relating to the Y2K issue.
Although the Company believes that its computer systems are Y2K compliant, the
Company is continuing to monitor its computer systems in a continual effort to
insure that its systems are Y2K compliant. Additionally, the Company has
obtained written assurances from its major suppliers and the developers of its
Web site indicating that they have completed a review of their respective
computer systems and that such systems are Y2K compliant. Costs associated with
the Company's review were not material to its results of operations.
While the Company believes that its procedures have been designed to be
successful, because of the complexity of the Y2K issue and the interdependence
of organizations using computer systems, there can be no assurances that the
Company's efforts, or those of third parties with whom the Company interacts,
have fully resolved all possible Y2K issues. Failure to satisfactorily address
the Y2K issue could have a material adverse effect on the Company. The most
likely worst case Y2K scenario which management has identified to date is that,
due to unanticipated Y2K compliance problems, the Company's Web site may not
function at all or not function as expected, and that the Company may be unable
to bill its customers, in full or in part, for services used. Should this occur,
it would result in a material loss of some or all gross revenue to the Company
for an indeterminable amount of time, which could cause the Company to cease
operations. The Company has not yet developed a contingency plan to address this
worse case Y2K scenario, and does not intend to develop such a plan in the
future.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company is not exposed to material risk based on interest rate fluctuation,
exchange rate fluctuation, or commodity price fluctuation.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
The Company may from time to time be involved in various claims, lawsuits,
disputes with third parties, actions involving allegations of discrimination, or
breach of contract actions incidental to the operation of its business.
On September 13, 1999 and October 11, 1999, two putative class action lawsuits
were filed in the United States District Court, Central District of California,
Southern Division, against the Company and its principal officers, Steven W.
Rebeil and Dominic J. Magliarditi entitled Mary Ellen Harrington, On Behalf of
Herself and All Others Similarly Situated v. 2TheMart.com, Inc., Steven W.
Rebeil, and Dominic J. Magliarditi (No. SACV99-1127 DOC (ANX)) (the "Harrington
Action") and Vinh D. Diep, On Behalf of Herself and All Others Similarly
Situated v. 2TheMart.com, Inc., Steven W. Rebeil, and Dominic J. Magliaridit
(No. SACV99-1255 DOC (EEX) (the "Diep Action"). The complaints allege, on behalf
of a class of individuals who purchased shares of the Company between January
19, 1999 and August 26, 1999, engaged in a plan to defraud the market and
purchasers of the Company's Common Stock in violation of section 10(b) of the
Exchange Act, SEC Rule 10b-5 and Section 20(a) of the Exchange Act (as against
Mr. Rebeil and Mr. Magliarditi) by failing to disclose material facts or making
material misstatements of fact regarding the status of the Company's Web site.
The complaints seek compensatory damages for themselves and for the class. The
Company is informed and believes that there may be additional purported class
action lawsuits filed against the Company based on facts and claims similar or
identical to those state above and the Company anticipates that all such
lawsuits based on similar claims and facts would be consolidated.
The Company and its defendant officers and directors believe that the lawsuits
are without merit and that they have meritorious defenses to the above actions.
The Company has tendered the Harrington and Diep Actions to its insurers and
plans on vigorously defending the litigation. The Company believes that it has
adequate insurance coverage to meet any potential losses, subject to a $250,000
deductible. However, failure to successfully defend the Harrington or Diep
Actions or other similar actions which result in an award greater than the
Company's insurance coverage, could have a material adverse effect on the
Company's results of operations, liquidity and financial condition.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
In August 1999, the Company issued 53,000 shares of "restricted" Common Stock to
four accredited investors at a price of $10.00 per share pursuant to the July
12, 1999 Private Offering of the Company's Common Stock, resulting in net
proceeds of approximately $530,000 to the Company. In September 1999, the
Company elected to terminate the July 12, 1999 Private Offering and initiated a
private placement of 2.0 million shares of its Common Stock at a price of $5.00
per share. Investors of the Company's July 12, 1999 Private Offering were issued
additional shares of "restricted" Common Stock to reduce their purchase price
from $10.00 per share to $5.00 per share.
On September 1, 1999, the Company issued 5,000 "restricted" (as that term is
defined under Rule 144 of the Securities Act of 1933) shares of the Company's
Common Stock to the Company's securities counsel in exchange for legal services
rendered valued at $25,000.
On September 14, 1999, the Company issued 2,500 "restricted" (as that term is
defined under Rule 144 of the Securities Act of 1933) shares of the Company's
Common Stock to an unrelated consultant of the Company in exchange for certain
consultation services rendered valued at $26,250. The issuance was an isolated
transaction not involving a public offering and consequently conducted under an
exemption under Section 4(2) of the Securities Act of 1933.
On October 1, 1999, the Company initiated a private placement of 7,000,000
shares of its Common Stock at a price of $1.50 per share. No shares of the
Company's Common Stock were sold under this private placement until October 28,
1999. As of November 18, 1999, the Company has sold 3,732,498 shares of
"restricted" Common Stock to 35 accredited investors, resulting in proceeds of
$3,732,498.
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On October 8, 1999, the Company sold an additional 300,000 shares of the
"restricted" Common Stock of the Company to an unaffiliated accredited
shareholder of the Company at a price of $3.33 per share resulting in net
proceeds to the Company of approximately $999,000.
On October 18, 1999, the $500,000 short-term note entered into with an
unaffiliated accredited shareholder was converted into 291,429 shares of the
"restricted" Common Stock of the Company.
On October 25, 1999, the Company sold an additional 1.0 million shares of the
"restricted" Common Stock of the Company to an unaffiliated accredited
shareholder of the Company at a price of $1.00 per share resulting in proceeds
to the Company of approximately $1.0 million.
On November 18, 1999, the Company sold 2,000,000 shares of the "restricted"
Common Stock of the Company to an accredited shareholder of the Company at a
price of $1.50 per share resulting in proceeds to the Company of approximately
$3,000,000. This shareholder is now considered an "affiliate" of the Company.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
ITEM 5. OTHER INFORMATION.
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
Exhibit 27 -- Financial Data Schedule (previously filed on Form 10-Q
dated September 30, 1999).
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this amended report to be signed on its behalf by the
undersigned thereunto duly authorized.
2THEMART.COM, INC.
Date: March 6, 2000 By: /s/ Dominic J. Magliarditi
-------------------------------------
Dominic J. Magliarditi
President and Chief Financial Officer
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