2THEMART COM INC Form: 10-Q Filing Date: 6/8/2000
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] Quarterly report under Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended March 31, 2000
[ ] Transition report under Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _________ to _________
Commission File No. 0-27151
2THEMART.COM, INC.
(Exact Name of registrant as specified in its charter)
OKLAHOMA 33-0544320
(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification Number)
18301 VON KARMAN AVE., 7TH FLOOR
IRVINE, CALIFORNIA 92612
(Address of Principal Executive Offices) (Zip Code)
(949) 477-1200
(Issuer's Telephone Number)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
(None)
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Common Stock, par value $0.001
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports); and (2)
has been subject to such filing requirements for the past 90 days.
Yes [ X ] No [ ]
Indicate the number of shares outstanding of each of the issuer's class of
common stock as of the latest practicable date:
Title of each class of Common Stock Outstanding as May 15, 2000
----------------------------------- ---------------------------
Common Stock, $0.001 par value 30,221,350
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
Page
Balance Sheets as of December 31, 1999 and March 31,
2000 (unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Statements of Operations (unaudited) for the period
from December 22, 1998 (date of inception) to
March 31, 1999, for the three months ended March
31, 2000 and for the cumulative period from
December 22, 1998 (date of inception) to March 31,
2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Statements of Cash Flows (unaudited) for the period
from December 22, 1998 (date of inception) to
March 31, 1999; for the three months ended
March 31,2000 and for the cumulative period from
December 22, 1998 (date of inception) to March 31,
2000. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Notes to Financial Statements as of March 31, 2000 . . . . . . . . . . . . 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations . . . . . . . . . . . . . . . . . . 16
Item 3. Quantitative and Qualitative Disclosures About Market Risk . . 18
PART II - OTHER INFORMATION
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . 19
Item 2. Changes in Securities . . . . . . . . . . . . . . . . . . . 19
Item 3. Defaults Upon Senior Securities . . . . . . . . . . . . . . 20
Item 4. Submission of Matters to a Vote of Security Holders. . 20
Item 5. Other Information . . . . . . . . . . . . . . . . . . . . . . 20
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . 20
1
2THEMART.COM, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
BALANCE SHEETS
--------------------------------------------------------------------------------
ASSETS DECEMBER 31, MARCH 31,
1999 2000
(unaudited)
------------ -------------
Current assets:
Cash and cash equivalents $ 2,521,770 $ 30,694
Prepaid expenses 274,288 349,288
------------ -------------
2,796,058 379,982
------------ -------------
Property and equipment, at cost:
Computer hardware and software 12,148,137 12,660,241
Furniture, fixtures and other office equipment 429,611 451,260
Leasehold improvements 648,168 668,091
------------ -------------
13,225,916 13,779,592
Less accumulated depreciation and amortization (372,099) (942,099)
------------ -------------
12,853,817 12,837,493
------------ -------------
Other assets:
Restricted cash 220,224 220,224
Other 206,429 156,405
------------ -------------
426,653 376,629
------------ -------------
$16,076,528 $ 13,594,104
============ =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,750,805 $ 2,288,602
Accrued liabilities 525,818 1,202,106
Note 1,775,000 1,536,760
------------ -------------
Total current liabilities 4,051,623 5,027,468
------------ -------------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $0.0001 par value; 25,000,000
shares authorized; no shares issued and outstanding - -
Common stock, $0.0001 par value; 50,000,000 shares
authorized; 29,482, 016 and 30,221,350 shares issued
and outstanding at December 31, 1999 and March 31,
2000, respectively 2,948 3,022
Additional paid-in capital 25,990,942 23,730,202
Deferred compensation expense (1,339,263) (1,244,139)
Deficit accumulated during the development stage (9,629,722) (13,922,449)
------------ -------------
Total stockholders' equity 12,024,905 8,566,636
------------ -------------
$16,076,528 $ 13,594,104
============ =============
--------------------------------------------------------------------------------
See accompanying notes to condensed financial statements
2
2THEMART.COM, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF OPERATIONS (UNAUDITED)
--------------------------------------------------------------------------------
FROM DECEMBER FOR THE THREE FROM DECEMBER
22,1998 (DATE OF MONTHS ENDED 22,1998 (DATE OF
INCEPTION) TO MARCH 31, INCEPTION) TO
MARCH 31, 1999 2000 MARCH 31, 2000
--------------- ------------------ ----------------
Sales and interest income $ 33,746 $ 13,629 $ 130,659
--------------- ------------------ ----------------
Expenses:
Payroll and related expenses 98,503 1,147,492 3,159,250
Professional fees 34,074 475,093 2,976,403
Value of non-cash stock and option
issuances 264,434 182,624 1,337,796
Marketing - 223,095 1,147,607
Depreciation and amortization - 570,000 942,099
Interest - 86,938 166,913
Other general and administrative 203,764 1,595,114 4,323,040
--------------- ------------------ ----------------
600,775 4,280,356 14,053,108
--------------- ------------------ ----------------
Net loss $ (567,029) $ (4,266,727) $ (13,922,449)
=============== ================== ================
Basic and diluted loss per common share $ (0.03) $ (0.14)
=============== ==================
Basic and diluted weighted average
shares outstanding 21,119,697 29,578,866
=============== ==================
--------------------------------------------------------------------------------
See accompanying notes to condensed financial statements
3
2THEMART.COM, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENT OF CASH FLOWS (UNAUDITED)
--------------------------------------------------------------------------------
FROM DECEMBER FOR THE THREE FROM DECEMBER
22, 1998 (DATE MONTHS ENDED 22, 1998 (DATE OF
OF INCEPTION TO MARCH 31, INCEPTION) TO
MARCH 31, 1999 2000 MARCH 31, 2000
--------------- ------------------- ----------------
Cash flows from operating activities:
Net loss $ (567,029) $ (4,266,727) $ (13,922,449)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization - 570,000 $ 942,099
Loss on disposition of software - - 40,000
Value of non-cash stock and
option issuances 264,434 182,624 1,432,920
Accrued interest on notes payable
converted to common stock - - 28,438
Change in operating assets and
liabilities:
Prepaid expenses and other
assets - (24,976) (505,693)
Accounts payable and accrued
liabilities 31,520 1,214,085 3,490,708
--------------- ------------------- ----------------
Net cash used in operating activities (271,075) (2,324,994) (8,493,977)
--------------- ------------------- ----------------
Cash flows provided by (used in)
investing activities:
Purchases of property and equipment
and costs incurred for development
of software and web site (231,962) (553,676) (11,846,892)
--------------- ------------------- ----------------
Cash flows from financing activities:
Proceeds from issuances of common
stock 5,845,500 625,834 18,330,027
Proceeds from issuances of notes
payable - - 2,750,000
Repayment of note payable - - (250,000)
Net change in restricted cash - - (220,224)
Principal payments on note payable - (238,240) (238,240)
--------------- ------------------- ----------------
Net cash provided by financing
activities 5,845,500 387,594 20,371,563
--------------- ------------------- ----------------
Net change in cash and cash equivalents 5,342,463 (2,491,076) 30,694
Cash and cash equivalents at beginning
of period - 2,521,770 -
--------------- ------------------- ----------------
Cash and cash equivalents at end of
period $ 5,342,463 $ 30,694 30,694
=============== =================== ================
--------------------------------------------------------------------------------
See accompanying notes to condensed financial statements
4
2THEMART.COM, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENT OF CASH FLOWS (UNAUDITED)
--------------------------------------------------------------------------------
FROM DECEMBER FOR THE THREE FROM DECEMBER
22, 1998 (DATE MONTHS ENDED 22, 1998 (DATE OF
OF INCEPTION TO MARCH 31, INCEPTION) TO
MARCH 31, 1999 2000 MARCH 31, 2000
--------------- ------------------- ----------------
Supplemental disclosure of cash flow
information:
Conversion of short-term note and
accrued interest payable to common
stock $ - $ - $ 510,027
=============== =================== ================
Conversion of short-term note and
accrued interest payable to capital
contribution $ - $ - $ 2,018,411
=============== =================== ================
Purchase of fixed assets with
common stock $ - $ - $ 197,700
=============== =================== ================
Purchase of fixed assets with note
payable $ - $ - $ 1,775,000
=============== =================== ================
Cash paid during the period for
interest $ - $ 86,938 $ 86,938
=============== =================== ================
--------------------------------------------------------------------------------
See accompanying notes to condensed financial statements
5
2THEMART.COM, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO UNAUDITED FINANCIAL STATEMENTS
MARCH 31, 2000
--------------------------------------------------------------------------------
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements of 2TheMart.com, Inc.
("2TheMart" or the "Company") have been prepared in accordance with generally
accepted accounting principles for interim financial statements and the
instructions to Form 10-Q related to interim period financial statements.
Accordingly, these condensed financial statements do not include certain
information and footnotes required by generally accepted accounting principles
for complete financial statements. However, the accompanying unaudited condensed
financial statements contain all adjustments (consisting only of normal
recurring accruals) which, in the opinion of management, are necessary in order
to present the financial statements fairly. The results of operations for
interim periods are not necessarily indicative of the results to be expected for
the full year. These condensed financial statements should be read in
conjunction with the Company's audited financial statements, and notes thereto,
which are included in the Company's Annual Report on Form 10-K for the year
ended December 31, 1999.
NOTE 2 - ORGANIZATION
The Company
The Company is a development stage, internet-based electronic commerce
("e-commerce") company. The Company has contracted with an unrelated party to
develop and launch a business-to-consumer and consumer-to-consumer trading
community on the internet. The Company, which launched its web site on November
18, 1999, has developed an e-commerce site in which buyers and sellers are
brought together to buy and sell a variety of goods such as antiques, apparel,
coins, collectibles, computers, memorabilia, movies, music, toys and more. The
2TheMart service enables sellers to list items for sale, buyers to bid on those
items and it allows the 2TheMart users to browse through all items in a fully
automated, topically arranged online service. In connection with the proposed
merger (see Note 12), the Company has temporarily shut down its online service
as of April 25, 2000 (see Note 4).
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
shares of common stock of 2TheMart-Nevada, a Nevada corporation formed on
December 22, 1998. As the shareholders of 2TheMart-Nevada controlled CD-Rom
after this transaction, this business combination was treated as a reverse
acquisition for accounting purposes whereby 2TheMart-Nevada was considered the
accounting acquiror and CD-Rom was considered the accounting acquiree. The
merger became effective on January 8, 1999. Between December 22, 1998 and
January 8, 1999,
6
2THEMART.COM, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO UNAUDITED FINANCIAL STATEMENTS
MARCH 31, 2000
--------------------------------------------------------------------------------
NOTE 2 - ORGANIZATION, CONTINUED
neither 2TheMart-Nevada nor CD-Rom had any activity of significance including
capital transactions and operating activities. The surviving legal entity,
CD-Rom, changed its name to 2TheMart.com, Inc. The transaction was treated as a
recapitalization of 2TheMart-Nevada with no recording of assets or liabilities
at fair values on that date.
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 of common stock to the shareholders of
2TheMart-Nevada in exchange for all of the shares of common stock 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 various
shareholders of CD-Rom and 1.2 million of the previously issued CD-Rom shares of
common stock were placed in escrow under the terms of an agreement (the "Escrow
Agreement"), to be distributed to the 2TheMart-Nevada shareholders upon the
occurrence of either of the following events: 1) the exercise of any of the
CD-Rom options given to the previous controlling shareholders of CD-Rom; or 2)
the effectiveness of any Registration Statement filed with the Securities and
Exchange Commission ("SEC") with respect to any of the shares of common stock
underlying the CD-Rom options. In the event that either the CD-Rom options are
not exercised or the Company fails to file and have declared effective a
Registration Statement covering the shares of common stock underlying the CD-Rom
options by June 22, 2000, all of the escrow shares of common stock would be
returned to the previous controlling shareholder of CD-Rom. Shares of common
stock covered by this Escrow Agreement are depicted as outstanding since January
8, 1999 (the merger date).
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Property and Equipment
The Company has adopted Statement of Position 98-1 ("SOP 98-1"), "Accounting for
the Cost of Computer Software Developed or Obtained for Internal Use." In
fiscal 1999 and 2000, the Company capitalized external costs to acquire and
customize hardware, software and its Internet web site.
Depreciation and amortization are provided for over the estimated useful lives
of the assets, ranging from 2.5 years to 7 years. Leasehold improvements are
amortized over the lives of the respective leases or the useful 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.
7
2THEMART.COM, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO UNAUDITED FINANCIAL STATEMENTS
MARCH 31, 2000
--------------------------------------------------------------------------------
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
Betterments, renewals, and extraordinary repairs that extend the lives of the
assets are capitalized; other repairs and maintenance charges are expensed as
incurred. The cost and related accumulated depreciation applicable to assets
retired are removed from the accounts, and
the gain or loss on disposition is recognized in current operations.
Impairment of Long-Lived Assets
The Company evaluates the recoverability of long-lived assets in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of." SFAS No. 121 requires recognition of impairment of long-lived assets in
the event the net book value of such assets exceeds the future undiscounted cash
flows attributable to such assets. During the quarter ended March 31, 2000, the
Company temporarily discontinued the use of its Lawson software ("Lawson") in
order to reduce costs related to maintaining the software. The Company is
currently using another accounting software package in place of Lawson until
revenue-generating activities justify the cost of maintaining the Lawson
software. At March 31, 2000, management determined that there has been no
impairment of the Company's long-lived assets. There can be no assurance,
however, that market conditions will not change or demands for the Company's
services will continue which could result in future long-lived asset impairments
(see Note 4).
Revenue Recognition
Online transaction revenues are derived primarily from success fees charged for
the selling of items on the 2TheMart web site and are calculated as a percentage
of the final sales transaction value. Revenues related to success fees are
recognized at the time that the transaction is successfully concluded. A
transaction is considered successfully concluded when at least one buyer has bid
above the seller's specified minimum price or reserve price, whichever is
higher, at the end of the transaction term.
Segment Information
The Company has adopted Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information," which
requires public companies to report selected segment information in their
quarterly reports. It also requires entity-wide disclosures about the products
and services an entity provides, the material countries in which it holds assets
and reports revenues and its major customers. As the Company is currently in
the start-up phase, it does not yet have any reportable segments.
8
2THEMART.COM, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO UNAUDITED FINANCIAL STATEMENTS
MARCH 31, 2000
--------------------------------------------------------------------------------
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
Earnings Per Share
Basic net income per common 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. As the Company has a loss for the periods presented, all options are
antidilutive and are therefore not included in the per share computation.
Recent Accounting Pronouncements
The FASB issued Statement of Financial Accounting Standards No. 133 ("SFAS
133"), "Accounting for Derivative Instruments and Hedging Activities." SFAS 133
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities on the balance sheet at their fair value. This
statement, as amended by SFAS 137, is effective for financial statements for all
fiscal quarters of all fiscal years beginning after June 15, 2000. The Company
does not expect the adoption of this standard to have a material impact on its
results of operations, financial position or cash flows as it currently does not
engage in any derivative or hedging activities.
In March 2000, the Emerging Issues Task Force reached a consensus on Issue No.
00-2, "Accounting for Web Site Development Costs" ("EITF 00-2") to be applicable
to all web site development costs incurred for the quarter beginning after June
30, 2000. The consensus states that for specific web site development costs,
the accounting for such costs should be accounted for under AICPA Statement of
Position 98-1 (SOP 98-1), "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use." The Company has not yet addressed
whether the adoption of EITF 00-2 will have a material effect on its financial
statements.
NOTE 4 - DEVELOPMENT STAGE ENTERPRISE AND GOING CONCERN
Since December 22, 1998 (date of 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.
9
2THEMART.COM, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO UNAUDITED FINANCIAL STATEMENTS
MARCH 31, 2000
--------------------------------------------------------------------------------
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