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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-QSB
(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, 2001
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 0-28179
ABLEAUCTIONS.COM, INC.
(Exact name of small business issuer in its charter)
Florida 59-3404233
------------------------------- -------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1963 Lougheed Highway
Coquitlam, British Columbia
V3K-3T8
(Address of principal executive offices)
(604) 521-2253
(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, 2001 was 20,976,661 at October 31, 2001 was
25,011,284
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PART I -
ITEM 1.
ABLEAUCTIONS.COM, INC.
CONSOLIDATED FINANCIAL STATEMENTS
AS AT
SEPTEMBER 30, 2001
UNAUDITED
ABLEAUCTIONS.COM, INC. 1.
CONSOLIDATED BALANCE SHEET
Unaudited
September 30 December 31
2001 2000
ASSETS
Current
Cash and cash equivalents $ 3,165,823 $ 1,376,814
Accounts receivable - trade 528,021 864,296
Inventory 529,450 302,767
Prepaid expenses 260,450 113,750
Current portion of receivable on agreement for sale (Note 8(j)) 14,287 -
------------- -------------
Total current assets 4,498,031 2,657,627
Note Receivable (Note 4 ) 100,000 100,000
Trademarks 9,278 10,638
Capital Assets (Note 5) 3,120,986 3,057,531
Web Site Development Costs (Note 6 ) 45,670 86,353
Goodwill (Note 7 ) 8,959,756 1,050,902
------------- -------------
Total assets $ 16,733,721 $ 6,963,051
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current
Accounts payable and accrued liabilities $ 4,687,478 $ 2,107,079
Deferred compensation notes (Note 8m) 2,690,000 -
Current portion of promissory note 9,058 8,479
------------- -------------
Total current liabilities 7,386,536 2,115,558
Promissory Note (Note 9) 1,035,911 1,043,692
------------- -------------
Total liabilities 8,422,447 3,159,250
------------- -------------
Stockholders' equity
Shares To Be Issued (Note 8m) 5,921,660 -
Capital Stock (Note 10)
Authorized
62,500,000 common shares with a par value of $0.001
Issued and outstanding common shares with a par value of $0.001
September 30, 2001 and December 31, 2000 - 20,976,661 20,976 20,976
Additional Paid-In Capital 17,508,261 17,508,261
Deferred Option Plan Compensation (362,436) (520,089)
Deficit (14,737,385) (13,184,049)
Accumulated Other Comprehensive Loss (39,802) (21,298)
------------- -------------
Total stockholders' equity 8,311,274 3,803,801
------------- -------------
Total liabilities and stockholders' equity $ 16,733,721 $ 6,963,051
============= =============
The accompanying notes are an integral part of these consolidated financial statements
F-1
ABLEAUCTIONS.COM, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
Unaudited
Three Month Three Month Nine Month Nine Month
Period Ended Period Ended Period Ended Period Ended
September 30, September 30, September 30, September 30,
2001 2000 2001 2000
REVENUES
Sales $ 1,196,605 $ 3,356,955 $ 4,976,385 $ 6,526,462
Commissions 911,127 466,931 2,680,259 1,013,183
-------------- -------------- ------------- -------------
2,107,732 3,823,886 7,656,644 7,539,645
COST OF REVENUES 1,103,449 2,670,315 3,617,652 5,423,587
-------------- -------------- ------------- -------------
GROSS PROFIT 1,004,283 1,153,571 4,038,992 2,116,058
-------------- -------------- ------------- -------------
OPERATING EXPENSES
Accounting and legal 17,205 113,586 52,354 337,630
Advertising and promotion 248,811 337,254 783,399 681,906
Amortization of goodwill 72,789 38,573 218,364 72,351
Automobile 15,936 21,755 49,778 45,117
Bad debts 27,571 40,409 28,007 48,772
Commission 30,735 91,539 89,023 209,491
Consulting 69,505 34,710 261,119 373,474
Depreciation and amortization of capital assets 96,624 176,888 275,944 414,448
Insurance 39,537 42,455 98,457 75,506
Interest on promissory note 22,604 - 69,992 -
Investor relations and shareholder information 4,736 19,101 5,913 395,487
Licenses and permits 643 18,147 2,253 44,505
Management fees (recovery) - (4,361) - 15,903
Office and administration 132,502 122,705 386,298 297,116
Rent and utilities 217,355 198,978 606,610 614,040
Repairs and maintenance 41,333 68,755 113,929 133,326
Salaries and benefits 545,134 1,078,587 1,841,675 1,956,363
Telephone 44,714 61,096 130,828 166,598
Travel 19,847 132,419 53,092 408,982
-------------- -------------- ------------- -------------
1,647,581 2,592,596 5,067,035 6,291,015
-------------- -------------- ------------- -------------
Loss Before Other Items (643,298) (1,439,025) (1,028,043) (4,174,957)
OTHER ITEMS
Interest income 15,475 31,927 21,751 54,817
Foreign exchange gain (loss) 19,974 (59,530) 18,422 (74,672)
-------------- -------------- ------------- -------------
35,449 (27,603) 40,173 (19,855)
-------------- -------------- ------------- -------------
Income (Loss) From Continuing Operations $ (607,849) $ (1,466,628) $ (987,870) $ (4,194,812)
Loss On Dispositions Of Subsidiaries (Notes 8(j/l)) (101,245) - (532,327) -
Gain (Loss) From Discontinued Operations
(Notes 8(j/l)) 3,144 - (33,139) -
-------------- -------------- ------------- -------------
Loss For The Period $ (705,950) $ (1,466,628) $ (1,553,336) $ (4,194,812)
============== ============== ============= =============
Basic And Diluted Income (Loss) Per Share
From Continuing Operations $ (0.03) $ (0.07) $ (0.05) $ (0.22)
From Discontinued Operations - - (0.02) -
-------------- -------------- ------------- -------------
$ (0.03) $ (0.07) $ (0.07) $ (0.22)
============== ============== ============= =============
Weighted average number of shares of common
stock outstanding 20,976,661 20,939,952 20,976,661 19,420,250
============== ============== ============= =============
The accompanying notes are an integral part of these consolidated financial statements
F-2
ABLEAUCTIONS.COM, INC.
CONSOLIDATED STATEMENT OF COMPREHENSIVE LOSS
Unaudited
Three Month Three Month Nine Month Nine Month
Period Ended Period Ended Period Ended Period Ended
September 30, September 30, September 30, September 30,
2001 2000 2001 2000
Loss For The Period $ (705,950) $ (1,466,628) $ (1,553,336) $ (4,194,812)
Other Comprehensive Income (Loss), net of tax:
Foreign currency translation adjustments (31,786) 14,166 (18,504) (11,444)
------------- -------------- -------------- -------------
Consolidated Comprehensive Loss $ (737,736) $ (1,452,462) $ (1,571,840) $ (4,206,256)
============= ============== ============== =============
Basic and Diluted Comprehensive
Loss Per Share $ (0.04) $ (0.07) $ (0.07) $ (0.22)
============= ============== ============== =============
Weighted Average Number of
Shares Outstanding 20,976,661 20,939,952 20,976,661 19,420,250
============= ============== ============== =============
The accompanying notes are an integral part of these consolidated financial statements
F-3
ABLEAUCTIONS.COM, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Unaudited
Accumulated Deferred
Shares Additional Other Option Total
to be Common Stock Paid-In Comprehensive Plan Stockholders'
issued Shares Amount Capital Income (Loss) Compensation Deficit Equity
----------------------------------------------------------------------------------------------------------------------------------
Balance, Dec. 31, 1999 $ - 18,310,001 $ 18,310 $ 3,740,108 $ 11,445 $ - $(1,346,686) $ 2,423,177
Private placements - 2,210,240 2,210 11,048,990 - - - 11,051,200
Share issuance costs - - - (1,147,670) - - - (1,147,670)
Common stock issued for
acquisition of assets of
Falcon Trading Inc. - 53,405 53 360,752 - - - 360,805
Common stock issued for
acquisition of land
and a building - 155,486 155 1,243,733 - - - 1,243,888
Common stock issued for
acquisition of assets of
Mesler's Auction House - 30,625 31 244,969 - - - 245,000
Common stock issued for
acquisition of rights to
a trademark - 4,822 5 34,473 - - - 34,478
Common stock issued for
acquisition of assets of
Auctions West Sales
Corporation - 10,000 10 69,990 - - - 70,000
Common stock issued for
acquisition of Ehli's
Commercial/Industrial
Auctions, Inc. - 50,000 50 349,950 - - - 350,000
Common stock issued for
acquisition of Johnston's
Surplus Office Systems - 68,182 68 513,342 - - - 513,410
Common stock issued for
acquisition of Warex
Supply Ltd. - 6,900 7 55,193 - - - 55,200
Stock options exercised - 77,000 77 354,323 - - - 354,400
Deferred option plan
compensation - - - 640,108 - (640,108) - -
Stock based compensation - - - - - 120,019 - 120,019
Translation adjustment - - - - (32,743) - - (32,743)
Loss for the year - - - - - - (11,837,363) (11,837,363)
---------- ----------- ---------- ---------- ----------- ---------- --------------- -------------------
Balance, Dec. 31, 2000 $ - 20,976,661 $20,976 $17,508,261 $(21,298) $(520,089) $(13,184,049) $3,803,801
3,803,801
Shares to be issued for
acquisition of shares
of iCollector PLC 5,934,500 - - - - - - 5,934,500
Share issuance costs (12,840) - - - - - - (12,840)
Stock based compensation - - - - - 157,653 - 157,653
Translation adjustment - - - - (18,504) - - (18,504)
Loss for the period - - - - - - (1,553,336) (1,553,336)
---------- ----------- ---------- ---------- ----------- ---------- ---------------- ------------------
Balance, Sept.30, 2001 $5,921,660 20,976,661 $20,976 $17,508,261 $(39,802) $(362,436) $(14,737,385) $ 8,311,274
========== =========== ========== =========== =========== =========== ============== ------------------
The accompanying notes are an integral part of these consolidated financial statements
F-4
ABLEAUCTIONS.COM, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
Unaudited
Nine Month Nine Month
Period Ended Period Ended
September 30, September 30,
2001 2000
CASH FLOWS FROM OPERATING ACTIVITIES
Income (loss) for the period from continuing operations $ (987,870) $ (4,194,812)
Non-cash items included in loss:
Depreciation and amortization of capital assets 275,944 414,448
Amortization of goodwill 218,364 72,351
Bad debts 28,007 -
Stock based compensation 157,653 34,066
------------- -------------
(307,902) (3,673,947)
Changes in operating working capital items:
Decrease (increase) in accounts receivable 30,743 (1,819,035)
Increase in inventory (341,696) (1,088,333)
Increase in prepaid expenses (171,426) (176,405)
Increase in accounts payable and accrued liabilities 454,109 1,226,011
------------- -------------
Net cash used in operating activities (336,172) (5,531,709)
------------- -------------
CASH FLOWS FROM DISCONTINUED OPERATIONS
Loss for the period from discontinued operations (33,139) -
Net change in net assets of discontinued operations 23,883 -
------------- -------------
Net cash used in discontinued operations (9,256) -
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of capital assets (76,526) (1,996,737)
Cash acquired on investments in subsidiaries 2,161,308 -
Proceeds on disposition of subsidiaries, net of cash divested 23,207 -
Proceeds of receivable on agreement for sale 64,994 -
Website development costs - 10,964
Acquisition of investment - (900,000)
------------- -------------
Net cash from (used in) investing activities 2,172,983 (2,885,773)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of promissory note (7,202) -
Issuance of common stock - 11,274,200
Share issuance costs (12,840) (1,147,670)
------------- -------------
Net cash from (used in) financing activities (20,042) 10,126,530
------------- -------------
Change in cash and cash equivalents for the period 1,807,513 1,709,048
Cash and cash equivalents, beginning of period 1,376,814 (60,916)
Effect of exchange rates on cash (18,504) (11,444)
------------- -------------
Cash and cash equivalents, end of period $ 3,165,823 $ 1,636,688
============= =============
Supplemental disclosures with respect to cash flows (Note 12)
The accompanying notes are an integral part of these consolidated financial statements
F-5
ABLEAUCTIONS.COM, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTH PERIOD ENDED SEPTEMBER 30, 2001
Unaudited
1. HISTORY AND ORGANIZATION OF THE COMPANY
Ableauctions.com, Inc. (the 'Company') was organized on September 30,
1996, under the laws of the State of Florida, as J.B. Financial
Services, Inc. On July 19, 1999, an Article of Amendment was filed
with the State of Florida for the change of the Company's name from
J.B. Financial Services, Inc. to Ableauctions.com, Inc.
The Company's primary business activity is as a high-tech
business-to-business and consumer auctioneer that conducts its
auctions live and simultaneously broadcasts over the Internet. The
Company liquidates a broad range of computers, electronics, office
equipment, furniture and industrial equipment that it acquires through
bankruptcies, insolvencies and defaults.
The Company's primary operating subsidiaries at September 30, 2001
were:
Able Auctions (1991) Ltd., operating a Canadian-based auction
business.
Ableauctions.com (Washington) Inc., operating a U.S.-based
auction business.
Ehli's Commercial/Industrial Auctions, Inc., a U.S.-based
liquidator of automobiles and industrial equipment.
Jarvis Industries Ltd., operating a Canadian-based auction
business.
iCollector PLC, operating a U.K.-based auction business which
also operates in the U.S.
The Company's common stock is listed on the American Stock Exchange
under the ticker symbol AAC.
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 incurred
significant losses since its inception. In order to continue as a
going concern, the Company must generate profits and/or obtain
additional financing. It is management's plan to seek additional
capital through equity financing.
F-6
ABLEAUCTIONS.COM, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTH PERIOD ENDED SEPTEMBER 30, 2001
Unaudited
3. SIGNIFICANT ACCOUNTING POLICIES
a) Principles of consolidation
These consolidated financial statements include the accounts of
Ableauctions.com, Inc. and its wholly owned subsidiaries, from the
dates of acquisition.
b) Foreign currency translation
The Company accounts for foreign currency transactions and translation
of foreign currency financial statements under Statement of Financial
Accounting Standards No. 52, "Foreign Currency Translation" ("SFAS
52"). Transaction amounts denominated in foreign currencies are
translated at exchange rates prevailing at transaction dates. Carrying
values of monetary assets and liabilities are adjusted at each balance
sheet date to reflect the exchange rate at that date. Non-monetary
assets and liabilities are translated at the exchange rate on the
original transaction date. Gains and losses from restatement of
foreign currency monetary and non-monetary assets and liabilities are
included in income. Revenues and expenses are translated at the rates
of exchange prevailing on the dates such items are recognized in
earnings.
Financial statements of the Company's Canadian and U.K. subsidiaries
(see Note 1) are translated into U.S. dollars using the exchange rate
at the balance sheet date for assets and liabilities. The Company's
investments in the structural capital of the Canadian and U.K.
subsidiaries have been recorded at the historical cost in U.S.
dollars. The resulting gains or losses are reported as a separate
component of stockholders' equity. The functional currency of the
Canadian and U.K. subsidiaries, are the local currencies, the Canadian
dollar and the U.K. pound sterling respectively.
c) Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amount of assets and
liabilities, disclosure of contingent assets and liabilities at the
date of the financial statements, and the reported amount of revenues
and expenses during the period. Actual results could differ from those
estimates.
d) Cash and cash equivalents
Cash and cash equivalents includes highly liquid investments with
original maturities of three months or less and bank indebtedness.
e) Financial instruments
The carrying amounts of financial instruments including cash and cash
equivalents, accounts receivable, receivable on agreement for sale,
note receivable, accounts payable and accrued liabilities, and notes
payable, approximated fair value at September 30, 2001.
F-7
ABLEAUCTIONS.COM, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTH PERIOD ENDED SEPTEMBER 30, 2001
Unaudited
3. SIGNIFICANT ACCOUNTING POLICIES (continued)
f) Inventory
Inventory is stated at the lower of cost and estimated net realizable
value.
g) 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.
h) Capital assets and depreciation and amortization
Capital assets are recorded at cost. The cost of capital assets is
depreciated using the declining balance method at the following annual
rates:
Building 4%
Furniture, fixtures and equipment 20%
Computer equipment 30%
Computer software 30%
Vehicles 30%
Leasehold improvements are amortized using the straight-line method
over the terms of the leases.
i) Revenue recognition
The Company generally earns revenues from its auction activities
either through consignment sales, or through sales of inventory
purchased by the Company. For consignment sales, the Company earns
auction fees charged to consignees, and buyer's premiums charged to
purchasers, determined as a percentage of the sale price. For
inventory sales, the Company earns a profit or incurs a loss on the
sale, to the extent the purchase price exceeds or is less than the
purchase price paid for such inventory.
For each type of auction revenue, an invoice is rendered to the
purchaser, and revenue is recognized by the Company, at the date of
the auction. The auction purchase creates a legal obligation upon the
purchaser to take possession of, and pay for the merchandise. This
obligation generally provides the Company with reasonable assurance of
collection of the sale proceeds, from which the Company's earnings are
derived, including the fees from consignees and purchasers, as well as
resale profits.
In December 1999, the Securities and Exchange Commission staff
released Staff Accounting Bulletin No. 101, Revenue Recognition in
Financial Statements ("SAB 101"), which provides guidance on the
recognition, presentation and disclosure of revenue in financial
statements. The Company believes its revenue recognition policies do
not significantly differ from those outlined in SAB 101.
F-8
ABLEAUCTIONS.COM, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTH PERIOD ENDED SEPTEMBER 30, 2001
Unaudited
3. SIGNIFICANT ACCOUNTING POLICIES (continued)
j) Trademark
The cost of a trademark acquired is being amortized on a straight-line
basis over its life of fifteen years.
k) Acquisitions and Goodwill
All business acquisitions have been accounted for under the purchase
method and, accordingly, the excess of the purchase price over the
fair value of the net assets acquired has been recorded as goodwill in
the consolidated balance sheet. The results of operations, changes in
equity and cash flows of acquired companies are included in operations
only for the period between the date of acquisition and the end of the
financial year.
Goodwill arising from acquisitions of businesses prior to July 1, 2001
is amortized on a straight-line basis over periods ranging from three
to twenty years.
Goodwill arising from acquisitions of businesses after June 30, 2001
has been accounted for under Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS
142"). Under SFAS 142, goodwill is no longer subject to amortization
over its estimated useful life. Instead, goodwill will be subject to
at least an annual assessment for impairment by applying a
fair-value-based test.
l) Loss per share
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings Per
Share" ("SFAS 128"). Under SFAS 128, basic and diluted earnings per
share are to be presented. Basic earnings per share is computed by
dividing income available to common shareholders by the weighted
average number of common shares outstanding in the period. Diluted
earnings per share takes into consideration common shares outstanding
(computed under basic earnings per share) and potentially dilutive
common shares.
m) 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, based
upon currently available information, 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.
n) Segment information
Statement of Financial Accounting Standards No. 131, "Disclosures
About Segments of an Enterprise and Related Information", establishes
standards for reporting information about the operating and geographic
segments of the Company's business. Currently, the nature and extent
of the Company's operations are such that it operates in only one
reportable segment, as an auction house and liquidator. Information
regarding the Company's geographic segments is set forth in Note 18.
F-9
ABLEAUCTIONS.COM, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTH PERIOD ENDED SEPTEMBER 30, 2001
Unaudited
3. SIGNIFICANT ACCOUNTING POLICIES (continued)
o) 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.
p) Accounting for derivative instruments and hedging activities
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133 "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS 133") which
establishes accounting and reporting standards for derivative
instruments and for hedging activities. SFAS 133 is effective for all
fiscal quarters of fiscal years beginning after June 15, 1999. In June
1999, the FASB issued SFAS 137 to defer the effective date of SFAS 133
to fiscal quarters of fiscal years beginning after June 15, 2000. The
Company does not believe that the adoption of the statement has a
significant impact on its financial statements.
q) Generally accepted accounting principles
The accompanying financial statements have been prepared by the
Company without audit. In the opinion of management, all adjustments
(which include only normal recurring adjustments) necessary to present
fairly the financial position, results of operations, comprehensive
loss, changes in stockholders' equity and cash flows at September 30,
2001 and for the period then ended have been made. These financial
statements should be read in conjunction with the audited financial
statements of the Company for the year ended December 31, 2000. The
results of operations for the period ended September 30, 2001 are not
necessarily indicative of the results to be expected for the year
ending December 31, 2001.
r) Comparative figures
Certain of the figures for the nine month period ended September 30,
2000 have been reclassified to conform to the presentation adopted for
the 2001 period.
F-10
ABLEAUCTIONS.COM, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTH PERIOD ENDED SEPTEMBER 30, 2001
Unaudited
4. NOTE RECEIVABLE
The Company made a loan in the amount of $100,000 to an employee
during the 2000 year. An agreement between the borrower and Able
Auctions (1991) Ltd. provides that the loan is due and payable on July
2, 2003, bears interest at a rate of 4% per annum from July 2, 2000
until the maturity date, and is secured by a charge on certain real
property of the borrower.
5. CAPITAL ASSETS
December 31,
September 30, 2001 2000
----------------------------------------------- -------------
Accumulated Net Book Net Book
Cost Depreciation Value Value
------------- ------------- ------------- -------------
Land $ 800,000 $ - $ 800,000 $ 800,000
Building 1,082,605 32,445 1,050,160 1,081,500
Furniture and fixtures 221,429 89,037 132,392 84,492
Computer equipment 1,292,601 531,018 761,583 660,669
Computer software 152,365 77,858 74,507 93,563
Vehicle 90,031 45,381 44,650 61,373
Leasehold improvements 285,898 28,204 257,694 275,934
------------- ------------- ------------- -------------
$ 3,924,929 $ 803,943 $ 3,120,986 $ 3,057,531
============= ============= ============= =============
6. WEB SITE DEVELOPMENT COSTS
Web site development costs of $45,670 (net of amortization costs of
$97,997) (December 31, 2000: $86,353) is comprised of hardware and
software costs incurred by the Company in developing its web site. The
Company amortizes these costs over a period of five years from the
commencement of operations of the web site.
7. GOODWILL
September 30, December 31,
Accumulated 2001 2000
Gross Amortization Net Net
--------------- --------------- ---------------- -------------
Goodwill $ 9,222,273 $ 262,517 $ 8,959,756 $ 1,050,902
=============== =============== ================ ==============
F-11
ABLEAUCTIONS.COM, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTH PERIOD ENDED SEPTEMBER 30, 2001
Unaudited
8. ACQUISITIONS AND DIVESTITURES
Following is a description of the Company's more significant business
acquisitions and divestitures:
a) Effective August 24, 1999, the Company acquired all of the issued
shares and certain loans of Able Auctions (1991) Ltd. ('Able').
The Company issued 1,843,444 of its common shares at an aggregate
deemed value of $73,738, and paid cash of $545,305 to acquire the
shares of Able, and paid additional cash of $504,695 for
shareholders' loans, for a total purchase price of $1,123,738.
The $667,127 excess of the purchase price over the fair value of
the net assets acquired was recorded as goodwill.
b) Effective February 29, 2000, the Company acquired certain assets
of a business operating as Falcon Trading Inc. The Company issued
53,405 shares of common stock at an aggregate deemed value of
$360,805, representing the total purchase price. The $245,000
excess of the purchase price over the fair value of the assets
acquired was recorded as goodwill.
c) Effective March 20, 2000, the Company acquired land and a
building in Scottsdale, Arizona. The Company issued 155,486
shares of common stock at an aggregate deemed value of
$1,243,888, paid cash of $1,200,000, and assumed a promissory
note liability of $1,056,112, for a total purchase price of
$3,500,000.
d) Effective March 20, 2000, the Company acquired certain assets of
a business operating as Meslers Auction House L.L.C. The Company
issued 30,625 shares of common stock at an aggregate deemed value
of $245,000 and paid cash of $255,000, for a total purchase price
of $500,000. The $471,000 excess of the purchase price over the
fair value of the assets acquired was recorded as goodwill.
e) Effective May 5, 2000, the Company acquired certain assets of a
business operating as Auctions West Sales Corporation. The
Company issued 10,000 shares of common stock at an aggregate
deemed value of $70,000, representing the total purchase price.
The $70,000 excess of the purchase price over the fair value of
the assets acquired was recorded as goodwill.
f) Effective May 16, 2000, the Company acquired all of the issued
shares of Ehli's Commercial/Industrial Auctions, Inc. The Company
issued 50,000 shares of common stock at an aggregate deemed value
of $350,000 and paid cash of $900,000, for a total purchase price
of $1,250,000. The $1,195,286 excess of the purchase price over
the fair value of the net assets acquired was recorded as
goodwill.
g) Effective July 26, 2000, the Company acquired all of the issued
shares of Johnston's Surplus Office Systems Ltd. The Company
issued 68,182 shares of common stock at an aggregate deemed value
of $513,410 and paid cash of $338,300, for a total purchase price
of $851,710. The $551,168 excess of the purchase price over the
fair value of the net assets acquired was recorded as goodwill.
h) Effective July 31, 2000, the Company acquired all of the issued
shares of Warex Supply Ltd. The Company issued 6,900 shares of
common stock at an aggregate deemed value of $55,200 and paid
cash of $146,800, for a total purchase price of $202,000. As the
purchase price did not exceed the fair value of the net assets
acquired, no goodwill was recorded.
i) Effective July 31, 2000, the Company acquired all of the issued
shares of Jarvis Auctions Ltd. The Company paid cash of $288,000,
representing the total purchase price. The $219,900 excess of the
purchase price over the fair value of the net assets acquired was
recorded as goodwill.
F-12
ABLEAUCTIONS.COM, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTH PERIOD ENDED SEPTEMBER 30, 2001
Unaudited
8. ACQUISITIONS AND DIVESTITURES (continued)
j) Effective March 29, 2001, the Company agreed to dispose of all of
its shares of Johnston's Surplus Office Systems Ltd. ('Surplus').
The Company also agreed to settle debt owed to the Company by
Surplus in the amount of $1,191,724. The debt was settled by the
issuance by Surplus to the Company of 1,191,724 common shares of
Surplus at a deemed price of $1.00 per share.
The Company agreed to then sell all of the issued shares of
Surplus to an employee of Surplus, for consideration of
Cdn$600,000 (US$ 380,500).
The purchase price is to be paid as follows:
(a) Cash of Cdn$75,000 (US$47,568) due on the closing date of
March 31, 2001.
(b) Cash of Cdn$125,000 (US$79,280) payable as to Cdn$3,472
(US$2,202) per month for three years after the closing date,
without interest, evidenced by a promissory note and secured
by the pledge and escrow to the Company of the shares.
(c) An amount of Cdn$400,000 (US$253,696) payable by the
provision to the Company of goods or services of Surplus at
an agreed discount.
The proceeds described in (a) and (b) have been recorded as at
the effective date of sale. The benefit, if any, derived by the
Company from the discount described in (c) will be reflected in
the gross profit of the Company as earned.
The carrying values of assets and liabilities of Surplus that
were sold were as follows:
Cash $ 24,361
Goodwill 200,000
Other assets 569,868
Liabilities (236,299)
--------------
$ 557,930
The revenues and expenses of Surplus until the date of
disposition have been presented as discontinued operations.
k) The Company completed an agreement in April of 2001 under which
it agreed to transfer inventory and accounts receivable of the
business acquired as described in Note 8(b) to the original
seller, in return for the net proceeds of a future sale of the
53,405 shares of common stock of the Company issued in
conjunction with the original purchase
The amount of net proceeds to the Company and the dollar amount
of assets sold have yet to be finalized. Any gain or loss
associated with the sale will be recorded once this determination
is made.
l) Effective August 31, 2001, the Company agreed to dispose of all
of its shares of Warex Supply Ltd. ('Warex') to an employee for
total consideration of $1.
F-13
ABLEAUCTIONS.COM, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTH PERIOD ENDED SEPTEMBER 30, 2001
Unaudited
8. ACQUISITIONS AND DIVESTITURES (continued)
The carrying values of assets and liabilities of Warex that were
sold were as follows:
Accounts receivable $ 28,361
Inventory 65,465
Other assets 33,127
Liabilities (25,707)
--------------
$ 101,246
The Company recognized a loss of $101,245 on the sale.
The revenues and expenses of Warex until the date of disposition
have been presented as discontinued operations.
m) On August 13, 2001, the Company made an offer to acquire all of
the issued shares of iCollector PLC ("iCollector"). Effective
September 27, 2001, all conditions of the offer had been
satisfied.
The purchase price to be paid is as follows:
(a) The Company will issue 4,150,000 shares of its common stock
to the shareholders of iCollector. At September 30, 2001 an
amount has been recorded as Shares to be Issued, based on a
value of $5,921,660, net of filing fees of $12,840. The
Company is in the process of issuing these shares to the
consenting shareholders and has issued notice to the
non-consenting shareholders of compulsory acquisition by
November 20, 2001.
(b) The Company has issued non-interest bearing and unsecured
promissory notes ("deferred consideration notes") in the
face amount of $3,000,000, which are due to be repaid
September 13, 2002. These deferred consideration notes are
convertible into shares of common stock of the Company at
$1.43 per share at the sole option of the Company, subject
to regulatory , listing, and shareholder approval.
The deferred consideration notes have been recorded at
estimated fair market value based on an implicit interest
rate of 12%, such that an unamortized discount to face value
of $310,000 has been recorded at September 30, 2001.
(c) The Company has also issued non-interest bearing and
unsecured promissory notes ("earnout consideration notes")
in the amount of $5,000,000, which are payable on September
30, 2002, only if iCollector satisfies certain revenue and
transaction milestones during the month of July, 2002. These
earnout consideration notes are convertible into shares of
common stock of the Company, at the fair market value of
such shares at the date of conversion, at the sole option of
the Company, subject to a minimum of 2,000,000 shares and a
maximum of 3,500,000 shares in aggregate, as well as
regulatory, listing, and shareholder approval. The amount of
the obligation to the Company in respect to the earnout
consideration notes, if any, will be recorded at such time
as the amount of such obligation can be reasonably
determined.
The total recorded cost to the Company of the acquisition
including estimated transaction costs of $345,582, was
$8,957,242. The excess of the cost to the Company over the fair
value of the net assets acquired, in the amount of $8,327,218,
was recorded as goodwill.
F-14
ABLEAUCTIONS.COM, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTH PERIOD ENDED SEPTEMBER 30, 2001
Unaudited
8. ACQUISITIONS AND DIVESTITURES (continued)
The operating results of the combined companies on a proforma basis,
under the assumption that the combination occurred at the beginning of
the 2001 year are as follows:
Ableauctions.com iCollector Consolidated
------------------- ----------------- ----------------
Revenues $ 7,656,644 $ 227,622 $ 7,884,266
Expenses (9,209,980) (5,950,567) (15,160,547)
------------- -------------- ---------------
$ (1,553,336) $ (5,722,945) $ (7,276,281)
============= =============== ===============
9. PROMISSORY NOTE
September 30, December 31,
2001 2000
------------------ -----------------
Promissory note, with interest at 9% per annum,
repayment at $8,569 per month including
principal and interest, secured by mortgage
over land and building, due July 24, 2028 $ 1,044,969
$ 1,052,171
Less: current portion (9,058) (8,479)
------------------ ----------------
$ 1,035,911 $ 1,043,692
10. CAPITAL STOCK
a) On September 2, 1998, the Company implemented a 200:1 forward
stock split. On July 20, 1999, the Company effected a stock
dividend of four shares for every one share of record. On July
21, 1999, the Company implemented a 5:1 forward stock split and
on September 5, 1999, the Company implemented a 4:1 reverse stock
split. The consolidated statement of changes in stockholders'
equity for the 1999 year was restated to give retroactive
recognition to the stock splits and stock dividend presented by
reclassifying from common stock to additional paid-in capital the
par value of consolidated shares arising from the splits and
stock dividend. In addition, all references to number of shares
and per share amounts of common stock were restated to reflect
the stock splits.
b) In March, 1999, the Company issued 53,750,000 shares at an
aggregate deemed value of $8,600 as payment of fees for services
received.
c) In April, 1999, the Company issued 5,312,500 shares at an
aggregate deemed value of $850 as payment of fees for services
received.
d) In July, 1999, the Company received from a shareholder 50,000,000
shares which were previously issued for services rendered, and
returned these shares to treasury for cancellation.
e) In August, 1999, the Company completed a private placement
whereby it issued 1,094,057 post-consolidation units at a price
of $3.20 per unit for total consideration in the amount of
$3,500,980. Each unit consists of one restricted common share and
half of a share purchase warrant. Each whole warrant will entitle
the holder to purchase an additional restricted common share at a
price of $4.00 per share until August 24, 2001.
f) In October, 1999, the Company issued 60,000 shares at an
aggregate deemed value of $168,000 for the purchase of certain
assets of Ross Auctioneers & Appraisers Ltd.
F-15
ABLEAUCTIONS.COM, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTH PERIOD ENDED SEPTEMBER 30, 2001
Unaudited
10. CAPITAL STOCK (continued)
g) In February, 2000, the Company issued 53,405 shares of
common stock at an aggregate deemed value of $360,805 to
purchase certain assets of Falcon Trading Inc.
h) In March, 2000, the Company completed a private placement of
1,000,000 units at a price of $5.00 per unit for total
proceeds of $4,700,000, net of issuance costs of $300,000.
Each unit consists of one share of common stock and one
non-transferable share purchase warrant. Each warrant
entitles the holder to purchase one additional share of
common stock at a price of $5.00 per share until March 25,
2001 and at a price of $6.00 per share until March 25, 2002.
i) In March, 2000, the Company issued 155,486 shares of common
stock at an aggregate deemed value of $1,243,888 as partial
consideration for the purchase of a building and land in
Scottsdale, Arizona.
j) In March, 2000, the Company issued 30,625 shares of common
stock at an aggregate deemed value of $245,000 as partial
consideration for the purchase of certain assets of Mesler's
Auction House Ltd.
k) In April, 2000, the Company issued 4,822 shares of common
stock at an aggregate deemed value of $34,478 as partial
consideration for acquiring certain trademark rights from
Simon Fraser University.
l) In May, 2000, the Company completed a private placement of
1,210,240 units at a price of $5.00 per unit for total
proceeds of $5,203,440, net of issuance costs of $847,670.
Each unit consists of one share of common stock and one
non-transferable share purchase warrant. Each warrant
entitles the holder to purchase one additional share of
common stock at a price of $6.00 per share until April 28,
2001.
m) In May, 2000, the Company issued 10,000 shares of common
stock at an aggregate deemed value of $350,000 as partial
consideration for the purchase of Ehli's
Commercial/Industrial Auctions Inc.
n) In May, 2000, the Company issued 50,000 shares of common
stock at an aggregate deemed value of $350,000 as partial
consideration for the purchase of Ehli's
Commercial/Industrial Auctions Inc.
o) In July, 2000, the Company issued 68,182 shares of common
stock at an aggregate deemed value of $513,410 as partial
consideration for the purchase of Johnston's Surplus Office
Systems Ltd.
p) In July, 2000, the Company issued 6,900 shares of common
stock at an aggregate deemed value of $55,200 as partial
consideration for the purchase of Warex Supply Ltd.
11. WARRANTS
The following warrants were outstanding at September 30,
2001:
Year Granted Number of Shares Subscription Price Expiry Date
------------- ---------------- -------------------- ----------------
2000 1,000,000 $ 6.00 March 25, 2002
During the nine month period ended September 30, 2001,
150,000 warrants with a subscription price of $8.00,
1,210,240 warrants with a subscription price of $6.00, and
547,029 warrants with a subscription price of $4.00 expired.
F-16
ABLEAUCTIONS.COM, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTH PERIOD ENDED SEPTEMBER 30, 2001
Unaudited
12. SUPPLEMENTAL DISCLOSURES WITH RESPECT TO CASH FLOWS
Nine Month Nine Month
Period Ended Period Ended
September 30, September 30,
2001 2000
------------------ --------------
Cash paid for income taxes $ 3,148 $ -
============= =============
Cash paid for interest $ 84,045 $ 35,294
============= =============
The following non-cash operating, investing and financing transactions
occurred during the nine month period ended September 30, 2001:
a) The Company issued deferred compensation notes in the face amount
of $3,000,000, earn out consideration notes in the amount of
$5,000,000, and incurred an obligation to issue 4,150,000 shares
of common stock at an aggregate value of $5,934,500 as proceeds
for the purchase of shares of iCollector PLC as described in Note
8 (m).
b) The Company received a promissory note in the amount of $79,280
as partial proceeds for the sale of its shares of Johnston's
Surplus Office Systems Ltd. as described in Note 8(j).
The following non-cash operating, investing and financing transactions
occurred during the nine month period ended September, 2000:
a) The Company issued 155,486 shares of common stock at a deemed
value of $1,243,888 and assumed a promissory note in the amount
of $1,056,112 for the purchase of a building and land in
Scottsdale, Arizona for the purchase of a building and land in
Scottsdale, Arizona.
b) The Company issued 53,405 shares of common stock at a deemed
value of $360,805 to purchase the assets of Falcon Trading Inc.
c) The Company issued 30,625 shares of common stock at a deemed
value of $245,000 to purchase the assets of Mesler's Auction
House.
d) The Company issued 4,822 shares of common stock at an aggregate
deemed value of $34,478 to acquire rights to a trademark from
Simon Fraser University.
e) The Company issued 10,000 shares of common stock at an aggregate
deemed value of $70,000 to purchase certain assets of Auctions
West Sales Corporation.
f) The Company issued 50,000 shares of common stock at an aggregate
deemed value of $350,000 as partial consideration for the
purchase of Ehli's Commercial/Industrial Auctions Inc.
g) The Company issued 68,182 shares of common stock at an aggregate
deemed value of $513,410 as partial consideration for the
purchase of Johnston's Surplus Office Systems.
h) The Company issued 6,900 shares of common stock at an aggregate
deemed value of $55,200 as partial consideration for the purchase
of Warex Supply Ltd.
F-17
ABLEAUCTIONS.COM, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTH PERIOD ENDED SEPTEMBER 30, 2001
Unaudited
13. ACCUMULATED OTHER COMPREHENSIVE LOSS
Total comprehensive losses for the nine month periods ended
September 30, 2001 and 2000 were $1,571,840 and $4,206,256
respectively. The only item included in other comprehensive loss
is foreign currency translation adjustments in the amounts of a
$18,504 loss for the nine month period ended September 30, 2001
and a $11,444 loss for the nine month period ended September 30,
2000.
Foreign Accumulated
Currency Other
Translation Comprehensive
Adjustment Income
---------------- ---------------
Balance, December 31, 1999 $ 11,445 $ 11,445
Change During Period (11,444) (11,444)
------------- -------------
Balance, September 30, 2000 $ 1 $ 1
============= =============
Balance, December 31, 2000 $ (21,298) $ (21,298)
Change During Period (18,504) (18,504)
------------- -------------
Balance, September 30, 2001 $ (39,802) $ (39,802)
============= =============
14. INCOME TAXES
a) The Company's total deferred tax asset is as follows:
September 30, December 31,
2001 2000
---------------- -------------
Tax benefit relating to net operating
loss carryforwards and temporary timing differences $ 3,821,169 $ 3,510,361
Valuation allowance (3,821,169) (3,510,361)
---------------- -------------
$ - $ -
================ =============
The Company has net operating losses carried forward of approximately
$8,000,000 which expire in years ranging from 2006 to 2020. The
Company has provided a full valuation allowance on the deferred tax
asset because of the uncertainty of realizability.
b) Following is a reconciliation of expected and actual income tax
benefit, using the applicable statutory income tax rates for the
nine month period ended September 30, 2001
Expected tax benefit $ 559,201
Certain non-deductible expenses (248,393)
Change in valuation allowance (310,808)
-------------
$ -
=============
15. RELATED PARTY TRANSACTIONS
During the nine month period ended September 30, 2001 the following
related party transactions occurred:
a) The Company paid rent of $104,859 to a company controlled by a
director of the Company.
b) Included in accounts payable is an amount of $94,950 owing to a
company controlled by a director of the Company.
F-18
ABLEAUCTIONS.COM, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTH PERIOD ENDED SEPTEMBER 30, 2001
Unaudited
15. RELATED PARTY TRANSACTIONS (continued)
c) Included in accounts payable is an amount of $54,438 owing
to a director of the Company with respect to accrued wages
expensed during the 2000 year.
During the nine month period ended September 30, 2000, the
following related party transactions occurred:.
a) The Company paid $24,474 in consulting fees to companies
controlled by a director of the Company.
b) The Company paid $216,081 in rent, leasehold improvements, and
repairs and maintenance to a company controlled by a director of
the Company.
c) The Company had sales of goods of $52,854 to companies
controlled by a director of the Company.
d) The Company paid $25,789 for web site development costs to a
company controlled by a director of the Company.
16. STOCK BASED COMPENSATION EXPENSE
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 quoted market price of the Company's stock
at the date of grant over the option price.
During the 2000 year, compensation costs of $640,108 were
incurred based on options granted. These costs will be recognized
over a period of three years, which is the average vesting period
of options.
During the nine month period ended September 30, 2001, stock
based compensation expense of $157,653 was recognized in the
consolidated statement of operations.
A summary of the Company's stock option plan and changes during
2001 and 2000 are presented below:
Weighted
Average
Number Exercise
of Shares Price
-------------- ------------
Outstanding, at December, 31, 1999 812,500 $ 3.20
Granted 694,500 6.95
Forfeited (42,500) 5.22
Exercised (77,000) 4.60
-------------- ------------
Outstanding, at December 31, 2000 1,387,500 $ 4.94
Granted - -
Forfeited (105,000) 7.11
Exercised - -
------------- -------------
Outstanding, at September 30, 2001 1,282,500 $ 4.76
Weighted average fair value of ============= =============
options granted during the period
$ -
=============
F-19
ABLEAUCTIONS.COM, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTH PERIOD ENDED SEPTEMBER 30, 2001
Unaudited
16. STOCK BASED COMPENSATION EXPENSE (continued)
The following table summarizes information about employee and director
stock options outstanding and exercisable under the Company's stock
incentive plans at September 30, 2001:
Average
Weighted Remaining
Exercise Number Contractual Number
Price Outstanding Life Exercisable
------------------------------------------------------------------
$ 3.20 788,000 3.3 717,000
5.00 22,500 3.6 22,500
7.15 50,000 3.9 10,000
6.53 20,000 3.9 6,667
6.53 80,000 3.9 -
7.00 75,000 4.1 25,000
7.00 120,000 4.1 30,000
8.50 15,000 4.1 5,000
8.66 112,000 4.1 37,333
------------ ------------
1,282,500 853,500
============= =============
Compensation
Had compensation cost been recognized on the basis of fair value,
pursuant to Statement of Financial Accounting Standards No. 123, net
loss and loss per share would have been adjusted as follows:
Three Month Three Month Nine Month Nine Month
Period Ended Period Ended Period Ended Period Ended
September 30, September 30, September 30, September 30,
2001 2000 2001 2000
------------------------------------------------------- ---------------
Loss for the period
As reported $ (705,950) $ (1,466,628) $(1,553,336) $(4,194,812)
============== ============= ============= =============
Pro forma $ (952,189) $ (1,586,906) $(2,292,051) $(4,315,090)
============== ============= ============= =============
Basic and diluted loss per share
As reported $ (0.03) $ (0.07) $ (0.07) $ (0.22)
============== ============= ============= =============
Pro forma $ (0.05) $ (0.08) $ (0.11) $ (0.22)
============== ============= ============= =============
The fair value of each option was estimated using the Black-Scholes
Option Pricing Model.
The assumptions used in calculating fair value were as follows:
2001 2000
----------- ----------
Dividend Yield - -
Expected Volatility 60% - 126% 189%
Risk Free Interest Rates 6.0% - 6.7% 6.23%
Weight Average Expected Option Terms 2 to 5 years 2 years
F-20
ABLEAUCTIONS.COM, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTH PERIOD ENDED SEPTEMBER 30, 2001
Unaudited
17. COMMITMENTS
a) The Company leases office space and equipment under
non-cancelable operating leases extending for periods in excess
of one year. Future commitments under such lease agreements are
as follows:
2001 $ 145,934
2002 426,665
2003 183,906
2004 171,996
2005 152,796
Thereafter 598,451
-------------
$ 1,679,748
=============
Included in these totals are amounts with respect to an agreement
made by the Company effective November 1, 2000 with a company
controlled by a director of the Company, to lease operating
premises in Coquitlam, British Columbia. Under the agreement, the
Company must make lease payments of $12,840 per month, plus
operating costs, until November 30, 2009.
b) Future commitments pursuant to the promissory note described in
Note 9 are as follows:
2001 $ 1,277
2002 9,273
2003 10,145
2004 11,097
2005 12,138
Thereafter 1,001,039
-------------
$ 1,044,969
=============
c) The Company maintains employment agreements with various key
management personnel.
18. INTERNATIONAL OPERATIONS
The external sales and long-lived assets of the Company's businesses
by geographical region are summarized below:
Nine Month Nine Month
Period Ended Period Ended
September 30, September 30,
2001 2000
-------------- --------------
External sales from continuing operations:
United States $ 2,678,330 $ 3,531,410
Canada 4,950,892 4,008,235
United Kingdom 27,422 -
------------- -------------
$ 7,656,644 $ 7,539,645
============= =============
September 30, December 31,
2001 2000
------------- -------------
Long-lived assets of continuing operations:
United States $ 2,358,270 $ 2,756,222
Canada 1,192,758 1,549,202
United Kingdom 8,684,662 -
------------- -------------
$ 12,235,690 $ 4,305,424
============= =============
F-21
NOTE REGARDING FORWARD LOOKING STATEMENTS
Certain information contained herein constitutes "forward-looking statements,"
including without limitation statements containing the words "believes,"
"anticipates," "intends," "expects" and words of similar import, as well as all
projections of future results. Such forward-looking statements involve known and
unknown risks, uncertainties and other factors which may cause the actual
results or achievements of the Registrant to be materially different from any
future results or achievements of the Registrant expressed or implied by such
forward-looking statements. Such factors include, but are not limited to, the
following: risks related to political and economic uncertainties; risks related
to the Registrant's acquisition strategy and its ability to integrate acquired
businesses into its operations; risks involved in implementing a new business
strategy; risk related to the operations of iCollector and its operations in
Europe; the Registrant's ability to obtain financing on acceptable terms;
competition in the auction industry; market acceptance of live auction
broadcasts on the Internet; the Registrant's ability to manage growth and
integrate the operations of acquired auction houses; risks of technological
change; the Registrant's dependence on key personnel; the Registrant's
dependence on marketing relationships with auction houses and third party
suppliers; the Registrant's ability to protect its intellectual property rights;
government regulation of Internet commerce and the auction industry; economic
factors affecting the sales of auction merchandise; dependence on continued
growth in use of the Internet; risk of technological change; capacity and
systems disruptions; uncertainty regarding infringing intellectual property
rights of others and the other risks and uncertainties described under
"Description of Business - Risk Factors" in the Registrant's annual report on
Form 10-KSB.
The Registrant's management has included projections and estimates in this
quarterly report, which are based primarily on management's assessment of the
Registrant's results of operations, discussions and negotiations with third
parties, management's experience and a review of information filed by its
competitors with the Securities and Exchange Commission. Investors are cautioned
against attributing undue certainty to management's projections.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview
We auction merchandise and equipment from a variety of industries including:
antique, automotive, bakery, broadcasting, chemical, construction, dairy,
electronics, energy, food processing, foundry, furniture, high-technology,
machine tool, metal fabrication, office, paper, pharmaceutical, plastic,
printing, restaurant, textile, and others. Our auctions are open to the public.
Our typical auction draws approximately 300 to 500 bidders in person and offers
on average approximately 1,200 items or lots of merchandise and equipment for
auction. Bidders are generally businesses and commercial purchasers. We
broadcast certain of our live auctions over the Internet on our web site. In
auctions that we broadcast, our physical "brick-and-mortar" auction audiences
are integrated with our Web-based online auction audiences, and our online
customers are able to bid on and buy merchandise at our live auctions. We
generally earn gross profit margins ranging from 16% to 40% on goods we hold
title to and sell at our physical auctions. We cannot assure you that we will
attain any particular level of gross profit margins or that we will achieve
profitability.
Our business strategy is to increase the gross revenues and profitability of our
existing auction operations by expanding the scope of our auction audience
through the capabilities of the Internet.
We broadcasted our first live auction on our web site in January, 2000. We
currently broadcast approximately 20% of our auctions over the Internet using
software we developed internally. We are in the process of refining our software
to minimize the amount of human intervention required for broadcasting our
auctions over the Internet.
We are an early stage company and we have developed our business through the
acquisition, by either share purchase or asset purchase, of Able Auctions
(1991), Ross Auctioneers & Appraisers, Auctions West, Johnston's Surplus Office
Systems, Jarvis Industries and Warex Supply, all in British Columbia, Canada,
and Falcon Trading and Ehli's Auctions in Washington State, and Mesler's Auction
House in Arizona. Before these acquisitions, we had no material business and no
material revenues, expenses, assets or liabilities.
1
On September 27, 2001, we acquired iCollector PLC, a company that provides an
indexed catalogue of art, antiques and collectibles to auction houses, dealers,
and galleries. iCollector also broadcasts live auctions over the Internet in
conjunction with eBay Live auctions. Our acquisition is expected to expand our
presence on the Internet and to diversify our business and product offerings.
See "Item 5. Other Information."
All of our subsidiaries were acquired in the second or third quarter of 2000,
except for Ableauctions (1991) Ltd., which was acquired in the last quarter of
1999 and iCollector PLC, which we acquired late in the third quarter 2001. The
companies we acquired were typically owner-operated businesses, and the major
internal controls over spending, inventory, and assets were generally the
oversight of the owner. Consequently, when we acquired these companies, we
implemented many internal controls and operating procedures. As with most
consolidations or mergers of related-business companies, we incurred significant
costs to implement our inventory procurement model, operational strategy and
administrative and accounting procedures. Many of the write-downs in the value
of our assets were realized as a result of changing accounting systems and
policies of the newly acquired businesses and recognizing the true value of
their assets. These write-downs, such as bad debts, inventory and goodwill are
expected to be non-recurring.
Throughout the year 2000, we also implemented our business plan and strategy of
developing a platform to conduct auctions live over the Internet. As a result,
we expended significant funds on developing the actual website and software,
organizing a management team to market and develop the programs, and marketing
our software in North America. During the fourth quarter 2000, we hired
marketing personnel in an effort to license our technology to auction houses and
to market our Internet capabilities and broadcasting services.
During the third quarter 2001, Levy Gee, our U.K. financial advisor, commenced a
recommended offer to acquire iCollector PLC, a company that provides an indexed
catalogue of art, antiques and collectibles to auction houses, dealers, and
galleries. iCollector also broadcasts live auctions over the Internet in
conjunction with eBay Live auctions. Our acquisition is expected to expand our
presence on the Internet and to diversify our business and product offerings.
See "Item 5. Other Information." Our offer to acquire iCollector was subject to
a number of conditions, including the approval of iCollector shareholders of a
restructuring and financing and acceptance of our offer by at least 90% of the
iCollector shareholders. The offer was declared unconditional in all respects on
September 27, 2001, the first closing date of the offer. Our offer was accepted
by shareholders holding approximately 96% of the iCollector ordinary shares. We
are in the process of compulsory acquisition of the remaining iCollector shares,
which is anticipated to close on November 20, 2001.
We cannot assure you that we will be able to effectively integrate the
iCollector business into our operations.
Results of Operation
Three months ended September 30, 2001 compared to the corresponding period in
2000.
Revenues. During the three months ended September 30, 2001, we had net auction
revenues of $2,107,732, compared to $3,823,886 during the same period in 2000, a
decrease of $1,716,154 (approximately 44.9%). Sales of goods were $1,196,605 or
approximately 56.8% of our revenues during the three month period ended
September 30, 2001, compared to $3,356,955 or approximately 87.8% during the
same period in 2000. In the third quarter of 2000, we acquired certain auction
houses that realize revenue mainly on a commission basis. The decrease in
revenues and the revenues resulting from sales of goods as a percentage of
revenue in 2001 is a direct result of combining the auction houses that sell
inventory mainly on a commission basis with the auction houses that sell mainly
purchased inventory.
Operating Expenses. During the three month period ended September 30, 2001,
operating expenses were $1,647,582 (78.2% of revenue), compared to $2,592,596
(67.8% of revenue) for the same period in 2000. The operating costs in the third
quarter of 2001 were lower than 2000 as additional expenses were incurred in
2000 to build the infrastructure, management team, and Internet technology and
as we began to realize the synergies and benefits of consolidating the
administrative functions of the auction houses we acquired and of implementing
inventory and management controls.
Personnel and consulting expenses were $645,374 during the three-month period
ended September 30, 2001 (2000 - $1,200,475) or 39.2% (2000 - 46.3%) of our
operating expenses and consisted of expenses related to salaries and
2
benefits $545,134 (2000 - $1,078,587), consulting and management fees $69,505
(2000 - $30,349), and commissions $30,735 (2000 - $91,539). We anticipate that
our acquisition of iCollector will significantly increase our personnel and
consulting expenses as a result of adding approximately 23 iCollector employees.
We also anticipate that such personnel and consulting expenses will increase as
(i) we hire additional personnel for our auction houses, (ii) we expand our
operations, and (iii) we increase the frequency and number of auctions that we
conduct.
During the three-month period ended September 30, 2001, advertising and
promotion expenses were $248,811 (2000 - $337,254) or 15.1% (2000 - 13%) of our
operating expenses. Advertising expenses were lower in comparison to 2000, even
as our operations have been expanded through acquisitions as a result of
increased efficiency in marketing and promoting our auctions. We also incurred
significant advertising expenses in developing our new auction businesses in
Scottsdale, Arizona and San Mateo, California. We anticipate that the total
dollar amount of promotion expenses will remain constant throughout the
remainder of 2001.
General overhead expenses related to rent and utilities $217,355 (2000 -
$198,978), telephone $44,714 (2000 - $61,096), travel related to operations
$19,847 (2000 - $132,419), repairs and maintenance $41,333 (2000 - $68,755),
automotive $15,936 (2000 - $21,755), insurance $39,537 (2000 - $42,455) and
office and administrative expenses $132,503 (2000 - $122,705).
We anticipate that general overhead expenses will increase as a result of our
acquisition of iCollector. We anticipate that overhead as a percentage of
operating expenses and total revenue will decrease in future periods after we
successfully integrate certain administrative aspects of iCollector's operations
and as we achieve certain economies from our operations. The total dollar amount
of general overhead expenses is expected to increase as we expand our operations
and, specifically, as a result of the acquisition of iCollector PLC.
Professional fees were $17,205 (2000 - $113,586) during the three-month period
ended September 30, 2001. The professional fees related to completing our
Securities Exchange Act of 1934 reports, and professional fees associated with
our acquisition of iCollector. Professional fees are expected to increase during
the fourth quarter of 2001 as a result of accrued, legal, accounting and
financial advisor expenses anticipated to occur as a result of our acquisition
of iCollector.
Depreciation and amortization expense was $96,624 (2000 - $176,888) for the
three-month period ended September 30, 2001. Amortization of goodwill for the
period was $72,789 compared to $38,573 for the corresponding period in the prior
year.
Gross Profit. Cost of revenues was $1,103,449 (2000 - $2,670,315) for the
three-month period ended September 30, 2001. Gross profits were $1,004,284 (2000
- $1,153,371) or 47.6% (2000 - 30.2%). Until we developed our inventory
procurement model, normal gross margins were approximately 25% overall. We
believe gross profits on our physical auctions may improve further in future
periods as we realize the benefits of our inventory procurement model and as we
implement a strategy of buying large quantities of discount merchandise and
distributing this merchandise to our various outlets for sale at our auctions.
Operating Income and Net Loss. For the quarter ended September 30, 2001, we
realized a loss from operations of $607,849 (2000 - loss of $1,466,628). We
realized an overall net loss for the quarter of $705,950 (2000 - $1,466,628) or
$0.03 (2000 - $0.07) per share.
In order to pursue our business model and market our live broadcasting software
to the auction houses throughout North America, we intend to continue the
development of our Internet technologies and business development efforts during
the fourth quarter of 2001 and first half of 2002. During the second quarter
2001, we invested in computer hardware and software and hired additional
programmers. We expect to continue the development of the internet and auction
software throughout the remainder of 2001.
During the fiscal year 2000, we acquired all of the issued and outstanding
shares of Johnson's Surplus Office Systems ("Surplus"). We then combined the
profitable components of Surplus with our operating auction and liquidation
houses in Seattle, Washington, Surrey, British Columbia, and San Mateo,
California. Since the remaining division of Surplus was engaged in the business
of manufacturing and refurbishing office systems, which was inconsistent with
our business strategy, we elected to sell Surplus to its management.
Consideration for the
3
purchase of Surplus was $75,000 cash plus the issuance of a promissory note of
$125,000 secured by a personal guarantee, and an agreement to supply products to
us totalling an additional $400,000.
Late in the third quarter 2001, we acquired iCollector PLC to further expand our
Internet presence and to develop a market in Europe. We anticipate that we will
experience losses, on a consolidated basis, as a result of our investments in
the development of our Internet-related business and our acquisition of
iCollector PLC. We expect to incur losses in the fourth quarter and into 2002
and we anticipate we will require additional financing to expand the development
and marketing of our Internet technology. If we are unable to obtain additional
financing, we may be required to suspend all Internet technology development and
marketing, which may have a materially adverse affect on the growth of our
business.
Nine months ended September 30, 2001 compared to the corresponding period in
2000.
Revenues. During the nine months ended September 30, 2001, we had net auction
revenues of $7,656,644, compared to $7,539,645 during the same period in 2000,
an increase of $116,999 (approximately 1.6%). Sales of goods were $4,976,385
(65%) of our revenues during the nine months period ended September 30, 2001,
compared to $6,526,462 (86.6%) during the same period in 2000. In the third
quarter of 2000, we acquired certain auction houses that realize revenue mainly
on a commission basis. The decrease in the revenues resulting from sales of
goods as a percentage of revenue in 2001 is a direct result of combining the
auction houses that sell inventory mainly on a commission basis with the auction
houses that sell mainly purchased inventory. We anticipate that revenues from
the sales of goods may increase as a percentage of revenues, as we plan to
conduct a greater number of auctions using inventory we purchase in buy-out
situations, which generally result in higher gross profit margins.
Late in the third quarter 2001, we acquired iCollector, which operates a website
that catalogues arts, collectibles and antiques for auction houses, galleries
and dealers and conducts live auctions on eBay. iCollector's revenue model is
designed to generate income from commissions charged to buyers and sellers. We
anticipate that revenues from iCollector's operations will increase our total
revenues marginally in future periods until we are able to fully integrate
iCollector's operations and increase the number of auctions broadcast over the
Internet
Operating Expenses. During the nine months period ended September 30, 2001,
operating expenses were $5,067,035, compared to $6,291,015 for the same period
in 2000.
Personnel and consulting expenses were $2,191,817 during the nine-month period
ended September 30, 2001 (2000 - $2,555,231) or 43.3% (2000 - 40.6%) of our
operating expenses and consisted of expenses related to salaries and benefits
$1,841,675 (2000 - $1,956,363), consulting and management fees $261,119 (2000 -
$389,377), and commissions $89,023 (2000 - $209,491). We increased our number of
employees by approximately 20 as a result of our acquisition of iCollector. We
anticipate that personnel and consulting expenses will increase as a result of
the iCollector acquisition and as (i) we hire additional personnel for our
internet and auction software development, (ii) we expand our operations, and
(iii) we increase the frequency and number of auctions that we conduct.
During the nine-month period ended September 30, 2001, advertising and promotion
expenses were $783,399 (2000 - $681,906) or 15.5% (2000 - 10.8%) of our
operating expenses. Advertising expenses were higher in comparison to 2000, as
our operations were expanded through acquisitions. We also incurred significant
advertising expenses in developing our new auction businesses in Scottsdale,
Arizona and San Mateo, California. We anticipate that the total dollar amount of
promotion expenses to remain constant in 2001. We anticipate advertising
expenses may increase further as we actively promote the iCollector business.
General overhead expenses related to rent and utilities $606,610 (2000 -
$614,040), telephone $130,828 (2000 - $166,598), travel related to operations
$53,092 (2000 - $408,982), repairs and maintenance $113,929 (2000 - $133,326),
automotive $49,778 (2000 - $45,117), insurance $98,457 (2000 - $75,506) and
office expenses $386,298 (2000 - $297,116).
The total dollar amount of general overhead expenses is expected to increase as
we expand our operations and integrate the iCollector business into our
operations.
Professional fees were $52,354 (2000 - $337,630) during the nine-month period
ended September 30, 2001. The professional fees related to completing our
Securities Exchange Act of 1934 reports, professional fees associated
4
with the preparation of our American Stock Exchange filings, and other
professional fees. Professional fees are expected to increase in the fourth
quarter 2001 as a result of legal fees and accounting fees anticipated to result
from our acquisition of iCollector.
Depreciation and amortization expense was $275,944 (2000 - $414,448) for the
nine-month period ended September 30, 2001.
Gross Profit. Cost of revenues was $3,617,652 (2000 - $5,423,587) for the
nine-month period ended September 30, 2001. Gross profits were $4,038,992 (2000
- $2,116,058) or 52.8% (2000 - 28.1%). Until we developed our inventory
procurement model, normal gross margins were approximately 15-20% overall. We
believe gross profits for our auction house operations may improve further in
future periods as we realize the benefits of our inventory procurement model by
buying large quantities of discount merchandise and distributing this
merchandise to our various outlets.
Gross profits from the iCollector operations are anticipated to be lower than
our historical margins as a result of iCollector's business model. iCollector
currently generates revenues from commissions received for transactions
facilitated on the Internet
Operating Income and Net Loss. For the quarter ended September 30, 2001, we
realized loss from operations of $987,870 (2000 - loss of $4,194,812). We
realized an overall net loss for the nine-month period of $1,553,336 (2000 -
$4,194,812) or $0.07 (2000 - $0.22) per share, including a loss of $532,327 from
disposition of a subsidiary and a loss of $33,139 from discontinued operations
during the nine-month period ended September 30, 2001.
We believe that our "bricks and mortar" operations will be operationally
profitable; however, we anticipate we will experience losses during the fourth
quarter 2001 resulting from the continued development of our Internet
broadcasting technology and software and as a result of our acquisition of
iCollector and the development of the iCollector business and integration of
their operations into our organization. We plan to market our auction software
to third parties subject to completing development and testing of our software
for auction houses.
Our financial model is expected to change in future periods as a result of our
acquisition of iCollector PLC. iCollector's business model is based on earning
fees in connection with transactions facilitated on the Internet.
Liquidity and Capital Resources
We had cash and cash equivalents of $3,165,823, accounts receivable of $528,021,
inventory of $529,450, prepaid expenses of $260,450 and current portion of
receivables on agreement for sale of $14,287 at September 30, 2001. We
anticipate that trade accounts receivables and inventory may increase during the
remainder of fiscal 2001 as we increase the number and frequency of our auctions
and as we expand our business operations. We had a working capital deficit of
$2,888,505, including current assets of $4.5 million and current liabilities of
$7.4 million. The current liabilities include $2.7 million in deferred
compensation notes issued in connection with our acquisition of iCollector which
are convertible into our common stock at our option, subject to shareholder and
regulatory approval. Cash flow used for operating activities required $336,172
during the quarter ended September 30, 2001.
Cash flow from investing activities during the quarter ended September 30, 2001
generated $2,172,983. Cash flow from investing is expected to decrease as we
curtail our investing activities until funds are raised.
Net cash flow used in financing activities during the quarter ended September
30, 2001 was $20,042. The only financing activities during the quarter involved
payments on the principal portion of the promissory note on our Scottsdale
property.
In light of the current capital market condition, our operating and capital
budget for the year ending December 31, 2001 is approximately $750,000. We
intend to concentrate our resources on achieving profitability during 2001.
Outlook
We believe that we have created an infrastructure, Internet technology, and
inventory procurement model that will realize significant benefits in the
future. This model will allow us to open a new auction house in Vancouver,
5
British Columbia in June 2001 and will allow us to expand into new markets in
the United States in the second and third quarter of 2001.
We believe our acquisition of iCollector will allow us to diversify our business
and accelerate the development of our Internet business. See "Item 5 Other
Information."
We intend to meet our cash requirements through revenues generated from our
operations and private or public offerings of our equity or debt. We are
currently seeking such financing by presenting our business plan to merchant and
investment banks, fund managers and investment advisors. We cannot assure you
that we will successfully raise any additional financing on acceptable terms, if
at all, and our failure to meet our cash requirements will force us to abandon
some of our plans of operation, sell some of our assets or certain business
operations or liquidate our business, all of which will have a material adverse
effect on our business and results of operations.
We cannot assure you that our actual expenditures for fiscal 2001 will not
exceed our estimated operating and capital budget. Actual expenditures will
depend on a number of factors, some of which are beyond our control, including,
among other things, the revenues from our auction operations, the success of our
geographical expansion, the availability of financing on acceptable terms,
reliability of the assumptions of management in estimating cost and timing,
costs related to the development of our web site and technologies, economic
conditions and competitive factors in the auction industry.
Plan of Operation
Our plan of operation is based on our operating history, our experience in the
industry, our discussions with third parties, the SEC filings of our competitors
and the decisions of our management. Set out below is a summary of our plan of
operation and operating budget for the remainder of the fiscal year ending
December 31, 2001.
Generate revenues through auctions and increase our volume of sales by
increasing the number of live auctions at our existing locations
We will continue to operate auctions at our five locations in Surrey and
Coquitlam, British Columbia; Tacoma, Washington; Scottsdale, Arizona, and San
Mateo, California. We also hold auctions at customer locations in bankruptcies
and insolvencies.
Increase revenues by broadcasting our auctions on the Internet and by selling
merchandise on our web site
We launched our web site for public viewing in September 1999 and broadcasted
our first live auction in January 2000. We are in the process of further
refining the technologies related to broadcasting live auctions on our web site.
We intend to broadcast auctions from all our locations on an alternating basis.
We may add auctions of other auction houses if we acquire additional auction
locations or if we develop strategic affiliations with other auction houses to
broadcast their auctions. We intend to integrate the iCollector business into
our business.
Continue research and development to improve our web site and auction
broadcasting technologies
We plan to continue our research and development efforts to improve our web site
and auction broadcasting technologies. We are in the process of refining our
live auction broadcasting technologies and intend to develop software and
systems that will allow us to improve graphical presentations, the speed of our
bidding process, the preview of merchandise and the method of registering
bidders. We anticipate that we will spend a total of approximately $750,000 on
research and development efforts during fiscal 2001, subject to securing
additional financing and generating sufficient cash flow from our operations.
Install the live broadcast technology at regional auction sites
We plan to install live broadcast technology at all of our auction locations. We
intend to complete the installation of broadcast equipment at Coquitlam, British
Columbia and San Mateo, California during 2001. We estimate the costs of
installing broadcast equipment will be approximately $10,000 to $15,000 per
location.
6
Commence geographic expansion program by acquiring or entering into strategic
affiliations with auction companies
We intend to broadcast the auctions of other auction houses from a variety of
locations throughout North America. We also intend to license our software to
other auction companies and commence marketing efforts in the remainder of 2001.
Our management also intends to continue to identify possible auction companies
to enter into marketing strategic relationships. We have also entered a new
lease to acquire additional auction space in Vancouver, British Columbia. We
intend to search for a new location in Northwest Washington State. This facility
is expected to house an expansion of our Tacoma location and will be a new
location for additional liquidation and auction services.
Our acquisition of iCollector is expected to result in a number of strategic
relationships with galleries, auction houses and art dealers, and a relationship
with e-Bay to broadcast our live auctions. We cannot assure you that we will
successfully integrate the iCollector operations into our business or that our
venture will be commercially successful.
Install the computer server hardware
We installed 17 servers in the first phase of our hardware and software
implementation program in our British Columbia location in December 1999. We
intend to install additional servers as traffic on our web site increases. When
this demand increases, we may install additional servers in Arizona and New
York. Our multi-server networking strategy is designed to allow visitors to our
auction sites to have timely response time to effectively bid for items at our
live auctions without bandwidth restrictions. We are now at a point where the
Internet traffic to our Web site is taxing the ability of our current servers.
To keep up with the demand placed on our current servers, we acquired new
servers in the second quarter of 2001.
Hire additional key personnel
We anticipate adding up to 15 new employees with e-commerce, software
development, and software maintenance experience during 2001. The hiring of
these employees will subject to the Company obtaining additional financing and
the level of profits generated from our operations.
In addition, iCollector has approximately 20 employees, which we have retained.
Expansion of iCollector Business
We believe that the acquisition of iCollector will enable us to more efficiently
and quickly deploy our technology to the many auction houses in Europe, the
United Kingdom and the United States. We expect to realize synergies of scale in
the areas of marketing, web and internet hosting, and internet and software
development. We expect to realize the benefits of these synergies throughout the
remainder of 2001.
iCollector had approximately $2 million in working capital to fund its
operations and capital requirements for approximately one year. We believe that
this will be sufficient time for us to develop and integrate the iCollector
business into our organization profitably.
Summary of Operating and Capital Budget
Set forth below are our estimated cash operating and capital budgets for
operations, technology purchases, research and development and implementing our
expansion strategy for the remainder of the fiscal year ending December 31,
2001:
7
Marketing $ 250,000
Ongoing research and development 200,000
Expansion of inventories 200,000
Servers and operating systems 100,000
Geographic expansion 0
------------------
Required Capital: $750,000
Our revised operating and capital budget for the fiscal year ending December 31,
2001 is estimated to be approximately $750,000. As of September 30, 2001, we had
a working capital deficit of approximately $2.9 million, including current
liabilities related to deferred compensation notes in the principal amount of
$2.7 million issued in connection with our acquisition of iCollector. These
deferred compensation notes are convertible at our option into common shares at
$1.43 per share, subject to shareholder approval. We intend to convert these
notes into shares if we cannot raise additional capital on acceptable terms to
fund payment of the notes and our working capital requirements. We cannot assure
you that our actual expenditures for that period 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, the availability
of financing on acceptable terms, acquisition and/or expansion costs,
reliability of the assumptions of management in estimating cost and timing,
certain economic factors, the timing related to development of our technology
and cost associated with operating our auctions.
In the event we determine that we may be unable to meet our on-going capital
commitments, we plan to sell certain non-essential assets, including our
property located in Scottsdale, Arizona. We anticipate that we may realize
approximately $1 million on the sale of the property. In addition, we may take
some or all of the following actions:
o reduce expenditures on research and development;
o reduce sales and marketing expenditures;
o reduce general and administrative expenses through lay offs or
consolidation of our operations;
o suspend operations that are not economically profitable; or
o sell assets, including licenses to our technologies.
Political and Economic Uncertainties
Our business and our ability to raise additional financing may be adversely
affected by political and economic risks and uncertainties. The general economic
slow down in the United States and Europe may adversely affect the demand for
products offered at our auctions. The events of September 11, 2001 and the
political uncertainty in the Middle East may negatively affect the general
economy, the capital markets and our ability to raise capital on acceptable
terms, if at all. There can be no assurance that the Company will be able to
increase our revenues from operations or to raise sufficient financing to meet
our on-going obligations on acceptable terms, if at all. We also cannot assure
you we will successfully integrate the iCollector operations into our business
or that economic uncertainties will not have a material adverse affect on our
business and results of operations.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
We believe that we do not have any material exposure to interest or commodity
risks. We are exposed to certain economic and political changes in international
markets where we compete, such as inflation rates, recession, foreign ownership
restrictions, domestic and foreign government spending, budgetary and trade
policies and other external factors over which we have no control.
Our financial results are quantified in U.S. dollars but a majority of our
obligations and expenditures with respect to our operations are incurred in
Canadian dollars. Although we do not believe we currently have any materially
significant market risks relating to our operations resulting from foreign
exchange rates, if we enter into financing or other business arrangements
denominated in currency other than the U.S. dollar or the Canadian dollar,
variations in the exchange rate may give rise to foreign exchange gains or
losses that may be significant.
8
We currently have no material long-term debt obligations other than a promissory
note, with interest at 9% per annum, repayable at $8,569 per month including
principal and interest, due July 24, 2028. The promissory note is secured by a
mortgage on our Scottsdale property. We do not use financial instruments for
trading purposes and we are not a party to any leverage derivatives. In the
event we experience substantial growth in the future, our business and results
of operations may be materially affected by changes in interest rates and
certain other credit risk associated with its operations.
Part II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As of the date hereof, there is no material litigation pending against us. From
time to time, we are a party to litigation and claims incidental to the ordinary
course of our business. While the results of litigation and claims cannot be
predicted with certainty, we believe that the final outcome of such matters will
not have a material adverse effect on our business, financial condition, results
of operations and cash flows.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On September 27, 2001, our offer to acquire iCollector was declared
unconditional in all respects. As a result, we were required to issue 4,150,000
shares of common stock and deferred consideration notes in the aggregate
principal amount of $3,000,000 and earn-out consideration notes in the aggregate
principal amount of $5,000,000. See "Other Events." The Offer was made pursuant
to an exemption from the U.S. tender offer rules provided by Rule 14d-1(c) under
the Exchange Act and pursuant to an exemption from the registration requirements
of the Securities Act of 1933, as amended, provided by Rule 802 thereunder.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the security holders during the quarter
ended September 30, 2001.
ITEM 5. OTHER INFORMATION
On August 13, 2001, Levy Gee, our financial advisor in the United Kingdom, made
a recommended offer on our behalf to acquire all of the issued and outstanding
ordinary shares of iCollector PLC (the "Offer") for 4,150,000 common shares of
Ableauctions, deferred consideration notes in the aggregate principal amount of
$3,000,000 ("Deferred Consideration Note"), and additional earn-out deferred
consideration notes in the aggregate principal amount of $5,000,000 ("Earn Out
Consideration Note"). Total consideration for all of the shares of iCollector
has been valued at $14,256,000.
Deferred Consideration Notes. We will issue Ableauctions Deferred Consideration
Notes to the shareholders of iCollector in the aggregate principal amount of
$3,000,000 payable, without interest, one year from the date the Offer becomes
unconditional in all respects. These Deferred Consideration Notes are
convertible into shares of common stock at our sole option at $1.43 per share,
subject to approval by our shareholders and the approval of a listing
application by AMEX related to such shares, if required.
Earn Out Consideration Notes. We will issue Earn Out Consideration Notes to the
shareholders of iCollector in the aggregate principal amount of $5,000,000,
payable, without interest, on September 30, 2002 only if iCollector satisfies
certain revenue and transaction milestones during the month of July 2002. The
Earn Out Consideration Notes are convertible into common stock at our sole
option at the fair market value of such shares (as determined by the five day
average closing price of the shares of common stock of Ableauctions as quoted on
the AMEX or such other primary exchange or public market for such shares),
subject to minimum of 2,000,000 shares and a maximum
9
of 3,500,000 shares in aggregate. We will obtain shareholder approval and
listing approval from AMEX prior to exercising our option to convert the
Ableauctions Earn Out Consideration Notes into Earn Out Consideration Shares, if
required.
The Offer was declared unconditional in all respects on September 27, 2001. On
October 1, 2001, we filed a report on Form 8-K in connection with this
transaction.
The business of iCollector is to provide an indexed catalogue of art, antiques
and collectibles for over 300 auction houses, dealers and galleries in the U.K.,
the United States and Europe and to facilitate transactions by broadcasting live
auctions over the Internet with the provision of interactive live bidding in
conjunction with eBay Live Auctions.
We expect to market and distribute our auction software to the various customers
of iCollector. We will not compete with eBay with iCollector's customers to
deploy and implement our live Internet broadcasting technology.
In connection with our negotiations related to the Offer, we entered into a
non-binding Heads of Terms with iCollector and Schroders Investment Management
Limited, which outlined the terms of the Offer. Under the terms of the Heads of
Terms, Schroders arranged for Northern Ireland Local Government Officers'
Superannuation Committee ("Northern Ireland") to provide bridge financing to
iCollector in the amount of $460,000. We guaranteed iCollector's obligation
under the bridge financing and agreed to issue up to 500,000 shares of our
common shares to Northern Ireland in the event iCollector defaulted on the
bridge loan. The bridge loan was converted into iCollector shares immediately
prior to the first closing and exchanged for Ableauctions.com, Inc. common
stock, Deferred Consideration Notes and Earn Out Consideration Note under the
terms of the Offer.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
2.1(1) Share Purchase Agreement dated July 9, 1999 among Dexton
Technologies Corporation, Able Auctions (1991) Ltd., and
Ableauctions.com, Inc., as amended by Addendum dated August 16,
1999.
2.4(1) Agreement and Plan of Reorganization dated February 1, 2000
among Falcon Trading, Inc., Ableauctions.com (Washington), Inc.,
and Ableauctions.com, Inc
2.5(3) Asset Purchase Agreement dated March 20, 2000 among Mesler's
Auction House of Scottsdale, LLC, Ableauctions.com (Washington),
Inc., and Ableauctions.com, Inc.
2.6(3) Purchase and Sale Agreement dated March 20, 2000 between C&C
Capital Investment, Inc. and Ableauctions.com (Washington), Inc.
3.1(1) Articles of Incorporation, as amended (incorporated by
reference to Exhibits 3.1, 3.2, 3.3, 3.4 and 3.5 of the
Registrant's Registration Statement on Form 10-SB).
3.2(2) Bylaws (Incorporated by reference to Exhibit 3.6 of the
Registrant's Registration Statement on Form 10-SB.
10.1(1) 1999 Stock Option Plan with Form of Option Agreement
(Incorporated by reference to Exhibit 4.2 of the Registrant's
Registration Statement on Form S-8.
10.2(1) Form of Stock Option Agreement
10.3(1) Share Purchase Agreement dated April 1, 1998 among Jeremy Dodd,
Dexton Technologies Corporation, and Able Auctions (1991) Ltd.
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10.4(1) Share Purchase Agreement dated July 9, 1999 among Dexton
Technologies Corporation, Able Auctions (1991) Ltd., and
Ableauctions.com, Inc., as amended by Addendum dated August 16,
1999
10.5(1) Contribution Agreement dated July 15, 1999 between Douglas
McLeod and Ableauctions.com, Inc. (then J.B. Financial Services,
Inc.) regarding Mr. McLeod's contribution of 8,000,000 shares of
common stock to the Company's treasury
10.6(1) Asset Purchase Agreement dated September 20, 1999 among Ross
Auctioneers & Appraisers Ltd., Able Auctions (1991) Ltd., and
Ableauctions.com, Inc.
10.7(1) Asset Purchase Agreement dated September 20, 1999 between John
Carrier dba LJM Computer Resources and Able Auctions (1991) Ltd.
regarding the web site located at www.bcbids.com.
10.8(1) Bill of Sale dated September 20, 1999 between Ronald H.
Smallwood and Able Auctions (1991) Ltd. regarding the domain name
"bcbids.com".
10.9(1) Employment Agreement dated September 20, 1999 between Able
Auctions (1991) Ltd. and Richie Smallwood.
10.10(1) Subscription Agreement dated July 20, 1999 between
Ableauctions.com, Inc. and Silicon Capital Corp.
10.11(1) Consulting Agreement dated August 24, 1999 between Able
Auctions (1991) Ltd. and Dexton Technologies Corporation
10.12(1) Investor Relations Agreement dated September 15, 1999 between
Ableauctions.com, Inc. and North Star Communications Inc.
10.13(1) Investor Relations Agreement dated October 1, 1999 between
Ableauctions.com, Inc. and European Investor Services Ltd.
10.14(1) Lease Agreement dated September 1, 1999 between Derango
Resources Inc. and Ableauctions.com, Inc.
10.15(1) Sublease dated August 22, 1999 between HGP Glass Industries
of Canada Inc. and Ableauctions.com, Inc.
10.16(2) Proposal by Compaq Computer and accepted by Dexton
Technologies Corporation dated September 1999, for installation
of Distributed Internet Server Array (DISA).
10.17(2) Internet Business Services Agreement by and between Telus
Advanced Communications and Dexton Technologies Corporation dated
September 14, 1999.
10.18(4) Investor Relations Agreement dated February 3, 2000 between
Ableauctions.com, Inc. and KCSA Public Relations Worldwide
10.19(3) Share Purchase Agreement dated May 16, 2000 among Randy Ehli,
Ehli's Commercial/Industrial Auctions, Inc., and
Ableauctions.com, Inc.
10.20(5) Share Purchase Agreement dated July 14, 2000 among Brett
Johnston and One Day Holdings Ltd., Johnston's Surplus Office
Systems Ltd., and Ableauctions.com, Inc.
10.21(6) Letter agreement dated July 31, 2000 between Murray Jarvis,
Michael Collins, and Ableauctions.com, Inc.
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10.22(7) Letter agreement dated July 31, 2000 between Murray Jarvis
and Ableauctions.com, Inc.
10.23(7) Lease Agreement dated November 1, 2000.
10.24(8) Guarantee by and between Ableauctions.com, Inc. and Northern
Ireland Local Government Officers' Superannuation dated June 21,
2001.
(1) Previously filed on November 13, 1999 on Form 10-SB.
(2) Previously filed on December 30, 1999 on Form 10-SB/A.
(3) Previously filed on April 4, 2000 on Form 8-K, as amended on June 9,
2000.
(4) Previously filed on April 13, 2000 on Form 10-KSB.
(5) Previously filed on August 14, 2000 on Form 8-K.
(6) Previously filed on October 19, 2000 on Form S-1.
(7) Previously filed on April 2, 2001 on Form 10-KSB.
(8) Previously filed on August 16, 2001 on Form 10-KSB.
b) Reports on Form 8-K
Form 8-K filed on August 17, 2001.
Form 8-K filed on October 1, 2001.
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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.
ABLEAUCTIONS.COM INC.
Date: November 19, 2001 By: /s/ Abdul Ladha
--------------------------------
Name: Abdul Ladha
Title: President & Chief Executive
Officer
(Principal Executive Officer)
Date: November 19, 2001 By: /s/ Ron Miller
---------------------------------
Name: Ron Miller
Title: Chief Financial Officer
(Principal Financial Officer)