UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002
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: 000-25129
MAREX, INC.
(Exact name of registrant as specified in its charter)
FLORIDA 65-0354269
------------------------------- ---------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2701 S. Bayshaore Drive, 5th Floor
Miami, Florida 33126
---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (305) 285-2003
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 shares outstanding of the registrant's Common Stock as of November
6, 2002 was 763,597.
MAREX, INC.
TABLE OF CONTENTS
Page
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PART I - Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of September 30, 2002
and December 31, 2001...................................................................... 2
Condensed Consolidated Statements of Operations for the three months
and nine months ended September 30, 2002 and 2001......................................... 3
Condensed Consolidated Statements of Cash Flows for the nine months
ended September 30, 2002 and 2001......................................................... 4
Notes to Condensed Consolidated Financial Statements...................................... 5
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations..................................................................... 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk................................ 22
PART II - Other Information
Item 1. Legal Proceedings......................................................................... 22
Item 2. Changes in Securities and Use of Proceeds................................................. 22
Item 3. Defaults Upon Senior Securities........................................................... 22
Item 4. Submission of Matters to a Vote of Security Holders....................................... 22
Item 5. Other Information......................................................................... 22
Item 6. Exhibits and Reports on Form 8-K.......................................................... 23
Signatures................................................................................ 24
MAREX, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, December 31,
2002 2001
------------ ------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 478,883 $ 4,479,095
Accounts receivable, net 47,981 275,680
Inventories -- 14,546
Prepaid expenses and other current assets 73,815 145,835
Loan to related party 449,746 425,649
------------ ------------
Total current assets 1,050,425 5,340,805
------------ ------------
Property and equipment, net 367,047 1,533,872
------------ ------------
Other assets:
Trademark, net -- --
Software development costs, net 458,789 2,311,551
Goodwill -- 304,086
Deposits and other assets 7,113 171,623
------------ ------------
Total other assets 465,902 2,787,260
------------ ------------
Total assets $ 1,883,374 $ 9,661,937
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of seller-financed note payable $ -- $ 684,718
Current portion of capital lease obligations 15,385 163,775
Accounts payable and accrued expenses 352,248 1,453,864
------------ ------------
Total current liabilities 367,633 2,302,357
------------ ------------
Long-term liabilities:
Seller-financed note payable, net of current portion -- 726,735
Capital lease obligations, net of current portion 10,598 90,725
------------ ------------
Total long-term liabilities 10,598 817,460
------------ ------------
Total liabilities 378,231 3,119,817
------------ ------------
Shareholders' equity:
Preferred Stock, par value $.01 per share, 1,000,000
shares authorized, 304,693 shares of Series A1
Convertible Preferred Stock outstanding as of
September 30, 2002 and December 31, 2001 26,675,000 30,175,000
Common Stock, par value $.01 per share,
25,000,000 shares authorized, 763,597 and
736,662 shares, post split, issued and outstanding
as of September 30, 2002 and December 31, 2001,
respectively 7,636 7,367
Additional paid-in capital 48,940,895 45,323,759
Accumulated deficit (74,118,388) (68,964,006)
------------ ------------
Total shareholders' equity 1,505,143 6,542,120
------------ ------------
Total liabilities and shareholders' equity $ 1,883,374 $ 9,661,937
============ ============
See Notes to Condensed Consolidated Financial Statements
2
MAREX, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------------- ---------------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
Revenues $ -- $ 92,921 $ 15,025 $ 245,576
------------ ------------ ------------ ------------
Operating expenses:
Product support and development 204,847 1,231,669 1,363,831 4,907,035
Selling and marketing 9,089 710,788 660,372 2,827,049
General and administrative 111,765 769,816 1,917,733 2,258,257
Impairment of software development costs -- 6,679,679 -- 6,679,679
Impairment of long-lived assets -- -- 468,546 --
Stock-based compensation -- 120,013 117,404 356,127
Fair value of warrants -- -- -- 1,764,402
------------ ------------ ------------ ------------
Total operating expenses 325,701 9,511,965 4,527,886 18,792,549
------------ ------------ ------------ ------------
Loss from operations (325,701) (9,419,044) (4,512,861) (18,546,973)
------------ ------------ ------------ ------------
Other income (expense):
Interest income 17,158 79,854 50,709 433,291
Interest expense -- (8,799) (43,142) (26,312)
Other 85,348 (374) 92,357 (6,547)
------------ ------------ ------------ ------------
Total other income 102,506 70,681 99,924 400,432
------------ ------------ ------------ ------------
Loss from continuing operations (223,195) (9,348,363) (4,412,937) (18,146,541)
------------ ------------ ------------ ------------
Discontinued operations:
Loss from operations of segment (138,165) -- (607,343) --
Loss on disposal (134,103) -- (134,103) --
------------ ------------ ------------ ------------
Total discontinued operations (272,268) -- (741,446) --
------------ ------------ ------------ ------------
Net loss $ (495,463) $ (9,348,363) $ (5,154,383) $(18,146,541)
============ ============ ============ ============
Net less per share, basic and diluted:
Continuing operations (0.29) (12.73) (5.80) (24.71)
Discontinued operations (0.36) -- (0.97) --
------------ ------------ ------------ ------------
Net loss $ (0.65) $ (12.73) $ (6.77) $ (24.71)
============ ============ ============ ============
Weighted average shares of Common Stock
outstanding, post split 763,585 734,398 760,824 734,321
============ ============ ============ ============
See Notes to Condensed Consolidated Financial Statements
3
MAREX, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months
Ended
September 30,
-----------------------------------
2002 2001
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (5,154,383) $(18,146,541)
Adjustments to reconcile net loss to
net cash used in operating activities
Provision for doubtful accounts 160,857 7,673
Depreciation 583,785 619,388
Amortization 780,109 1,721,272
Impairment of software development costs -- 6,679,679
Impairment of long-lived assets 468,546 --
Stock-based compensation 117,404 356,127
Fair value of warrants -- 1,764,402
Gain on disposal of property and equipment (8,441) --
Loss on disposal of segment 134,103 --
Decrease (increase) in accounts receivable 7,770 (78,065)
Increase in inventory (1,986) --
Decrease in prepaid expenses and other current assets 67,202 480,804
Decrease (increase) in deposits 150,164 (1,719)
Decrease in accounts payable and accrued expenses (828,830) (4,405,032)
------------ ------------
Net cash used in operating activities (3,523,700) (11,002,012)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (36,458) (294,205)
Proceeds from sale of fixed assets 22,974 --
Proceeds from sale of assets of segment 279,120 --
Software development costs (264,506) (747,358)
Increase in loan to related party (24,097) (400,000)
------------ ------------
Net cash used in investing activities (22,967) (1,441,563)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on capital lease obligations (116,278) (100,799)
Principal payments on note payable (337,267) --
Proceeds from exercise of stock options and warrants -- 1,400
------------ ------------
Net cash used in financing activities (453,545) (99,399)
------------ ------------
Net decrease in cash and cash equivalents (4,000,212) (12,542,974)
CASH AND CASH EQUIVALENTS, beginning of period 4,479,095 19,624,266
------------ ------------
CASH AND CASH EQUIVALENTS, end of period $ 478,883 $ 7,081,292
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during each period for interest $ 45,273 $ 26,312
============ ============
4
MAREX, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) BASIS OF FINANCIAL STATEMENT PRESENTATION
In management's opinion, the accompanying unaudited condensed consolidated
financial statements of Marex, Inc. and subsidiaries (the "Company") contain all
adjustments (consisting of only normal recurring adjustments) necessary to
present fairly the Company's financial position, results of operations and cash
flows for each period shown. The results of operations for the 2002 interim
periods presented are not necessarily indicative of the results to be expected
for any subsequent quarter or for the entire year ending December 31, 2002.
The accompanying unaudited interim condensed consolidated financial statements
have been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission for reporting on Form 10-Q. Certain information and footnote
disclosures normally included in the financial statements prepared in accordance
with accounting principles generally accepted in the United States have been
condensed or omitted. The condensed consolidated financial statements should be
read in conjunction with the consolidated financial statements and the notes to
consolidated financial statements included in the Company's Annual Report on
Form 10-K for the year ended December 31, 2001.
The accounting policies followed for interim financial reporting are the same as
those disclosed in the Notes to Consolidated Financial Statements included in
the Company's Annual Report on Form 10-K for the year ended December 31, 2001.
(2) GOING CONCERN CONSIDERATIONS
The accompanying unaudited condensed consolidated financial statements have been
prepared on a going concern basis, which contemplates the realization of assets
and the satisfaction of liabilities in the normal course of business. We have
sustained net operating losses, which include approximately $23.5 million of
non-cash charges related to fair value of warrants and approximately $1.4
million of non-cash charges related to stock-based compensation, and negative
cash flows from operations since inception and have an accumulated deficit of
$74,118,388. Such conditions, among others, give rise to substantial doubt about
our ability to continue as a going concern for a reasonable period of time. The
accompanying unaudited condensed consolidated financial statements do not
include any adjustments relating to the recoverability and classification of
recorded asset amounts or the amounts and classifications of liabilities that
might be necessary should we be unable to continue as a going concern.
We currently anticipate that our available funds will be sufficient to meet our
projected working capital and operating resource requirements into the first
quarter of 2003 since we significantly decreased our staff and, during April
2002, shifted our focus from our electronic commerce solutions to our telemetry
solution. However, any projections of future cash needs and cash flows are
subject to substantial uncertainty. If current cash and cash equivalents, and
cash that may be generated from operations are not sufficient to satisfy our
liquidity requirements, we will likely seek to sell additional equity or debt
securities. If we raise additional funds through the issuance of equity or
convertible securities, such securities may have rights, preferences or
privileges senior to those of the rights of our Common Stock. Furthermore, in
the event that we issue or sell Common Stock or securities convertible for
Common Stock, at a price per share less than the conversion price of the
outstanding Series A1 Preferred Stock, the holders of the Series A1 Preferred
Stock have the right to amend the conversion price of the price per share of the
issuance. As a result, our stockholders may experience significant additional
dilution. We cannot be certain that additional capital will be available to us
on acceptable terms or at all.
5
(3) RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations."
SFAS No. 141 addresses financial accounting and reporting for business
combinations and supercedes Accounting Principles Board ("APB") Opinion No. 16,
"Business Combinations" and SFAS No. 38, "Accounting for Preacquisition
Contingencies of Purchased Enterprises." All business combinations in the scope
of SFAS No. 141 are to be accounted for under the purchase method. SFAS No. 141
is effective for acquisitions initiated subsequent to June 30, 2001.
Accordingly, the Company's purchase of Software Support Team, Inc. ("Software
Support Team") on October 2, 2001 was accounted for under the provisions of SFAS
No. 141.
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets." SFAS No. 142 addresses financial accounting and reporting for
intangible assets acquired individually or with a group of other assets (but not
those acquired in a business combination) at acquisition. SFAS No. 142 also
addresses financial accounting and reporting for goodwill and other intangible
assets subsequent to their acquisition. With the adoption of SFAS No. 142,
goodwill is no longer subject to amortization. Rather, goodwill will be subject
to at least an annual assessment for impairment by applying a fair value-based
test. The impairment loss is the amount, if any, by which the implied fair value
of goodwill is less than the carrying or book value. SFAS No. 142 is effective
for fiscal years beginning after December 15, 2001. Impairment loss for goodwill
arising from the initial application of SFAS No. 142 is to be reported as
resulting from a change in accounting principle. As a result of the purchase of
Software Support Team in October 2001, the Company recognized goodwill in the
amount of $304,000. The Company adopted certain provisions of SFAS 141 and SFAS
142 effective July 1, 2001, as required for goodwill and intangible assets
acquired in purchase business combinations consummated after June 30, 2001. The
Company adopted the remaining provisions of SFAS 141 and SFAS 142 effective
January 1, 2002. There was not a cumulative transition adjustment upon adoption
as of July 1, 2001 or January 1, 2002. SFAS 141 and SFAS 142 required the
Company to perform the following as of January 1, 2002: (i) review goodwill and
intangible assets for possible reclasses; (ii) reassess the lives of intangible
assets; and (iii) perform a transitional goodwill impairment test. The Company
has reviewed the balances of goodwill and identifiable intangibles and
determined that the Company does not have any amounts that are required to be
reclassified from goodwill to identifiable intangibles, or vice versa. The
Company has also reviewed the useful lives of its identifiable intangible assets
and determined that the original estimated lives remain appropriate. The Company
has completed the transitional goodwill impairment test and has determined that
the Company did not have a transitional impairment of goodwill. The Company
completed the sale of Software Support Team during August 2002, which included
the disposal of goodwill.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations." SFAS No. 143 requires entities to record the fair value of a
liability for an asset retirement obligation in the period in which it is
incurred and a corresponding increase in the carrying amount of the related
long-lived asset. Subsequently, the asset retirement cost should be allocated to
expense using a systematic and rational method over its useful life. SFAS No.
143 is effective for fiscal years beginning after June 15, 2002. The Company
does not believe the adoption of SFAS No. 143 will have a material effect on the
Company's financial position, results of operations or cash flows.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." SFAS No. 144 addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. This statement
supersedes FASB Statement No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of," and the accounting and
reporting provisions of APB Opinion No. 30, "Reporting the Results of Operations
- Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and
6
Transactions," for the disposal of a segment of a business as previously defined
in that opinion. This statement also amends Accounting Research Bulletin No. 51,
"Consolidated Financial Statements," to eliminate the exception to consolidation
for a subsidiary for which control is likely temporary. For purposes of this
statement, impairment is the condition that exists when the carrying amount of a
long-lived asset exceeds its fair value. An impairment loss recognized for a
long-lived asset to be held and used shall be included in income from continuing
operations before income taxes in the income statement of a business enterprise.
A long-lived asset shall be tested for recoverability whenever events or changes
in circumstances indicate that its carrying amount may not be recoverable. SFAS
No. 144 is effective for fiscal years beginning after December 15, 2001, and
interim periods within those fiscal years, with early application encouraged.
The Company reviews long-lived assets for impairment in accordance with SFAS
144. For the nine months ended September 30, 2002, Marex recognized $469,000 of
impairment of long-lived assets related to assets that will no longer be
utilized or that were sold at below net book value due to decreases in human
resources and operations and is charged to expense in the accompanying unaudited
condensed consolidated statements of operations as "Impairment of long-lived
assets."
In April 2002, the FASB issued SFAS No. 145, "Recission of FASB Statements No.
4, 44 and 64, Amendment of FASB Statement No. 13 and Technical Corrections."
This statement, among other things, eliminates an inconsistency between required
accounting for certain sale-leaseback transactions and provides for other
technical corrections. Management believes the adoption of this statement will
not have a material effect on its financial position, results of operations or
cash flows.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." This statement addresses accounting and
reporting for costs associated with exit or disposal activities and nullifies
Emerging Issues Task Force Issue No. 94-3. The statement is effective for exit
or disposal costs initiated after December 31, 2002, with early application
encouraged. This statement has not yet been adopted by the Company and
management has not determined the impact of this statement on the financial
position, results of operations or cash flows.
(4) NET LOSS PER SHARE
The Company is required to present basic and diluted earnings per share
information. Basic earnings per share is computed by dividing income available
to common stockholders (the numerator) by the weighted average number of common
shares (the denominator) for the period. The computation of diluted earnings
per share is similar to basic earnings per share, except that the denominator
is increased to include the number of additional common shares that would have
been outstanding if the potentially dilutive common shares had been issued.
During August 2002, the Company, pursuant to the approval of the Company's
shareholders, effectuated a one-for-ten reverse stock split. The common stock
and net loss per share information has been retroactively adjusted in all
periods presented to reflect the one-for-ten reverse stock split. Diluted
earnings per share was the same as basic earnings per share for all periods
presented because the Company reported a net loss for all periods presented
and, therefore, the effects of potential shares would be anti-dilutive. The
total number of potential shares outstanding, post split, at September 30, 2002
and 2001 that were excluded from the diluted earnings per share calculation was
approximately 558,000 and 600,000, respectively.
(5) SOFTWARE DEVELOPMENT COSTS
The Company follows SFAS No. 86, "Accounting for the Costs of Computer Software
to be Sold, Leased, or Otherwise Marketed," Statement of Position 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use," and Emerging Issues Task Force ("EITF") Issue No. 00-02,
"Accounting for Web Site Development Costs," for the accounting of development
costs. During the nine
7
months ended September 30, 2002 and 2001, the Company capitalized approximately
$265,000 and $747,000, respectively, of development costs associated with
development of its software products.
(6) ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company accounts for stock-based compensation using the intrinsic value
method prescribed in APB No. 25, "Accounting for Stock Issued to Employees," and
related Interpretations. Under APB No. 25, compensation cost is measured as the
excess, if any, of the quoted market price of the Company's Common Stock at the
date of grant over the exercise price of the option granted. Compensation cost
for stock options, if any, is recognized ratably over the vesting period. In
March 2000, the Company granted options to a director at an exercise price below
the quoted market price, which resulted in total non-cash compensation of $2.4
million. Compensation expense related to the vested portion of stock options
granted to the director totaled $117,000 for the nine months ended September 30,
2002, and $120,000 and $356,000, respectively, for the three months and nine
months ended September 30, 2001. For the three months ended September 30, 2002,
no compensation expense was recognized as the director resigned. The
compensation expense is included in the unaudited condensed consolidated
statements of operations as "Stock-based compensation."
For the nine months ended September 30, 2002, the Company issued to various
employees and directors options to acquire 250,000 shares, post split, of Common
Stock at an exercise price of $3.30 per share, post split. The options vest
through June 2006 and expire through June 2007. During the same period, 172,000
options, post split, were cancelled and 93,000 options, post split, expired.
(7) INCOME TAXES
The Company did not record a benefit for income taxes due to the full valuation
allowance that has been recorded given the uncertainty of the realization of its
deferred income tax assets.
(8) PREFERRED STOCK
The Company has authorized 1,000,000 shares of Preferred Stock of $.01 par value
with preferences to be determined by the Board of Directors. On March 2, 2000,
the Board of Directors designated 430,000 shares as Series A1 Convertible
Preferred Stock ("Series A1 Preferred Stock").
In March 2000, the Company received net proceeds of $20.4 million in connection
with the sale of 210,000 shares of Series A1 Preferred Stock at $100 per share.
In May 2000, the Company completed the private placement through the sale of an
additional 210,000 shares of Series A1 Preferred Stock at $100 per share. Total
net proceeds from the private placement were $40.9 million. During the nine
months ended September 30, 2002, 35,000 shares of Series A1 Preferred Stock were
converted into 26,923 shares, post split, of Common Stock.
Each share of the Series A1 Preferred Stock is convertible into 0.769 shares,
post split, of Common Stock at the option of the holder at any time. In the
event that the Company issues or sells Common Stock or securities convertible or
exchangeable for Common Stock, subject to certain exclusions, at a price per
share less than the conversion price of the outstanding Series A1 Preferred
Stock, the holders of the Series A1 Preferred Stock shall have the right to
amend the conversion price of the Series A1 Preferred Stock outstanding to the
price per share of the issuance. Automatic conversion occurs upon either of the
following: completion by the Company of a public offering which raises gross
proceeds of at least $50 million, at an effective price per share to the public
of at least $26.00 as adjusted for stock splits, stock dividends or other
similar transactions; or, upon the event that the market price per share of the
Company's Common Stock exceeds $26.00, subject to adjustments for stock splits,
stock dividends, or other similar transactions, for a consecutive twenty-day
period following the one-year anniversary of the
8
effective date of a registration statement covering the Common Stock underlying
the Series A1 Preferred Stock.
The holders of the Series A1 Preferred Stock are entitled to the number of votes
equal to the number of shares of Common Stock into which such Preferred Stock is
convertible.
Upon declaration by the Board of Directors, holders of Series A1 Preferred Stock
shall be entitled to receive dividends ratably in an amount per share equal to
that which the holders would have been entitled had they converted their Series
A1 Preferred Stock into shares of Common Stock.
Upon any liquidation of the Company, holders of record of the Series A1
Preferred Stock shall be entitled to receive, out of the assets of the Company
and before any distribution or payment is made upon any class of security of
lesser rank, an amount per share equal to the lesser of $100 per share or the
assets of the Company available for distribution to its shareholders,
distributed ratably among holders of the outstanding Series A1 Preferred Stock.
After the distribution to the holders of Series A1 Preferred Stock has been
made, the remaining assets of the Company available for distribution to
shareholders shall be distributed pro rata solely among the holders of Common
Stock.
Holders may redeem shares of Series A1 Preferred Stock in the event that the
Company does not honor a conversion. In such a case, the redemption amount is
equal to, at the option of the holder, the market value of the Common Stock that
the shares of Series A1 Preferred Stock would otherwise have been convertible
into or $100 per share.
(9) WARRANTS
During the fourth quarter of 2001, the Company terminated the Strategic
Relationship Agreement (the "Strategic Relationship Agreement") and the Warrant
Agreement (the "Warrant Agreement") it had entered into with Genmar Holdings,
Inc. ("Genmar"). The Strategic Relationship Agreement provided that Genmar would
utilize the Company as its exclusive provider of an online procurement system.
Pursuant to the Warrant Agreement, the Company issued to Genmar, on April 26,
2000 and April 26, 2001, warrants to purchase 1,442,081 and 1,495,256 shares,
respectively, of Common Stock. All such warrants were exercisable immediately,
subject to certain restrictions, and had an exercise price of $1.83.
The Company accounted for the warrants issued to Genmar by amortizing the
Black-Scholes value of such warrants over the vesting period. In 2001, the
Black-Scholes value of the warrants issued was calculated using the following
assumptions: Volatility, 100%; Risk-free Interest Rate, 4.19%; Expected
Dividends, $0; and Expected Term, 2 years. Based on these assumptions, the
computed fair value of the warrants issued on April 26, 2001 was $1.8 million.
No warrants were issued or vested during 2002. The computed fair values of the
warrants issued are charged to expense in the accompanying unaudited condensed
consolidated statements of operations as "Fair value of warrants."
(10) SEGMENT INFORMATION
Through August 31, 2002, the Company operated two primary business segments for
internal management reporting purposes: electronic commerce products and
management information solutions software products. The Company sold its assets
related to its management information solutions software products segment on
August 31, 2002. The sale price was approximately $1.7 million, consisting of
$279,000 in net cash received, $1.1 million in the assumption of the seller
financed note payable and $325,000 in the assumption of operating
liabilities. The related loss from operations and loss on disposal are
reflected in the Discontinued Operations section of the Condensed Consolidated
Statements of Operations. The assets sold and liabilities assumed were removed
from the Condensed Consolidated Balance Sheet as of August 31, 2002. Electronic
commerce products consist of our internally developed procurement and telemetry
solutions. Management information solution software products consisted of
9
those products obtained through the acquisition of Software Support Team on
October 2, 2001. These operating segments generally follow the management
organizational structure of the Company. Sales are made only to external
customers in the United States of America. Information on operating segments for
the nine months ended September 30, 2002 is as follows:
Management
Information
Solutions Electronic Commerce* Total
------------------ -------------------- -----------
Net sales $ 1,255,185 $ 15,025 $ 1,270,210
================== =========== ===========
Costs and expenses $ 1,864,099 $ 4,527,886 $ 6,391,985
================== =========== ===========
Interest income $ 4,005 $ 50,709 $ 54,714
================== =========== ===========
Interest expense $ 2,131 $ 43,142 $ 45,273
================== =========== ===========
Net loss $ (741,446) $(4,412,937) $(5,154,383)
================== =========== ===========
Total assets at quarter end $ -- $ 1,883,374 $ 1,883,374
================== =========== ===========
Long-lived assets at quarter end $ -- $ 825,836 $ 825,836
================== =========== ===========
*Certain corporate overhead and assets are included within the electronic
commerce segment for reporting purposes.
For the nine months ended September 30, 2001, the Company operated solely in the
electronic commerce operating segment and one customer accounted for
approximately 54% of total revenues of this segment. During the fourth quarter
of 2001, the agreement with this customer was terminated. For the nine months
ended September 30, 2002, the Company did not have a major customer.
(11) RELATED PARTY TRANSACTIONS
During 2001, the Company loaned its Chief Executive Officer, who is also a
Director and shareholder, $400,000. The loan accrues interest at an annual rate
of 8.0% and matures on December 31, 2002. The loan is included in the unaudited
condensed consolidated balance sheets as "Loan to related party."
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS AND THE NOTES TO THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS, WHICH ARE INCLUDED ELSEWHERE IN THIS FORM 10-Q. IT
CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 21E OF THE
SECURITIES EXCHANGE ACT OF 1934, AS AMENDED, WHICH RELATE TO SUCH MATTERS AS
ANTICIPATED FINANCIAL PERFORMANCE, BUSINESS PROSPECTS, TECHNOLOGICAL
DEVELOPMENTS, AND SIMILAR MATTERS. SUCH FORWARD-LOOKING STATEMENTS INVOLVE KNOWN
AND UNKNOWN RISKS, UNCERTAINTIES, AND OTHER FACTORS WHICH MAY CAUSE OUR ACTUAL
RESULTS, PERFORMANCE, OR ACHIEVEMENTS TO BE MATERIALLY DIFFERENT FROM THOSE
EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS. FACTORS INCLUDE, BUT
ARE NOT LIMITED TO, THOSE DISCUSSED ELSEWHERE IN THIS REPORT IN THE SECTION
ENTITLED "RISK FACTORS" AND THE RISKS DISCUSSED IN OUR OTHER SECURITIES AND
EXCHANGE COMMISSION FILINGS.
OVERVIEW
Marex, Inc. (the "Company" or "Marex") is a software products and technology
services company offering high end technology solutions to businesses. Our
mission is to improve the efficiency of our customers' technology initiatives.
We have available for the markets we serve two products which include: an
e-commerce solution which enables the electronic exchange of business documents
and product information and a telemetry product which is capable of tracking
assets from a remote location.
We have developed a line of client server applications under the name of
MarConnect Enterprise, Standard and Advisor ("MarConnect Suite"), which enable
the electronic exchange of business documents including the promotion of new
product information and advisories. The MarConnect offerings include support for
EDI, XML and flat file formats and do not require additional hardware, staff or
specialized training.
The MarConnect Suite replaced MarExpress! and MarexPO!. MarExpress! and MarexPO!
provided marine industry buyers and suppliers with an e-procurement solution for
the purchase and sale of new parts, supplies, components and equipment through a
web-based transaction system. Prior to the launch of MarExpress! and MarexPO!,
our Internet based trading exchange, the Exchange, and its successor, Classified
and Auctions, were the only products offered to the marine industry. We
suspended the Classifieds and Auctions product in the first quarter of 2001.
We have developed a telemetry solution ("Telemetry") for the marine and
transportation industries. Telemetry is designed to enable the remote tracking
of assets from virtually any location in the world by using our MarConnect
Suite.
DISCONTINUED OPERATIONS
On August 31, 2002, our Board of Directors approved an Asset Purchase Agreement
for the sale of the assets of Software Support Team, Inc. ("Software Support
Team"). Software Support Team engaged in the business of developing management
information solution software for retailers, distributors and dealers. The
estimated loss on the disposal of the assets of Software Support Team was
$134,000 and the loss from discontinued operations for the nine months ended
September 30, 2002 was $607,000.
The financial information in "Management's Discussion and Analysis of Financial
Condition and Results of Operations" refers to our continuing operations and
excludes the operations of Software Support Team.
11
CRITICAL ACCOUNTING POLICIES
Our discussion and analysis of our financial condition and results of operations
are based upon our unaudited condensed consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States. The preparation of these financial statements requires us
to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities. We base our estimates on historical experience and on various
other assumptions that are believed to be reasonable under the circumstances,
the results of which form the basis for making judgments about the carrying
values of assets and liabilities that are not readily apparent from other
sources. Actual results may differ from these estimates under different
assumptions or conditions.
Our significant accounting policies are described in Note 2 to the consolidated
financial statements included in Item 8 of our Form 10-K for the year ended
December 31, 2001. We believe our most critical accounting policies include
software and website development costs and revenue recognition.
We follow Statement of Financial Accounting Standards ("SFAS") No. 86,
"Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise
Marketed," Statement of Position ("SOP") 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use," and Emerging Issues
Task Force Issue No. 00-02, "Accounting for Web Site Development Costs," for the
accounting of development costs. We evaluate software and website development
costs for impairment whenever events or changes in circumstances indicate that
the carrying amount of such assets may not be recoverable. Recoverability of
assets to be held and used is measured by a comparison of the carrying amount of
any asset to future net cash flows expected to be generated by the asset. If
such assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceeds the
fair value of the assets.
We follow SOP 97-2, "Software Revenue Recognition," which requires companies to
defer revenue and profit recognition if certain required criteria of a sale are
not met. In addition, SOP 97-2 requires that revenue recognized from software
arrangements is to be allocated to each element of the arrangement based on the
relative fair values of the elements, such as software products, upgrades,
enhancements, post contract customer support, installation, or training. We
licensed software under noncancellable license agreements.
DockMaster, Software Support Team's core management information solutions
product acquired during 2001, generated revenues from the licensing of software
modules, customer support contracts, training, custom programming, and hardware
sales. Licensing and related hardware and service revenues were recognized on a
subscription basis over the term of the related customer support contract, which
is typically one year. Customer support contracts were billed on a monthly or
quarterly basis and revenue was recognized during the month of support.
The MarConnect Suite generates revenues by charging a monthly subscription fee.
MarExpress! and MarexPO!, Marex's former core products, generated revenues by
charging a transaction fee which was based on the gross transaction price of
items purchased and sold through the system. The fee was recognized as revenue
when the customers' right to receive a refund for the transaction fee expired.
Classifieds and Auctions, which supplemented MarExpress! and MarexPO!, generated
revenues by charging listing and transaction fees.
12
RESULTS OF OPERATIONS
COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
REVENUES
For the three months ended September 30, 2002, we did not record revenues
compared to $93,000 during the same period in 2001. The decrease was related to
the Company's current strategy being focused on the marketing of Telemetry.
The MarConnect Suite generates revenues by charging a monthly subscription fee.
For the three months ended September 30, 2002, we did not record any revenues
from the MarConnect Suite as our sales focus concentrated on Telemetry. For the
three months ended September 30, 2001, we did not record revenues related to the
MarConnect Suite as it was completed in the first quarter of 2002. MarExpress!
and MarexPO! generated revenues by charging a transaction fee based on the gross
transaction price of items purchased and sold through the system. The fees were
recognized as revenue when customers' right to receive a refund expired. For the
three months ended September 30, 2001, we recorded revenues of $93,000 generated
from $7.9 million of transactions. MarExpress! and MarexPO! did not generate
revenues during the three months ended September 30, 2002 as they were
discontinued during the fourth quarter of 2001.
PRODUCT SUPPORT AND DEVELOPMENT
Product support and development expenses consist primarily of compensation for
product support and development personnel, cost of outside contractors,
amortization of software development costs, and other costs associated with the
operations and enhancements of our products. Product support and development
expenses decreased to $205,000 for the three months ended September 30, 2002,
compared to $1.2 million for the same period in 2001. The change related
primarily to decreases of $350,000 in personnel and personnel related costs,
$438,000 in depreciation expense, and $86,000 in outside contractor costs. The
balance was comprised of decreases in overhead and operating costs directly
associated with the development and maintenance of our products.
SELLING AND MARKETING
Selling and marketing expenses consist primarily of compensation for sales and
marketing personnel, cost of outside contractors and marketing costs. Selling
and marketing expenses decreased to $9,000 for the three months ended September
30, 2002, compared to $711,000 for the same period in 2001. The change is
primarily due to decreases of $439,000 in personnel and personnel related costs
and $22,000 in outside contractor costs. The balance was comprised of decreases
in overhead and operating costs directly associated with selling and marketing
activities.
GENERAL AND ADMINISTRATIVE
General and administrative expenses consist primarily of compensation for
administrative personnel, facilities expenses, professional fees, and general
corporate expenses. General and administrative expenses decreased to $112,000
for the three months ended September 30, 2002, compared to $770,000 for the same
period in 2001. The change related primarily to decreases of $248,000 in
personnel and personnel related costs and $252,000 in professional fees. The
balance was comprised of corporate charges directly associated with our
administrative functions.
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IMPAIRMENT OF SOFTWARE DEVELOPMENT COSTS
For the three months ended September 30, 2001, we recorded an impairment of
software development costs of $6.7 million related to the development of
MarConnect, which replaced MarExpress! and MarexPO!.
STOCK-BASED COMPENSATION
For the three months ended September 30, 2001, we recorded a non-cash
compensation expense of $120,000 relating to the vested portion of stock options
granted to a director. We did not record non-cash compensation expense for the
three months ended September 30, 2002 as the director resigned.
OTHER INCOME AND EXPENSE
We recorded $17,000 of interest income for the three months ended September 30,
2002, compared to $80,000 for the three months ended September 30, 2001. The
decrease was a result of lower balances of marketable securities. We did not
have interest expense for the three months ended September 30, 2002 compared to
$9,000 for the three months ended September 30, 2001. The decrease was primarily
due to the return of assets under capital lease obligations.
LOSS FROM CONTINUING OPERATIONS
Our loss from continuing operations decreased to $223,000 for the three months
ended September 30, 2002, compared to $9.3 million for the three months ended
September 30, 2001. The change resulted from decreases in the impairment of
software development costs and decreases in other costs, as described above.
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
REVENUES
For the nine months ended September 30, 2002, we recorded revenues of $15,000
compared to $246,000 during the same period in 2001. The decrease was related to
the Company's current strategy being focused on the marketing of Telemetry.
The MarConnect Suite generates revenues by charging a monthly subscription fee.
For the nine months ended September 30, 2002, we recorded revenues of $15,000
related to the MarConnect Suite. For the nine months ended September 30, 2001,
we did not record revenues related to the MarConnect Suite as it was completed
in the first quarter of 2002. MarExpress! and MarexPO! generated revenues by
charging a transaction fee based on the gross transaction price of items
purchased and sold through the system. The fees were recognized as revenue when
customers' right to receive a refund expired. For the nine months ended
September 30, 2001, we recorded revenues of $246,000 generated from $16.7
million of transactions. MarExpress! and MarexPO! did not generate revenues
during the nine months ended September 30, 2002 as they were discontinued during
the fourth quarter of 2001.
PRODUCT SUPPORT AND DEVELOPMENT
Product support and development expenses consist primarily of compensation for
product support and development personnel, cost of outside contractors,
amortization of software development costs, and other costs associated with the
operations and enhancements of our products. Product support and development
expenses decreased to $1.4 million for the nine months ended September 30, 2002,
compared to $4.9 million for the same period in 2001. The change related
primarily to decreases of $577,000 in depreciation expense, $901,000 in
amortization expense, $1.1 million in personnel and
14
personnel related costs, $408,000 in software support, and $399,000 in outside
contractor costs. The balance was comprised of decreases in overhead and
operating costs directly associated with the development and maintenance of our
products.
SELLING AND MARKETING
Selling and marketing expenses consist primarily of compensation for sales and
marketing personnel, cost of outside contractors and marketing costs. Selling
and marketing expenses decreased to $660,000 for the nine months ended September
30, 2002, compared to $2.8 million for the same period in 2001. The change is
primarily due to decreases of $1.2 million in personnel and personnel related
costs, $234,000 in outside contractor costs, and $313,000 in marketing costs.
The balance was comprised of decreases in overhead and operating costs directly
associated with selling and marketing activities.
GENERAL AND ADMINISTRATIVE
General and administrative expenses consist primarily of compensation for
administrative personnel, facilities expenses, professional fees, and general
corporate expenses. General and administrative expenses decreased to $1.9
million for the nine months ended September 30, 2002, compared to $2.3 million
for the same period in 2001. The change related primarily to a decrease of
$265,000 in personnel and personnel related costs. The balance was comprised of
corporate charges directly associated with our administrative functions.
IMPAIRMENT OF SOFTWARE DEVELOPMENT COSTS
For the nine months ended September 30, 2001, we recorded an impairment of
software development costs of $6.7 million related to the development of
MarConnect, which replaced MarExpress! and MarexPO!.
IMPAIRMENT OF LONG-LIVED ASSETS
Impairment of long-lived assets of $469,000 was recognized for the nine months
ended September 30, 2002. The impairment was related to assets that will no
longer be utilized or that were sold at below net book value due to decreases in
human resources and operations.
STOCK-BASED COMPENSATION
Stock-based compensation resulting from stock options granted to a director
decreased to $117,000 for the nine months ended September 30, 2002, compared to
$356,000 for the same period in 2001. The decrease resulted from the resignation
of the director.
FAIR VALUE OF WARRANTS
For the nine months ended September 30, 2001, we recorded an expense of $1.8
million relating to the fair value of warrants issued in connection with a
strategic relationship agreement. The warrants became fully vested during the
second quarter of 2001.
OTHER INCOME AND EXPENSE
We recorded $51,000 of interest income for the nine months ended September 30,
2002, compared to $433,000 for the nine months ended September 30, 2001. The
decrease was a result of lower balances of marketable securities. Interest
expense for the nine months ended September 30, 2002 was $43,000, compared to
$26,000 for the nine months ended September 30, 2001. The increase was primarily
due to the seller-financed note payable related to the acquisition of Software
Support Team, which was partially
15
offset by the decrease related to the return of assets under capital lease
obligations.
LOSS FROM CONTINUING OPERATIONS
Our loss from continuing operations decreased to $4.4 million for the nine
months ended September 30, 2002, from $18.1 million for the nine months ended
September 30, 2001. The change resulted from decreases in the fair value of
warrants issued, decreases in the impairment of software development costs and
decreases in other costs, as described above.
LIQUIDITY AND CAPITAL RESOURCES
We have financed our operations primarily through the private sales of Common
Stock and Preferred Stock.
Net cash used in operating activities was $3.5 million for the nine months ended
September 30, 2002, primarily as a result of a net loss of $5.2 million and a
decrease of $829,000 in accounts payable and accrued expenses. The net loss and
decrease in accounts payable and accrued expenses were partially offset by
amortization expense of $780,000, depreciation expense of $584,000, impairment
of long-lived assets of $469,000, provision for doubtful accounts of $161,000,
loss on disposal of subsidiary assets of $134,000, decrease in deposits of
$150,000 and a non-cash charge of $117,000 for stock-based compensation.
Net cash used in investing activities was $23,000 for the nine months ended
September 30, 2002, primarily due to $265,000 of software development costs
related to the development of our solutions and $36,000 of purchases of property
and equipment. The software development costs and purchases of property and
equipment were partially offset by proceeds of $279,000 from the sale of the
assets of Software Support Team.
Net cash used in financing activities was $454,000 for the nine months ended
September 30, 2002, primarily due to $337,000 of principal payments on the
seller-financed note payable and $116,000 of principal payments related to
capital lease obligations.
At September 30, 2002, cash and cash equivalents totaled $479,000, while our
working capital was $683,000. In comparison, as of December 31, 2001, cash and
cash equivalents totaled $4.5 million, while our working capital was $3.0
million. To date, our primary uses of cash have been in operating activities to
fund the development and promotion of our products.
We currently anticipate that our available funds will be sufficient to meet our
projected working capital and operating resource requirements into the first
quarter of 2003 since we significantly decreased our staff and shifted our focus
to Telemetry. However, any projections of future cash needs and cash flows are
subject to substantial uncertainty. If current cash and cash equivalents, and
cash that may be generated from operations are not sufficient to satisfy our
liquidity requirements, we will likely seek to sell additional equity or debt
securities. If we raise additional funds through the issuance of equity or
convertible securities, such securities may have rights, preferences or
privileges senior to those of the rights of our Common Stock. Furthermore, in
the event that we issue or sell Common Stock or securities convertible for
Common Stock, at a price per share less than the conversion price of the
outstanding Series A1 Preferred Stock, the holders of the Series A1 Preferred
Stock have the right to amend the conversion price to the price per share of the
issuance. As a result, our stockholders may experience significant additional
dilution. We cannot be certain that additional capital will be available to us
on acceptable terms or at all.
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RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations."
SFAS No. 141 addresses financial accounting and reporting for business
combinations and supercedes Accounting Principles Board ("APB") Opinion No. 16,
"Business Combinations" and SFAS No. 38, "Accounting for Preacquisition
Contingencies of Purchased Enterprises." All business combinations in the scope
of SFAS No. 141 are to be accounted for under the purchase method. SFAS No. 141
is effective for acquisitions initiated subsequent to June 30, 2001.
Accordingly, the Company's purchase of Software Support Team, Inc. ("Software
Support Team") on October 2, 2001 was accounted for under the provisions of SFAS
No. 141.
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets." SFAS No. 142 addresses financial accounting and reporting for
intangible assets acquired individually or with a group of other assets (but not
those acquired in a business combination) at acquisition. SFAS No. 142 also
addresses financial accounting and reporting for goodwill and other intangible
assets subsequent to their acquisition. With the adoption of SFAS No. 142,
goodwill is no longer subject to amortization. Rather, goodwill will be subject
to at least an annual assessment for impairment by applying a fair value-based
test. The impairment loss is the amount, if any, by which the implied fair value
of goodwill is less than the carrying or book value. SFAS No. 142 is effective
for fiscal years beginning after December 15, 2001. Impairment loss for goodwill
arising from the initial application of SFAS No. 142 is to be reported as
resulting from a change in accounting principle. As a result of the purchase of
Software Support Team, we recognized goodwill in the amount of $304,000. We
adopted certain provisions of SFAS 141 and SFAS 142 effective July 1, 2001, as
required for goodwill and intangible assets acquired in purchase business
combinations consummated after June 30, 2001. We adopted the remaining
provisions of SFAS 141 and SFAS 142 effective January 1, 2002. There was not a
cumulative transition adjustment upon adoption as of July 1, 2001 or January 1,
2002. SFAS 141 and SFAS 142 required us to perform the following as of January
1, 2002: (i) review goodwill and intangible assets for possible reclasses; (ii)
reassess the lives of intangible assets; and (iii) perform a transitional
goodwill impairment test. We have reviewed the balances of goodwill and
identifiable intangibles and determined that we do not have any amounts that are
required to be reclassified from goodwill to identifiable intangibles, or vice
versa. We have also reviewed the useful lives of our identifiable intangible
assets and determined that the original estimated lives remain appropriate. We
have completed the transitional goodwill impairment test and have determined
that we did not have a transitional impairment of goodwill. The Company
completed the sale of Software Support Team during August 2002. Therefore, no
goodwill is recognized at September 30, 2002.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations." SFAS No. 143 requires entities to record the fair value of a
liability for an asset retirement obligation in the period in which it is
incurred and a corresponding increase in the carrying amount of the related
long-lived asset. Subsequently, the asset retirement cost should be allocated to
expense using a systematic and rational method over its useful life. SFAS No.
143 is effective for fiscal years beginning after June 15, 2002. We do not
believe the adoption of SFAS No. 143 will have a material effect on our
financial position, results of operations or cash flows.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." SFAS No. 144 addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. This statement
supersedes FASB Statement No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of," and the accounting and
reporting provisions of APB Opinion No. 30, "Reporting the Results of Operations
- Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions," for
the disposal of a segment of a business as previously defined in that opinion.
This statement also amends Accounting Research Bulletin No. 51, "Consolidated
Financial Statements," to eliminate the exception to consolidation for a
subsidiary for which control is likely temporary. For purposes of this
statement, impairment is the condition that exists when the carrying amount of a
long-
17
lived asset exceeds its fair value. An impairment loss recognized for a
long-lived asset to be held and used shall be included in income from
continuing operations before income taxes in the income statement of a business
enterprise. A long-lived asset shall be tested for recoverability whenever
events or changes in circumstances indicate that its carrying amount may not be
recoverable. SFAS No. 144 is effective for fiscal years beginning after
December 15, 2001, and interim periods within those fiscal years, with early
application encouraged. We review long-lived assets for impairment in
accordance with SFAS 144. For the nine months ended September 30, 2002,
we recognized $469,000 of impairment of long-lived assets related to assets
that will no longer be utilized or that were sold at below net book value due
to decreases in human resources and operations and is charged to expense in the
accompanying unaudited condensed consolidated statements of operations as
"Impairment of long-lived assets."
In April 2002, the FASB issued SFAS No. 145, "Recission of FASB Statements No.
4, 44 and 64, Amendment of FASB Statement No. 13 and Technical Corrections."
This statement, among other things, eliminates an inconsistency between required
accounting for certain sale-leaseback transactions and provides for other
technical corrections. Management believes the adoption of this statement will
not have a material effect on its financial position, results of operations or
cash flows.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." This statement addresses accounting and
reporting for costs associated with exit or disposal activities and nullifies
Emerging Issues Task Force Issue No. 94-3. The statement is effective for exit
or disposal costs initiated after December 31, 2002, with early application
encouraged. We have not yet adopted this statement and management has not
determined the impact of this statement on the financial position, results of
operations or cash flows.
RISK FACTORS
The following risk factors, together with all information in this Form 10-Q,
should be carefully considered in evaluating Marex and its business. Due to the
significant impact that the risk factors set forth below may have on our
business, results of operations and financial condition, actual results could
differ materially from those expressed or implied by any forward-looking
statement.
WE HAVE A LIMITED OPERATING HISTORY
We were founded in 1992 but did not launch our main products until June 2000,
which were replaced by new products launched in 2001 and will be replaced by
products launched in 2002. Thus, we have a limited operating history on which to
base an evaluation of our software business and prospects. Our prospects must be
considered in light of the risks, uncertainties, expenses and difficulties
frequently encountered by companies in their early stages of development,
particularly companies in new and rapidly evolving markets such as software
development. There can be no assurance that we will be able to address these
risks.
WE HAVE A HISTORY OF NET LOSSES
We have incurred net losses in each period since our inception. We have incurred
losses of $19.6 million, $43.4 million and $3.7 million for the years ended
December 31, 2001, 2000 and 1999, respectively, and $5.2 million for the nine
months ended September 30, 2002. We expect to incur substantial operating losses
and have continued negative cash flows from operations for the foreseeable
future. Moreover, we expect to incur significant sales and marketing, product
support and development, and general and administrative expenses. In addition,
we have no material revenues to date. If our revenue does not increase
substantially or if our expenses are more than we expect, we may not become
profitable.
18
IF WE FAIL TO ACHIEVE MARKET ACCEPTANCE, OUR BUSINESS WOULD BE ADVERSELY
AFFECTED
We are currently marketing orders for Telemetry. Accordingly, our core solution
has a limited market history. If Telemetry does not achieve market acceptance,
our business will be adversely affected.
WE FACE INTENSE COMPETITION
We perceive competition to be pervasive and we expect it to increase in the
future. We may face competition from other companies with telemetry or
management information offerings as well as traditional suppliers and
distributors in industries we serve and companies that have or may develop their
own online solutions. In addition, providers of online marketplaces and online
auction services that currently focus on other industries may expand their
services to include products from industries that we currently target. Our
competitors and potential competitors may develop superior solutions that
achieve greater market acceptance than our solutions. In addition, substantially
all of our prospective customers have established long-standing relationships
with some competitors and potential competitors. We cannot be certain that we
can compete successfully.
OUR SOLUTIONS AND SERVICES ARE NEW AND FACE RAPID TECHNOLOGICAL CHANGES
The markets for our solutions are characterized by rapid technological advances,
evolving standards in the software markets, changes in customer requirements and
frequent new product and service introductions and enhancements. As a result, we
believe that our future success depends upon our ability to enhance our current
solutions. If we do not adequately respond to the need to enhance our solutions
or services, then our business will be negatively affected.
WE WILL NEED TO MANAGE OUR EXPANDING BUSINESS
Our growth has placed, and is expected to continue to place, a significant
demand on our sales, marketing, managerial, operational, information technology
and other resources. If we cannot manage our growth effectively, our business
will be adversely affected. Our current information systems, procedures and
controls may not support expanded operations and may hinder our ability to take
advantage of the markets for telemetry and management information solutions to
the industries we serve.
WE DEPEND ON A MAJOR CUSTOMER
We had an agreement with one of the largest manufacturers of powerboats in the
world for the utilization of our e-commerce solution, which was our largest
customer. During 2001, the agreement was terminated. During April 2002, we
shifted our strategic focus from e-commerce solutions to Telemetry. Accordingly,
we do not expect revenues from our e-commerce solutions to be a significant part
of our future gross revenues.
WE DEPEND ON KEY PERSONNEL
Our performance is substantially dependent on the performance of the executive
officers and other key employees. Failure to successfully manage personnel
requirements would have a negative effect on the business. We have experienced
difficulty from time to time in hiring the personnel necessary to support the
growth of our business, and we may experience similar difficulty in hiring and
retaining personnel in the future. Competition for senior management,
experienced sales and marketing personnel, software developers, and other
employees is intense, and we cannot be certain that we will be successful in
attracting and retaining personnel. The loss of the services of any executive
officers or key employees could have a negative effect on the business. Failure
to obtain or retain the services of necessary executive officers or key
employees may not support existing or expanded operations, and may hinder our
ability to
19
take advantage of the markets for telemetry and management information solutions
in the industries we serve.
WE EXPECT THE PRICE OF OUR COMMON STOCK TO BE VOLATILE
The market price of our Common Stock may fluctuate significantly in response to
a number of factors, some which are beyond our control, including the following:
our Common Stock is thinly traded; quarterly variations in operating results;
changes in market valuation of Internet commerce companies; announcements of
significant contracts, acquisitions, strategic partnerships, joint ventures or
capital commitments; loss of a major customer or strategic partner, or failure
to complete a sale to a significant customer; additions or departures of any key
personnel; future sales of our Common Stock; and stock market price and volume
fluctuations, which are particularly common among highly volatile securities of
technology companies.
SECURITY PROBLEMS MAY INHIBIT THE GROWTH OF OUR SOLUTIONS
A significant barrier to the adoption of technology solutions is the secure
transmission of confidential information over public networks. Users generally
are concerned with security and privacy on the Internet and any publicized
security problems could inhibit the growth of the Internet, and therefore
inhibit the Marex solutions as a means of conducting transactions. If there is a
breach in our security system, we may be required to make significant
expenditures to protect against security breaches and to alleviate problems
caused by such breaches.
SYSTEM FAILURE MAY CAUSE INTERRUPTION OF SERVICES
The performance of our server and networking hardware and software
infrastructure is critical to our business and reputation, and affects our
ability to process transactions, provide high quality customer service and
attract and retain customers, suppliers, users and strategic partners.
Currently, the infrastructure and systems are located at one site in Miami,
Florida. Any disruption to this infrastructure resulting from a natural disaster
or other event could result in an interruption in service, fewer transactions
and, if sustained or repeated, could impair our reputation and the
attractiveness of the services.
WE MAY REQUIRE ADDITIONAL CAPITAL FOR OPERATIONS, WHICH COULD HAVE A NEGATIVE
EFFECT ON YOUR INVESTMENT
We currently anticipate that our available funds will be sufficient to meet our
projected working capital and operating resource requirements into the first
quarter of 2003 since we significantly decreased our staff and, during April
2002, shifted our focus from our electronic commerce solutions to Telemetry.
However, any projections of future cash needs and cash flows are subject to
substantial uncertainty. The Company is in process of launching new product
offerings which may or may not be successful. The Company's cash requirements
may be substantial and may exceed the amount of the Company's existing working
capital. If current cash and cash equivalents, and cash that may be generated
from operations are not sufficient to satisfy our liquidity requirements, we
will likely seek to sell additional equity or debt securities. If we raise
additional funds through the issuance of equity or convertible securities, such
securities may have rights, preferences or privileges senior to those of the
rights of our Common Stock. Furthermore, in the event that we issue or sell
Common Stock or securities convertible for Common Stock, at a price per share
less than the conversion price of the outstanding Series A1 Preferred Stock, the
holders of the Series A1 Preferred Stock have the right to amend the conversion
price of the price per share of the issuance. As a result, our stockholders may
experience significant additional dilution. We cannot be certain that additional
capital will be available to us on acceptable terms or at all.
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A PROLONGED ECONOMIC DOWNTURN WOULD ADVERSELY AFFECT OUR OPERATIONS AND
FINANCIAL CONDITION
Although we have not operated during a period of prolonged general economic
downturn or a recession, these events have historically resulted in unfavorable
results for corporate entities. The United States economy is currently
undergoing a difficult period, which some observers might view as a recession.
This economic condition has been worsened by the September 11th terrorist
attacks in New York City and Washington, D.C. A continued economic downturn
would have a significant adverse impact on our operations and our financial
condition.
WE DEPEND ON INTELLECTUAL PROPERTY RIGHTS
Our intellectual property is important to us. We seek to protect intellectual
property through copyrights, trademarks, trade secrets, confidentiality
provisions in customer, supplier and strategic relationship agreements, and
nondisclosure agreements with third parties, employees and contractors. We
cannot assure that measures we take to protect intellectual property will be
successful or that third parties will not develop alternative purchasing
solutions that do not infringe upon our intellectual property. In addition, we
could be subject to intellectual property infringement claims by others. Failure
to protect against misappropriation of intellectual property, or claims that we
are infringing the intellectual property of third parties could have a negative
effect on our business.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We do not hold any market risk sensitive instruments. As a result, this item is
not applicable to the Company's consolidated balance sheet as of September 30,
2002.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On July 24, 2002, the Company held a special shareholder meeting in Miami,
Florida. The matter voted upon and its result were as follows:
PROPOSAL 1
To amend Marex, Inc.'s Articles of Incorporation to effectuate a one-for-ten
reverse stock split.
Proposal 1 was approved based on the following voting results:
For Against Abstain
--------- ------- -------
5,283,960 16,530 11,350
ITEM 5. OTHER INFORMATION
Not Applicable
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
EXHIBITS DESCRIPTION OF DOCUMENT
3.1 -- Amended and Restated Articles of Incorporation of the Company (1)
3.2 -- Amended and Restated Bylaws of the Company (1)
3.3 -- Articles of Amendment to Amended and Restated Articles of
Incorporation of the Company (3)
4.1 -- Certificate of Designation for the Series A1 Convertible Preferred
Stock, par value $.01 (3)
4.2 -- Securities Purchase Agreement among Marex, Inc. and Certain
Purchasers, dated March 2, 2000 (3)
4.3 -- Registration Rights Agreement among Marex, Inc. and Certain
Purchasers, dated March 2, 2000 (3)
10.1 -- 1996 Incentive Stock Option Plan, as amended (1)
10.2 -- Amended and Restated 1997 Stock Option Plan (2)
10.3 -- Company's Office Lease, 2701 South Bayshore Dr., Miami, FL, as
amended (4)
10.4 -- Company's Office Lease, 5835 Blue Lagoon Dr., Miami, FL,
as amended (5)
10.5 -- Stock Purchase Agreement among Marex, Inc., Software Support Team,
Inc., Arthur M. Peacock and Albert L. Peacock, dated September 21,
2001 (6)
10.6 -- Asset Purchase Agreement among Marex, Inc., Software Support Team,
Inc., and Exuma Technologies, Inc., dated August 31, 2002 (7)
99.1 -- Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, dated
November 14, 2002 (8)
(1) Previously filed as an exhibit to the Company's Form 10-SB and Amendment
No. 1 to Form 10-SB.
(2) Previously filed as part of the Company's Form DEFS14A filed on October 19,
1999.
(3) Previously filed as an exhibit to the Company's Form 8-K filed on March 8,
2000.
(4) Previously filed as an exhibit to the Company's Form 10-K filed on March
23, 2000.
(5) Previously filed as an exhibit to the Company's Form 10-K filed on March
23, 2001.
(6) Previously filed as an exhibit to the Company's Form 8-K filed on October
16, 2001.
(7) Previously filed as an exhibit to the Company's Form 8-k filed on September
13, 2002.
(8) Filed herewith
(b) Reports on Form 8-K
On September 13, 2002, the Company filed a report on Form 8-K which
announced that the Company, upon the approval of its Board of Directors,
entered into an Asset Purchase Agreement to sell all of the assets related
to the operations of Software Support Team, Inc.
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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.
MAREX, INC.
November 14, 2002 By: /s/ DAVID A. SCHWEDEL
-----------------------------------------
David A. Schwedel
President and Chief Executive Officer
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