10-Q 1 pawn10q_6312001.txt QUARTERLY REPORT FOR 6/30/2001 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ------------------------------------------ FORM 10-Q (Mark One) |X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 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 0-27215 PAWNBROKER.COM, INC. (Exact name of registrant as specified in its charter) DELAWARE 33-0794473 (State or Other Jurisdiction (I.R.S. Employer Identification No.) of Incorporation or Organization) 85 Keystone, Suite A Reno, Nevada 89503 (Address of principal executive offices) (775) 332-5048 (Registrant's Telephone Number, Including Area Code) Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] The number of outstanding common shares, no par value, of the Registrant at: September 4, 2001: 5,027,870 PAWNBROKER.COM, INC. INDEX TO THE FORM 10-Q For the quarterly period ended June 30, 2001 Page ---- PART I - FINANCIAL INFORMATION................................................1 ITEM 1. FINANCIAL STATEMENTS.................................................1 CONSOLIDATED BALANCE SHEETS .........................................1 CONSOLIDATED STATEMENTS OF OPERATIONS ...............................2 CONSOLIDATED STATEMENTS OF CASH FLOWS ...............................3 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY ......................4 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS ......................5 ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS...............................17 ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK...........28 Part II OTHER INFORMATION...................................................28 ITEM 1. LEGAL PROCEEDINGS...................................................28 ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS...........................28 ITEM 3. DEFAULTS UPON SENIOR SECURITIES.....................................29 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.................29 ITEM 5. OTHER INFORMATION...................................................30 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K....................................30 SIGNATURES....................................................................35 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS PAWNBROKER.COM, INC. (A Development Stage Company) CONSOLIDATED BALANCE SHEETS (Unaudited) =============================================================================================================== June 30, December 31, 2001 2000 --------------------------------------------------------------------------------------------------------------- ASSETS Current Cash and cash equivalents $ - $ 231,763 Due from related parties (Note 12) 43,633 - Prepaid expenses - 754 ------------- ------------ Total current assets 43,633 232,517 Deposits - 1,695 Capital assets (Note 4) 198,104 615,350 Domain name (Note 5) 38,195 59,029 ------------- ------------ Total assets $ 279,932 $ 908,591 =============================================================================================================== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Bank indebtedness $ 37,102 $ - Accounts payable and accrued liabilities 557,025 815,727 Notes payable (Note 6) 120,000 1,500,000 ------------- ------------ Total current liabilities 714,127 2,315,727 Notes payable (Note 6) 85,000 - ------------- ------------ 799,127 2,315,727 Stockholders' equity Capital stock (Note 7) Authorized 10,000,000 preferred shares with a par value of $0.0001 50,000,000 common shares with a par value of $0.0001 Issued and outstanding June 30, 2001 - 5,080,357 common shares December 31, 2000 - 2,070,357 common shares 508 207 Additional paid-in capital 9,297,400 7,634,597 Deficit accumulated during the development stage (9,817,103) (9,041,940) ------------- ------------ Total stockholders' equity (519,195) (1,407,136) ------------- ------------ Total liabilities and stockholders' equity $ 279,932 $ 908,591 ===============================================================================================================

History and organization of the Company (Note 1) Commitments (Note 11) Subsequent event (Note 14) The accompanying notes are an integral part of these consolidated financial statements. 1 PAWNBROKER.COM, INC. (A Development Stage Company) CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) ============================================================================================================================== Cumulative Amounts From February 5, Three Month Three Month Six Month Six Month 1999 to Period Ended Period Ended Period Ended Period Ended June 30, June 30, June 30, June 30, June 30, 2001 2001 2000 2001 2000 ------------------------------------------------------------------------------------------------------------------------------ OPERATING EXPENSES Amortization $ 572,268 $ 47,031 $ 104,505 $ 109,676 $ 59,463 Contract services 787,066 - 65,810 - 383,841 Consulting 555,096 11,748 52,773 14,105 420,505 Finders fee 65,000 - 65,000 - 65,000 General and administrative 2,374,115 19,953 348,492 31,804 1,435,420 Marketing and related expenses 773,158 (12,554) 467,681 (12,554) 554,752 Professional fees 710,207 74,024 206,807 102,193 478,748 Recovery of operating expenses (158,993) 59,436 - (158,993) - Rent 573,272 130,218 78,052 165,262 146,190 Salary and wages 2,123,384 114,093 494,282 160,440 1,064,382 Stock-based compensation 378,685 - - - 93,617 Telephone 354,089 576 183,374 23,202 200,641 Travel and related 339,457 30,149 215,835 39,770 238,245 -------------- ------------ ------------ ------------ ------------ (9,446,804) (474,674) (2,282,611) (474,905) (5,140,804) -------------- ------------ ------------ ------------ ------------ OTHER ITEMS Interest expense (202,585) (12,149) - (55,649) - Interest income 79,943 417 5,452 3,048 18,170 Loss on disposal of capital assets (176,983) 3,163 - (176,983) - Write-off of capital assets (70,674) - - (70,674) - -------------- ------------ ------------ ------------ ------------ (370,299) (8,569) 5,452 (300,258) 18,170 -------------- ------------ ------------ ------------ ------------ Loss for the period $ (9,817,103) $ (483,243) $(2,277,159) $ (775,163) $(5,122,634) ============================================================================================================================== Basic and diluted loss per common share (Note 3) $ (0.11) $ (1.32) $ (0.23) $ (2.94) ============================================================================================================================== Weighted average number of shares of common stock outstanding 4,547,257 1,724,697 3,312,291 1,740,674 ==============================================================================================================================

The accompanying notes are an integral part of these consolidated financial statements. 2 PAWNBROKER.COM, INC. (A Development Stage Company) CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) ============================================================================================================================== Cumulative Amounts From February 5, Six Month Six Month 1999 to Period Ended Period Ended June 30, June 30, June 30, 2001 2001 2000 ------------------------------------------------------------------------------------------------------------------------------ CASH FLOWS FROM OPERATING ACTIVITIES Loss for the period $ (9,817,103) $ (775,163) $ (5,122,634) Items not affecting cash: Amortization 572,268 109,676 59,463 Stock-based compensation 378,685 - 93,617 Loss on disposal of assets 176,983 176,983 - Recovery of operating expenses (158,993) (158,993) - Interest accrued on notes payable 102,500 - - Write-off of capital assets 70,674 70,674 - Net change in non-cash working capital items: Increase in receivable 80,500 - - Increase in due from related parties (34,633) (34,633) - (Increase) decrease in prepaid expenses - 754 (2,912) Increase in accounts payable and accrued liabilities 875,733 54,394 1,387,838 ------------- ------------- ------------- Net cash used in operating activities (7,753,386) (556,308) (3,584,628) ------------- ------------- ------------- CASH FLOWS FROM INVESTING ACTIVITIES Purchase of capital assets (1,011,971) - (133,420) Purchase of domain name (125,000) - - Acquisition of cash on purchase of subsidiary 8,007 - - Proceeds from disposal of capital assets 80,748 80,748 - Increase (decrease) in deposits - 1,695 (224,699) ------------- ------------- ------------- Net cash provided by (used in) investing activities (1,048,216) 82,443 (358,119) ------------- ------------- ------------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from convertible debenture 500,000 - 500,000 Capital lease obligations - - (55,776) Proceeds from notes payable 1,705,000 205,000 1,000,000 Proceeds from issuance of common stock 6,559,500 - 1,501,500 ------------- ------------- ------------- Net cash provided by financing activities 8,764,500 205,000 2,945,724 ------------- ------------- ------------- Change in cash position for the period (37,102) (268,865) (997,023) Cash and cash equivalents, beginning of period - 231,763 917,367 ------------- ------------- ------------- Cash and cash equivalents, end of period $ (37,102) $ (37,102) $ (79,656) ==============================================================================================================================

Supplemental disclosure with respect to cash flows (Note 10) The accompanying notes are an integral part of these consolidated financial statements. 3 PAWNBROKER.COM, INC. (A Development Stage Company) CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (Unaudited) ============================================================================================================================= Deficit Accumulated Common Stock Additional During the Total -------------------------- Paid-in Development Stockholders' Shares Amount Capital Stage Equity ----------------------------------------------------------------------------------------------------------------------------- Balance, February 5, 1999 - $ - $ - $ - $ - Common stock issued for cash 850,000 85 80,415 - 80,500 --------- ---------- ------------ ------------- ----------- Balance, March 31, 1999 850,000 85 80,415 - 80,500 Capital stock of Pawnbroker.com, Inc. at April 6, 1999 112,475 11 26,257 - 26,268 Deficit of Pawnbroker.com, Inc. at April 6, 1999 - - (23,261) - (23,261) Common stock issued pursuant to the acquisition of Pawnbroker.com, Inc. (Nevada) 624,000 62 - - 62 Common stock issued for cash 130,000 13 3,002,987 - 3,003,000 Share cancellation (25,000) (3) (247) - (250) Common stock issued on exercise of share purchase warrants 65,000 7 1,501,493 - 1,501,500 Stock-based compensation for options issued to consultants and non-employees - - 93,617 - 93,617 Loss for the year - - - (4,706,109) (4,706,109) --------- ---------- ------------ ------------- ----------- Balance, March 31, 2000 1,756,475 175 4,681,261 (4,706,109) (24,673) Common stock issued for conversion of convertible debenture 26,882 3 499,997 - 500,000 Common stock issued for cash 100,000 10 1,999,990 - 2,000,000 Common stock issued on exercise of stock options 187,000 19 168,281 - 168,300 Stock-based compensation for options issued to consultants and non-employees - - 285,068 - 285,068 Loss for the period - - - (4,335,831) (4,335,831) --------- ---------- ------------ ------------- ----------- Balance, December 31, 2000 2,070,357 207 7,634,597 (9,041,940) (1,407,136) Common stock issued on exercise of stock options 10,000 1 8,999 - 9,000 Common stock issued to settle debt 3,000,000 300 1,653,804 - 1,654,104 Loss for the period - - - (775,163) (775,163) --------- ---------- ------------ ------------- ----------- Balance, June 30, 2001 5,080,357 $ 508 $ 9,297,400 $(9,817,103) $ (519,195) ============================================================================================================================

The accompanying notes are an integral part of these consolidated financial statements. 4 PAWNBROKER.COM, INC. (A Development Stage Company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) JUNE 30, 2001 ================================================================================ 1. HISTORY AND ORGANIZATION OF THE COMPANY Digital Sign Corporation ("the Company), a Delaware corporation, was incorporated on February 13, 1998. On February 14, 1998, the Company issued 2,500 common shares at par value for all of the issued and outstanding shares of Digital Signs, Inc. On April 6, 1999, the Company acquired all of the issued and outstanding shares of Eriko Internet Inc. in exchange for 850,000 common shares of the Company. Effective June 14, 1999, the Company acquired all of the issued and outstanding shares of Pawnbroker.com, Inc. (a Nevada corporation), in exchange for 624,000 common shares of the Company. On June 10, 1999, the Company changed its name to Pawnbroker.com, Inc. These financial statements contain the financial statements of Eriko Internet Inc. ("Eriko"), Pawnbroker.com, Inc., Digital Signs, Inc. and Pawnbroker.com, Inc. (a Nevada Corporation) presented on a consolidated basis. On April 6, 1999, Pawnbroker.com, Inc. acquired all of the issued and outstanding share capital of Eriko by issuing 850,000 common shares. As a result of the share exchange, control of the combined companies passed to the former shareholders of Eriko. This type of share exchange has been accounted for as a capital transaction accompanied by a recapitalization of Eriko. Recapitalization accounting results in consolidated financial statements being issued under the name of Pawnbroker.com, Inc., but are considered a continuation of Eriko. As a result, the financial statements present the consolidated financial position of the companies as at June 30, 2001 and December 31, 2000 and the results of operations of Eriko for the period ended June 30, 2001 and the results of operations of Pawnbroker.com, Inc., (Nevada) and Digital Signs Inc. from their respective dates of acquisition. The number of shares outstanding at June 30, 2001 and December 31, 2000 as presented are those of Pawnbroker.com, Inc. 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, changes in stockholders' equity and cash flows at June 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 June 30, 2001 are not necessarily indicative of the results to be expected for the year ending December 31, 2001. The Company is in the process of restructuring its business and developing a new business plan and strategy under which it intends to provide financial services by offering secured loans to pawnbrokers and to operate a web site that provides pawnbroker industry specific business-to-business services. The Company is in the process of finalizing a business plan and attempting to restructure its liabilities to allow it to raise financing to fund the development of its planned business and its working capital requirements. The Company currently does not have sufficient working capital to finance its planned business strategy and may be unable to continue as a going concern. 2. GOING CONCERN The Company's consolidated 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, as shown in the accompanying consolidated financial statements, the Company has sustained substantial losses from operations since inception and has no current source of revenue. In addition, the Company has used, rather than provided, cash in its operations. The Company has utilized all of its available funding. Without realization of additional capital, it would be unlikely for the Company to continue as a going concern. It is management's plan in this regard to obtain additional working capital through equity financings. 5 PAWNBROKER.COM, INC. (A Development Stage Company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) JUNE 30, 2001 ================================================================================ 2. GOING CONCERN (cont'd...) The consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should the Company be unable to continue in existence. On March 1, 2001, the Company terminated facilitating transactions on their website and suspended operations. ============================================================================================ June 30, December 31, 2001 2000 -------------------------------------------------------------------------------------------- Deficit accumulated during the development stage $ (9,817,103) $ (9,041,940) Working capital (deficiency) (670,494) (2,083,210) ============================================================================================

3. SIGNIFICANT ACCOUNTING POLICIES Principles of consolidation These consolidated financial statements include Pawnbroker.com, Inc. (formerly Digital Sign Corporation) and its wholly-owned subsidiaries, Digital Signs, Inc., Eriko Internet Inc. and Pawnbroker.com, Inc. (a Nevada corporation). All significant inter-company balances and transactions have been eliminated upon consolidation. Revenue recognition The Company recognizes revenue from transaction fees charged to pawn shops when completion of the sale of the related item has occurred and the Company has received its portion of the sales proceeds released from escrow. Use of estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the year. Actual results could differ from these estimates. Cash and cash equivalents The Company considers all investments with a maturity of three months or less to be cash equivalents. 6 PAWNBROKER.COM, INC. (A Development Stage Company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) JUNE 30, 2001 ================================================================================ 3. SIGNIFICANT ACCOUNTING POLICIES (cont'd...) Loss per share Statement of Financial Accounting Standards No. 128, "Earnings Per Share" requires basic and diluted earnings per share to be presented. Basic earnings per share is computed by dividing income available to common shareholders by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share takes into consideration shares of common stock outstanding (computed under basic earnings per share) and potentially dilutive shares of common stock. Income taxes Income taxes are provided in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes". A deferred tax asset or liability is recorded for all temporary differences between financial and tax reporting and net operating loss carryforwards. Deferred tax expenses (benefit) results from the net change during the year of deferred tax assets and liabilities. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. Accounting for derivative instruments and hedging activities In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 133 ("SFAS 133"), "Accounting for Derivative Instruments and Hedging Activities" which establishes accounting and reporting standards for derivative instruments and for hedging activities. SFAS 133 is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. In June 1999, the FASB issued SFAS 137 to defer the effective date of SFAS 133 to fiscal quarters of fiscal years beginning after June 15, 2000. In June 2000, the FASB issued SFAS No. 138, which is a significant amendment to SFAS 133. The Company does not anticipate that the adoption of the statement will have a significant impact on its financial statements. Stock-based compensation Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation," encourages, but does not require, companies to record compensation cost for stock-based employee compensation plans at fair value. The Company has chosen to account for stock-based compensation using Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees." Accordingly compensation cost for stock options is measured as the excess, if any, of the quoted market price of the Company's stock at the date of the grant over the amount an employee is required to pay for the stock. The Company accounts for stock-based compensation issued to non-employees in accordance with the provisions of SFAS 123 and the Emerging Issues Task Force consensus in Issue No. 96-18 ("EITF 96-18"), "Accounting for Equity Instruments that are Issued to Other Than Employees for Acquiring or in Conjunction with Selling, Goods or Services". 7 PAWNBROKER.COM, INC. (A Development Stage Company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) JUNE 30, 2001 ================================================================================ 3. SIGNIFICANT ACCOUNTING POLICIES (cont'd...) Comprehensive income The Company has adopted Statement of Financial Accounting Standards No. 130 ("SFAS 130"), "Reporting Comprehensive Income". This statement establishes rules for the reporting of comprehensive income and its components. The adoption of SFAS 130 had no impact on total stockholders' deficit as of June 30, 2001. Software development The Company has adopted Statement of Position 98-1 ("SOP 98-1"), "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use", as its accounting policy for internally developed computer software costs. Under SOP 98-1, computer software costs incurred in the preliminary development stage are expensed as incurred. Computer software costs incurred during the application development stage are capitalized and amortized over the software's estimated useful life. Capital assets Capital assets will be recorded at cost less accumulated amortization. The cost of capital assets is amortized using the straight-line method over the following estimated useful lives of the related assets: Furniture and fixtures 5 years Computer equipment 3 years Computer software 1.5 years Leasehold improvements 2 years Domain name The cost of domain name rights will be amortized over 3 years from the date of commencement of operations. Advertising costs The Company recognizes advertising expenses in accordance with Statement of Position 98-7, "Reporting on Advertising Costs". As such, the Company expenses the cost of advertising in the period in which the advertising space or airtime is used. Financial instruments The Company's financial instruments consists of cash and cash equivalents, due from related parties, deposits, bank indebtedness, accounts payable and accrued liabilities and notes payable. Unless otherwise noted, it is management's opinion that the Company is not exposed to significant interest, currency or credit risks arising from these financial instruments. The fair value of these financial instruments approximate their carry values, unless otherwise noted. 8 PAWNBROKER.COM, INC. (A Development Stage Company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) JUNE 30, 2001 ================================================================================ 4. CAPITAL ASSETS ================================================================================================= Net Book Value ----------------------------- Accumulated June 30, December 31, Cost Amortization 2001 2000 ------------------------------------------------------------------------------------------------- Furniture and fixtures $ 64,970 $ (24,037) $ 40,933 $ 47,432 Computer equipment 224,994 (81,357) 143,637 502,986 Computer software 275,381 (264,714) 10,667 61,066 Leasehold improvements 4,990 (2,123) 2,867 3,866 ----- ------ -------------- ------------ ----------- $ 570,335 $ (372,231) $ 198,104 $ 615,350 =================================================================================================

5. DOMAIN NAME ========================================================================== June 30, December 31, 2001 2000 -------------------------------------------------------------------------- Domain name $ 125,000 $ 125,000 Less: Accumulated amortization (86,805) (65,971) ------------ ------------ Net book value $ 38,195 $ 59,029 ========================================================================== 6. NOTES PAYABLE ================================================================================================================== June 30, December 31, 2001 2000 ------------------------------------------------------------------------------------------------------------------ Line of credit from BWI Avionics Ltd., bearing interest at 12% per annum, due and payable on May 1, 2001. The note is personally guaranteed by two directors of the Company up to $500,000 each. During the period ended June 30, 2001, the Company converted the debt into 2,000,000 common shares of the Company. $ - $ 1,000,000 Promissory note from Granite Communications Inc., bearing interest at 10% per annum, payable on July 15, 2001. During the period ended June 30, 2001, the Company converted the debt into 600,000 common shares of the Company. - 300,000

- continued - 9 PAWNBROKER.COM, INC. (A Development Stage Company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) JUNE 30, 2001 ================================================================================ 6. NOTES PAYABLE (cont'd.....) ================================================================================================================== June 30, December 31, 2001 2000 ------------------------------------------------------------------------------------------------------------------ Continued..... Loan payable from Eurogrowth Investments Ltd., bearing interest at 12% per annum, payable on July 15, 2001. During the period ended June 30, 2001, the Company converted the debt into 400,000 common shares of the Company. - 200,000 Promissory note from Pacific Pawnbroker, non-interest bearing, unsecured and payable on demand. 20,000 - Promissory note, bearing interest at 18% per annum, unsecured, and payable on December 31, 2003. 50,000 - Promissory note, bearing interest at 18% per annum, unsecured, and payable on October 19, 2001. 100,000 - Convertible debentures from various parties, bearing interest at 18% per annum, unsecured, and payable on December 31, 2003. 35,000 - ------------ ------------- 205,000 $ 1,500,000 Less: current portion (120,000) (1,500,000) ------------ ------------- $ 85,000 $ - ==================================================================================== ================ ================

7. CAPITAL STOCK On April 6, 1999, Pawnbroker acquired all the issued and outstanding share capital of Eriko Internet Inc. As consideration, Pawnbroker issued 850,000 common shares for cash proceeds of $80,500. On May 19, 1999, a shareholder of Pawnbroker surrendered 25,000 shares of common stock which were initially issued as a part of the total shares issued for the acquisition of Eriko Internet Inc. Capital stock and contributed surplus have been reduced by $1 and $249 respectively to eliminate the values initially recorded on issuance. On June 14, 1999, Pawnbroker acquired all of the issued and outstanding share capital of Pawnbroker.com, Inc., a Nevada Corporation. As consideration, Pawnbroker issued 624,000 common shares at a deemed value of $62, equal to the par value of the shares issued. 10 PAWNBROKER.COM, INC. (A Development Stage Company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) JUNE 30, 2001 ================================================================================ 7. CAPITAL STOCK (cont'd.....) On June 23, 1999, the Company issued 130,000 units through a private placement at a price of $23.10 per unit, for total proceeds of $3,003,000. Each unit consisted of one common share and one-half of a share purchase warrant. One full share purchase warrant entitled the holder to acquire one additional common share at a price of $23.10 per share until September 23, 2000 and at a price of $29.00 per share until September 23, 2001. These share purchase warrants were exercised during the year ended March 31, 2000 for total proceeds of $1,501,500. On August 17, 2000, the Company issued 100,000 units through a private placement at a price of $20.00 per unit, for total proceeds of $2,000,000. Each unit consisted of one common share and one non-transferable share purchase warrant. One purchase warrant entitles the holder to acquire one additional common share at a price of $30.00 per share until August 10, 2001. On September 7, 2000, the Company converted the 9% convertible debenture in the aggregate principal amount of $500,000 into 26,882 common shares of the Company at a price of $18.60 per share. In December, 2000, the Company issued 187,060 common shares upon exercise of stock option at a price of $0.90 per share. On January 30, 2001, the Company issued 10,000 common shares upon exercise of stock option at a price of $0.90 per share. On April 17, 2001, the company issued 3,000,000 common shares of the Company to settle notes payable in the amount of $1,500,000 plus accrued interest of $154,104. On August 1, 2001, the Company consolidated its capital stock on a 10:1 basis. All capital stock numbers have been restated to reflect this consolidation. 8. STOCK OPTIONS AND WARRANTS At June 30, 2001, incentive stock options were outstanding enabling the optionee to acquire the following number of common shares: ===================================================================================================================== Number Exercise of Shares Price Expiry Date --------------------------------------------------------------------------------------------------------------------- 25,000 $ 67.50 November 1, 2002 15,000 67.50 3 years from the date when the Company receives a specified amount of financing in private or public offerings after November 1, 1999. 8,200 67.50 September 1, 2002 93,009 45.00 - 81.30 3 years from the initial vesting dates of the stock options, over periods ranging from September 13, 2002 to March 15, 2003. 5,000 15.30 September 25, 2003 =====================================================================================================================

11 PAWNBROKER.COM, INC. (A Development Stage Company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) JUNE 30, 2001 ================================================================================ 8. STOCK OPTIONS AND WARRANTS (cont'd.....) The following warrants were outstanding at June 30, 2001: =========================================================================== Number Exercise of Shares Price Expiry Date --------------------------------------------------------------------------- 100,000 $ 30.00 August 10, 2001 (subsequently expired) 7,200 67.50 May 10, 2003 5,882 48.90 June 7, 2003 33,426 35.90 July 7, 2003 150,000 20.00 October 11, 2005 =========================================================================== 9. STOCK BASED COMPENSATION EXPENSE SFAS 123, "Accounting for Stock-Based Compensation", encourages but does not require companies to record compensation cost for stock-based employee compensation plans at fair value. The Company has chosen to account for stock-based compensation using Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees". Accordingly, compensation cost for stock options is measured as the excess, if any, of quoted market price of the Company's stock at the date of grant over the option price. The Company accounts for stock issued to non-employees in accordance with the provisions of SFAS 123 and the Emerging Issues Task Force consensus in Issue No. 96-18, "Accounting for Equity Instruments that are Issued to Other Than Employees for Acquiring or in Conjunction with Selling, Goods or Services". Following is a summary of the stock option activity: ====================================================================== Weighted Average Number Exercise of Shares Price ---------------------------------------------------------------------- Outstanding at March 31, 1999 - $ - Granted 40,000 67.50 Forfeited - - Exercised - - --------- Outstanding at March 31, 2000 40,000 67.50 Granted 489,667 40.90 Forfeited (193,557) 71.00 Exercised (187,000) 0.90 --------- - continued - 12 PAWNBROKER.COM, INC. (A Development Stage Company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) JUNE 30, 2001 ================================================================================ 9. STOCK BASED COMPENSATION EXPENSE (cont'd.....) ====================================================================== Weighted Average Number Exercise of Shares Price ---------------------------------------------------------------------- Continued..... Outstanding at December 31, 2000 149,110 77.40 Granted 10,000 0.90 Forfeited (2,900) 52.30 Exercised (10,000) 0.90 --------- Outstanding at June 30, 2001 146,210 67.40 ====================================================== =============== Following is a summary of the status of options outstanding at June 30, 2001: ============================================================================================== Outstanding Options Exercisable Options ---------------------------------- ---------------------- Weighted Average Weighted Weighted Remaining Average Average Contractual Exercise Exercise Exercise Price Number Life Price Number Price ----------------------------------------------------------------------------------------------- $ 67.50 40,000 2.42 $67.50 25,000 $67.50 45.00 - 81.30 93,009 1.80 67.10 17,467 63.10 67.50 8,200 1.92 67.50 15,233 67.50 15.30 5,000 2.73 15.30 - 15.30 ==============================================================================================

Compensation The Company has granted 53,200 options to consultants and non-employees which are accounted for under SFAS 123 and EITF 96-18. Accordingly, using the Black-Scholes option pricing model, the options are marked to fair value through charges to operations as stock-based compensation. Stock-based compensation recognized during the period ended June 30, 2001 was $Nil (2000 - $93,617). The Company has 95,909 options granted to employees outstanding at June 30, 2001. These options are accounted for using Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees". Had compensation expense relating these options been recognized on the basis of fair value pursuant to Statement of Financial Accounting Standard No. 123, net loss and loss per share would have been adjusted as follows: 13 PAWNBROKER.COM, INC. (A Development Stage Company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) JUNE 30, 2001 ================================================================================ 9. STOCK BASED COMPENSATION EXPENSE (cont'd.....) ==================================================================================== Six Month Six Month Period Ended Period Ended June 30, June 30, 2001 2000 ------------------------------------------------------------------------------------ Loss for the period As reported $ (775,163) $ (5,122,634) =============== ================ Pro-forma $ (1,089,903) $ (10,142,027) =============== ================ Basic and diluted loss per share As reported $ (0.23) $ (2.94) =============== ================ Pro-forma $ (0.33) $ (5.83) ====================================================================================

The fair value of each option granted is estimated using the Black-Scholes Model. The assumptions used in calculating fair values are as follows: ==================================================================================== Six Month Six Month Period Ended Period Ended June 30, June 30, 2001 2000 ------------------------------------------------------------------------------------ Risk-free interest rate - 5.94% Expected life of the options - 1 year Expected volatility - 32% Expected dividend yield - - ====================================================================================

10. SUPPLEMENTAL DISCLOSURE WITH RESPECT TO CASH FLOWS =================================================================================== Six Month Six Month Period Ended Period Ended June 30, June 30, 2001 2000 ----------------------------------------------------------------------------------- Cash paid for income taxes $ - $ - Cash paid for interest - - ===================================================================================

14 PAWNBROKER.COM, INC. (A Development Stage Company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) JUNE 30, 2001 ================================================================================ 10. SUPPLEMENTAL DISCLOSURE WITH RESPECT TO CASH FLOWS (cont'd.....) Non-cash investing and financing transactions during the period from January 1, 2001 to June 30, 2001 were as follows: a) During the period, employee stock options were exercised to acquire 10,000 shares of common stock at a price of $0.90 per share in exchange for a receivable of $9,000. b) During the period, the Company converted notes payable in the amount of $1,500,000 plus accrued interest of $154,104 into 3,000,000 common shares of the Company. 11. COMMITMENTS a) The Company leases office and production premises and certain office equipment pursuant to operating leases which expire in 2003 and 2004: Future annual lease payments are as follows: 2001 $ 86,583 2002 108,417 2003 18,565 2004 2,038 b) The Company has formed a Stock Option Plan ("Plan") under which it may grant stock options to employees and officers to acquire up to a total of 800,000 shares of the Company's common stock, at a price to be determined by the Plan administrator. 12. DUE FROM RELATED PARTIES Amounts due from an officer and an employee are non-interest bearing, unsecured and have no fixed terms of repayment. The fair value of amounts due from related parties is not determinable as they have no specific repayment terms and are non-interest bearing. 13. INCOME TAXES Subject to certain restrictions, the Company has certain operating losses available to reduce taxable income of future years. Future tax benefits which may arise as a result of these losses and resource deductions have not been recognized in these financial statements. The Company has not recorded potential future income tax benefits of $3,337,815 in operating losses which, if unutilized, expire as follows: 2020 $ 9,817,103 ============== 15 PAWNBROKER.COM, INC. (A Development Stage Company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) JUNE 30, 2001 ================================================================================ 13. INCOME TAXES (cont'd.....) A reconciliation of the U.S. statutory federal income tax rate to the effective rate is as follows: ============================================================================================================ Six Month Six Month Period Ended Period Ended June 30, June 30, 2001 2000 ------------------------------------------------------------------------------------------------------------ U.S. federal statutory graduated rate 15.00% 15.00% State income tax rate, net of federal benefit 7.00% 7.00% Net operating loss for which no tax benefit is currently available (22.00)% (22.00)% ------------ ------------ 0.00% 0.00% =============================================================================================================

At June 30, 2001, deferred taxes consisted of a net tax asset of $3,337,815 due to operating loss carryforwards of $9,817,103 which was fully allowed for in the valuation allowance of $3,337,815. The valuation allowance offsets the net deferred asset for which there is no assurance of recovery. The change in the valuation allowance for the six month period ended June 30, 2001 was $263,555. The valuation allowance will be evaluated at the end of each period, considering positive and negative evidence about whether the asset will be realized. At that time, the allowance will either be increased or reduced; reduction could result in the complete elimination of the allowance if positive evidence indicates that the value of the deferred tax asset is no longer impaired and the allowance is no longer required. 14. SUBSEQUENT EVENT The following events occurred subsequent to period end: a) The Company carried out a 10:1 share consolidation on August 1, 2001. All share and per share amounts in these financial statements have been retroactively restated to reflect the consolidation. The total number of authorized shares of capital stock of the Company was reduced to 60,000,000 shares, consisting of 50,000,000 of common stock with par value of $0.0001 per share, and 10,000,000 of preferred stock with par value of $0.0001 per share. b) The Company obtained a bridge loan in the amount of $100,000 from a party, evidenced by a promissory note, bearing interest at 18% per annum, unsecured, and payable on February 20, 2002. c) The Company obtained bridge loans in the amount of $20,000 from various parties, evidenced by convertible debentures, bearing interest at 18% per annum, and payable on December 31, 2003. d) The Company obtained a bridge loan in the amount of $5,000 from Pacific Pawnbroker, evidenced by a non-interest bearing promissory note, unsecured and payable on demand. 16 NOTE REGARDING FORWARD LOOKING STATEMENTS Except for statements of historical fact, 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 our actual results or achievements to be materially different from any of our future results or achievements expressed or implied by such forward-looking statements. Such factors include, but are not limited to the following: our limited operating history; our history of losses; our lack of adequate working capital to fund its operations; risks related to our ability to continue as a going concern; need for additional capital; risks involving new product development; risk related to developing a financial services business; credit risk related to lending money to pawnbrokers; competition; management of growth and integration; risks of technological change; our dependence on key personnel, marketing relationships with pawnshops and third party suppliers; our ability to protect its intellectual property rights; government regulation of the financial services, Internet commerce and the pawn industry; economic and political factors; dependence on continued growth in use of Internet; liability for Internet content; uncertainty regarding infringing intellectual property rights of others; security risks and the other risks and uncertainties described under "Description of Business - Risk Factors" in this annual report. Certain of the forward looking statements contained in this registration statement are identified with cross-references to this section and/or to specific risks identified under "Description of Business - Risk Factors". You should not place undue reliance on forward looking statements. We do not intend to update forward looking statements contained in this report. References to "Company," "Registrant," "our," "us," and "we," refer to Pawnbroker.com, Inc. and its subsidiaries. ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW We, Pawnbroker.com, Inc., are a development stage company with no revenues from our operations. We have never generated any profits. We were incorporated in Delaware in February 1998. On June 14, 1999, we acquired all of the issued and outstanding shares of Pawnbroker.com, Inc., a Nevada corporation, and for the purposes of implementing a business strategy of developing a web site to list and offer for sale the merchandise of independent pawnshops throughout North America. Prior to our acquisition of the Nevada corporation we had no assets, liabilities, revenues or expenses. We are in the process of incorporating Pawnbroker Financial Services Inc., a Delaware corporation, for the purposes of operating our planned business of offering financial and business-to-business services to pawnbrokers. 17 During 1999 and 2000, we developed and launched a web site that provided online customers a method to search for and buy merchandise from the inventories of pawnshops. We completed the initial development of the software and technology related to the business and began the beta test of a web site in December 1999. During the course of developing our web site and marketing strategy, we presented our concept to several hundred pawnshops at conventions and tradeshows and received oral expressions of interest or requests for additional information from several pawnshops about our plan to facilitate transactions between pawnshops and consumers through our web site. Based on information provided to us by pawnshops, our goal was to have a total of up to 2,000 participating member pawnshops offering an average of 475 items each by December 2000. In June 2000, we launched the commercial version of Pawnbroker.com. Pawnbroker.com featured items of merchandise from the inventories of pawnshops, including merchandise such as jewelry, consumer electronics, tools, collectibles, coins, cameras and musical instruments. Although several hundred pawnshops initially expressed an interest in posting merchandise for sale on our web site, we experienced difficulties in offering sufficient supplies of inventory as several pawnbrokers failed to post the merchandise on our web site as they had initially indicated. During the second half of 2000, we entered into a strategic relationship with a major chain of pawnshops in an effort to increase our inventory, but were unable to post such inventory on our web site in a timely manner. We failed to generate any material revenues from our operations. Based in part on the condition of the capital markets, we were unable to obtain additional financing on acceptable terms to fund our marketing efforts and our working capital requirements. We began to consolidate and restructure our operations to conserve working capital by closing our technical development and support facility in Philadelphia and our business office in California, and by laying off all of our technical development and support staff. During the fourth quarter 2000 and the first quarter of 2001, we experienced technical difficulties maintaining our web site and were unable to continue to provide technical support to our customers because of lack of working capital. As a result, we further consolidated our operations and we terminated facilitating transactions on our web site and suspended our business operations on March 1, 2001, to concentrate our efforts on developing our financial and business-to-business services. We anticipate that we may re-launch our pawnbroker-to-consumer web site in an alternative format in the future, assuming that we are able to raise sufficient financing to do so and that there is sufficient interest from pawnbrokers and end users for such service offering. We have no current plans to do so during 2001. We are in the process of restructuring our business and developing a new business plan and strategy under which we intend to provide financial services by offering secured loans to pawnbrokers and to operate a web site that provides pawnbroker industry specific business-to-business services. We are in the process of finalizing a business plan and attempting to restructure our liabilities to allow us to raise financing to fund the development of our planned business and our working capital requirements. We currently do not have sufficient working capital to finance our planned business strategy and may be unable to continue as a going concern. 18 In their independent auditor's report dated May 10, 2001 related to our audited financial statements for December 31, 2000, Davidson & Company, Chartered Accountants, expressed doubt about our ability to continue as a going concern due to our lack of working capital for our planned business activities. We had a working capital deficiency of $2,083,210 at December 31, 2000, and a working capital deficiency of $670,494 at June 30, 2001. The decrease in our working capital deficit was a result of our conversion of certain notes payable into common shares during the quarter ended June 30, 2001. See "Liquidity and Capital Resources." We intend to address this going concern issue by raising capital through equity, debt or convertible securities financing. We are currently seeking financing by presenting our business plan to potential investors. If we are unable to raise additional financing, we anticipate we will not be able to continue as a going concern. Effective August 1, 2001, we completed a 10 (old)-for- 1 (new) reverse split of our issued and outstanding common stock and reduced our authorized share capital to consist of 50,000,000 shares of common stock and 10,000,000 shares of preferred stock, each with a par value of $0.0001 per share. At July 31, 2001, we had 50,803,567 shares of common stock issued and outstanding, and after giving effect to the reverse split, we had approximately 5,080,357 shares of common stock issued and outstanding. All share information contained in this quarterly report gives effect to the reverse split. Neither we nor any of our subsidiaries are currently subject to any bankruptcy, receivership or similar proceedings at the date of this report. Our headquarters are located at 85 Keystone, Suite A, Reno, Nevada, 89503, and our telephone number is (775) 332-5048. Our web site address is www.pawnbroker.com. The information on our web site is not a part of this quarterly report. Results of Operations Three Months Ended June 30, 2001 Compared to June 30, 2000 Revenues. We had no material revenues from operations. Salaries and Payroll. Salaries and wage expenses for three months ended June 30, 2001 decreased to $114,093 compared to $494,282 for the same period in 2000. During the second quarter 2000, we incurred significant salaries and wage expense as a result of hiring personal to meet our needs as we attempted to execute our business plan, including our hiring in the areas of product development, sales and marketing and general and administrative. During the quarters ended December 31, 2000, we began consolidating our operations to conserve working capital by closing our Philadelphia development and technical support facilities and our California business office and by laying off personnel in those offices. During the first quarter 2001, we laid off all of our personnel, with the exception of four employees, including one administrative employee and three management, marketing and sales employees. We intend to hire additional employees and management with experience in the financial service industry to assist us with 19 implementing our financial service business strategy, assuming we can raise adequate funding to finance our plan of operation. Contract Services. Outside service expense for three months ended June 30, 2001 were nil compared to $65,810 in the same quarter of 2000, which consist primarily of contract services for investor relations, public relations and market research. Subsequent to December 31, 2000, we suspended our business operations and terminated all our arrangements with contract service providers. We may incur contract service expenses related to regulatory compliance and research to develop our financial services business during the remainder of 2001. Consulting. Consulting expense for three months ended June 30, 2001 were $11,748 compared to $52,773 during the same period in 2000. Consulting expenses during the three month period ended June 30, 2000 consisted primarily of assistance related to the evaluation and development of our Internet business strategies, development of a Internet business plan and interim executive personnel. These costs were associated with the development of our business strategy to offer the merchandise of pawnshops over the Internet. Subsequent to December 31, 2000, we suspended our business operations and terminated all our arrangements with our consultants. As a result, we anticipate that we may incur nominal expenses related to consulting expenses during the third and fourth quarters of 2001, but that consulting expenses will increase in 2002 as we begin the process of implementing our business strategy of offering financial services to pawnbrokers. We intend to engage outside consultants with experience in the financial service industry to assist us with developing and implementing policies and procedures for our financial service offerings, assuming we can raise adequate funding to finance our plan of operation. Professional Fees. Professional fees for three months ended June 30, 2001 were $74,024 compared to $206,807 for the same period in 2000. Professional fees consist primarily of legal and accounting expenses. The decrease in professional expense resulted from our lack of working capital and our reduction in the use of our legal counsel and accounting professionals during 2001. During the quarter ended June 30, 2000, we incurred substantial professional fees expenses related to legal and accounting support during the development of our Internet business and expenses related to preparing filings to comply with our Securities and Exchange Commission reporting obligations. We anticipate that expenses related to professional fees may decline during 2001, as we have been relatively inactive during the first two quarters of 2001. However, professional fees may increase if we obtain additional financing to undertake research related to our financial services business and the development of documents, forms and procedures related to such business. Marketing and Related Expense. Marketing and related expenses for three months ended June 30, 2001 were $(12,554) compared to $467,681 for the same period in 2000. During the quarter ended June 30, 2001, we had an adjustment to marketing and related expenses related to a discount received from a provider. Marketing and related expenses in 2000 consisted primarily of creative printing and advertising. Marketing expenses are expected to be substantially lower during 2001 than in 2000, as we have suspended our operations and do not anticipate that we will begin to market our financial and business-to-business services until at least the fourth quarter of 2001 or first quarter of 2002. 20 General and Administrative. General and administrative related expenses for three months ended June 30, 2001 were $19,953, compared to $348,492 during 2000. General and administrative related expense for three months ended June 30, 2000 consisted primarily of general office, printing, purchased software, recruiting and facility costs associated with the development of our Internet business and maintaining offices in Reno, Philadelphia and California. General and administrative expenses are expected to remain lower than the levels experienced in 2000, as we have consolidated our operations into one office in Reno, Nevada. Travel and Related. Travel and related expenses for three months ended June 30, 2001 were $30,149 compared to $215,835 during the same period in 2000. Travel and related expenses related primarily to travel for raising capital and business development activities. Travel and related expenses are expected to be consistent with the levels in the first and second quarters 2001 during the remaining quarters of 2001. Recovery of Operating Expenses. During the three month period ended June 30, 2001, we had a $59,436 adjustment in recovery of operating expenses resulting primarily from our write-off of a loan receivable from one of our former officers in consideration of accrued salaries for his services. Loss. Our loss for three months ended June 30, 2001 was $483,243 ($0.11 per share) compared to $2,277,159 ($1.32 per share) during the same period in 2000, a decrease of $1,793,916. The decrease resulted from the suspension of our web site operations during the first half of 2001 and our restructuring. During the three month period ended June 30, 2000, we incurred substantial costs associated with the development and launch of the Pawnbroker.com web site and business, including corporate acquisition expenses, developing our business plan, product development expenses, sales and marketing expenses and administrative expenses. We anticipate that we will continue to incur losses during the third quarter 2001 at a level approximately as that recorded during the second quarter 2001, and that losses will increase during the fourth quarter of 2001 as we anticipate that we will begin implementing our new business strategy, assuming adequate financing is available. See "Plan of Operation." Six Months Ended June 30, 2001 Compared to Six Months Ended June 30, 2000 Revenues. We had no material revenues from operations. Salaries and Payroll. Salaries and wage expenses for six months ended June 30, 2001 decreased to $160,440 compared to $1,064,382 for the same period in 2000. During the six months ended 2000, we incurred significant salaries and wage expense as a result of hiring personnel to meet our needs as we attempted to execute our Internet business plan, including our hiring in the areas of product development, sales and marketing and general and administrative. We consolidated our operations to conserve working capital by closing our Philadelphia development and technical support facilities and our California business office and by laying off personnel in those offices. During the six months ended 2001, we laid off all of our personnel, with the exception of four employees, including one administrative employee and three management, marketing and sales employees. During the six month period ended June 30, 2000, 21 we had stock based compensation of $93,617, compared to no stock based compensation during the same period in 2001. Contract Services. Outside service expense for six months ended June 30, 2001 were nil compared to $383,841 in the same quarter of 2000, which consist primarily of contract services for investor relations, public relations and market research. Consulting. Consulting expense for six months ended June 30, 2001 were $14,105 compared to $420,505 during the same period in 2000. Consulting expenses during the six month period ended June 30, 2000 consisted primarily of assistance related to the evaluation and development of our Internet business strategies, development of a Internet business plan and interim executive personnel. We anticipate that we may incur nominal expenses related to consulting expenses during the third and fourth quarter of 2001, but that consulting expenses will increase in the 2002 as we intend to engage outside consultants with experience in the financial service industry to assist us with developing and implementing policies and procedures for our financial service offerings, assuming adequate financing is available. Professional Fees. Professional fees for six months ended June 30, 2001 were $102,193 compared to $478,748 for the same period in 2000. Professional fees consist primarily of legal and accounting expenses. The decrease in professional expense resulted from our lack of working capital and our reduction in the use of our legal counsel and accounting professionals during 2001. During the six months ended June 30, 2000, we incurred substantial professional fees expenses related to legal and accounting support during the development of our Internet business and expenses related to preparing filings to comply with our Securities and Exchange Commission reporting obligations. Marketing and Related Expense. Marketing and related expenses for six months ended June 30, 2001 were $(12,554) compared to $554,752 for the same period in 2000. During the quarter ended June 30, 2001, we received an adjustment from a service provider. Marketing and related expenses in 2000 consisted primarily of creative printing and advertising. Marketing expenses are expected to be substantially lower during 2001 than in 2000, as we have suspended our operations. General and Administrative. General and administrative related expenses for six months ended June 30, 2001 were $31,804, compared to $1,435,420 during 2000. General and administrative expenses are expected to remain lower than the levels experienced in 2000, as we have consolidated our operations into one office in Reno, Nevada. Travel and Related. Travel and related expenses for six months ended June 30, 2001 were $39,770 compared to $238,245 during the same period in 2000. Travel and related expenses related primarily to travel for raising capital and business development activities. Travel and related expenses are expected to be consistent with the levels in the first half of 2001 during the remainder of 2001. Recovery of Operating Expenses. During the six month period ended June 30, 2001, we had $(158,993) in recovery of operating expenses resulting from our negotiation and 22 settlement of debt owed to creditors, offset by a write-off of a loan receivable from one of our former officers in consideration of accrued salaries for his services, and an adjustment related to accrued liabilities for an equipment lease which was terminated. This reduction in obligations to our creditors is expected to continue as our management has determined such restructuring is required to allow us to raise additional financing to be able to continue as a going concern and to fund our plan of operation. Future restructuring and settlement of creditor obligations may result in additional recovery of operating expenses during 2001, but there can be no assurance that we will successfully restructure or settle such obligations. Loss. Our loss for six months ended June 30, 2001 was $775,163 ($0.23 per share) compared to $5,122,634 ($2.94 per share) during the same period in 2000, a decrease of $4,347,471. Our loss during the six month period ended June 30, 2001 included interest expenses of $55,649, loss on disposal of capital assets of $176,983 and write-off of capital assets of $70,674. The decrease in our losses in 2001 compared to 2000 resulted from the suspension of our web site operations and our restructuring. Liquidity and Capital Resources In their independent auditor's report dated May 10, 2001 related to our audited financial statement for December 31, 2000, Davidson & Co., our auditors, expressed substantial doubt about our ability to continue as a going concern due to our lack of working capital for our planned business activities. We currently do not have sufficient working capital to meet our on-going obligations. As of June 30, 2001, we had cash and cash equivalents of nil and receivables of $43,633, due from employees who exercised stock options, and a working capital deficit of $670,494, which includes current liabilities of $799,125. During the three months ended June 30, 2001, we received no revenues from our operations and we used net cash of $556,308 in operating activities. We received $80,748 from the disposal of capital assets and $205,000 from financing activities (the issuance of promissory notes). We had a net change in cash position of negative $268,865. Our use of cash during such period was primarily as a result of expenses related to sustaining our operations for salary expenses, professional fees and expenses related to general administrative expenses and overhead. Our use of cash during the first six months of 2001 in operating activities declined from levels of cash used in operating activities for the same period in 2000 ($3,584,628), as we have consolidated our operations in our Reno office and have suspended our business operations related to facilitating transactions between pawnshops and customers through our web site. We anticipate that our working capital needs will increase during the remainder of 2001, as we attempt to raise additional financing and to implement our new business plan. We will continue to incur losses until we can generate revenues from financings and membership fees and from business to business revenue opportunities. We do not anticipate we will begin to generate any revenues until we can offer our financial services, which is not anticipated to occur until the fourth quarter of 2001 or first quarter of 2002, assuming sufficient financing is available. We estimate that our minimum cash requirements to implement our plan of operation is between approximately $3 million to $9 million during 2001 and 2002, primarily for capital to 23 provide loans to qualified pawnbrokers; expenses related to general over head and administration, regulatory research and licensing; preparing documents, forms and procedures to offer our planned financial services; costs associated with developing our business-to-business web site and costs related to marketing our financial and business-to-business services. See "Plan of Operation." We are currently in the process of seeking sufficient financing to implement our business strategy. As part of our plan to raise additional financing to fund our Plan of Operation, we began to implement a capital restructuring plan under which (i) we proposed a reverse split of our issued and outstanding common stock and (ii) negotiated the conversion of certain outstanding debt into shares of our common stock. On May 11, 2001, we entered into agreements with three note holders to convert $1,500,000 owed to them into shares of our common stock at $0.50 per share (post reverse-split). The market price of our common stock as quoted on the NASD Over-the-Counter Bulletin Board was $0.15 on May 11, 2001 (after giving effect to the reverse-split). Under the terms of these agreements, we issued 30,000,000 shares of our common stock to the following note holders: 2,000,000 shares to BWI Avionics Ltd., 600,000 shares to Granite Communications Inc., and 400,000 shares to Eurogrowth Investments Ltd. BWI Avionics Ltd., Granite Communications Inc., and Eurogrowth Investments Ltd. are non-U.S. persons and the shares were issued outside the United States in reliance upon an exemption from registration available under Regulation S of the Securities Act of 1933, as amended. On July 5, 2001, we held our annual general meeting of shareholders at which our shareholders: (i) elected three members to our board of directors; (ii) approved an amendment to our Certificate of Incorporation to effect a stock combination (reverse stock split) pursuant to which every ten (10) shares of outstanding common stock would be reclassified into one (1) share of common stock; (iii)approved an amendment to our Certificate of Incorporation to decrease our authorized share capital from 150,000,000 shares (consisting of 100,000,000 shares of common stock and 50,000,000 shares of preferred stock) to 60,000,000 shares (consisting of 50,000,000 shares of common stock and 10,000,000 shares of preferred stock); and (iv) ratify the selection of Davidson & Company as our independent auditors. We filed an amendment to our certificate of incorporation to effect the reverse-split of our issued and outstanding common stock and to decrease our authorized capital, effective August 1, 2001. Our trading symbol on the National Association of Securities Dealers Over-the-Counter Bulletin Board was changed to "PBOK." During the past six months, we have been attempting to raise the capital required to fund our Plan of Operation, but our efforts have only been marginally successful. Since January 1, 2001, we have raised only $205,000, in the form of short-term bridge financing as follows: 24 Lender Instrument/Terms Principal Amount ------ ---------------- ---------------- Pacific Pawnbroker Demand promissory note, unsecured, without $20,000 interest Lew Mirviss Promissory note, unsecured, bearing interest $50,000 at 18% per annum, due December 31, 2003 Edward Romano Promissory note, unsecured, bearing interest $100,000 at 18% per annum, due October 19, 2001 Others Convertible debentures, unsecured, bearing $35,000 interest at 18% per annum, due December 31, 2003 -------------- Total $205,000

Joseph Schlader, our President and a director, is the President and a controlling shareholder of Pacific Pawnbroker. William Galine, our Vice President and a director, is a former officer and shareholder of Pacific Pawnbroker. We are continuing to seek additional financing. We cannot assure you that we will be able to obtain sufficient financing to fund our working capital needs on acceptable terms, if at all. If adequate funds are not available, we will be required to sell or liquidate our business or file bankruptcy. We cannot assure you that our actual expenditures will not exceed our estimated operating budget. Actual expenditures will depend on a number of factors, some of which are beyond our control, including, among other things: (i) the costs to complete the regulatory research and obtain licenses to operate our financial services business, (ii) our ability to successfully complete financing transactions with pawnbrokers, (iii) the availability of financing on acceptable terms, (iv) reliability of the assumptions of management in estimating cost and timing, (v) competition; and (vi) other factors that may be beyond our control. We cannot assure you that we will generate sufficient revenues from our operations to earn a profit or that our planned service offerings will be commercially successful. Our inability to successful implement our business plan or generate revenues from financial services will have a material adverse affect on our business and results of operations. 25 Plan of Operation Our plan of operation is based on information provided in discussions with our consultants, discussions with pawnshop owners, our results of operations, our negotiations and discussions with third party vendors, experience of management and the decisions of our management. Our plan of operation for the fiscal year ending December 31, 2001 and during the first two quarters ended June 30, 2002, is as follows: o Restructure our outstanding liability and capital structure to allow us to obtain financing; o Raise additional financing of between $3 million to $9 million to fund our operations and to implement our business strategy; o Complete research related to regulatory compliance issues related to lending rates, licensing requirements, perfecting security interests in assets and other regulatory issues in states targeted for our financial services roll out; o Develop or license the technology required to facilitate loans to member pawnbrokers and to offer our business-to-business services; o Develop the documentation, forms and required procedures to facilitate loans to member pawnbrokers; o Market and promote our financial services to pawnbrokers in the targeted states and our business-to-business network to pawnbrokers throughout North America; o Generate revenues through the offering of loans to member pawnbrokers in the target market (based on credit ratings and rankings) and membership fees; and o Identify viable target markets for additional roll outs of our financial services. In order to reduce our cash requirements, we intend to outsource certain development, marketing, human resources, legal and accounting functions. Similarly, in order to reduce capital expenditures, we intend to enter into leasing agreements for hardware and other equipment requirements. Capital Obligations and Commitments As of September 5, 2001, we have commitments related to a $100,000 promissory note, bearing interest at the annual rate of 18%, due October 19, 2001; a promissory note, bearing interest at the annual rate of 18%, due February 21, 2002; and two demand promissory notes in the aggregate amount of $25,000. In addition, we estimate that our initial cash requirements are approximately $90,000 a month, principally for salaries, professional services, marketing and office expenses. We anticipate that our cash requirements will increase to approximately $126,000 to $150,000 per month in the fourth quarter 2001 and first quarter 2002 as a result of costs related to raising capital; professional services associated with the research related to regulatory requirements of our financial services; development of documents, forms and procedures to offer loans to pawnbrokers in targeted states; hiring of management with experience in the financial services industry; development of our website to enable the application loan process related to our financial services; web site and technology development costs related to development of the services for our business-to-business web site; increased 26 salary and related expenses associated with the implementation of our business strategy; and costs associated with marketing our web site. We estimate that the cost to develop the technology to launch and operate our business-to-business web site will be approximately $50,000. We intend to engage a third party developer to develop our business-to-business web site based in part, if feasible, on the technology which we developed for our pawnbroker.com web site. We have not made any arrangements for such development and currently do not have sufficient working capital to commence such development efforts. Actual costs to development our business-to-business web site may be significantly higher than our estimates, in which case, we intend to scale-down the services proposed to be offered until appropriate levels of financing are available. We intend to compete in the highly competitive financial services industry. We will compete against companies that have substantially greater financial, technical and other resources than us. Several competitors already have established web sites, brand names, strategic relationships and other web sites and user loyalty, all of which create a competitive advantage over us. We have not yet begun the process of determining the regulatory requirements for conducting our proposed financial services business and we do not currently have sufficient working capital to implement our planned business strategy. During 2000 and the first half of 2001, several Internet related companies have failed or been acquired by larger competitors. Competitive pressures, lack of adequate financing and failure to gain market acceptance are some of the factors that have caused such companies to fail. We face these same challenges, and we cannot guarantee that we will be able to compete effectively or that we will obtain sufficient financing to develop a commercially viable business. Our ability to implement our proposed business plan is subject to obtaining adequate financing. We currently do not have sufficient financing to continue as a going concern; however, based on our discussions with potential investors, we believe that we can raise additional financing if we are able to restructure our liabilities. We may arrange to convert a significant portion of our debt into equity, which based on the current market price of our common stock, would result in significant dilution to existing shareholders. In addition, to implement our business plan we anticipate that we will enter into financing arrangements in which we issue equity, debt, convertible securities or a combination of these. Such financing arrangements are anticipated to result in additional dilution to our existing shareholders. We cannot assure you that we will be able to restructure our liabilities or that we will successfully obtain additional financing. If we are unsuccessful at either of these, we will not be able to continue as a going concern and we may be required to liquidate our company or declare bankruptcy. Subsequent Events On July 5, 2001, we obtained a bridge loan in the amount of $5,000 from Pacific Pawnbroker, evidenced by an unsecured demand promissory note bearing no interest. On July 26, 2001, we received $10,000 from an investor related to the issuance of an unsecured convertible debenture bearing interest at 18% per annum, due December 31, 2003. On August 21, 2001, we obtained a bridge loan in the amount of $10,000, evidenced by an unsecured promissory note bearing interest at the annual rate of 18%, due February 21, 2002. On August 27 22, 2001, we received $10,000 from an investor related to the issuance of an unsecured convertible debenture, bearing interest at 18% per annum, due December 31, 2003. Subsequent to June 30, 2001, 52,630 shares of common stock were returned to treasury in consideration of the cancellation of a loan receivable from one of our officers and directors. ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK The Company believes that it does not have any material exposure to interest or commodity risks. The Company is exposed to economic and political changes in international markets where the Company competes, such as inflation rates, recession, foreign ownership restrictions, domestic and foreign government spending, budgetary and trade policies and other external factors over which the Company has no control. PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS As of the date hereof, there is no material litigation pending against the Company. From time to time, the Company is a party to litigation and claims incident to the ordinary course of business. While the results of litigation and claims cannot be predicted with certainty, the Company believes that the final outcome of such matters will not have a material adverse effect on the Company's business, financial condition, results of operations and cash flows. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS On May 11, 2001, we entered into agreements with three note holders to convert $1,500,000 owed to them into shares of our common stock at $0.50 per share (post reverse-split). The market price of our common stock as quoted on the NASD Over-the-Counter Bulletin Board was $0.15 on May 11, 2001 (after giving effect to the reverse-split). Under the terms of these agreements, we issued 30,000,000 shares of our common stock to the following note holders: 2,000,000 shares to BWI Avionics Ltd., 600,000 shares to Granite Communications Inc., and 400,000 shares to Eurogrowth Investments Ltd. BWI Avionics Ltd., Granite Communications Inc., and Eurogrowth Investments Ltd. are non-U.S. persons and the shares were issued outside the United States in reliance upon an exemption from registration available under Regulation S of the Securities Act of 1933, as amended. Effective August 1, 2001, we completed a 10 (old)-for- 1 (new) reverse split of our issued and outstanding common stock and reduced our authorized share capital to consist of 50,000,000 shares of common stock and 10,000,000 shares of preferred stock, each with a par value of $0.0001 per share. At the July 31, 2001, we had 50,803,567 shares of common stock issued and outstanding, and after giving effect to the reverse split, we had approximately 5,080,357 shares of common stock issued and outstanding. All share information contained in this quarterly report gives effect to the reverse split. 28 ITEM 3. DEFAULTS UPON SENIOR SECURITIES None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS During the quarter ended June 30, 2001, we did not submit any matters to shareholders. Subsequent to June 30, 2001, on July 5, 2001, we held our annual general meeting of shareholders. Shareholders representing 3,721,577 (post reverse-split) of the 5,080,357 (post reverse-split) outstanding shares of the Company as of the record date, May 24, 2001, were represented at the Annual Meeting in person or by proxy. The shares represented at the Annual Meeting constituted 73.25% of the outstanding shares. Our shareholders took the following actions: Election of Board of Directors Our shareholders elected the following persons to serve as members to our board of directors: A. Steven Fowler is elected to serve as a Class A director for an initial term of one (1) year; B. Joseph Schlader is elected to serve as a Class B director for an initial term of two (2) years; and C. William Galine is elected to serve as a Class C director for an initial term of three (3) years. Director For Against Abstain -------- --- ------- ------- Steven Fowler 3,718,952 1,440 1,185 Joseph Schlader 3,718,952 1,440 1,185 William Galine 3,718,952 1,440 1,185 Reverse Stock Split Our shareholders approved an amendment to our Certificate of Incorporation to effect a stock combination (reverse stock split) pursuant to which every ten (10) shares of outstanding of our common stock would be reclassified into one (1) share of common stock. For Against Abstain --- ------- ------- 3,718,062 2,520 995 29 Share Capital Reduction Our shareholders approved an amendment to our Certificate of Incorporation to decrease the authorized share capital of the Company from 150,000,000 shares (consisting of 100,000,000 shares of common stock and 50,000,000 shares of preferred stock) to 60,000,000 shares (consisting of 50,000,000 shares of common stock and 10,000,000 shares of preferred stock). For Against Abstain --- ------- ------- 3,719,197 1,185 1,195 Appointment of Auditors Our shareholders ratified the selection of Davidson & Company as independent auditors. For Against Abstain --- ------- ------- 3,721,127 450 0 ITEM 5. OTHER INFORMATION Our Chief Financial Officer, Greigory Park, resigned during the quarter ended June 30, 2001. During the quarter ended June 30, 2001, we wrote off a loan receivable from Mr. Park in the amount of $47,741 in consideration of accrued salaries payable to Mr. Park for his services during the first and second quarters of 2001. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K a) Exhibits Exhibit Number Description ------ ----------- 2.1(1) Agreement of Reorganization by and between Digital Sign Corporation, Edward F. Meyers III and Digital Signs, Inc. dated February 14, 1998. 2.2(1) Agreement and Plan of Share Exchange by and between Digital Sign Corporation and Eriko Internet, Inc. dated April 4, 1999. 2.3(1) Agreement and Plan of Reorganization by and among Pawnbroker.com, Inc. and Joseph Schlader, Cheryl Schlader and William Galine dated May 14, 1999. 30 Exhibit Number Description ------ ----------- 2.4(1) Addendum to Agreement and Plan of Reorganization by and among Pawnbroker.com, Inc. and Joseph Schlader, Cheryl Schlader and William Galine dated June 11, 1999. 3.1(1) Certificate of Incorporation of Digital Sign Corporation filed February 13, 1998. 3.2(1) Certificate of Amendment of Digital Sign Corporation filed June 10, 1999. 3.3(3) Certificate of Amendment of Pawnbroker.com, Inc. filed June 1, 2000. 3.5(1) Bylaws of Digital Sign Corporation. (Previously filed as Exhibit 3.3 to Form 10) 3.6(3) Amended and Restated Bylaws of Pawnbroker.com, Inc. 5.1 Opinion of Dorsey & Whitney LLP 10.1(1) Form of Private Placement Subscription Agreement dated February 1998. 10.2(1) Contribution Agreement by and between Digital Sign Corporation and Cameron Woodbridge dated May 19, 1999. 10.3(1) Subscription Agreement by and between Pawnbroker.com, Inc. and Packard Financial Group Inc. dated June 14, 1999 10.4(1) Form of Share Purchase Warrant issued to Packard Financial Group Inc. on June 14, 1999 10.5(1) 85 Keystone Lease Agreement by and between Pawnbroker.com, Inc. and The Kowalski Family Trust dated April 1, 1999 10.6(1) Design and Development Agreement by and between Pawnbroker.com, Inc. and Banshee, Inc. dated April 26, 1999 10.7(1) Consulting Agreement by and between Pawnbroker.com, Inc. and IRG Investor Relations dated June 25, 1999 10.8(2) Lease Agreement by and between Pawnbroker.com, Inc. and Don Pearlman Joint Venture Six dated December 2, 1999 31 Exhibit Number Description ------ ----------- 10.9(2) Employment Agreement by and between Pawnbroker.com, Inc. and Neil McElwee effective September 13, 1999 10.10(2) Employment Agreement by and between Pawnbroker.com, Inc. and Joseph Schlader effective June 13, 1999 10.11(2) Employment Agreement by and between Pawnbroker.com, Inc. and William Galine effective June 13, 1999 10.12(2) Employment Agreement by and between Pawnbroker.com, Inc. and Vahid Rafizadeh 10.13(2) Severance and Release Agreement by and between Pawnbroker.com, Inc. and Daniel McElwee effective May 18, 2000 10.14(2) Letter Agreement by and between Pawnbroker.com, Inc. and Jefferies & Co., Inc. dated December 1, 1999 10.15(2) 12% Promissory Note in the Principal Amount of $1,000,000 dated April 26, 2000 issued to BWI Avionics, Ltd. 10.16(2) Agreement by and between Pawnbroker.com, Inc. and RedTagOutlet.com, Inc. dated May 10, 2000 10.17(4) Letter Agreement by and between Pawnbroker.com, Inc. and Ladenburg Thalmann & Co. Inc. dated June 7, 2000 10.18(4) Letter Agreement by and between Pawnbroker.com, Inc. and Ladenburg Thalmann & Co. Inc. dated June 7, 2000 10.19(4) Loan Agreement by and between Pawnbroker.com, Inc. and Lamothe Investing Corp. dated June 7, 2000 10.20(4) Registration Rights Agreement by and between Pawnbroker.com, Inc. and Lamothe Investing Corp. dated June 7, 2000 10.21(4) Escrow Agreement related to the Loan Agreement dated June 7, 2000 10.22(4) Form of 9% Convertible Debenture issued to Lamothe Investing Corp. 32 Exhibit Number Description ------ ----------- 10.23(4) Form of Warrant issued to Lamothe Investing Corp. 10.29(3) Amended and Restated Stock Option Plan, filed June 1, 2000. 10.30(5) Common Stock Purchase Agreement by and between Pawnbroker.com, Inc. and Gestrow Investments Limited dated July 6, 2000 10.31(5) Registration Rights Agreement by and between Pawnbroker.com, Inc. and Gestrow Investments Limited dated July 6, 2000 10.32(5) Escrow Agreement related to the Common Stock Purchase Agreement dated July 6, 2000 10.33(5) Form of Warrant issued to Gestrow Investments Limited 10.34(5) Form of Warrant issued to Ladenburg Thalmann & Co. Inc. 10.35(5) Letter Agreement dated July 7, 2000 10.36(5) Promissory Note issued to Ladenburg Thalmamm & Co. Inc. 10.37(5) Letter Agreement with Gestrow Investment Limited dated July 19, 2000 10.38(6) Sales and Fulfillment Agreement dated September 2000, by and between Jewelry Edge and Pawnbroker.com, Inc. (filed as Exhibit 10.1) 10.39(6) Subscription Agreement related to August 11, 2000 unit private placement. (filed as Exhibit 10.2) 10.40(6) Strategic Alliance Agreement, dated October 18, 2000, between First Cash Financial Services, Inc. and Pawnbroker.com, Inc. (filed as Exhibit 10.3) 10.41(6) Form of Warrant issued to First Cash Financial Services, Inc. (filed as Exhibit 10.4) 10.42(6) Strategic Alliance Agreement, dated October 18, 2000, between First Cash Financial Services, Inc. and Pawnbroker.com, Inc. (filed as Exhibit 10.3) 10.43(6) Form of Warrant issued to First Cash Financial Services, Inc. (filed as Exhibit 10.4) 33 Exhibit Number Description ------ ----------- 10.44(7) 18% Promissory Note in the Principal Amount of $100,000 dated July 19, 2001 issued to Edward Romano. 10.45(7) Form of Subscription Agreement dated May 11, 2001 - Note Conversion ------------------- (1) Previously filed September 1, 1999 on Form 10. (2) Previously filed October 13, 1999 on Form 10/A. (3) Previously filed on June 1, 2000 on Form 8-K. (4) Previously filed on June 30, 2000 on Form 10-K. (5) Previously filed on July 31, 2000 on Form S-1. (6) Previously filed on November 14, 2000 on Form 10-Q. (7) Previously filed on May 15, 2001 on Form 10-K. b) Reports on Form 8-K Form 8-K filed on July 19, 2001. 34 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Date: September 6, 2001 PAWNBROKER.COM, INC. By: /s/ Joseph Schlader ------------------------------------ Name: Joseph Schlader Title: President (Principal Executive Officer and Principal Financial Officer) 35

PAWNBROKER COM INC 10-Q