SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark one)
[X] Quarterly Report Under Section 13 or 15(d) of Securities Exchange Act of
1934
[ ] Transition Report Under Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the transition period from ______________ to
___________________
For Period Ended June 30, 2001
Commission File Number 0-26839
SNAP2 CORPORATION
(f/k/a White Rock Enterprises, Ltd.)
(Exact name of registrant as specified in its charter)
NEVADA 88-0407246
(State of Incorporation) (I.R.S. Employer Identification No.)
10641 JUSTIN DRIVE, URBANDALE, IOWA 50322
(Address of Principal Executive Offices) (Zip Code)
(515) 331-0560
(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 [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock at the latest practicable date.
As of June 30, 2001, the registrant had 17,856,000 shares of common stock, $.001
par value, issued and outstanding and 10,000 shares of convertible preferred
stock issued and outstanding which are convertible into 10,000,000 shares of
common stock, $.001 par value, on February 28, 2002.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
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PART I FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
SNAP2 Corporation
Balance Sheets
(Unaudited) (Audited)
June 30, September 30,
2001 2000
----------- -------------
Assets
Cash and cash equivalents $ 18,961 $ 18,956
Accounts receivable 275,690 127,279
----------- -----------
Total current assets 294,651 146,235
Equipment, net of accumulated depreciation 62,654 76,833
Other assets 3,150 4,760
----------- -----------
Total assets $ 360,455 $ 227,828
=========== ===========
Liabilities and Stockholders' Deficit
Accounts payable $ 184,410 $ 56,390
Accrued payroll and related liabilities 226,872 36,339
Accrued royalty 10,500 3,750
Accrued interest payable 18,766 --
Deferred income 101,118 9,343
Line of credit 200,000 --
Current portion of long-term debt 41,538 21,445
----------- -----------
Total current liabilities 783,204 127,267
Long-term debt 183,077 203,170
----------- -----------
Total liabilities 966,281 330,437
Stockholders' deficit:
Common stock - $0.001 par value; 50,000,000 shares
authorized; 17,856,000 shares issued and outstanding 17,856 17,856
Convertible preferred stock - $0.001 par value; 20,000,000
Shares authorized; 10,000 shares issued and outstanding
Shares convert to common stock at a ratio of 1,000 shares
of common for each share of convertible preferred stock
on February 28, 2002. See note 2 10 10
Additional paid-in capital 1,377,648 1,188,858
Accumulated deficit (1,983,690) (1,291,683)
Unearned compensation (17,650) (17,650)
----------- -----------
Total stockholders' deficit (605,826) (102,609)
----------- -----------
Total liabilities and stockholders' deficit $ 360,455 $ 227,828
=========== ===========
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SNAP2 Corporation
Statements of Operations (Unaudited)
For the Three Months Ended June 30, 2001 and 2000
and for the Nine Months Ended June 30, 2001 and 2000
Three Months Ended Nine Months Ended
June 30, June 30,
----------------------------- -----------------------------
2001 2000 2001 2000
------------ ------------ ------------ ------------
Revenue
License fees $ 161,059 $ 80,562 $ 417,894 $ 287,560
Consulting 343,196 150,349 946,617 382,290
Maintenance 11,875 3,910 40,593 3,910
------------ ------------ ------------ ------------
Total revenue 516,130 234,821 1,405,104 673,760
------------ ------------ ------------ ------------
Expenses
Payroll 471,731 236,769 1,281,561 538,970
Payroll Taxes 30,070 16,190 85,417 40,419
Employee health insurance 14,346 6,524 52,159 25,256
Employer 401(k) contribution 8,991 -- 39,191 --
Software development and consulting 41,101 88,397 169,101 270,314
Administration 69,361 48,515 252,221 84,306
Interest 14,595 3,038 31,226 13,361
Travel 11,556 26,086 88,689 72,675
Marketing (1,751) 244 15,533 7,080
Miscellaneous 65 725 19,896 2,545
Equipment and office rent 10,632 15,950 44,072 28,639
Depreciation 6,150 5,490 18,045 8,490
------------ ------------ ------------ ------------
Total expenses 676,847 447,928 2,097,111 1,092,055
------------ ------------ ------------ ------------
Loss before
income taxes (160,717) (213,107) (692,007) (418,295)
Income taxes -- -- -- --
------------ ------------ ------------ ------------
Net loss $ (160,717) $ (213,107) $ (692,007) $ (418,295)
============ ============ ============ ============
Loss per share
Basic and diluted loss per share $ (0.01) $ (0.01) $ (0.04) $ (0.03)
============ ============ ============ ============
Weighted average shares 17,856,000 17,856,000 17,856,000 13,421,489
============ ============ ============ ============
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SNAP2 Corporation
Statements of Cash Flows (Unaudited)
For the Nine Months Ended June 30, 2001 and 2000
2001 2000
---------- ----------
Cash flows from operating activities
Net loss $ (692,007) $ (418,295)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation 18,045 8,490
Deferred income 91,775 13,734
Changes in:
Accounts receivable, trade (148,411) (78,328)
Accounts payable and accrued expenses 344,069 (136,768)
---------- ----------
Net cash used by operating activities (386,529) (611,167)
Cash flows from investing activities
Purchases of equipment (3,866) (39,369)
Other assets 1,610 (36,123)
---------- ----------
Net cash used by investing activities (2,256) (75,492)
Cash flows from financing activities
Proceeds from notes payable -- 100,000
Repayment of notes payable and long-term debt -- (185,385)
Proceeds from line of credit 200,000 --
Proceeds from issuance of common stock -- 760,000
Additional paid-in capital from investors 188,790 100,000
---------- ----------
Net cash provided by financing activities 388,790 774,615
---------- ----------
Increase in cash and cash equivalents 5 87,956
Cash and cash equivalents, beginning of period 18,956 22,102
---------- ----------
Cash and cash equivalents, end of period $ 18,961 $ 110,058
========== ==========
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SNAP2 Corporation
Notes to Financial Statements
For the Three Months Ended June 30, 2001 and 2000
and for the Nine Months Ended June 30, 2001 and 2000
(Unaudited)
1. BASIS OF PRESENTATION
These unaudited financial statements were prepared in accordance with
instructions for Form 10-QSB and therefore, do not include all disclosures
necessary for a complete presentation of the statements of financial
condition, operations and cash flows in accordance with generally accepted
accounting principles. However, in the opinion of management, all adjustments
for a fair presentation of the financial statements have been included.
Results for interim periods are not necessarily indicative of results
expected for the year.
These financial statements should be read in conjunction with the financial
statements and related notes, which are included in the Company's Annual
Report on Form 10-KSB for the year ended September 30, 2000.
2. REVERSE ACQUISITION
Effective February 28, 2000, SNAP2 Corporation (f/k/a White Rock Enterprises,
Ltd.) (the Company) merged with ISES Corporation (ISES), with the Company as
the surviving corporation. At the date of the merger, the Company was a
"shell company" as the Company had no assets or liabilities, had generated no
revenues since inception and had incurred total expenses of $6,100 since its
inception on October 8, 1998. The merger transaction has been accounted for
as a reverse acquisition. In such a transaction, the operating enterprise
(ISES) is determined to be the acquiring enterprise for financial reporting
purposes. The historical financial statements of ISES are presented as the
historical financial statements of the combined enterprise. The equity of
ISES is presented as the equity of the combined enterprise, however, the
capital stock account of ISES is adjusted to reflect the par value of the
outstanding stock of the Company after giving effect to the number of shares
issued in merger. For periods prior to the merger, the equity of the combined
enterprise is the historical equity of ISES prior to the merger retroactively
restated to reflect the number of shares received in the merger.
In connection with the merger, the Company provided for the issuance of
10,000,000 shares of common stock and 10,000 shares of convertible preferred
stock for 100% of the outstanding shares of ISES. The convertible preferred
stock automatically converts to 10,000,000 shares of common stock on February
28, 2002. Also in connection with the merger, an additional 2,200,000 shares
of common stock were issued to others in exchange for locating investors and
a commitment to raise $2,000,000 to fund the Company's working capital needs
and general corporate purposes. As of June 30, 2001, $615,650 of the
$2,000,000 had been received and recorded as additional paid-in capital.
Management believes that it is unlikely that any additional capital will be
provided by those entities, and is in the process of attempting to recover as
many of those shares as
5
5 possible. As of June 30, 2001, approximately 1,097,000 shares have been
surrendered by these entities in lieu of additional capital contributions.
These shares are not held as treasury stock, have not been returned to
authorized but unissued shares, and are still shown as outstanding on the
Company's stock records.
3. EARNINGS PER SHARE OF COMMON STOCK
Basic loss per share is computed based on the weighted-average common shares
outstanding during the period.
Diluted loss per share is computed by considering the weighted-average common
shares outstanding and dilutive potential common shares as a result of
conversion features of convertible preferred stock and outstanding stock
options. The effect of convertible preferred stock and outstanding stock
options were not used in the calculation of diluted earnings per share, as
they were anti-dilutive during the periods shown.
4. STOCK OPTIONS
During the quarter ended June 30, 2001, 1,000,000 options to acquire shares
of common stock were granted but none were exercised. The Company has
outstanding options for 1,847,500 shares of common stock at June 30, 2001.
The options will be exercisable in conformity with a stock option plan that
was approved by the Board of Directors and a majority of the stockholders of
the Company on March 15, 2000. Stock options are generally granted at fair
value and vest over a four-year period. The plan is more restrictive for any
options granted to stockholders owning in excess of ten percent of
outstanding common stock.
5. NOTES PAYABLE
The Company has entered into a $200,000 bank line of credit agreement. The
line of credit is collaterlized by real property owned by a stockholder,
matures November 10, 2001 and bears interest at the bank's base interest
rate. At June 30, 2001, $200,000 was outstanding under this agreement.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
Forward-Looking Statements
The discussion in this Report on Form 10-QSB contains forward-looking statements
that have been made pursuant to the provisions of the Private Securities
Litigation Reform Act of 1995. Such forward-looking statements are based on
current expectations, estimates and projections about the Company's business,
based on management's current beliefs and assumptions made by management. Words
such as "expects", "anticipates", "intends", "believes", "plans", "seeks",
"estimates" and similar expressions or variations of these words are intended to
identify such forward-looking statements. Additionally, statements that refer to
the Company's estimated or
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anticipated future results, sales or marketing strategies, new product
development or performance or other non-historical facts are forward-looking and
reflect the Company's current perspective based on existing information. These
statements are not guarantees of future performance and are subject to certain
risks, uncertainties and assumptions that are difficult to predict. Therefore,
actual results and outcomes may differ materially from what is expressed or
forecasted in any such forward-looking statements. Such risks and uncertainties
include those set forth herein below under "Risk Factors That May Affect Future
Results of Operations" as well as previous public filings with the Securities
and Exchange Commission. The discussion of the Company's financial condition and
results of operations should also be read in conjunction with the financial
statements and related notes included in Item 1 of this quarterly report. The
Company undertakes no obligation to update publicly any forward-looking
statements, whether as a result of new information, future events or otherwise.
Overview
SNAP2 Corporation (f/k/a White Rock Enterprises, Ltd.) is a software product
developer and software service provider for embedded systems including set-top
boxes (STB) for interactive television, in-flight entertainment systems (IFE)
for passenger aircraft and Internet appliances for the consumer electronics
market. The Company's activities to date have consisted of:
- Providing on-going embedded software services to Microsoft Corporation
WebTV for its Internet enabled, television set-top box.
- Developing and announcing SNAP2 GEAR as the Company's first
interactive television (iTV) content development product targeting the
worldwide Digital Video Broadcast - Media Home Platform (DVB-MHP)
standard.
- Continuing support, integration and deployment of its Airsoft Travel
Kit Games software product on the following airlines:
- Air France
- British Airways
- Delta Air Lines
- Aer Lingus
- LanChile
- AOM French Airlines
- Qantas Airways
- Entering into software license agreements with airlines that generate
recurring revenue on the anniversary date of the license when extended
by the airline. The Company's SNAP2 Games for in-flight entertainment
systems have been selected for use on 274 wide-body aircraft
worldwide.
- Demonstrating SNAP2 Java-based Interactive Television applications and
software middleware components with Sun Microsystems at National
Association of Broadcasters (NAB 2001) in April, 2001 and Java One in
June, 2001.
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- Ported and demonstrated SNAP2 Games for the Interlink Corporation's
IntuiTouch interactive television remote controller at the National
Cable and Telecommunications Association (NCTA - Cable 2001)
conference in June 2001.
- Expanding the research and development staff to grow software service
capacity and continue development of SNAP2 intellectual property
product assets for embedded systems.
- Expanding its presence in the Interactive Television, Internet
Appliance, In-Flight Entertainment and Embedded Systems markets.
Management. The Company's management positions are now held by:
Rick Grewell (43) -- President and CEO
Steve Johnson (41) -- Vice President of Marketing
Antony Hoffman (40) -- Vice President of Research and Development
Mark Malinak (40) -- Vice President of Sales
The Company's directors are Messrs. Grewell, Johnson, Hoffman, Malinak, Mike
Hennel (42), and Stephen Dukes (47).
Operations. The Company operates from its new headquarters located at 10641
Justin Drive, Des Moines, Iowa 50322. The Company is traded on the
over-the-counter bulletin board (OTCBB) using the trading symbol SSNP. In
addition to its offices in Des Moines, the Company has a home sales office in
Austin, Texas and an affiliation with engineering and graphic designers in
Toronto, Canada. The combined three locations develop and market software
products and service the industries targeted by the Company.
Products. The Company markets software applications for the IFE and interactive
television markets. Its Airsoft Travel Kit software targets IFE systems
manufactured by Rockwell Collins, Matsushita Avionics and Sony Trans Com. The
Travel Kit is comprised of digital information and entertainment software that
airline passengers can access from video displays at their passenger seats while
traveling. The complete Travel Kit consists of destination information, language
training and games and customized airline information. The package can be sold
as a complete package or as individual components. The Company has sold packages
of Travel Kit Games to Air France, British Airways, Delta Air Lines, LanChile,
Aer Lingus, AOM French Airlines and Qantas Airways. The Company has licensed
destination information and language training from Lonely Planet Publishing
based in Australia. Airsoft Travel Kit Games are created, copyrighted, owned and
licensed by the Company. The Company has also licensed Tetris(R) game content
from Blue Planet So ftware, San Francisco, California for use in its In-Flight
Tetris(TM) game for in-flight entertainment. The game suite consists of 18
assorted board, card, arcade, children's games and games of chance. The
Company's products are sold on a royalty-based model that generates revenue at
the time of customer contract execution and provides annual revenues for
continued use of the software. IFE products have been sold to airlines and to
IFE equipment manufacturers. The Company is porting these games to interactive
television STBs targeting interactive cable and telephone networks.
8
The Company plans to broaden its software product offering for the interactive
television market and the Internet appliance market. The Company intends to sell
interactive television and Internet appliance software products to original
equipment manufacturers, technology providers and network operators in these
markets.
Services. The Company is staffed with software engineers experienced in software
design and programming for emerging embedded computer systems and digital
graphic artists experienced in graphical user interfaces and display for
consumer electronic applications. The Company has provided embedded software
services to Motorola, Microsoft, and Canal+ for interactive television and
Internet appliances. For IFE, the Company has provided services to Rockwell
Collins and to the airlines that required graphics customization for their SNAP2
Travel Kit Games.
The Company emphasizes embedded software services for revenue generation and
strategic positioning of developing intellectual property for the interactive
television, Internet appliance and embedded systems markets.
Revenues. Through June 30, 2001, the Company's revenues were derived from
license fees and renewals of its SNAP2 Travel Kit Games for the IFE market and
software and engineering services provided to interactive television equipment
manufacturers and technology providers. The Company's IFE revenues were
comprised of two types: (i) license fees from airlines for Airsoft Travel Kit
Game products previously sold; and (ii) OEM initial product sales to IFE
equipment manufacturers for SNAP2 Travel Kit Game products. License fees, which
are typically one year in duration, where the Company does not anticipate
incurring significant additional support costs, are recognized at the time of
sale. Maintenance fees from the Company's software products are recognized
(based on software license fee at time of license commencement or renewal)
ratably over the term of the maintenance contract, which is typically one year
in duration. Software service fees are recognized using the invoice amount for
labor hours as services are performed. Software services are typically performed
under contracts of up to six months in duration and are renewable.
The Company intends to derive the primary portion of its revenue growth through
Company software services. The Company intends to continue engaging in software
services with original equipment manufacturers (OEMs), network operators and
technology providers. The service engagements are strategic to the Company as it
provides licensing opportunities for software product and product development.
The Company continues to collect revenues from its IFE products. Revenue is
collected on execution of the software product license and is subject to renewal
fees on each anniversary date of the agreement thereafter. The Company plans to
continue distributing products directly to end users as well as to OEMs who
bundle and resell the Company's products to end users.
Payroll and Related Costs. The Company's payroll and related expenses includes
salaries of research and development, sales (including commissions), marketing
and executive administration personnel. These expenses also include payroll
taxes, employee health insurance
9
and employer 401(k) contributions. The Company expects payroll and related
benefits expenses will increase in the future as additional personnel are hired
to support anticipated growth.
Software Development and Consulting. The Company's software development and
consulting expense includes allocated related expenses and payments to
third-party consultants developing software and graphic assets owned and used by
the Company.
Travel and Marketing. These sales and marketing costs primarily relate to sales
related travel and various marketing efforts, promotional materials and public
relations activities. The Company expects its sales and marketing efforts to
increase as it focuses on increasing its services revenues and as it develops
and releases new products.
Administrative, Interest, Miscellaneous, Equipment and Office Rent, and
Depreciation. The Company's general and administrative expense includes
administrative costs, legal fees, travel costs, interest on debt,
facilities-related expenses, bad debt expense, depreciation and other
administrative costs. The Company expects that general and administrative
expense will increase in the future as a result of the anticipated growth in
business and cost of operating as a public company.
Results of Operations
Since the inception of ISES Corporation (now the Company), it has been engaged
primarily in the business of developing and licensing software products and
providing engineering software and graphic design services. Accordingly,
historical results of operations are not indicative of and should not be relied
upon as an indicator of future performance.
All revenue and the majority of the costs and expenses disclosed in this report
for the period ended June 30, 2000 (prior to the merger) were generated by ISES
Corporation. The Company had no revenue prior to the merger with ISES
Corporation and minimal costs and expenses. As a result, the consolidated
comparative data represents the comparison of the Company's results for the
period ended June 30, 2001 with revenue, costs and expenses of ISES Corporation
(or the Company, as applicable) for the same period in the previous year.
Three Months Ended June 30, 2001 and 2000
Revenues
Total revenues increased 120% to $516,000 for the three months ended June 30,
2001, compared to $235,000 for the three months ended June 30, 2000. The
increase was related to an increase in software service revenues and software
license fees. Software service fees represented 66% of revenues versus 34% for
software license fees and maintenance. During the three months ended June 30,
2001, transactions with Microsoft, British Airways, Interlink Electronics, Delta
Air Lines, AOM French Airlines, and Air France, accounted for 56%, 22%, 9%, 7%,
3% and 2%, respectively of the Company's total revenues.
10
Costs and Expenses
Total costs increased 51% to $677,000 for the three months ended June 30, 2001,
compared to $448,000 for the three months ended June 30, 2000. The increase was
related to payroll and related costs and other administrative costs needed to
support increased business and anticipated future growth. The Company is
currently analyzing costs and expenses due to continued losses. See further
discussions in "Liquidity and Capital Resources".
Payroll and Related Costs. Payroll and related benefits increased 102% to
$525,000 for the three months ended June 30, 2001 from $259,000 for the three
months ended June 30, 2000 reflecting costs associated with the Company's
expansion in research and development and the shift in having employees perform
development work versus outside consultants.
Software Development and Consulting. Software development and consulting costs
decreased 54% to $41,000 for the three months ended June 30, 2001 from $88,000
for the three months ended June 30, 2000, which reflects efforts by the Company
to reduce its reliance on outside consultants.
Travel and Marketing. These sales and marketing related costs decreased 63% to
$10,000 for the three months ended June 30, 2001 from $26,000 for the three
months ended June 30, 2000, which reflects the timing of trips associated with
the Company's sales and marketing efforts.
Administrative, Interest, Miscellaneous, Equipment and Office Rent, and
Depreciation. These general and administrative costs increased 37% to $101,000
for the three months ended June 30, 2001 from $74,000 for the three months ended
June 30, 2000. The increase in costs is primarily due to interest on borrowings,
the professional fees associated with being a public reporting company,
professional fees associated with the ongoing business of the Company, rent, and
other general and administrative expenses.
Nine Months Ended June 30, 2001 and 2000
Revenues
Total revenues increased 109% to $1,405,000 for the nine months ended June 30,
2001, compared to $674,000 for the nine months ended June 30, 2000. The increase
was related to an increase in software service revenues. Software service fees
represented 67% of revenues versus 33% for software license fees and
maintenance. During the nine months ended June 30, 2001, transactions with
Microsoft, British Airways, Rockwell, Delta Air Lines, Qantas Airways Limited,
Interlink Electronics, Air France, and LanChile accounted for 55%, 8%, 10%, 8%,
4%, 3%, 3%, and 2% respectively of the Company's total revenues.
Costs and Expenses
Total costs increased 92% to $2,097,000 for the nine months ended June 30, 2001,
compared to $1,092,000 for the nine months ended June 30, 2000. The increase was
related to payroll and related costs and other administrative costs needed to
support increased business and anticipated
11
future growth. The Company is currently analyzing costs and expenses due to
continued losses. See further discussions in "Liquidity and Capital Resources".
Payroll and Related Costs. Payroll and related benefits increased 141% to
$1,458,000 for the nine months ended June 30, 2001 from $605,000 for the nine
months ended June 30, 2000 reflecting costs associated with the Company's
expansion in research and development and the shift in having employees perform
development work versus outside consultants.
Software Development and Consulting. Software development and consulting costs
decreased 37% to $169,000 for the nine months ended June 30, 2001 from $270,000
for the nine months ended June 30, 2000, which reflects efforts by the Company
to reduce its reliance on outside consultants.
Travel and Marketing. These sales and marketing costs increased 31% to $104,000
for the nine months ended June 30, 2001 from $80,000 for the nine months ended
June 30, 2000, which reflects the Company's increased sales and marketing
efforts.
Administrative, Interest, Miscellaneous, Equipment and Office Rent, and
Depreciation. These general and administrative costs increased 166% to $365,000
for the nine months ended June 30, 2001 from $137,000 for the nine months ended
June 30, 2000. The increase in costs is primarily due to interest on borrowings,
the professional fees associated with being a public reporting company,
professional fees associated with the ongoing business of the Company, rent, bad
debt expense and other general and administrative expenses.
Liquidity and Capital Resources
The Company requires working capital to fund its operations, since the Company
has experienced losses from operations and negative cash flows.
In an effort to fund its planned development and sales and marketing efforts,
the Company, effective February 28, 2000 (the date of filing of a Certificate of
Merger with the Nevada Secretary of State), merged with ISES Corporation with
the Company as the surviving corporation. The merger was arranged for the
Company by Investment Capital Corporation and Pursuit Capital LLC, venture
capital firms located in Scottsdale, Arizona in accordance with understandings
these entities reached with ISES Corporation to raise capital in private
transactions. According to their agreement, these entities were to raise
$2,000,000 to fund the Company's post-merger research and development, marketing
and overall expansion. Pursuant to and in consideration of this arrangement and
the identification of the potential merger as an investment opportunity, the
Company issued 2,200,000 shares of its $.001 par value per share common stock to
these entities and/or their designees. During the fiscal quarter ended March 31,
2000 these entities conducted a private placement on behalf of the Company and
raised $760,000, the proceeds of which have been given to the Company. For these
funds, the Company issued an additional 760,000 shares of its $.001 per share
common stock. These entities are obligated to provide the Company with an
additional $2,000,000 in equity (without further issuance of equity securities
by the Company) of which $615,650 was received through June 30, 2001, leaving a
balance of $1,384,350 to be provided by these entities. None of such
12
shares of common stock was or will be registered under the Securities Act of
1933, as amended. Management believes that it is unlikely that these entities
will provide any additional capital to the Company and is in the process of
attempting to recover as many of such shares as possible. As of June 30, 2001,
approximately 1,097,000 shares have been surrendered by those entities in lieu
of additional capital contributions. These shares are not held as treasury
stock, have not been returned to authorized but unissued shares, and are still
shown as outstanding on the Company's stock records.
As a result of the unfunded commitment, the Company entered into a $200,000 line
of credit with a bank, which is guaranteed by a stockholder, entered in other
debt arrangements of approximately $200,000, and has delayed paying certain
accounts payable to fund its operations. The Company is investigating several
other financing activities, but there is no assurance any funding will be
obtained, or if obtained, the terms may not be favorable. Also, the Company has
focused its efforts on increasing revenues, primarily services revenues, in an
effort to generate positive cash flow. The Company has been able to increase
revenues, but has not been able to consistently generate profitable operations.
Due to the continued losses and the inability to pay its debts as they come due,
the Company is currently analyzing its costs and expenses in an effort to
achieve profitability based on its current revenue level. Also, the Company
continues to seek and investigate potential transactions that may generate cash;
however, there are no assurances that any such transactions will be identified
or successfully closed.
Since incorporation, ISES (the Company's predecessor in interest pursuant to the
merger) and the Company after the merger, have experienced various levels of
losses and negative cash flow from operations and notwithstanding the merger,
expects to experience negative cash flows in the foreseeable future, without a
significant reduction in costs and expenses. In addition, the Company needs to
raise additional capital and there can be no assurance the merged Company will
be able to obtain additional financing on favorable terms, if at all. If
additional capital cannot be obtained on acceptable terms, if and when needed,
the Company may not be able to further develop or enhance its products, take
advantage of future opportunities or respond to competitive pressures or
unanticipated requirements, any of which could have a material adverse effect on
the Company's business.
RISK FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS
In addition to the other risk factors contained herein and within other filings
with the Securities and Exchange Commission, the Company believes the following
additional risk factors should be taken into consideration in evaluating its
business:
Funding Needs
The Company needs additional funding to pay its obligations as they come due,
further develop or enhance its products, take advantage of future opportunities
or respond to competitive pressures or unanticipated requirements. The Company's
financing plans were to obtain funding of approximately $2,000,000 as a result
of the merger with ISES Corporation on February 28, 2000. Only $615,650 of
funding was received. As a result of the unfunded commitment, the Company
entered into a $200,000 line of credit with a bank, which is guaranteed by a
13
stockholder, entered in other debt arrangements of approximately $200,000, and
has delayed paying certain accounts payable to fund its operations. The Company
is investigating several other financing activities, but there is no assurance
any funding will be obtained, or if obtained, the terms may not be favorable.
Also, the Company has focused its efforts on increasing revenues, primarily
services revenues, but has been unable to consistently generate profitable
operations. As a result of the continued losses, the Company is analyzing its
costs and expenses and continues to seek and investigate transactions that would
generate cash; however, there is no assurance that any such transaction will be
identified or successfully closed. If additional capital cannot be obtained on
acceptable terms, if and when needed, the Company may not be able to further
develop or enhance its products, take advantage of future opportunities or
respond to competitive pressures or unanticipated requirements, any of which
could have a material adverse effect on the Company's business.
The Company Expects to Incur Operating and Net Losses
The Company has a limited operating history, has incurred significant losses in
the past year and, at June 30, 2001, had an accumulated deficit of $2,013,390.
To date, the Company has recognized growing revenue, however; its ability to
generate revenue is subject to substantial uncertainty. The Company expects to
incur significant additional losses and continued negative cash flow from
operations in 2001 and it may never become profitable. The Company expects to
incur significant sales and marketing, research and development and general and
administrative expenses. The Company will need to generate significant revenues
to achieve profitability and positive operating cash flows. Even if
profitability and positive operating cash flow are achieved, the Company may not
be able to achieve, sustain or increase profitability or positive operating cash
flow on a quarterly or annual basis.
The Company's Limited Operating History and the Emerging Market for Interactive
Television and In-Flight Entertainment Systems Make Its Future Financial Results
Unpredictable
The Company's business and prospects depend on the development and market
acceptance of interactive television and the growth of aircraft in-flight
entertainment systems. The Company's future revenue prospects are subject to a
high degree of uncertainty. Currently, it derives revenues evenly from in-flight
entertainment software license fees and interactive television engineering
service fees. In the future, however, the Company intends to generate revenue
primarily from software license fees particularly in the emerging market of
interactive television while maintaining modest growth in the in-flight
entertainment market. The market for interactive television software is new,
unproven and subject to rapid technology change. This market may never develop
or may develop at a slower rate than anticipated. In addition, the Company's
success in marketing the Company as a supplier of interactive television
application software is dependent upon developing and maintaining relationships
with industry-leading computer and consumer electronics manufacturers, network
operators and Internet content providers. There is already competition in the
market to provide interactive television software. Companies such as Liberate,
Intellocity, Microsoft, and AOL have established a market presence and have
significantly greater financial, marketing and technical resources than the
Company. These companies who offer interactive television application software
may capture a larger
14
portion of the market than the Company. Any failure to establish relationships
with interactive television equipment manufacturers and network operators will
have a material adverse effect on the Company's business and prospects.
The Company's Business is Dependent Upon the Successful Deployment of Digital
Set Top Boxes for Interactive Television and the In-Flight Entertainment Systems
Targeted by the Company
The Company's software products target specific interactive television and
in-flight entertainment systems and the opportunity to generate revenue can be
directly related to the number and the timing of systems deployed. It is the
Company's intent to pursue and support the most popular system platforms for
these markets. If the platforms targeted fail to establish significant and
timely deployment in the market it will have a material adverse effect on the
Company's business and prospects.
The Company Faces Competition from Companies with Significantly Greater
Financial, Marketing, and Technical Resources
The markets for interactive television and in-flight entertainment systems are
competitive. Companies that offer competing software applications and services
for interactive television include Liberate, Intellocity, Microsoft, AOL and
others. These entities each have a larger customer base, a greater number of
applications, and greater brand recognition, market presence and financial,
marketing and distribution resources than the Company. Other companies that
offer competing software applications and services for in-flight entertainment
include Nintendo, Infogrames, Tenzing, and Intergame some of which have a larger
customer base, a greater number of applications, and greater brand recognition,
market presence and financial, marketing and distribution resources than the
Company. As a result, the Company will have difficulty increasing the number of
design "wins" for its products and services.
The Company May Not Be Able to Respond to the Rapid Technological Change in the
Markets in Which It Competes
The Company currently participates in markets that are subject to:
o rapid technology change;
o frequent product upgrades and enhancements;
o changing customer requirements for new products and features; and
o multiple, competing, and evolving industry standards
The introduction of the software applications targeting interactive television
and in-flight entertainment containing new technologies and the emergence of new
industry standards could render the Company's products less desirable or
obsolete. In particular, the Company expects that changes in the operating
system environment including client and server middleware will require it to
rapidly evolve and adapt its products to be competitive. As a result, the life
cycle of each release of the Company's products is difficult to estimate. To be
competitive, the Company will need to develop and release new products and
upgrades that respond to technological
15
changes or evolving industry standards on a timely and cost-effective basis.
There can be no assurance that the Company will successfully develop and market
these types of products and upgrades or that the Company's products will achieve
market acceptance. If the Company fails to produce technologically competitive
products in a timely and cost-effective manner, its business and results of
operations could suffer materially.
Volatility of Stock Price
The market price of the Company's common stock is likely to fluctuate in the
future. The Company believes that various factors, including quarterly
fluctuations in results of operations, announcements of new products or partners
by the Company or by its competitors, changes in interactive television and
in-flight entertainment markets in general, or general economic, political and
market conditions may significantly affect the market price of its common stock.
PART II OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS.
The Company currently is not aware of any pending legal proceedings to which it
is a party or to which any of its property is subject. The Company currently is
not aware that any governmental authority is contemplating any proceedings
against the Company or its property.
ITEM 2: CHANGES IN SECURITIES AND USE OF PROCEEDS
In connection with the merger of ISES with and into the Company, the Acquisition
Agreement and Plan of Merger (previously filed as Exhibit 1.1 to the Company's
Current Report on Form 8-K filed March 1, 2000) provided for the issuance of (i)
10,000,000 shares of common stock and (ii) 10,000 shares of convertible
preferred stock which are automatically convertible into 10,000,000 shares of
common stock of the Company two (2) years after the Closing Date of the Merger
which was February 28, 2000.
An additional 2,200,000 shares of common stock were issued to various designees
of Investment Capital Corporation and Pursuit Capital, LLC in connection with
the merger, in exchange for the commitment of these entities to raise $2,000,000
to fund working capital needs and general corporate purposes, including, but not
limited to, expansion of sales and marketing efforts, research and development
activities, licensing of new technology and payment of additional legal and
accounting services occasioned by the merger of the Company and ISES. These
entities conducted a private placement of the Company's $.001 par value common
stock during the fiscal quarter ended March 31, 2000 and raised $760,000, in
consideration of which the Company issued an additional 760,000 shares of its
common stock. These entities are obligated to provide the Company with an
additional $2,000,000 in equity (without further issuance of equity securities
by the Company) of which $615,650 was received through June 30, 2001, leaving a
balance of $1,394,350 to be provided by these entities. None of such shares of
common stock or preferred stock was or will be registered under the Securities
Act of 1933, as amended. The funds received have been used for working capital.
Management believes that it is unlikely that these entities will provide any
additional capital to the Company and is in the
16
process of attempting to recover as many of such shares as possible. As of June
30, 2001 approximately 1,097,000 shares have been surrendered by these entities
in lieu of additional capital contributions. These shares are not held as
treasury stock, have not been returned to authorized but unissued shares, and
are still shown as outstanding on the Company's stock records.
ITEM 3: DEFAULTS UPON SENIOR SECURITIES
There has been no material default or any material arrearage or delinquency by
the Company of the type to be reported under this item.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5: OTHER INFORMATION
The Company does not believe there is any information to report under this item.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
3.1 Articles of Incorporation, as amended (Incorporated by
reference to the Company's 10-KSB for the fiscal year
ended September 30, 2000)
3.2 Bylaws, as amended (Incorporated by reference to the
Company's 10-KSB for the fiscal year ended September
30, 2000)
10.1 Consulting Agreement dated February 25, 1999 between
ISES Corporation and Trivia Mania (Incorporated by
reference to the Company's 10-QSB for the period ended
March 31, 2000)
10.2 Copyright and Trademark License and Distribution
Agreement dated September 30, 1999 between The Tetris
Company, L.L.C. and ISES Corporation (Incorporated by
reference to the Company's 10-QSB for the period ended
March 31, 2000)
10.4 Investment Capital Corporation - Letter agreement
regarding Merger of White Rock Enterprises Ltd. and
ISES Corporation (Incorporated by reference to the
Company's 10-QSB for the period ended March 31, 2000)
10.5 Investment Capital Corporation - Memo regarding
proposed new capital structure of White Rock
Enterprises, Ltd. reflecting the merger (Incorporated
by reference to the Company's 10-QSB for the period
ended March 31, 2000)
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10.7 Content License Agreement dated November 15, 1999
between Lonely Planet Publications Pty. Ltd. and
ISES Corporation (Incorporated by reference to the
Company's 10-QSB for the period ended March 31,
2000)
10.8 License and Distribution Agreement dated October 1,
1999 pursuant to which ISES Corporation appoints
Licensee- Rockwell Collins, Inc. and End User-Air
France (Incorporated by reference to the Company's
10-QSB for the period ended March 31, 2000)
10.12 First Amendment to SNAP2 Corporation Stock Option
Plan (Amending Stock Option Plan previously filed as
Exhibit 10.12 to the Company's 10-QSB for the period
ended June 30, 2000) (Incorporated by reference to
the Company's 10-KSB for the year ended September
30, 2000)
10.13 In-Flight Entertainment Software License Agreement
for Delta Air Lines, Inc. dated as of April 26, 2000
(Incorporated by reference to the Company's 10-QSB
for the period ended June 30, 2000)
10.15 In-Flight Entertainment Software License Agreement
by AOM dated as of April 27, 2000 (Incorporated by
reference to the Company's 10-QSB for the period
ended June 30, 2000)
10.16 In-Flight Entertainment Software License Agreement
by LanChile dated as of October 6, 2000
(Incorporated by reference to the Company's 10-QSB
for the period ended December 31, 2000)
10.17 Software Services Agreement dated as of October 24,
2000 between Microsoft and SNAP2 (Incorporated by
reference to the Company's 10-QSB for the period
ended December 31, 2000)
10.18 In-Flight Entertainment Software License Agreement
for Aer Lingus dated as of October 30, 2000
(Incorporated by reference to the Company's 10-QSB
for the period ended December 31, 2000)
* 10.19 In-Flight Entertainment Software License Agreement
for British Airways dated as of April 16, 2001
* Filed herewith
(b) Report on Form 8-K: None.
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
SNAP2 CORPORATION
Date: August 10, 2001 By: /s/ Dean R. Grewell
-------------------------------
Dean R. Grewell, III, President
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