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 March 31, 2002
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 March 31, 2002, the registrant had 27,856,000 shares of common stock,
$.001 par value, issued and outstanding. At February 28, 2002 10,000 shares of
convertible preferred stock was converted into 10,000,000 shares of common
stock, $.001 par value.
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
March 31, 2002 and September 30, 2001 (Unaudited)
March 31, September 30,
2002 2001
----------- -----------
Assets
Cash $ 115,269 $ 10,792
Accounts receivable 213,126 143,794
----------- -----------
Total current assets 328,395 154,586
Equipment, net of accumulated depreciation 47,395 55,580
Other assets 300 300
----------- -----------
Total assets $ 376,090 $ 210,466
=========== ===========
Liabilities and Stockholders' Deficit
Line of credit $ 200,000 $ 200,000
Current portion of long-term debt 111,000 66,000
Accounts payable 175,144 205,312
Accrued payroll and related liabilities 261,996 310,358
Accrued royalty 17,250 12,750
Accrued interest payable 19,115 14,209
Deferred income 19,375 46,809
----------- -----------
Total current liabilities 803,880 855,438
Long-term debt 113,615 158,615
----------- -----------
Total liabilities 917,495 1,014,053
Stockholders' deficit:
Common stock - $0.001 par value; 50,000,000 shares
authorized; 27,856,000 and 17,856,000 shares issued and outstanding
at March 31, 2002 and September 30, 2001, respectively 27,856 17,856
Convertible preferred stock - $0.001 par value; 20,000,000
shares authorized; 0 and 10,000 shares issued and outstanding
at March 31, 2002 and September 30, 2001, respectively -- 10
Additional paid-in capital 1,431,018 1,417,528
Accumulated deficit (1,937,602) (2,192,581)
Unearned compensation (62,677) (46,400)
----------- -----------
Total stockholders' deficit (541,405) (803,587)
----------- -----------
Total liabilities and stockholders' deficit $ 376,090 $ 210,466
=========== ===========
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SNAP2 Corporation
Statements of Operations (Unaudited)
For the Three and Six Months Ended
March 31, 2002 and 2001
Three Months Ended Six Months Ended
March 31, March 31,
-------------------------------------------------------------
2002 2001 2002 2001
-------------------------------------------------------------
Revenue
License fees $ 97,143 $ 223,635 $ 190,327 $ 256,835
Consulting 543,086 398,354 921,504 603,423
Maintenance 11,875 14,359 16,250 28,718
-------------------------------------------------------------
Total revenue 652,104 636,348 1,128,081 888,976
Cost of Revenue 307,488 181,533 544,786 284,741
-------------------------------------------------------------
Gross Profit 344,616 454,815 583,295 604,235
Expenses
Research and development 62,930 198,486 177,855 460,302
Sales and marketing 60,293 174,206 117,455 319,362
General and administrative 152,194 180,280 315,649 339,230
-------------------------------------------------------------
Total operating expenses 275,417 552,972 610,959 1,118,894
-------------------------------------------------------------
Loss from operations 69,199 (98,157) (27,664) (514,659)
Interest expense (10,148) (9,733) (17,357) (16,630)
Gain on sale and license of IFE assets -- -- 300,000 --
-------------------------------------------------------------
Net income (loss) $ 59,051 $ (107,890) $ 254,979 $ (531,289)
============ ============ ============ ============
Net income (loss) per share -
Basic $ 0.00 $ (0.01) $ 0.01 $ (0.03)
============ ============ ============ ============
Diluted $ 0.00 $ (0.01) $ 0.01 $ (0.03)
============ ============ ============ ============
Weighted average shares outstanding -
Basic 21,411,556 17,856,000 19,614,242 17,856,000
============ ============ ============ ============
Diluted 27,856,000 17,856,000 27,856,000 17,856,000
============ ============ ============ ============
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SNAP2 Corporation
Statements of Cash Flows (Unaudited)
For the Six Months Ended
March 31, 2002 and 2001
2002 2001
--------- ---------
Cash flows from operating activities
Net income (loss) $ 254,979 $(531,289)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation 11,263 11,895
Amortization of unearned compensation 7,204 --
Deferred income (27,434) 18,782
Changes in:
Accounts receivable (69,332) (91,450)
Accounts payable and accrued expenses (69,124) 278,871
--------- ---------
Net cash provided by (used in) operating activities 107,556 (313,191)
Cash flows from investing activities
Purchases of equipment (3,079) (2,536)
Other assets -- 1,385
--------- ---------
Net cash used in investing activities (3,079) (1,151)
Cash flows from financing activities
Proceeds from line of credit -- 200,000
Additional paid-in capital from investors -- 143,750
--------- ---------
Net cash provided by financing activities -- 343,750
--------- ---------
Increase in cash 104,477 29,408
Cash at beginning of period 10,792 18,956
--------- ---------
Cash at end of period $ 115,269 $ 48,364
========= =========
Supplemental disclosure:
Cash paid for interest $ 7,951 $ 4,776
========= =========
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SNAP2 Corporation
Notes to Financial Statements
For the Three and Six Months Ended March 31, 2002 and 2001
(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 accounting
principles accepted in the United States of America. 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 incorporated by
reference from the Company's Annual Report on Form 10-KSB for the year
ended September 30, 2001.
2. REVENUE RECOGNITION
Software license fees are recognized as revenue upon contract signing and
shipment of the software master copy or download of software by the
customer. Consulting revenues are derived primarily from custom contract
engineering work and training and consulting services. Revenues from
custom contract engineering work are recognized using the percentage of
completion method. Revenues from training and consulting services are
recognized as the services are rendered. Maintenance revenues are
recognized ratably over the term of the related agreements.
3. EARNINGS PER SHARE
Basic earnings per share are computed based on the weighted-average common
shares outstanding during the period.
Diluted earnings per share are computed by considering the
weighted-average common shares outstanding (plus shares committed to be
issued) and dilutive potential common shares as a result of outstanding
stock options. The effect of previously convertible preferred stock and
outstanding stock options were not used in the calculation of diluted
earnings per share for the three and six month periods ended March 31,
2001, as they were anti-dilutive during this period.
4. STOCK OPTIONS
On March 29, 2002, the Company re-priced 1,612,500 employee stock options
at .272 per share. These options were issued below fair value and $13,400
was recorded as unearned compensation. These options will be exercisable
at 75% at March 29, 2003 and 25% at March 29, 2004. These options are
subject to variable pricing accounting rules which will result in
increased compensation expense as the Company's stock price increases.
On March 31, 2002, the Company issued employee stock options for 1,260,000
shares of common stock at .272 per share which was below fair value and
$10,080 was recorded as unearned
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compensation. 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 shareholders 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 shareholders owning in
excess of ten percent of outstanding common stock. No options were
exercised during the period. The Company has outstanding options for
3,157,500 shares of common stock at March 31, 2002.
5. LINE OF CREDIT AND LONG-TERM DEBT
On June 20, 1999, the Company entered into a promissory note with a
related party of the Company's president whereby $135,000 was borrowed by
the Company. The note bears an interest rate of 9% per annum on the unpaid
principal balance. Under the terms of the note, principal payments of
$10,385 along with interest are due in quarterly installments beginning
July 1, 2001. The Company has not paid the $31,155 due under this note, as
well as the accrued interest, since October 1, 2000. Principal payments
have not been accelerated under this note by the noteholder.
On August 17, 1999 the Company entered an agreement with the Iowa
Department of Economic Development (IDED) whereby the Company would
receive $100,000 of financial assistance under the Community Economic
Betterment Account (CEBA). Under the terms of the agreement, the Company
shall pay an annual royalty equal to 1.5% of the prior year total gross
revenues to IDED in semi-annual payments each June 1 and December 1, until
a repayment amount of $200,000 has been reached. $11,060 was due under
this agreement at March 31, 2002.
The Company has a $200,000 line of credit with a bank bearing interest at
the bank's commercial base rate. This line is guaranteed by a
director/officer of the Company. Funds advanced are secured by the
Company's accounts receivable and equipment. At March 31, 2002, $200,000
was outstanding under the agreement. The line of credit matured November
10, 2001 at which time the Company was unable to repay the amounts due.
The line was renewed on January 29, 2002 through February 10, 2003.
6. GAIN ON SALE AND LICENSE OF IFE ASSETS
On November 26, 2001 the Company entered into an Amended and Substituted
Asset Purchase Agreement ("Agreement") with Inflight Digital Limited, a
company incorporated under the laws of England and Wales ("Buyer") which
superceded an earlier Asset Purchase Agreement between the parties dated
September 6, 2001. Pursuant to the Agreement, the Company agreed to sell
to the Buyer all of Company's IFE assets. The IFE assets include all of
the Company's rights and obligations under its contracts with airline
operators for the licensing of IFE products and services, the Company's
rights and obligations under license and distribution agreements relating
to its IFE business, Company's files, books and records relating to its
IFE assets and other tangible property and physical assets used by the
Company solely in connection with IFE business. The Company also granted
Buyer a perpetual, royalty free, exclusive worldwide license for IFE
business. Terms include a total purchase price for the sale and license of
the IFE assets of $300,000 plus (i) fifty percent (50%) of all revenue
received by Buyer from certain existing customers for a period of three
(3) years after the closing; (ii) twenty-five percent (25%) of all
revenues received by Buyer under certain new business generated by Buyer;
(iii) an amount not to exceed $100,000 of the existing contract with
British Airways as assigned to Buyer plus fifty percent (50%) of all
revenue received by Buyer from British Airways during the three (3) years
after closing; and (iv) $75,000 upon receipt of the consent of Air France
that it will expand the number of aircraft using the software and fifty
percent
6
(50%) of the revenues received from Air France during the three (3) years
after closing. In November 2001, the Company received $300,000 as a result
of this transaction, which was recorded as a gain on sale. Additional
amounts to be received will be recorded as license fees. For the quarter
ended March 31, 2002, $21,259 was billed to the Buyer and recorded as
license fees. The Company recorded license fees related to this Agreement
for the six months ended March 31, 2002 of $85,834. Air France
subsequently extended its existing contractual arrangement and is
increasing the number of aircraft utilizing inflight entertainment
packages. However, Air France has also indicated its intention to
terminate the existing contract and utilize the services and products of
another vendor. Consequently, it is unlikely that the Company will receive
substantial additional revenues resulting from this customer. The Company
and the Buyer have subsequently agreed that the Company may retain
proceeds from the Air France contract prior to its termination. For the
quarter ended March 31, 2002, proceeds of $92,000 were received by the
Company which were comprised of $60,750 of license fees, $11,875 of
maintenance fees and $19,375 of deferred income that will be recognized as
revenue in the quarter ended June 30, 2002.
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 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.) (the "Company") is a
software product developer and software service provider for interactive set-top
boxes (STB) for interactive television. The Company was incorporated on October
8, 1998 under the laws of the State of Nevada originally for the purpose of
developing and marketing its only product, a boot dryer that dries both boots
and shoes for commercial and consumer use. Effective February 28, 2000 the
Company merged with ISES Corporation (an Iowa corporation originally
incorporated on May 14, 1997) ("ISES") with the Company being the survivor. In
7
connection with the merger, the Company disposed of its boot dryer product to
the original owner. The Company's name was subsequently changed to SNAP2
Corporation pursuant to Articles of Amendment filed July 12, 2000.
The resulting Company's activities to date have consisted of:
o Developing the Airsoft Travel Kit software product which includes
destination information, language training, games and airline
information for IFE systems.
o Licensing and installing the Airsoft Travel Kit Games on
international and domestic airlines with IFE equipped aircraft, and
subsequently selling these assets.
o Providing interactive television set-top box manufacturers with
professional software design, programming and graphic design
services.
o Research and development strategies to productize its intellectual
property assets for interactive television.
o Contracting with interactive television suppliers to support
promotional efforts of their related products.
o The Company is registered with the SEC as SNAP2 Corporation and is
traded on the over-the-counter bulletin board: OTCBB:SSNP.
On November 26, 2001 the Company entered into an Amended and Substituted Asset
Purchase Agreement ("Agreement") with Inflight Digital Limited, a company
incorporated under the laws of England and Wales ("Buyer") which superceded an
earlier Asset Purchase Agreement between the parties dated September 6, 2001.
Pursuant to the Agreement, the Company agreed to sell to the Buyer all of the
Company's IFE assets. The IFE assets include all of the Company's rights and
obligations under its contracts with airline operators for the provision of IFE
products and services, the Company's rights and obligations under license and
distribution agreements relating to its IFE business, the Company's files, books
and records relating to its IFE assets and other tangible property and physical
assets used by the Company solely in connection with IFE business. The Company
also granted Buyer a perpetual, royalty free, exclusive worldwide license to
use, for IFE business, only, the Company's intangible properties and rights
relating to its IFE business. The transaction is described in the Company's
Current Report on Amendment No. 1 to Form 8-K which was filed with the
Securities and Exchange Commission on December 10, 2001.
The Company continues to develop software and service the STB industry and to
explore emerging markets for embedded software technologies. The Company has
engaged with companies creating embedded devices technologies such as Internet
appliances, personal digital assistants and wireless devices. The Company feels
that it can target these markets successfully with the technologies and
experience from the STB and IFE markets as well as the skill sets it has
acquired from its growth of embedded software programmers. The Company will
pursue additional product and service opportunities in these markets.
Management. The Company's management positions are now held by:
Rick Grewell (44) -- President and CEO
8
Antony Hoffman (41) -- Vice President of Research and Development
Mark Malinak (41) -- Vice President of Sales
The Company's directors are Messrs. Grewell, Hoffman, Malinak, Stephen Dukes
(48), Mike Hennel (43) and Sheldon Ohringer (45).
Operations. The Company operates from its headquarters located at 10641 Justin
Drive, Des Moines, Iowa 50322. The Company was previously located at 2600 72nd
Street and moved to its expanded facilities on May 23, 2000 to accommodate its
growth and development. In addition to its offices in Des Moines, the Company
also has a sales office in Austin, Texas. The combined offices develop and
market software products and services for IFE systems and STB for interactive
television created by the Company.
Products. Prior to the sale of the IFE assets, the Company marketed software
applications for the IFE and interactive television markets. Its Airsoft Travel
Kit software targeted 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, Delta Air Lines, LanChile, Airtours, Aer Lingus and AOM French airlines.
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 Software, 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.
Management believes the sale of the IFE assets will enhance the Company's plans
to focus 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.
The Company will be focused on the development of products targeting the
interactive television market. These products include tools, middleware and
applications.
Consulting 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, IBM and Panasonic 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.
9
The Company emphasizes embedded software consulting services for revenue
generation and strategic positioning of developing intellectual property for the
interactive television, Internet appliance and embedded systems markets.
Revenue Recognition. Software license fees are recognized as revenue upon
contract signing and shipment of the software master copy or download of
software by the customer. Consulting revenues are derived primarily from custom
contract engineering work and training and consulting services. Revenues from
custom contract engineering work are recognized using the percentage of
completion method. Revenues from training and consulting services are recognized
as the services are rendered. Maintenance revenues are recognized ratably over
the term of the related agreements.
Revenues. Through March 31, 2002, the Company's revenues were derived from
software and engineering consulting services provided to interactive television
equipment manufacturers and technology providers, and license fees of its SNAP2
Travel Kit Games for the IFE market. Consulting services are recognized using
the invoice amount for labor hours as services are performed. Consulting
services are typically performed under contracts of up to six months in duration
and are renewable.
The Company's IFE revenues primarily relate to amounts received from the sale of
the IFE assets, as described in the Amended and Substituted Asset Purchase
Agreement.
Maintenance fees primarily resulted from the extension of the Air France
contract as discussed in Note 6 to the financial statements.
The Company intends to derive the primary portion of its revenue through
software engineering consulting services in the short term as it attempts to
grow the licensing of its products. The Company intends to continue engaging in
consulting 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.
On November 26, 2001 the Company sold its IFE assets; however, during the three
years after the sale, the Company will receive a certain percentage of certain
revenues collected by the Buyer.
Cost of Revenue. Primarily consists of payroll and related costs (salaries,
payroll taxes, employee health insurance and employer 401(k) contributions), and
consulting expenses incurred in performing software and engineering consulting
services. The Company allocates certain research and development costs to cost
of revenue, based on utilization of its employees and consultants.
Research and Development. Primarily consists of payroll and related costs
(salaries, payroll taxes, employee health insurance and employer 401(k)
contributions) of engineering and software development staff, as well as,
amounts paid to independent development consultants, to develop software and
graphic arts owned and utilized by the Company. During the three and six months
ended March 31, 2002, the Company increased the amount of time its product
development staff was utilized on consulting engagements. The Company expects to
continue using a significant amount of its development staff on consulting
projects during the next year as it strives to achieve more revenues.
Sales and Marketing. Primarily consists of payroll and related costs (salaries,
payroll taxes, employee health insurance and employer 401(k) contributions),
travel, various marketing efforts, promotional materials
10
and public relations activities. The Company expects sales and marketing costs
will increase as it continues to sell consulting projects and analyzes various
product development opportunities.
General and Administrative. Primarily consists of payroll and related costs
(salaries, payroll taxes, employee health insurance and employer 401(k)
contributions), legal fees, travel costs, 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.
Results of Operations
Since inception, the Company has been engaged primarily in the business of
developing and licensing software products and providing engineering and
software and software consulting services. In an effort to increase revenues, as
the Company attempts to reduce its operating losses, the Company has increased
the amount of consulting services it performs and has utilized more of its
product development personnel to perform these services. During the six months
ended March 31, 2002 the Company was not able to meet its obligations to make
payroll on several occasions and has delayed paying vendors. In an effort to
improve its liquidity, the Company sold its IFE assets on November 26, 2001. The
Company used the initial proceeds from this transaction to become current on its
payroll obligations and become more current on its vendor obligations. See
additional comments in "Liquidity and Capital Resources". Accordingly,
historical results of operations are not indicative of and should not be relied
upon as an indicator of future performance.
Three Months Ended March 31, 2002 and 2001
Revenues
Total revenues increased 2% to $652,000 for the quarter ended March 31, 2002,
compared to $636,000 for the quarter ended March 31, 2001. The increase was
related primarily to an increase in software and engineering consulting
services. Consulting services represented 83% and 63% of revenues for the
quarters ended March 31, 2002 and 2001, respectively. During the quarter ended
March 31, 2002, transactions with Rockwell, Microsoft and Panasonic accounted
for 52%, 31% and 7%, respectively, of the Company's total revenues.
Cost of Revenue
Cost of revenue increased 69% to $307,000 for the quarter ended March 31, 2002,
compared to $182,000 for the quarter ended March 31, 2001. The increase was
related to the increase in consulting revenue.
Gross Profit
Gross profit decreased as a percentage of revenue to 53% for the quarter ended
March 31, 2002, compared to 71% for the quarter ended March 31, 2001. This
decrease is mainly due to the increased focus on consulting projects, which have
lower margins than IFE license fees.
Research and Development
Research and development expense decreased 68% to $63,000 for the quarter ended
March 31, 2002, compared to $198,000 for the quarter ended March 31, 2001. The
decrease was related to the Company's
11
continued focus on consulting services and
the decrease in the number of employees working on product development.
Sales and Marketing
Sales and marketing expense decreased 65% to $60,000 for the quarter ended March
31, 2002, compared to $174,000 for the quarter ended March 31, 2001. The
decrease was related to the reduction of sales and marketing staff and
expenditures in an effort to streamline the Company's marketing efforts and
reduce expenses.
General and Administrative
General and administrative expense decreased 16% to $152,000 for the quarter
ended March 31, 2002, compared to $180,000 for the quarter ended March 31, 2001.
This decrease was mainly due to cost and expense reductions.
Interest Expense
Interest expense was approximately the same amount of $10,000 for the quarters
ended March 31, 2002 and 2001.
Six Months Ended March 31, 2002 and 2001
Revenues
Total revenues increased 27% to $1,218,000 for the six months ended March 31,
2002, compared to $889,000 for the six months ended March 31, 2001. The increase
was related primarily to an increase in software and engineering consulting
services. Consulting services represented 82% and 68% of revenues for the
quarters ended March 31, 2002 and 2001, respectively. During the six months
ended March 31, 2002, transactions with Rockwell, Microsoft, Delta and Panasonic
accounted for 49%, 33%, 5% and 4%, respectively, of the Company's total
revenues.
Cost of Revenue
Cost of revenue increased 91% to $545,000 for the six months ended March 31,
2002, compared to $285,000 for the six months ended March 31, 2001. The increase
was related to the increase in consulting revenue.
Gross Profit
Gross profit decreased as a percentage of revenue to 52% for the six months
ended March 31, 2002, compared to 68% for the six months ended March 31, 2001.
This decrease is mainly due to the increased focus on consulting projects, which
have lower margins than the IFE license fees.
Research and Development
Research and development expense decreased 61% to $178,000 for the six months
ended March 31, 2002, compared to $460,000 for the six months ended March 31,
2001. The decrease was related to the
12
Company's continued focus on consulting services and the decrease in the number
of employees working on product development.
Sales and Marketing
Sales and marketing expense decreased 63% to $117,000 for the six months ended
March 31, 2002, compared to $319,000 for the six months ended March 31, 2001.
The decrease was related to the reduction of sales and marketing staff and
expenditures in an effort to streamline the Company's marketing efforts and
reduce expenses.
General and Administrative
General and administrative expense decreased 7% to $316,000 for the six months
ended March 31, 2002, compared to $339,000 for the six months ended March 31,
2001. This decrease was mainly due to cost and expense reductions.
Interest Expense
Interest expense was approximately the same amount of $17,000 for the six months
ended March 31, 2002 and 2001.
Gain on Sale and License of IFE Assets
Gain on sale and license of IFE assets represents the initial $300,000 payment
under the terms of the agreement. Additional amounts to be received will be
recorded as license revenue.
Liquidity and Capital Resources
Since its inception, the Company has experienced losses from operations and
negative cash flows. At March 31, 2002, the Company had an accumulated deficit
of $1,938,000 and a stockholders' deficit of $541,000. The Company has not been
able to pay its obligations as they became due. During the six months ended
March 31, 2002, the Company was not able to meet its obligations to make payroll
on several occasions and has delayed paying vendors.
At its inception on February 28, 2000, (the date of filing of a Certificate of
Merger with the Nevada Secretary of State), the Company 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 March 31, 2002, leaving a
balance of $1,384,350 to be provided by
13
these entities. None of such 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 March 31, 2002, 1,097,000 shares have been surrendered by those
entities in lieu of additional capital contributions. The Company has not taken
action to either establish these shares as treasury stock or to cancel them and
return them to authorized but unissued shares. Accordingly, the shares are
outstanding in the names of the original owners 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 on November 10, 2000, which is guaranteed by a
stockholder. The Company renewed this line of credit on January 29, 2002 through
February 10, 2003.
Due to continued losses from operations during the six months ended March 31,
2002, the Company was not able to meet it obligations to make payroll on several
occasions and has delayed paying vendors. In an effort to improve its liquidity,
the Company has increased its consulting activities, reduced its work force by
three employees and sold its IFE assets.
On November 26, 2001 the Company entered into an Amended and Substituted Asset
Purchase Agreement with Inflight Digital Limited, a company incorporated under
the laws of England and Wales ("Buyer") which superceded a previous agreement
between the parties dated September 6, 2001. The Company used the initial
proceeds from this transaction to become current on its payroll obligations and
become more current on its vendor obligations. Terms of the IFE sale include a
total purchase price for the sale and license of the IFE assets of $300,000 plus
(i) fifty percent (50%) of all revenue received by Buyer from certain existing
customers for a period of three (3) years after the closing; (ii) twenty-five
percent (25%) of all revenues received by Buyer under certain new business
generated by Buyer; (iii) an amount not to exceed $100,000 of the existing
contract with British Airways as assigned to Buyer plus fifty percent (50%) of
all revenue received by Buyer from British Airways during the three (3) years
after closing; and (iv) $75,000 upon receipt of the consent of Air France that
it will expand the number of aircraft using the software and fifty percent (50%)
of the revenues received from Air France during the three (3) years after
closing. For the quarter ended March 31, 2002, $21,259 was billed to the Buyer
and recorded as license fees. The Company recorded license fees related to this
Agreement for the six months ended March 31, 2002 of $85,834. Air France
subsequently extended its existing contractual arrangement and is increasing the
number of aircraft utilizing inflight entertainment packages. However, Air
France has also indicated its intention to terminate the existing contract and
utilize the services and products of another vendor. Consequently, it is
unlikely that the Company will receive substantial additional revenues resulting
from this customer. The Company and the Buyer have subsequently agreed that the
Company may retain proceeds from the Air France contract prior to its
termination. For the quarter ended March 31, 2002, proceeds of $92,000 were
received by the Company and were comprised of $60,750 of license fees, $11,875
of maintenance fees and $19,375 of deferred income that will be recognized as
revenue in the quarter ended June 30, 2002.
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 consulting revenues, in an effort to generate positive cash flow. The
Company is dependent on four (4) key customers and the related contracts with
these customers. If these
14
customers do not renew there would be an adverse effect on the Company's
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. 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 or increase in revenues. In
addition, the Company needs to raise additional capital to begin product
development efforts 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:
Additional Funding Needed
The Company needs additional funding to pay its obligations as they come due,
further develop or enhance its products, and take advantage of future
opportunities or respond to competitive pressures or unanticipated requirements.
Without additional funding the Company may not be able to continue as a going
concern.
The Company's original 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 stockholder, and entered into other debt arrangements of
approximately $235,000. Also, the Company delayed paying vendors and employees.
On November 26, 2001 the Company entered into an Amended and Substituted Asset
Purchase Agreement ("Agreement") with Inflight Digital Limited, a company
incorporated under the laws of England and Wales ("Buyer") which superceded an
earlier Asset Purchase Agreement between the parties dated September 6, 2001.
Pursuant to the Agreement, the Company agreed to sell to the Buyer all of
Company's IFE assets. The IFE assets include all of the Company's rights and
obligations under its contracts with airline operators for the licensing of IFE
products and services, the Company's rights and obligations under license and
distribution agreements relating to its IFE business, Company's files, books and
records relating to its IFE assets and other tangible property and physical
assets used by the Company solely in connection with IFE business. The Company
also granted Buyer a perpetual, royalty free, exclusive worldwide license for
IFE business. Terms include a total purchase price for the sale and license of
the IFE assets of $300,000 plus (i) fifty percent (50%) of all revenue received
by Buyer from certain existing customers for a period of three (3) years after
the closing; (ii) twenty-five percent (25%) of all revenues received by Buyer
under certain new business generated by Buyer; (iii) an amount not to exceed
$100,000 of the existing contract with British Airways as assigned to Buyer plus
fifty percent (50%) of all revenue received by Buyer from British Airways
15
during the three (3) years after closing; and (iv) $75,000 upon receipt of the
consent of Air France that it will expand the number of aircraft using the
software and fifty percent (50%) of the revenues received from Air France during
the three (3) years after closing. In November 2001, the Company received
$300,000 as a result of this transaction, which was recorded as a gain on sale.
Additional amounts to be received will be recorded as license fees. For the
quarter ended March 31, 2002, $21,259 was billed to the buyer and recorded as
license fees. The Company recorded license fees related to this Agreement for
the six months ended March 31, 2002 of $85,834. Air France subsequently extended
its existing contractual arrangement and is increasing the number of aircraft
utilizing inflight entertainment packages. However, Air France has also
indicated its intention to terminate the existing contract and utilize the
services and products of another vendor. Consequently, it is unlikely that the
Company will receive substantial additional revenues resulting from this
customer. The Company and the Buyer have subsequently agreed that the Company
may retain proceeds from the Air France contract prior to its termination. For
the quarter ended March 31, 2002, proceeds of $92,000 were received by the
Company and were comprised of $60,750 of license fees, $11,875 of maintenance
fees and $19,375 of deferred income that will be recognized as revenue in the
quarter ended June 30, 2002.
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 March 31, 2002, had an accumulated deficit of $1,938,000
and a stockholders' deficit of $541,000. To date, the Company has recognized
growing revenue, however; its ability to generate revenue is subject to
substantial uncertainty and it has been unable to generate profitable
operations. 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 and there are no assurances this revenue level can be
obtained. 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.
Dependence on Key Customers
The Company's revenue is dependent on consulting services performed for four (4)
key customers. For the six months ended March 31, 2002, 91 % of the Company's
revenue was generated from four customers. Due to the sale of the IFE assets,
the Company will become more dependent on these customers. The Company's
operations would be adversely affected if any of these key customers do not
renew its current contracts.
The Company's Limited Operating History and the Emerging Market for Interactive
Television Make Its Future Financial Results Unpredictable
The Company's business and prospects depend on the development and market
acceptance of interactive television. 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
16
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 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 Targeted by the Company
The Company's software products target specific interactive television 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 market for interactive television systems is 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. 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
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 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.
17
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. The preferred shares were converted on February 28,
2002.
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 March 31, 2002 leaving a
balance of $1,384,350 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 process of attempting to recover
as many of such shares as possible. As of March 31, 2002, 1,097,000 shares have
been surrendered by those entities in lieu of additional capital contributions.
The Company has not taken action to either establish these shares as treasury
stock or to cancel them and return them to authorized but unissued shares.
Accordingly, the shares are outstanding in the names of the original owners on
the Company's stock records.
18
ITEM 3: DEFAULTS UPON SENIOR SECURITIES
The Company has a $200,000 line of credit with a bank, which matured on November
10, 2001 at which time the Company was unable to repay the amounts due
thereunder. The line was renewed on January 29, 2002.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its Annual Meeting on March 5, 2002. As the record date for the
Annual Meeting was prior to the conversion of the Company's 10,000 shares of
outstanding preferred stock to 10,000,000 shares of common stock, there were
17,856,000 shares eligible to vote of which 13,764,010 were represented in
person or by proxy at the Meeting. At the Meeting, the shareholders elected the
directors identified in Item 2 "Management" above, with 13,677,810 shares voted
"FOR," no shares voting "AGAINST" and 86,200 shares abstaining. The shareholders
also ratified the selection of KPMG LLP, as the Company's independent auditors
with 13,620,410 shares voted "FOR," 87,500 shares voted "AGAINST" and 56,100
shares abstaining.
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:
2 Amended and Restated Asset Purchase Agreement dated
November 26, 2001 by and among Company and ISES Canada
(a wholly-owned subsidiary of Company), as Sellers and
Inflight Digital Entertainment Ltd. as Buyer
(Incorporated by reference to the Company's Form 8-K/A
filed on December 10, 2001 with respect to an event
which occurred November 26, 2001)
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)
10.4 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)
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)
19
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)
10.21 Master Consulting Agreement effective as of August 1,
2001 as amended effective as of August 1, 2001, together
with related Work Plans, between SNAP2 Corporation and
Microsoft Corporation (Incorporated by reference to the
Company's 10-KSB for the fiscal year ended September 30,
2001)
10.23 Support Services Agreement No. 4500601442 with Rockwell
Collins dated November 2, 2001 together with related
Statement of Work (Incorporated by reference to the
Company's 10-QSB for the period ended December 31, 2001)
10.24 Support Services Agreement No. 4500601445 with Rockwell
Collins, dated November 7, 2001 together with related
Statement of Work (Incorporated by reference to the
Company's 10-QSB for the period ended December 31, 2001)
10.25 Support Services Agreement No. 4500549310 with Rockwell
Collins dated December 6, 2001 together with related
Statement of Work (Incorporated by reference to the
Company's 10-QSB for the period ended December 31, 2001)
*10.26 Support Services Agreement No. 4500667599 with Rockwell
Collins dated February 14, 2002 together with related
State of Work
*Filed herewith
(b) Report on Form 8-K: None
20
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: May 20, 2002 By: /s/ Dean R. Grewell, III
--------------------------------
Dean R. Grewell, III, President