UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-QSB
-----------------------------
(Mark One)
(X) Quarterly Report Under Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended March 31, 2002
( ) Transition Report Under Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from ___________ to _____________
Commission File Number: 000-32229
Wireless Synergies, Inc.
(Exact name of small business issuer as specified in its charter)
Nevada 76-0616474
- ------------------------------------------- --------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
21700 Oxnard Street, Suite 1030
Woodland Hills, California 91367
- ------------------------------------------- --------------------
(Address of principal executive offices) Zip Code
Issuer's telephone number (818) 593-2225
- ------------------------------------------- --------------------
June 30
----------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Check whether the issuer filed all documents and reports required to
be filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution
of securities under a plan confirmed by a court. Registrant was required to file
such reports, and (2) has been subject to such filing requirements for the past
90 days.
Yes _________ No________
APPLICABLE ONLY TO CORPORATE ISSUERS
The number of shares outstanding of the issuer's common stock as of
May 20, 2002 was 18,697,279.
WIRELESS SYNERGIES, INC AND SUBSIDIARY
QUARTERLY REPORT ON FORM 10-QSB
TABLE OF CONTENTS
Page Number
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheet as of March 31, 2002 ............... 1
Consolidated Statements of Operations for the three
months ended March 31, 2002 and March 31, 2001 ................ 2
Consolidated Statements of Cash Flows for the three months
ended March 31, 2002 and March 31, 2001 ....................... 3
Notes to Consolidated Financial Statements..................... 4
Item 2. Management's Discussion and Analysis or Plan of Operation...... 13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings..................................... 16
Item 2. Changes in Securities................................. 16
Item 3. Defaults Upon Senior Securities....................... 16
Item 4. Submission of Matters to a Vote of
Securities Holders.................................... 16
Item 5. Other Information..................................... 16
Item 6. Exhibits and Reports on Form 8-K...................... 16
Signatures............................................ 18
i
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
WIRELESS SYNERGIES, INC. AND SUBSIDIARY
Consolidated Balance Sheet
March 31, 2002
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $2,611,162
Accounts receivable 625,000
------------------
Total current assets 3,236,162
------------------
Property and equipment, net of accumulated depreciation of $254,916 572,024
------------------
Other assets:
Capitalized master recordings 300,000
Deposits 28,665
------------------
Total other assets 328,665
------------------
Total assets $4,136,851
==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $371,052
------------------
Total current liabilities 371,052
------------------
Commitments and contingencies
Stockholders' equity:
Common stock, $.001 par value; 100,000,000 shares authorized, 18,697,279 shares issued
and outstanding 18,697
Preferred stock, $.001 par value; 1,000,000 shares authorized, 0 shares issued and
outstanding --
Additional paid-in capital 6,331,752
Subscriptions receivable (20,421)
Accumulated deficit (2,564,229)
------------------
Total stockholders' equity 3,765,799
------------------
Total liabilities and stockholders' equity $4,136,851
==================
The accompanying notes are an integral part of these consolidated financial statements.
1
WIRELESS SYNERGIES, INC. AND SUBSIDIARY
Consolidated Statements of Operations
Three Months Ended
-------------------------------------
March 31,
2002 2001
(Unaudited) (Unaudited)
Revenues, net of allowance for returns $42 $(20,228)
Cost of sales 1,264 28,264
-------------- -----------
Gross profit (loss) (1,222) (48,492)
-------------- -----------
Operating expenses:
Salaries and wages 402,289 367,674
Professional services 228,917 629,048
Selling, general and administrative expenses 395,268 371,481
-------------- -----------
Total operating expenses 1,026,474 1,368,203
-------------- -----------
Operating loss (1,027,696) (1,416,695)
-------------- -----------
Other income (expense):
Loss on sale of assets (7,354) -
Interest income 5,492 320
-------------- -----------
Total other income (expense) (1,862) 320
Loss before provision for income taxes (1,029,558) (1,416,375)
Provision for income taxes - -
-------------- -----------
Net loss $(1,029,558) $(1,416,375)
============== ============
Basic and diluted loss per common shares $(0.09) $(0.13)
============== ============
Basic and diluted weighted average common shares outstanding 11,195,647 10,552,095
============== ============
The accompanying notes are an integral part of these consolidated financial statements.
2
WIRELESS SYNERGIES, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
Three Months Ended
------------------------------------
March 31,
2002 2001
(Unaudited) (Unaudited)
Cash flows from operating activities:
Net loss $(1,029,558) $(1,416,375)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 29,553 37,538
Loss on disposition of fixed assets 7,354 -
Non-cash advertising expense 20,268 -
Changes in operating assets and liabilities:
Accounts receivable 5,040 58,556
Accounts payable (208,881) 39,034
----------- ----------
Net cash used in operating activities (1,176,224) (1,281,247)
----------- ----------
Cash flows from investing activities:
Purchases of fixed assets (17,874) (42,027)
Proceeds from disposal of fixed assets 13,559 -
----------- ----------
Net cash used in investing activities (4,315) (42,027)
----------- ----------
Cash flows from financing activities:
Principal borrowing from related parties - 550,000
Proceeds from the sale of common stock, net of offering costs 2,285,000 -
Proceeds from the sale of preferred stock, net of offering costs 468,750 345,000
----------- ----------
Net cash provided by financing activities 2,753,750 895,000
----------- ----------
Net increase in cash 1,573,211 (428,274)
Cash at beginning of period 1,037,951 583,849
----------- ----------
Cash at end of period $2,611,162 $155,575
=========== ==========
Supplemental disclosure of cash flow information:
Interest paid during the period $600 $100
=========== ==========
Income taxes paid during the period $- $-
=========== ==========
The accompanying notes are an integral part of these consolidated financial statements.
3
WIRELESS SYNERGIES, INC. and Subsidiary
Notes to Consolidated Financial Statements
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited interim consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the three months ended
March 31, 2002 are not necessarily indicative of the results that may be
expected for the year ending December 31, 2002.
These interim financial statements should be read in conjunction with
the Company's historical audited consolidated financial statements and notes
thereto for the year ended December 31, 2001, which will be included in
Amendment No. 1 to Current Report on Form 8-K/A of Wireless Synergies, Inc. (the
"Company" or "Wireless Synergies") to be filed with the Securities and Exchange
Commission on or before June 14, 2002.
NOTE 2 - ORGANIZATION AND ACCOUNTING POLICIES
The Company was incorporated on August 19, 1999 under the laws of the
State of Nevada. Until March 29, 2002, the Company was a development stage
enterprise, as defined by Statement of Financial Accounting Standards No. 7
(SFAS No. 7). From inception until March 29, 2002, the Company was a public
shell corporation which conducted no meaningful business operations and had no
revenues.
On March 13, 2002, the Company, its wholly owned subsidiary 2K Sounds
Merger Co., Inc. ("Merger Sub"), and 2KSounds, Inc. ("2KSounds") entered into an
Amended and Restated Agreement and Plan of Merger (the "Agreement"), as amended
by that certain letter agreement dated March 21, 2002 (the "Letter," the
Agreement and the Letter are collectively referred to as the "Merger
Agreement"), whereby on March 29, 2002, 14,197,279 shares of the common stock of
the Company were exchanged for 100% of the common stock (totaling 29,214,490
shares) and 100% of the preferred stock (totaling 3,924,667 shares) of 2KSounds.
Prior to this transaction, Wireless Synergies had 4,500,000 shares issued and
outstanding; accordingly, after the consummation of this transaction, the
Company had 18,697,279 shares outstanding. The transaction is accounted for as a
reverse merger (the "Merger"), whereby 2KSounds was considered the accounting
acquiror, as the management of 2KSounds now controls Wireless Synergies after
the Merger. As a result, a reclassification has been recorded in the accounts of
2KSounds for the change in the number of shares outstanding as a result of the
Merger.
2KSounds, which was incorporated on December 2, 1999 under the laws of
the State of California, locates new musical talent, produces their recordings,
and promotes and distributes their music through a variety of methods, including
joint ventures with major record labels, sub-labeling and partnerships on albums
by existing artists.
As a result of the Merger, Merger Sub was merged with and into
2KSounds, with 2KSounds as the surviving corporation. 2KSounds continues as a
subsidiary of the Company and as its sole operating entity, and its historical
financial statements have replaced those of
4
WIRELESS SYNERGIES, INC. and Subsidiary
Notes to Consolidated Financial Statements
NOTE 2 - ORGANIZATION AND ACCOUNTING POLICIES, continued
those of Wireless Synergies. In furtherance of the historical financial
statements of 2KSounds replacing those of the Company, the Company's Board of
Directors approved a change in the fiscal year of the Company from June 30 to
December 31.
On May 21, 2002, the Company will change its name from Wireless
Synergies, Inc. to 2KSounds Corporation.
Principles of Consolidation
The consolidated financial statements include the accounts of the
Company and 2KSounds, Inc. All significant inter-company balances and
transactions have been eliminated in the consolidation.
Risks and Uncertainties
The Company, through its operating subsidiary 2KSounds, is subject to
risks and uncertainties common to growing companies engaged in the promotion and
distribution of music, including but not limited to the level of commercial
acceptance by the public of the music offerings of the Company's artists, the
long-term "staying power" of the Company's artists and their songs, the
Company's ability to retain existing artists and recruit new artists, the timing
and success of the Company's promotions of its artists, the Company's ability to
enter into joint venture distribution and promotion agreements, which reduce its
risk in investing in new unproven artists, and fluctuations in the demand for
recorded music sales and products associated with music and other entertainment
events.
The accompanying consolidated financial statements have been prepared
assuming the Company will continue as a going concern, which contemplates, among
other things, the realization of assets and satisfaction of liabilities in the
normal course of business. The Company has a limited operational history and has
experienced significant losses from operations for the period ended March 31,
2002, and had an accumulated deficit of $2,564,229 at March 31, 2002. The
Company expects to continue to increase its revenues from the exploitation of
music recorded by artists signed by the Company to recording contracts. The
Company also intends to fund the development of additional artists through
additional equity financing arrangements and revenue from albums the Company
expects to release in the next six to twelve months, which management believes
will be sufficient to fund its capital expenditures, working capital, and other
cash requirements for the fiscal year ending December 31, 2002. There are no
assurances, however, that the Company will generate sufficient revenue from
album sales or complete any equity financing transactions or, even if such
transactions are completed, have sufficient funds to execute its intended
business plan or generate positive operating results. The accompanying financial
statements do not include any adjustments that might be necessary should the
Company be unable to continue as a going concern.
5
WIRELESS SYNERGIES, INC. and Subsidiary
Notes to Consolidated Financial Statements
NOTE 2 - ORGANIZATION AND ACCOUNTING POLICIES, continued
Inventories
Inventories are stated at the lower of cost or market. Cost is
determined on a weighted average basis, which approximates the first-in,
first-out basis. Market is determined by estimates of the projected sales value
of the inventory to customers.
Such value is based on management's forecast for sales of the Company's
products. The industry in which the Company operates is characterized by
constant change in consumer preferences, making accurate forecasting extremely
difficult. As such, inventory has been written down to zero for financial
statement purposes as of March 31, 2001 and 2002 with the corresponding expense
recorded as a component of cost of goods sold.
Advance Royalties
The Company records advance royalties for monies paid to and expenses
paid on behalf of their recording artists that will be repaid through royalties
to be earned on future sales. These advances are recorded as an asset, with a
reserve for amounts that are considered uncollectible. As of March 31, 2001 and
2002 the entire amount of such advances have been fully reserved.
Capitalized Master Recordings
In 2000, the Company acquired recordings and the rights to manufacture,
distribute and commercially exploit an album featuring Patsy Cline for $300,000
of consideration. Pursuant to Statement of Financial Accounting Standards No.
50, "Financial Reporting in the Record and Music Industry," costs borne by the
Company for the production of master recordings should be capitalized and
amortized over the period revenue is realized. As the Company has not yet begun
distribution of this album, no amount of amortization has been recognized, but
will begin once distribution of the album begins.
Revenue Recognition
The Company recognizes revenue on album sales when such albums are
shipped to record stores, retail stores, and distributors. The Company records a
reserve for returns at the time of sale based on an estimated amount of returns.
Current period revenues are decreased or increased when projected returns from
sales in prior periods are estimated to be in excess of, or less than, reserves
previously recognized.
Earnings Per Share
The Company has adopted Statement of Financial Accounting Standards No.
128 ("SFAS 128"), "Earnings Per Share." Under SFAS 128, basic earnings per share
is computed by dividing income available to common shareholders by the
weighted-average number of common shares assumed to be outstanding during the
period of computation. Diluted earnings per share is computed similar to basic
earnings per share except that the denominator is increased to include the
number of additional common shares that would have been outstanding if the
potential common shares had been issued and if the additional common shares were
dilutive. Because the
6
WIRELESS SYNERGIES, INC. and Subsidiary
Notes to Consolidated Financial Statements
NOTE 2 - ORGANIZATION AND ACCOUNTING POLICIES, continued
Company has incurred net losses, basic and diluted loss per share are the same
as additional potential common shares would be anti-dilutive.
Stock-Based Compensation
The Company accounts for non-employee stock-based compensation under
Statement of Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting
for Stock Based Compensation." SFAS 123 defines a fair value based method of
accounting for stock-based compensation. However, SFAS 123 allows an entity to
continue to measure compensation cost related to stock and stock options issued
to employees using the intrinsic method accounting prescribed by Accounting
Principles Board Opinion No. 25 ("APB 25"), "Accounting for Stock Issued to
Employees." Under APB 25, compensation cost, if any, is recognized over the
respective vesting period based on the difference, on the date of grant, between
the fair value of the Company's common stock and the grant price. Entities
electing to remain with the accounting method of APB 25 must make pro forma
disclosures of net income and earnings per share, as if the fair value method of
accounting defined in SFAS 123 had been applied. The Company has elected to
account for its stock-based compensation to employees under APB 25.
Comprehensive Income
The Company has adopted Statement of Financial Accounting Standards No.
130 ("SFAS 130"), "Reporting Comprehensive Income." SFAS 130 establishes
standards for reporting and display of comprehensive income and its components
in a full set of general-purpose financial statements. The adoption of SFAS 130
did not have a material effect on the Company's results of operations or
financial position as the Company has no items of comprehensive income.
Segments of Business
The Company has adopted Statement of Financial Accounting Standards No.
131 ("SFAS 131"), "Disclosures about Segments of an Enterprise and Related
Information." SFAS 131 changes the way public companies report information about
segments of their business in their annual financial statements and requires
them to report selected segment information in their quarterly reports issued to
shareholders. It also requires entity-wide disclosures about the products and
services an entity provides, the material countries in which it holds assets and
reports revenues and its major customers. The Company currently operates in one
segment as disclosed in the accompanying consolidated statements of operations.
The Company has no foreign sales.
Recent Pronouncements
In July 2001, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 141, "Business Combinations," which is effective for business
combinations initiated after June 30, 2001. SFAS 141 eliminates the pooling of
interest method of accounting for business combinations and requires that all
business combinations occurring on or after July 1, 2001 are accounted for under
the purchase method. The Company does not expect SFAS 141 to have a material
impact on its financial statements.
7
WIRELESS SYNERGIES, INC. and Subsidiary
Notes to Consolidated Financial Statements
NOTE 2 - ORGANIZATION AND ACCOUNTING POLICIES, continued
In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other
Intangible Assets," which is effective for fiscal years beginning after December
15, 2001. SFAS 142 addresses how intangible assets that are acquired
individually or with a group of other assets should be accounted for in the
financial statements upon their acquisition and after they have been initially
recognized in the financial statements. SFAS 142 requires that goodwill and
intangible assets that have indefinite useful lives not be amortized but rather
be tested at least annually for impairment, and intangible assets that have
finite useful lives be amortized over their useful lives. SFAS 142 provides
specific guidance for testing goodwill and intangible assets that will not be
amortized for impairment. In addition, SFAS 142 expands the disclosure
requirements about goodwill and other intangible assets in the years subsequent
to their acquisition. Impairment losses for goodwill and indefinite-life
intangible assets that arise due to the initial application of SFAS 142 are to
be reported as resulting from a change in accounting principle. However,
goodwill and intangible assets acquired after June 30, 2001 will be subject
immediately to the provisions of SFAS 142. The Company does not expect SFAS 142
to have a material effect on its financial statements.
In July 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS 143 addresses financial accounting and
reporting for obligations associated with the retirement of intangible
long-lived assets and the associated asset retirement costs and is effective for
fiscal years beginning after June 15, 2002. The Company does not expect SFAS
143 to have a material impact on its financial statements.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS 144 address financial
accounting and reporting for the impairment of long-lived assets and for
long-lived assets to be disposed of. The provisions of SFAS 144 are effective
for financial statements issued for fiscal years beginning after December 15,
2001, and interim periods within these fiscal years, with early adoption
encouraged. The Company does not expect SFAS 144 to have a material impact on
its financial statements.
NOTE 3 - STOCKHOLDERS' EQUITY
Stock Conversion as a Result of the Merger
As a result of the Merger, all 2KSounds shareholders received .428414
of a share of the Company's common stock for each share of 2KSounds common and
preferred stock they owned prior to the Merger. As a result all references to
stock have been adjusted for this ratio.
Preferred Stock
The articles of incorporation of 2KSounds authorize it to issue up to
10,000,000 shares of Series A Preferred Stock, par value $0.001 per share (the
"Series A Preferred Stock"). The outstanding shares of Series A Preferred Stock,
which were exchanged for shares of the Company's common stock in the Merger,
had, subject to certain conditions, a liquidation preference of $1.00 per share
plus any declared and unpaid dividends, and were convertible at any time into
such number of fully paid and non-assessable shares of common stock at a
conversion price determined by dividing $1.00 by the applicable conversion rate
then in effect.
8
WIRELESS SYNERGIES, INC. and Subsidiary
Notes to Consolidated Financial Statements
NOTE 3 - STOCKHOLDERS' EQUITY, continued
During the three months ended March 31, 2002, 2KSounds sold 214,207 of
its Series A Preferred Stock to investors for net consideration of $468,750 (net
of issuance costs of $131,250).
On March 29, 2002, pursuant to the Merger, all of the outstanding
shares of 2KSounds' Series A Preferred Stock were converted to shares of common
stock of Wireless Synergies at the ratio of .428414 shares of Wireless
Synergies' stock for each share of 2KSounds' stock (see Note 2).
The articles of incorporation of Wireless Synergies authorize the
Company to issue up to 1,000,000 shares of $.001 par value preferred stock.
Shares of preferred stock may be issued in one or more classes or series with
such powers, designations, preferences and other rights as the Board of
Directors of the Company may from time to time determine. All shares of any
series shall be equal in rank and identical in all respects. As of March 31,
2002, there were no shares of Wireless Synergies preferred stock outstanding.
Common Stock
In January 2002, 2KSounds issued 34,733 shares of its common stock
valued at $20,268 (based on the estimated fair market value on the date of
grant) to an outside party for advertising and promotion services.
In March 2002, 2KSounds sold 1,713,656 shares of its common stock to an
investor for net proceeds of $1,965,000 (net of issuance costs of $1,035,000).
During the quarter ended March 31, 2002, 2KSounds issued 1,785 shares
of its common stock in connection with the exercise of a stock option for a
subscription receivable of $208.
Stock Options
Prior to the Merger with Wireless Synergies, 2KSounds had adopted the
2000 Stock Option Plan (the "2000 Plan"). Under the Plan, incentive stock
options and nonqualified options may be granted to employees, directors, and
consultants of 2KSounds for the purchase of up to 12,000,000 shares of 2KSounds'
common stock. The exercise price per share under the 2000 Plan shall not be less
than 100% of the fair market value of the shares on the date of grant, or 110%
for persons owning 10% or more of the voting power of the Company, as defined.
The exercise price per share under non-qualified stock options shall not be less
than 85% of the fair market value per share on the date of grant. Expiration
dates for the grants may not exceed 10 years from the date of grant. The 2000
Plan terminates automatically on March 8, 2010. During the quarter ended March
31, 2002, 2KSounds issued 390,000 options to employees with an exercise price
equal to the fair market value on the date of grant. Such options vest over four
years and expire in ten years. Since the exercise price of these options was
equal to the fair market value on the date of grant, no compensation expense was
recognized for the granting of these options. During the quarter ended March 31,
2002, 2KSounds issued 800,000 options as a commission related to the sale of its
common stock. These options have an exercise price equal to the fair market
value on the date. Of the 800,000 options granted, 400,000 vested
9
WIRELESS SYNERGIES, INC. and Subsidiary
Notes to Consolidated Financial Statements
NOTE 3 - STOCKHOLDERS' EQUITY, continued
immediately, with the remaining vesting at a rate of 16,667 per month. All such
options will expire in ten years. Since these options were issued in connection
with equity fundraising, no compensation expense was recognized for the granting
of these options.
Pursuant to the terms of the Merger Agreement, all options to purchase
shares of 2KSounds common stock outstanding prior to the Merger (totaling
2,290,000 shares) were converted (at a rate of .428414 shares of Wireless
Synergies' common stock for each share of 2KSounds' common stock) into options
to purchase 981,068 shares of Wireless Synergies' common stock with similar
terms.
Warrants
From time to time, 2KSounds issued warrants to certain of its
investors. Prior to the Merger, 2KSounds had outstanding 750,800 warrants.
Pursuant to the Merger Agreement, all warrants to purchase 2KSounds' common
stock outstanding at the time of merger were converted (at a rate of .428414
shares of Wireless Synergies' common stock for each share of 2KSounds' common
stock) into 321,653 warrants to purchase Wireless Synergies' common stock with
similar terms.
NOTE 4 - RELATED PARTY TRANSACTIONS
Stockholders' Agreement
The majority stockholders (collectively, the "Stockholders") entered
into a stockholders' agreement with 2KSounds on March 13, 2002 which was adopted
by Wireless Synergies upon consummation of the Merger (the "Stockholders'
Agreement"). The Stockholders' Agreement provides, among other things, that, for
so long as each Stockholder shall own beneficially at least two percent of the
fully diluted capital stock of the Company, each Stockholder shall take all
actions as may be necessary or appropriate within their power, including voting
all shares of common stock owned, to cause the Board of Directors of the Company
to consist (i) solely and entirely of the Stockholders or their respective
designees, and (ii) of such other person as an independent director who shall be
acceptable to a majority of the Stockholders.
The Stockholders' Agreement also restricts the transfer of the common
stock owned by the Stockholders and provides for "Tag-Along" and "Drag-Along"
rights. Pursuant to such "Tag Along" right, any Stockholder proposing to
transfer his shares of common stock shall refrain from making such transfer
unless, prior to the consummation thereof, the other Stockholders have been
afforded the opportunity to join in such sale on a pro rata basis, pursuant to
the provisions of the Stockholders' Agreement. Pursuant to the "Drag-Along"
right, if one or more Stockholders proposes to transfer to a non-affiliated
third person all of their shares of common stock at any time when: (i) such
selling Stockholder(s) own at least 35% of the fully diluted common stock; and
(ii) the total number of shares proposed to be sold constitutes at least 50% of
the fully diluted common stock, then such selling Stockholder(s) shall have the
right to require the other Stockholders to sell all their shares of common stock
to such non-affiliated third person
10
WIRELESS SYNERGIES, INC. and Subsidiary
Notes to Consolidated Financial Statements
NOTE 4 - RELATED PARTY TRANSACTIONS, continued
on the same terms and for the same consideration per share as is being paid to
the selling Stockholder(s).
The Stockholders' Agreement terminates upon the earlier to occur of
December 31, 2004 or the occurrence of a fundamental event, which is described
as (i) the sale or issuance by the Company of shares of common stock in any one
or more transactions to any person such that the common stock owned by such
person subsequent to such sale of issuance equals more than 50% of the issued
and outstanding common stock; (ii) the sale of all or substantially all the
assets of the Company or its 2KSounds subsidiary to any unaffiliated third
person; and (iii) the merger, consolidation or combination of the Company with
or into any unaffiliated third person, in each instance, where the composition
of a majority of the members of the Board of the surviving corporation or other
entity shall no longer be the Stockholders or otherwise under the direct
influence and control of the Stockholders.
Agreement with JAM'N-D Records
On April 11, 2002, the Company entered into a Memorandum of
Understanding with JAM'N-D Records ("JAM'N-D") and J. Michael Nixon, a director
and 13.7% stockholder of the Company, pursuant to which, among other things, the
Company has agreed to distribute recorded music produced by JAM'N-D. Mr. Nixon
owns a majority of the outstanding capital stock of JAM'N-D.
During the two year period ending April 11, 2004, JAM'N-D has the right
to sign up to five recording artists, subject to the approval of the Company.
For each recording artist signed by JAM'N-D and approved by the Company (the
"JAM'N-D" Artists"), JAM'N-D shall reimburse the Company up to $1.0 million for
expenses the Company incurs in connection with the recording, manufacturing,
marketing and promotion of each JAM'N-D Artist, as well as exploiting records
derived from the master recordings of each such artist (an "Allowance"). JAM'N-D
may recoup all or any portion of the Allowance allocated for each JAM'N-D Artist
from the exploitation of recorded music. The Company is responsible for any
expenses which exceed $1.0 million, provided that such excess is recoupable from
the exploitation of recorded music on an equal dollar for dollar basis as those
expenses recoupable by JAM'N-D.
Subject to the right of recoupment, the net proceeds derived from the
exploitation of music recorded by JAM'N-D Artists will be divided between
JAM'N-D and the Company, with JAM'N-D receiving 75% and the Company receiving
25% of such net proceeds. If the combined sales of records from all JAM'N-D
Artists is 500,000 units, then the division of the net proceeds shall be
adjusted, as defined, with JAM'N-D receiving 60% and the Company receiving 40%
of such net proceeds. If the combined sales of records from all the JAM'N-D
Artists is 1.0 million units, then the division of the net proceeds shall be
further adjusted, as defined, with each of JAM'N-D and the Company receiving 50%
of such net proceeds.
The Company will receive a distribution fee from the gross proceeds
realized from the exploitation of recorded music under this agreement in the
amount of 21% of such gross proceeds realized.
The Company may purchase all of the outstanding shares of capital stock
of JAM'N-D if the combined record sales of all JAM'N-D Artists exceeds 2.0
million units. If the Company
11
WIRELESS SYNERGIES, INC. and Subsidiary
Notes to Consolidated Financial Statements
NOTE 4 - RELATED PARTY TRANSACTION, continued
exercises such option, the purchase price would be equal to two and one-half
times the aggregate amount of Allowances actually spent by the Company. Such
purchase price may be paid in whole or in part in the form of shares of the
Company's common stock.
NOTE 5 - SUBSEQUENT EVENTS
On April 22, 2002, the Company's shareholders approved the 2002 Stock
Option Plan (the "2002 Plan"). Under the 2002 Plan, the Company may grant
options to purchase up to 60,000,000 shares of its common stock to employees,
directors and consultants of the Company. Options under the 2002 may be either
incentive or non-qualified stock options. Pursuant to the Merger, all options to
purchase shares of 2KSounds common stock under the 2000 Plan outstanding prior
to the Merger (totaling 2,290,000 shares), were converted (at a rate of .428414
shares of Wireless Synergies' common stock for each share of 2KSounds' common
stock) into options to purchase 981,068 shares of Wireless Synergies' common
stock under the 2002 Plan.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
INTRODUCTION
The following discussion of the Company's results of operations and
analysis of financial condition for the three months ordered March 31, 2002
should be read in conjunction with the unaudited interim consolidated financial
statements included in this Quarterly Report on Form 10-QSB, including the
accompanying notes thereto. For purposes of the following discussion and
analysis of the results of operations and liquidity and capital resources, all
references to the term "Company" refer only to the operations of 2KSounds, since
it is deemed to be the surviving entity of the Merger for accounting purposes.
Except for historical information contained herein, the matters
discussed in this Quarterly Report on Form 10-QSB are forward-looking statements
that are subject to certain risks and uncertainties that could cause actual
results to differ materially from those set forth in such forward looking
statements. Such forward-looking statements may be identified by the use of
certain forward-looking terminology, such as "may," "will," "expect,"
"anticipate," "intend," "estimate," "believe" or comparable terminology that
involves risks or uncertainties. Actual future results and trends may differ
materially from historical and anticipated results, which may occur as a result
of a variety of factors. Such risks and uncertainties include, without
limitation, the Company's limited operating history, the unpredictability of its
future revenues, the unpredictable and evolving nature of its key markets,
competition, internet-related risks, dependence on key personnel, dependence on
content acquisition, creation and licensing, and the Company's need for
additional capital. The Company undertakes no obligation to update any
forward-looking statement, whether as a result of new information, future events
or otherwise. Investors should carefully review the risk factors and other
disclosures set forth in other reports or documents that the Company files from
time-to-time with the Securities and Exchange Commission and matters generally
affecting the music industry.
REVENUE RECOGNITION
The Company recognizes revenue on album sales when such albums are
shipped to record stores, retail stores, and distributors. The Company records a
reserve for returns at the time of sale based on an estimated amount of returns.
Current period revenues are decreased or increased when projected returns from
sales in prior periods are estimated to be in excess of, or less than, reserves
previously recognized.
RESULTS OF OPERATIONS THREE MONTHS ENDED MARCH 31, 2002 COMPARED TO THREE
MONTHS ENDED MARCH 31, 2001
REVENUES
Revenues increased $20,270 to $42 for the three months ended March 31,
2002 from ($20,228) for the three months ended March 31, 2001. In the three
months ended March 31, 2001, product returns were greater than sales. Sales for
the three months ended March 31, 2002 were low due to efforts to begin
production of new talent.
13
During the fiscal year ended December 31, 2001, the Company was limited
in its ability to produce, promote and release record albums because of its
limited financial resources. As a result, the Company has limited sources of
revenue at the present time. Management believes that the additional capital
raised during the last quarter of 2001 and the first quarter of 2002 will
enable the Company to more actively pursue its business plan and produce,
promote and release a greater number of record albums during the remainder of
2002. Management expects that the albums released by the Company will generate
revenue in 2002 and in 2003.
COST OF SALES
Cost of sales decreased $27,000, or 96%, to $1,264 for the three months
ended March 31, 2002 from $28,264 for the three months ended March 31, 2001.
This decrease was due primarily to less inventory impairment recognized during
the three months ended March 31, 2002. For the three months ended March 31,
2001, the Company recognized approximately $21,000 of impairment losses for
returned inventory.
SALARY AND WAGES
Salary and wages increased $34,615, or 9.0%, to $402,289 for the three
months ended March 31, 2002, from $367,674 for the three months ended March 31,
2001. This increase was due primarily to increases in officer and employee
salaries. Until the second quarter of 2001, the Chief Executive Officer and
Executive Vice President of the Company took no salaries, and the President of
the Company took only 45% of his salary.
PROFESSIONAL FEES
Professional fees decreased $400,131, or 64%, to $228,917 for the three
months ended March 31, 2002, from $629,048 for the three months ended March 31,
2001. The primary components of this decrease were reductions made in
promotional and production expenses for artists.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general, and administrative expenses increased by $23,787, or
6.0%, to $395,268 for the three months ended March 31, 2002, from $371,481 for
the three months ended March 31, 2001. This increase was primarily due to
increased office rental and reserves recognized for uncollectible advance
royalty payments. Additionally, during the three months ended March 31, 2001,
the Company received $500,000 in reimbursement for certain expenses, which was
recorded as an offset to selling, general and administrative expenses.
INTEREST INCOME
Interest income, net increased by $5,172 to $5,492 for the
three months ended March 31, 2002 from $320 from the three months ended March
31, 2001. This increase was primarily due to the Company maintaining higher cash
balances during the three months ended March 31, 2002. The Company had no
significant interest expense for either period.
14
NET LOSS
The Company's net loss decreased by $386,817, or 27%, to $1,029,558 for
the three months ended March 31, 2002, from a net loss of $1,416,375 for the
three months ended March 31, 2001. The Company's net loss in the three months
ended March 31, 2002 was largely due to the reasons described above.
LIQUIDITY AND CAPITAL RESOURCES
During the three months ended March 31, 2002 the Company realized: (i)
$13,559 from the sale of certain fixed assets; (ii) $2,285,000, net offering
costs, from the sale of shares of its common stock; and (iii) $468,750, net of
offering costs, from the sale of its preferred stock. These transactions offset
cash used in operating activities in the amnount of $1,176,224. Cash and cash
equivalents increased by $1,573,211 for the three months ended March 31, 2002.
For the three months ended March 31, 2001 the Company borrowed $550,000
from related parties and sold shares of its preferred stock, net of offering
costs, in the amount of $345,000. The proceeds from the borrowings from related
parties and the sales of preferred stock partially offset net cash used in
operating activities in the amount of $1,281,247, and purchases of fixed assets
in the amount of $42,027. For the three months ended March 31, 2001, cash and
cash equivalents decreased by $428,274.
Historically, the Company has relied on sales of its equity securities
to fund its operations. The Company generated an insignificant amount of revenue
during the three months ended March 31, 2002, and there is no guarantee that the
Company will be able to generate sufficient revenues in the future to fund its
operations. Should the Company's operations continue to use net cash, the
Company may be required to seek additional debt or equity financings during the
coming quarters. There can be no assurance that the Company will be able to
consummate debt or equity financings in a timely manner or on terms favorable to
the Company, or at all.
The Company expects to continue to increase revenues from the sale of
recorded music. In the absence of significant revenue and profits, the Company
intends to fund operations through additional debt or equity financings, or
both, which may nevertheless be insufficient to fund its capital expenditures,
working capital and other cash requirements for the fiscal year ending December
31, 2002. While there can be no assurances about future results, the Company
believes it has adequate cash to fund its ongoing cash burn rate (approximately
$225,000 per month) through the balance of the Company's current fiscal year. In
the event additional revenues are not generated, the Company may be required to
seek additional funds to finance its long-term operations. The successful
outcome of future activities cannot be determined at this time and there are no
assurances that if achieved, the Company will have sufficient funds to execute
its intended business plan or generate positive operating results.
15
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
None.
ITEM 2. CHANGES IN SECURITIES.
On March 29, 2002, in connection with the closing of the Merger, the
Company issued 14,197,279 shares of its common stock to the
stockholders of 2KSounds in exchange for 100% of the outstanding
capital stock of 2KSounds, in a transaction exempt from registration
pursuant to Section 4(2) of the Securities Act of 1933, as amended. In
addition, the Company reserved 1,302,721 shares of common stock for
issuance upon exercise of 2KSounds options and warrants which were
converted in the merger into options and warrants to purchase shares
of the Company's common stock.
After giving effect to the merger, the Company had outstanding
18,697,279 shares of common stock and an additional 1,302,721 shares
of common stock reserved for issuance upon exercise of 2KSounds stock
options and warrants converted in the merger.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
Exhibits:
None.
Reports on Form 8-K:
1. The Company filed a Current Report on Form 8-K on March 1, 2002
to announce that it had entered into the agreement and plan of
merger, dated February 12, 2002, with MergerCo and 2KSounds (the
"Initial Merger Agreement"), and to disclose the terms of the
proposed merger.
2. On March 4, 2002, the Company filed Amendment No. 1 to Current
Report on Form 8-K/A to amend, in its entirety, the disclosures
contained in the Current Report on Form 8-K it had filed on March
1, 2002.
16
3. On March 20, 2002, the Company filed Amendment No. 2 to Current
Report on Form 8-K/A to disclose that on March 13, 2002, it had
entered into an amended and restated agreement and plan of merger
with MergerCo and 2KSounds (the "Merger Agreement"), and to
disclose the terms of the Merger Agreement.
4. On March 22, 2002, the Company filed Amendment No. 3 to Current
Report on Form 8-K/A to disclose the correction of an inadvertent
error in the Merger Agreement concerning the proposed forward
stock split of the Company's outstanding shares of common stock
to be effected at a future date following the consummation of the
merger. Such report disclosed that the proposed forward stock
split would be on a 20-for-1 basis, and not the 10-for-1 basis
previously disclosed.
17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
WIRELESS SYNERGIES, INC.
Dated: May 20, 2002 By:/s/John Guidon
-------------------------
John Guidon
Chief Executive Officer