SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2003
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 0-28829
SHARP HOLDING CORPORATION
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(Name of Small Business Issuer in Its Charter)
DELAWARE 65-0970516
- ---------------------------- --------------------
(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
13231 CHAMPION FOREST DRIVE, SUITE 213, HOUSTON, TEXAS 77069
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(Address of Principal Executive Offices) (Zip Code)
(713) 960-9100
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(Issuer's Telephone Number, Including Area code)
13135 CHAMPIONS DRIVE, SUITE 100, HOUSTON, TEXAS 77069
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(Former Name, Former Address, and Former Fiscal year,
if Changed Since Last Report)
APPLICABLE ONLY TO CORPORATE ISSUERS
As of August 19, 2003 there were 24,494,448 shares of common stock, $.001 par
value, outstanding.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
1
TABLE OF CONTENTS
PART I
Item 1. Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Item 3. Evaluation of disclosure controls and procedures
PART II
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
2
PART I
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets as of June 30, 2003 (unaudited) and
December 31, 2002
Consolidated Statements of Operations for the three and six-month
periods ended June 30, 2003 and 2002 (unaudited)
Consolidated Statements of Cash Flows for the six-month periods ended
June 30, 2003 and 2002 (unaudited)
Notes to Consolidated Financial Statements
3
SHARP HOLDING CORPORATION, AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2003 AND DECEMBER 31, 2002
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2003 2002
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(UNAUDITED)
ASSETS
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Current assets:
Cash and cash equivalents $ 47,229 $ 13,318
Accounts receivable 25,424 661
Notes receivable 167,000 17,000
Deferred financing cost 102,800 -
Other 36,023 43,000
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Total current assets 378,476 73,979
Property and equipment, net of accumulated depreciation of 18,484 31,904
$168,909 and $155,488, respectively
Deferred technology license 372,565 -
Other assets 588 550
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Total assets $ 770,113 $ 106,433
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LIABILITIES AND STOCKHOLDERS' DEFICIT
- -------------------------------------
Current liabilities:
Accounts payable $ 584,364 $ 701,275
Accrued payroll taxes 322,253 322,253
Accrued payroll 523,370 446,119
Other accrued liabilities 412,152 634,363
Notes payable to related parties 436,288 370,688
Notes payable 951,403 440,000
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Total current liabilities 3,229,830 2,914,698
Long term notes payable to related parties 120,587 -
Commitments and contingencies
Stockholders' deficit:
Common stock, $.001 par value, 80,000,000 shares authorized,
24,494,448 shares and 16,064,448 shares issued and outstanding,
respectively 24,495 16,065
Additional paid-in capital 7,374,434 6,445,539
Accumulated deficit (9,979,233) (9,269,869)
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Total stockholders' deficit (2,580,304) (2,808,265)
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Total liabilities and stockholders' deficit $ 770,113 $ 106,433
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
4
SHARP HOLDING CORPORATION, AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2003 AND 2002
-----------
THREE MONTHS ENDED SIX MONTHS ENDED
-------------------------- --------------------------
JUNE 30, JUNE 30,
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2003 2002 2003 2002
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Revenues:
Subscriptions $ - $ 44,250 $ - $ 88,500
Licenses - 91,008 - 182,016
Services and other 30,937 1,899 31,898 11,392
------------ ------------ ------------ ------------
Total revenues 30,937 137,157 31,898 281,908
Operating expenses:
Cost of sales and services 29,052 200 29,052 706
Selling, general and administrative, including
stock-based consideration of $60,000 and
$150 for the three months ended June 30,
2003 and 2002, $69,782 and $150 for the
six months ended June 30, 2003 and 2002. 257,446 332,151 455,482 505,684
------------ ------------ ------------ ------------
Total operating expenses 286,498 332,351 484,534 506,390
------------ ------------ ------------ ------------
Loss from operations (255,561) (195,194) (452,636) (224,482)
Interest expense, including stock based consider-
ation of $11,800 and $-0- for the three months
ended June 30, 2003 and 2002, $14,800 and $-0-
for the six months ended June 30, 2003 and 2002. (197,609) (16,461) (253,434) (33,525)
Other expense (4,553) (8,049) (9,048) (13,327)
Gain on settlement of payables 26,743 - 26,743 -
------------ ------------ ------------ ------------
Net loss, continuing operations (430,980) (219,704) (688,375) (271,334)
Discontinued operations-loss from assets held for
sale (20,989) - (20,989) -
------------ ------------ ------------ ------------
Net loss $ (451,969) $ (219,704) $ (709,364) $ (271,334)
============ ============ ============ ============
Basic and diluted net loss per common share:
Continuing operations $ (0.02) $ (0.02) $ (0.04) $ (0.03)
Discontinued operations - - - -
------------ ------------ ------------ ------------
Basic and diluted net loss per share $ (0.02) $ (0.02) $ (0.04) $ (0.03)
============ ============ ============ ============
Weighted average shares used in computing basic
and diluted net loss per share 22,293,844 10,216,448 19,913,205 10,216,448
============ ============ ============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
5
SHARP HOLDING CORPORATION, AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2003 AND 2002
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2003 2002
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(UNAUDITED)
Cash flows from operating activities:
Net loss $ (709,364) $(271,334)
Net loss from discontinued operation 20,989 -
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Net loss from continuing operations (688,375) (271,334)
Adjustments to reconcile net loss to net cash used in
operating activities-
Gain from settlement of payables (26,743) -
Stock-based consideration 84,582 150
Amortization of discount on convertible debt 45,300 -
Accrual for financing costs 125,000 -
Depreciation and amortization 19,807 19,957
Changes in operating assets and liabilities-
Decrease (increase) in accounts receivable (24,763) 633
Increase in other current assets 6,977 (30,630)
(Increase) decrease in other assets 4,220 900
Increase in accounts payable and accrued liabilities 245,414 330,271
Decrease in deferred revenue - (270,516)
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Net cash used in operating activities (208,581) (220,569)
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Cash flows from financing activities:
Proceeds from issuance of common stock 5,125 -
Proceeds from borrowings 260,500 282,750
Repayment of borrowings (23,133) (79,527)
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Net cash provided by financing activities 242,492 203,223
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Net decrease in cash and cash equivalents 33,911 (17,346)
Cash and cash equivalents at beginning of period 13,318 27,295
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Cash and cash equivalents at end of period $ 47,229 $ 9,949
============ ==========
Supplemental disclosure of cash flow information:
Cash paid for interest $ - $ -
Supplemental disclosure of noncash investing and financing activities:
Common stock and warrants issued for asset purchase $ 432,200 $ -
Common stock issued for accounts payable $ 198,236 $ -
Common stock issued for prepaid financing costs $ 117,000 $ -
Conversion of accrued liabilities for notes payable $ 175,000 $ -
The accompanying notes are an integral part of these consolidated financial
statements.
6
SHARP HOLDING CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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1. BASIS OF PRESENTATION
-----------------------
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB of
Regulation S-B. They do not include all information and footnotes required
by generally accepted accounting principles for complete financial
statements. However, except as disclosed herein, there has been no material
change in the information disclosed in the notes to the financial
statements for the year ended December 31, 2002 included in the Company's
2002 Annual Report on Form 10-KSB filed with the Securities and Exchange
Commission. The interim unaudited financial statements should be read in
conjunction with those financial statements included in the Form 10-KSB. In
the opinion of Management, all adjustments considered necessary for a fair
presentation, consisting solely of normal recurring adjustments, have been
made. Operating results for the three and six-month periods ended June 30,
2003, are not necessarily indicative of the results that may be expected
for the year ending December 31, 2003.
2. ORGANIZATION AND OPERATIONS
-----------------------------
Sharp Holding Corporation ("Sharp"), a Delaware corporation, together with
its wholly owned subsidiary, Sharp Technology, Inc. ("Sharp Technology"), a
Delaware corporation (collectively, the "Company"), develops and markets
Internet-related software products and provides innovative marketing
solutions to strategic partners.
The Company has reported recurring losses from continuing operations of
$430,980 and $219,704 for the three-month periods ended June 30, 2003 and
2002, as well as losses of $688,375 and $271,334 for the six-month periods
ended June 30, 2003 and 2002, respectively. These recurring losses have
produced an accumulated deficit of $9,979,233, and a working capital
deficit of $2,851,354 as of June 30, 2003. As a result of shortfalls in
anticipated funding, the Company is delinquent on certain payroll tax
deposits due the IRS. The Company expects cash flow deficits will continue,
which will necessitate additional financing. There can be no assurances
that future debt or equity funding will be available or have terms the
Company will find acceptable. These events raise a substantial doubt as to
the Company's ability to continue as a going concern. As a result, the
report of our independent accountants, which accompanied our consolidated
financial statements for the year ended December 31, 2002, was qualified
with respect to that risk.
3. NOTES PAYABLE
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On June 20, 2003 the Company entered into two notes payable agreements with
an individual and a company in the amount of $75,000 each. The notes are
collateralized by a note receivable of the Company and are due in five
monthly installments of $15,000 each. The notes are non-interest bearing;
however, the Company has issued 300,000 shares of the Company's restricted
common stock and warrants to purchase 150,000 shares of the Company's
restricted common stock to each lender as financing expenses. See
description of other notes payable issued during the quarter in related
party Note 5.
7
SHARP HOLDING CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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4. ACQUISITION AND SALE OF INTELLECTUAL PROPERTY
--------------------------------------------------
Effective February 28, 2003, the Company acquired substantially all of the
assets of John Galt Media, Inc. for a purchase price of $475,200. As
consideration for this asset acquisition, in addition to a $43,000 advance
made in 2002 the Company issued John Galt Media, Inc. 3,000,000 shares of
our restricted common stock and warrants to purchase up to 1,000,000 shares
of our restricted common stock at an exercise price of $0.01 per share that
expires on February 28, 2008. The stock was valued at the quoted market
price on the date of acquisition. The warrants were valued using the
Black-Scholes pricing model. This acquisition was the result of arms length
negotiations between the parties; however, no appraisal was done.
The assets that the Company acquired consist of six U.S. patents involving
security and Internet connectivity, trademarks, domain names and other
intellectual property related to a methodology of digital rights security.
John Galt Media, Inc. engages in the business of securing information and
content on CD's and web sites. The Company also acquired the office and
computer equipment of John Galt Media.
The cost of the acquired entity has been allocated as follows on the date
of acquisition:
Equipment $ 35,000
Patents and trademarks 571,000
Accounts Payable (130,800)
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Total purchase price $ 475,200
===========
The accompanying income statement for the three and six months ended June
30, 2003 includes the results of operations of the acquired entity for the
period February 28, 2003 through May 29, 2003.
The following represents proforma financial information as if the entity
had been included in operations for the three and six months ending June
30, 2003 and 2002:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
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2003 2002 2003 2002
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Revenue $ 30,937 $ 137,157 $ 31,898 $ 281,908
Net income $ (451,969) $ (240,693) $(785,876) $(407,076)
Earnings per share $ (0.02) $ (0.02) $ (0.04) $ (0.04)
Effective May 29, 2003, the Company sold all of its assets held for sale and
issued 1,000,000 shares of common stock and 1,000,000 warrants for a purchase
price of $300,000 and a five-year technology license. The stock and warrants
issued had a combined value of $102,000 (See Note 6). The license has an
estimated value of $383,210 and is being amortized over a three-year period.
The technology license gives the Company the right to make and sell HyperCD
products and services for 5 years with no royalty in year one and $0.15 per each
medium sold in years two through five. There was no gain or loss on the sale of
assets.
8
SHARP HOLDING CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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5. RELATED-PARTY TRANSACTIONS
---------------------------
On November 16 and December 12, 2000, the Company entered into note payable
agreements with a stockholder in the amount of $60,000 and $40,000,
respectively. On March 1, 2001, the Company entered into a note payable
agreement with this stockholder in the amount of $100,000. All three notes
bear interest at 10 percent per annum and were payable on demand. On
November 5, 2002, all three notes, including accrued interest, were
converted to equity for the purchase of 1,300,000 shares of common stock
and the signing of a new note in the amount of $100,000 bearing interest at
10 percent per annum and payable on demand. During the three-month period
ending June 30, 2003 the Company repaid $10,000. As of June 30, 2003, the
outstanding balance on this note is $90,000.
During April and June of 2002, the Company entered into two notes payable
agreements with a stockholder in the amount of $140,000 and $130,000,
respectively. The notes bear interest at 10 percent per annum and were
payable in January 2003 and September 2002, respectively. As of June 30,
2003, the entire balance of both notes was outstanding.
On May 12, 2003, the Company extinguished a note payable to a stockholder
in the amount of $175,000 plus $21,875 of accrued interest on such note
through issuance of 1,000,000 shares of common stock and a new note in the
amount of $96,875 bearing interest at 10 percent per annum and payable in
24 monthly installments beginning July 1, 2003. At June 30, 2003, the
entire balance of this note was outstanding.
On May 19, 2003, the Company converted accounts payable to a company owned
by a director of the Company to equity and a note payable through issuance
of 300,000 shares of common stock and the signing of a note payable to the
owner of such company in the amount of $100,000 bearing interest at 10
percent per annum and payable in 36 monthly installments beginning July 1,
2003. At June 30, 2003, the entire balance of this note was outstanding.
6. CHANGES IN SECURITIES
-----------------------
In April 2003, the Company issued 300,000 shares of common stock (valued at
$45,000) as payment-in-kind to one vendor for amounts owed. The Company
issued a total of 700,000 shares of common stock (valued at $20,000) as
payment-in-kind to a group of three individuals as payment in full of a
note payable to the group. The Company also issued a warrant to purchase
300,000 shares of common stock at $.10 per share, expiring April 30, 2008,
(valued at $8,400 based on fair market value as determined by the
Black-Scholes pricing model) to one individual as payment-in-kind for
consulting services.
In May 2003, the Company issued 360,000 shares of common stock (valued at
$32,400) as payment-in-kind to one individual for consulting services. The
Company issued a total of 1,325,000 shares of common stock (valued at
$80,500) to two individuals as payment-in-kind on notes payable owed to the
individuals. The Company issued 300,000 shares of common stock (valued at
$21,000) to a director of the Company as payment-in-kind of amounts owed to
a company owned by such director for amounts owed. The Company issued
170,000 shares of common stock (valued at $11,900) to one company as
payment-in-kind for amounts owed. The Company issued warrants to purchase a
total of 800,000 shares of common stock at prices ranging from $0.05 -
$0.10, expiring in two years, (valued at a total of $13,300 based on fair
market value as determined by the Black-Scholes pricing model) to four
individuals as payment-in-kind for consulting services.
9
SHARP HOLDING CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-----------
6. CHANGES IN SECURITIES, CONTINUED
-----------------------------------
As part of an asset sale agreement (See Note 3) the Company also issued
1,000,000 shares of common stock (valued at $80,000) and a warrant to
purchase 1,000,000 shares of common stock at $0.10, expiring May 31, 2008,
(valued at $22,000 based on fair market value as determined by the
Black-Scholes pricing model) to one company.
In June 2003, the Company issued warrants to purchase 100,000 shares of
common stock at a price of $0.10, expiring June 10, 2006, (valued at $5,900
based on fair market value as determined by the Black-Scholes pricing
model) to one company as payment-in-kind for consulting services. The
Company also issued a total of 600,000 shares of common stock (valued at
$96,000) and issued warrants to purchase a total of 300,000 shares of
common stock at $1.00 per share, expiring June 20, 2008, (valued at a total
of $600 based on fair market values as determined by the Black-Scholes
pricing model) as payment-in-kind to one company and one individual for
financing costs.
7. COMMITMENTS AND CONTINGENCIES
-------------------------------
At June 30, 2003, the Company was delinquent on approximately $322,000 in
payroll tax deposits. The Company is subject to interest and penalties for
making payroll tax deposits with the Internal Revenue Service after the due
date. The Company has accrued estimated interest and penalties through June
30, 2003. Management believes additional interest and penalties, if any are
levied will not be material to the Company's financial position or results
of operations.
In November 1999, the Company entered into a development and distribution
partnership agreement with Qwest (then US West). Pursuant to the provisions
of this agreement, the Company completed the development of a certain
Internet software application which Qwest promised to advertise and
actively market for a period of three years to its current and future
Internet access customers. Qwest has failed to fulfill its marketing
commitments under this agreement. Under the terms of the agreement Qwest
must reimburse the Company for the damages the Company suffered due to
Qwest's breach of the agreement. The Company plans to pursue all remedies
available under the terms of the partnership contract.
In connection with that same development and distribution partnership
agreement with Qwest, the Company engaged the software development services
of the Navi-Gates Corporation, a company controlled by our former chief
financial officer. As part of its compensation, Navi-Gates was to receive a
royalty on each unit of software sold by Qwest and Sharp Technology under
this agreement. On May 15, 2002 petition number 2002-24598, "Navi-Gates
Corporation vs. Sharp Technology, Inc. and Qwest Communications, Inc., etal
" was filed against our subsidiary, Sharp Technology, Inc. in the District
Court of Harris County, Texas, 269th Judicial District. In the petition,
Navi-Gates Corporation is attempting to secure reimbursement of its damages
arising from the failure of Qwest to fulfill its marketing commitments. The
Company believes this matter will not have a material adverse effect on its
financial position or results of operations.
10
SHARP HOLDING CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-----------
7. COMMITMENTS AND CONTINGENCIES, CONTINUED
-------------------------------------------
On February 8, 2002 petition number 2002-06647, "Leslie Sachnowitz Meimoun
and Sheila Sachnowitz Curl vs. George T. Sharp and Sharp Technology, Inc.,"
was filed against our subsidiary, Sharp Technology, Inc. and our chief
executive officer in the District Court of Harris County, Texas, 334th
Judicial District. In the petition, the heirs of a recently deceased note
holder/shareholder seek judgment against us for non-payment of a note. In
addition to the $200,000 principal balance of the note, the plaintiffs seek
payment of past due interest on the debt and reimbursement of court costs
including reasonable attorneys fees. On July 26, 2002, the Company reached
a settlement that allowed the Company to pay a total amount of $250,000
that includes all interest, legal fees, and court costs by December 31,
2002. One Million Five Hundred Thousand (1,500,000) shares of the Company's
restricted common stock collateralize the settlement and would have been
returned to the Company if payment had been made by December 31, 2002, in
accordance with the settlement agreement. At December 31, 2002, payment was
not made according to the settlement and, as a result, the Company was
liable for an additional $100,000 under the provisions of the settlement.
On June 18, 2003 the Company reached a settlement that allows the Company
to pay a total amount of $400,000 that includes all interest, legal fees,
and court costs on or before September 1, 2003. If such payment is made in
accordance with the agreement, the 1,500,000 shares of the Company's
restricted common stock held as collateral will be returned to the Company.
This additional amount has been accrued on the Company's financial
statements at June 30, 2003. If payment is not made by October 1, 2003, the
settlement allows for an increase in the amount owed to $475,000.
The Company is periodically involved in various claims and other actions
arising in the ordinary course of business. Management believes these
matters will not have a material adverse effect on the Company's financial
position or results of operations.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with our audited and
unaudited consolidated financial statements and related notes thereto included
in this Form 10-QSB and our 10-KSB filed with the Securities and Exchange
Commission on April 15, 2003.
FORWARD LOOKING STATEMENTS AND INFORMATION
We include the following cautionary statement in this Form10-QSB to make
applicable and take advantage of the safe harbor provision of the Private
Securities Litigation Reform Act of 1995 for any forward-looking statements made
by, or on our behalf. Forward-looking statements include statements concerning
plans, objectives, goals, strategies, future events or performance and
underlying assumptions and other statements, which are other than statements of
historical facts. Certain statements in this Form10-QSB are forward-looking
statements. Words such as "plans", "believes", "expects", "anticipates" and
"estimates" and similar expressions are intended to identify forward-looking
statements. Such statements are subject to risks and uncertainties that could
cause actual results to differ materially from those projected. Our
expectations, beliefs and projections are expressed in good faith and we believe
they have a reasonable basis, including without limitation, management's
examination of historical operating trends, data contained in our records and
other data available from third parties, but there can be no assurance that our
expectations, beliefs or projections will result, be achieved, or be
accomplished.
In addition to other factors and matters discussed elsewhere herein, the
following are important factors that, in our view, could cause material adverse
effects on our financial condition and results of operations: the ability of our
existing cash reserves and cash flows from operations to cover our ongoing cash
requirements and our ability to secure short-term cash funds to the extent our
cash reserves are unable to meet our cash requirements, uncertainties relating
to our product development and marketing, competitive factors, and our
dependence on key personnel. We have no obligation to update or revise these
forward-looking statements to reflect the occurrence of future events or
circumstances.
OPERATIONS
We are developers of software products that are utilized to provide marketing
and e-finance solutions for Fortune 500 companies. We expect that large
corporations will use our technology and distribute our software products as
premium components in their strategic marketing and e-finance campaigns.
Due to the failure of Qwest to perform their contract with us and the loss of
business due to 9/11 with a major bank, we have completely restructured the
Company. We are applying our experience in implementing mass distribution
projects with large corporations along with our experience in network security
and development to forge a market with secure optical media CD's. According to
DataQwest, orders for CDs were approximately 3.0 billion units or $468 billion
dollars in the United States in 2000. Worldwide distribution of specialty CDs
totaled an estimated 7.5 billion disks in 2001. Distribution is expected to
double to 15 billion disks this year. The wide spread distribution of these CDs
are now driving down the cost of CD production to a commodity level. Our focus
is on co-branded credit cards. We are now in conversations with many of the
nations largest banks to deliver an exclusive, patented optical media CD or DVD,
"OMCD", which can be personalized, containing embedded timed-release content
with full security features. These new optical media CDs have proven to deliver
a 14% to 47% average response rate, compared to less than 1% for direct mail and
3% for standard CDs. The new CD also prompts the customer to retain the CD for
repeated plays, thereby increasing its shelf life. The end result is that our
one-dollar and fifty-cent OMCD is more cost effective than the standard
seventy-cent commodity CD currently being delivered by competing companies. By
achieving a 2.5% or better response rate our technology is more cost effective
than direct mail.
To further enhance our position in the marketplace, effective May 29, 2003 we
acquired a license for a patented technology called Hyper CD. We subsequently
sold the technology and licensed it back on an exclusive basis for the
co-branded credit card and e-finance business. The transaction allowed us to
retain exclusivity while providing working capital for the Company. Last year
12
the banking industry mailed 5 billion pieces of mail containing credit card
offers to the American public. Due to the deluge of credit card offers,
response rates have now dropped below .05% causing the customer acquisition
costs to soar.
The benefit for large companies using our new Hyper CD's in their direct mail or
CD mail programs is a dramatic increase in response rates that dramatically
reduces the cost of customer acquisition. We have recently entered into an
agreement with a large bank to test our product with one of their airline
partners. If we deliver increased response rates on the test mailing, the bank
will award us a continuing contract for a mass mailing of our products.
We have recently entered into a ten-year agreement with the California
Organization of Police and Sheriffs "COPS" to distribute a homeland security
alert program to California residents. The COPS organization is currently
pulling together the support of police and public safety agencies and state
representatives to back the program. We will be working with large corporations
to distribute the program free of charge to their customers across the state.
We are projecting expanding the program nationally during 2004. The program
provides the opportunity to distribute co-branded credit cards, pre-paid calling
cards, security software and other security related products to a massive
security conscious database.
During the past few years, our primary source of business revenue was derived
from a series of agreements with US West/Qwest Communications. Formerly one of
the "Baby-Bells", Qwest services over twenty five million telephone customers
and delivers high-speed Internet connections worldwide. In one such campaign,
Qwest used programs we developed as a high value incentive in an effort to
motivate its telephone customers to purchase other Qwest services such as
dial-up Internet and DSL products. Our strategy of having client companies pay
for the majority of the sales, marketing and distribution costs by using our
products in their marketing programs provides a competitive advantage for us.
Another of our agreements with Qwest included the release of a content
management software program to all Qwest .net customers and potential .net
customers. Qwest has failed to perform under this agreement. We believe Qwest's
non-performance cost us in excess of two million dollars of actual damages and
twenty million dollars in projected revenue. We expect to exercise our right to
enter into binding arbitration with Qwest to force specific performance under
this agreement or be compensated for our loss of revenue.
RESULTS OF OPERATIONS FOR THE THREE AND SIX-MONTH PERIODS ENDED JUNE 30, 2003
AND 2002
During the three and six-month periods ended June 30, 2003, we had total
revenues of $31,000 and $32,000, respectively, compared to total revenues of
$137,000 and $282,000 for the same respective periods ended June 30, 2002.
Revenues during 2002 related primarily to the recognition of revenue from
software licenses and marketing contracts with Qwest, such licenses and
contracts were fully recognized at the end of 2002.
Costs of sales and services prior to 2002 related primarily to the amortization
of deferred development costs, but currently relate primarily to the license
fees for technology used in our products as well as actual costs of producing
such products. These costs totaled $29,000 and $29,000 for the three and
six-month periods ended June 30, 2003, respectively, compared to $200 and $700
for the same respective periods ended June 30, 2002. During the three and six
month periods ended June 30, 2002 we incurred only negligible costs of sales as
all deferred development costs had been fully amortized. During the three and
six month periods ending June 30, 2003, we began to incur technology license
fees related to our products.
Selling, general and administrative expenses totaled $257,000 and $455,000 for
the three and six month periods ended June 30, 2003, respectively, compared to
$332,000 and $506,000 for the same respective periods ended June 30, 2002. The
$75,000 and $51,000 decreases in these expenditures between the respective three
and six month periods ended June 30, 2003 and 2002 can be attributed to our
continued cost cutting programs to minimize salaries, wages, travel,
entertainment, rents and professional fees.
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Interest expense totaled $198,000 and $253,000 for the three and six month
periods ended June 30, 2003, respectively, compared to $16,000 and $34,000 for
the same respective periods ended June 30, 2002. The $182,000 and $219,000
increases between the respective three and six month periods ended June 30, 2003
and 2002 can be attributed to financing costs associated with debt obtained
during 2003.
LIQUIDITY AND CAPITAL RESOURCES
Through June 30, 2003 we have an accumulated deficit of $10.0 million. We have a
working capital deficit of $2.9 million at June 30, 2003. Although we continue
cost cutting programs, operating losses and negative cash flow continue as of
the date of this filing. As a result of shortfalls in anticipated funding, we
are delinquent on certain payroll tax deposits due the IRS. We expect cash flow
deficits will continue, which will necessitate additional financing. To the
extent our cash reserves and cash flows from operations are insufficient to meet
future cash requirements, we will need to successfully raise funds through an
equity infusion, the issuance of debt securities or the sale of securities.
There can be no assurances that future debt or equity funding will be available
or have terms we will find acceptable. These events raise a substantial doubt as
to our ability to continue as a going concern. As a result, the report of our
independent public accountants, which accompanied our consolidated financial
statements for the year ended December 31, 2002, was qualified with respect to
that risk.
We have financed our operations from inception primarily through private
financing transactions and payments related to our agreements with Qwest
Communication Services, Inc. One such agreement included the release of a
content management software program to all Qwest.net customers and potential
..net customers. We believe Qwest's non-performance on this agreement cost us in
excess of two million dollars of actual damages and twenty million dollars in
projected revenue. We expect to exercise our right to enter into binding
arbitration with Qwest to force specific performance under this agreement or be
compensated for our loss of revenue. Our future success is dependent upon many
factors including, but not limited to; our ability to continue to develop and
market products and services, our ability to create new Redistribution
Partnerships, and obtaining the funds necessary to complete these activities. As
a result of the aforementioned factors and the related uncertainties, there can
be no assurance of our future success.
At June 30, 2003 we have no material outstanding purchase commitments and during
fiscal years 2003 and 2002 there are no significant elements of income or loss
that do not arise from our continuing operations. Further, we do not expect
material changes in our results of operations from period to period based upon
the seasonality of our business.
CRITICAL ACCOUNTING POLICIES
We believe the following critical accounting policies affect our more
significant judgments and estimates used in preparation of our consolidated
financial statements:
REVENUE RECOGNITION
- --------------------
We generate revenues from licensing software and providing post contract
customer support (PCS) and other professional services. We use written
contracts to document the elements and obligations of arrangements with our
customers. At times, arrangements that include the licensing of software also
include PCS, such as the right to technical support. When we sell several
elements to a customer through a single contract, the revenues from such
multiple-element arrangements are allocated to each element based upon
vendor-specific objective evidence of fair value, if available. We have not
established sufficient vendor-specific objective evidence of fair value for PCS
since this element is not sold separately from software licenses. Accordingly,
we recognize revenue from software licenses that include PCS ratably over the
term of technical support.
Amounts that we received from Qwest for distribution of software products to its
new customers were nonrefundable and were classified as subscriptions. We
recognize subscriptions revenue ratably over the course of the respective
customer's contract term. We also license software under noncancelable license
agreements. We recognize license fees when a noncancelable license agreement is
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in force, the product has been shipped, the license fee is fixed or
determinable, collectibility is reasonably assured and no significant post
delivery performance obligations exist.
ACCOUNTING FOR STOCK-BASED COMPENSATION
- ------------------------------------------
In accordance with SFAS No. 123, "Accounting for Stock-Based Compensation," we
have elected to account for stock-based compensation plans under Accounting
Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to
Employees", and to provide the proforma disclosures required by SFAS No. 123.
ITEM 3. EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
George Sharp, our Chief Executive Officer and Chief Accounting Officer, has
concluded that our disclosure controls and procedures are appropriate and
effective. He has evaluated these controls and procedures as of a date within
90 days of the filing date of this report on Form 10-QSB. There were no
significant changes in our internal controls or in other factors that could
significantly affect these controls subsequent to the date of their evaluation,
including any corrective actions with regard to significant deficiencies and
material weaknesses.
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PART II
ITEM 1. LEGAL PROCEEDINGS
In November 1999, we entered into a development and distribution partnership
agreement with Qwest (then US West). Pursuant to the provisions of this
agreement, we completed the development of a certain Internet software
application that Qwest promised to advertise and actively market for a period of
three years to its current and future Internet access customers. Qwest has
failed to fulfill its marketing commitments under this agreement. Under the
terms of the agreement, Qwest must reimburse the Company for the damages the
Company suffered due to Qwest's breach of the agreement. The Company plans to
pursue all remedies available under the terms of the partnership contract.
In connection with that same development and distribution partnership agreement
with Qwest, we engaged the software development services of the Navi-Gates
Corporation, a company controlled by our former chief financial officer. As part
of its compensation, Navi-Gates was to receive a royalty on each unit of
software sold by Qwest and Sharp Technology under this agreement. On May 15,
2002, petition number 2002-24598, "Navi-Gates Corporation vs. Sharp Technology,
Inc. and Qwest Communications, Inc., etal " was filed against our subsidiary,
Sharp Technology, Inc. in the District Court of Harris County, Texas, 269th
Judicial District. In the petition, Navi-Gates Corporation is attempting to
secure reimbursement of its damages arising from the failure of Qwest to fulfill
its marketing commitments. We believe this matter will not have a material
adverse effect on our financial position or results of operations.
On February 8, 2002, petition number 2002-06647, "Leslie Sachnowitz Meimoun and
Sheila Sachnowitz Curl vs. George T. Sharp and Sharp Technology, Inc.," was
filed against our subsidiary, Sharp Technology, Inc. and our chief executive
officer in the District Court of Harris County, Texas, 334th Judicial District.
In the petition, the heirs of a recently deceased note holder/shareholder seek
judgment against us for non-payment of a note. In addition to the $200,000
principal balance of the note, the plaintiffs seek payment of past due interest
on the debt and reimbursement of court costs including reasonable attorneys
fees. On July 26, 2002, we reached a settlement that allowed us to pay a total
amount of $250,000 that includes all interest, legal fees, and court costs by
December 31, 2002. One Million Five Hundred Thousand (1,500,000) shares of our
restricted common stock collateralize the settlement and would have been
returned to us if payment had been made by December 31, 2002 in accordance with
the settlement agreement. At December 31, 2002 payment was not made according
to the settlement and, as a result, we were liable for an additional $100,000
under the provisions of the settlement. On June 18, 2003, we reached a
settlement that allows us to pay a total amount of $400,000 that includes all
interest, legal fees, and court costs on or before September 1, 2003. If such
payment is made in accordance with the agreement the 1,500,000 shares of our
restricted common stock held as collateral will be returned to us. This
additional amount has been accrued on our financial statements at June 30, 2003.
If payment is not made by October 1, 2003, the settlement allows for an increase
in the amount owed to $475,000.
In addition, from time to time, we are involved in various claims or other
actions arising in the ordinary course of business. Management believes these
matters do not individually, or in aggregate, have a material adverse effect on
our financial position or results of operations.
ITEM 2. CHANGES IN SECURITIES
RECENT SALE OF UNREGISTERED SECURITIES
During the quarter ended June 30, 2003, we made the following transactions in
reliance upon exemptions from registration under the Securities Act of 1933 as
amended (the "Act").
Unless stated otherwise, we believe that:
(1) Each of the persons who received these unregistered securities had
knowledge and experience in financial and business matters which allowed them to
evaluate the merits and risk of the receipt of these securities, and that they
were knowledgeable about our operations and financial condition.
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(2) No underwriter participated in, nor did we pay any commissions or fees
to any underwriter in connection with the transactions.
(3) No transaction involved a public offering.
(4) Each certificate issued for these unregistered securities contained a
legend stating that the securities have not been registered under the Act and
setting forth the restrictions on the transferability and the sale of the
securities.
In April 2003, we issued 300,000 shares of common stock (valued at $45,000) as
payment-in-kind to one vendor for amounts owed. We issued a total of 700,000
shares of common stock (valued at $20,000) as payment-in-kind to a group of
three individuals as payment in full of a note payable to the group. We also
issued a warrant to purchase 300,000 shares of common stock at $.10 per share,
expiring April 30, 2008, (valued at $8,400 based on fair market value as
determined by the Black-Scholes pricing model) to one individual as
payment-in-kind for consulting services. This transaction was made in reliance
on Section 4(2) of the Act.
In May 2003, we issued 360,000 shares of common stock (valued at $32,400) as
payment-in-kind to one individual for consulting services. We issued a total of
1,325,000 shares of common stock (valued at $80,500) to two individuals as
payment-in-kind on notes payable owed to the individuals. We issued 300,000
shares of common stock to a director of the Company (valued at $21,000) as
payment-in-kind of amounts owed to a company owned by such director for amounts
owed. We issued 170,000 shares of common stock (valued at $11,900) to one
company as payment-in-kind for amounts owed. We issued warrants to purchase a
total of 800,000 shares of common stock at prices ranging from $0.05 - $0.10,
expiring in two years, (valued at a total of $13,300 based on fair market value
as determined by the Black-Scholes pricing model) to four individuals as
payment-in-kind for consulting services. As part of an asset sale agreement we
also issued 1,000,000 shares of common stock (valued at $80,000) and a warrant
to purchase 1,000,000 shares of common stock at $0.10, expiring May 31, 2008,
(valued at $22,000 based on fair market value as determined by the Black-Scholes
pricing model) to one company. These transactions were made in reliance on
Section 4(2) of the Act.
In June 2003, we issued warrants to purchase 100,000 shares of common stock at a
price of $0.10, expiring June 10, 2006, (valued a $5,900 based on fair market
value as determined by the Black-Scholes pricing model) to one company as
payment-in-kind for consulting services. We also issued a total of 600,000
shares of common stock (valued at $96,000) and issued warrants to purchase a
total of 300,000 shares of common stock at $1.00 per share, expiring June 20,
2008, (valued at a total of $600 based on fair market values as determined by
the Black-Scholes pricing model) as payment-in-kind to one company and one
individual as consideration for a note payable. These transactions were made in
reliance on Section 4(2) of the Act.
ITEM 5. OTHER INFORMATION
Effective May 29, 2003, we sold the assets that we had acquired from John Galt
Media on February 28, 2003 to Octopus Media, LLC. These assets consisted of six
U.S. patents involving security and Internet connectivity, trademarks, domain
names, other intellectual property related to a methodology of digital rights
security (HyperCD), office and computer equipment. This sale was made pursuant
to a purchase which provided for the issue of 1,000,000 shares of our common
stock and 1,000,000 warrants to purchase common stock for a purchase price of
$300,000 and a license back to us of the right to sell products incorporating
HyperCD for a period of five years with no royalty in year one and $.015 per
each medium sold in years two through five. There was no gain or loss
recognized on the sale. (Purchase Agreement attached to this filing as exhibit
10.2)
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
Exhibit No. Identification of Exhibit
10.1 Agreement between Alan Pavsner (a director), Marine Way (a
company owned by Alan Pavsner) and Sharp Holding Corporation to
convert amounts owed to Marine Way into common stock of Sharp
Holding Corporation and a Note Payable to Alan Pavsner, dated May
19, 2003.
10.2 Purchase agreement between Sharp Holding Corporation and Octopus
Media, LLC, to sell certain intellectual and tangible assets to
Octopus Media, LLC, and license back to Sharp Holding Corporation
the rights to make and sell products utilizing the intellectual
assets, dated May 29, 2003.
31 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) REPORTS ON FORM 8-K
None
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SIGNATURES
In accordance with the requirements of Sections 13 and 15(d) of the Exchange
Act, the Registrant has caused this report to be filed on its behalf by the
undersigned, thereunto duly authorized.
Sharp Holding Corporation
By: /s/ George Sharp August 19, 2003
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George Sharp, Director, Chief Executive Officer,
Chief Accounting Officer and President
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INDEX OF EXHIBITS
Exhibit No. Identification of Exhibit
10.1 Agreement between Alan Pavsner (a director), Marine Way (a
company owned by Alan Pavsner) and Sharp Holding Corporation to
convert amounts owed to Marine Way into common stock of Sharp
Holding Corporation and a Note Payable to Alan Pavsner, dated May
19, 2003.
10.2 Purchase agreement between Sharp Holding Corporation and Octopus
Media, LLC, to sell certain intellectual and tangible assets to
Octopus Media, LLC, and license back to Sharp Holding Corporation
the rights to make and sell products utilizing the intellectual
assets, dated May 29, 2003.
31 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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