UNITED STATES
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, 2004
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 0-28829
SHARP HOLDING CORPORATION
-------------------------------------------------------------
(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
----------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
(713) 960-9100
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(Issuer's Telephone Number, Including Area code)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
As of August 20, 2004 there were 26,244,448 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 or Plan of Operations
Item 3. Controls and Procedures
PART II
Item 1. Legal Proceedings
Item 2. Changes in Securities and Small Business Issuer Purchases of Equity
Securities
Item 6. Exhibits and Reports on Form 8-K
2
PART I
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets as of
June 30, 2004 (unaudited) and December 31, 2003
Consolidated Statements of Operations for the three months
and six months ended June 30, 2004 and 2003 (unaudited)
Consolidated Statement of Stockholders' Deficit for the
six months ended June 30, 2004 (unaudited)
Consolidated Statements of Cash Flows for the
six months ended June 30, 2004 and 2003 (unaudited)
3
SHARP HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, 2004 and December 31, 2003
__________
June 30, December
2004 31, 2003
ASSETS (Unaudited) (Note)
- ------ ------------- -------------
Current assets:
Cash and cash equivalents $ 535,861 $ 7,479
Notes receivable - 17,000
------------- -------------
Total current assets 535,861 24,479
Property and equipment, net 7,205 5,063
Deferred technology license, net 244,824 308,695
Other noncurrent assets 588 588
------------- -------------
Total assets $ 788,478 $ 338,825
============= =============
4
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
- ----------------------------------------------
Current liabilities:
Accounts payable $ 603,666 $ 565,485
Accrued payroll taxes 322,253 322,253
Accrued payroll and contract labor 597,680 604,881
Other accrued liabilities 562,059 616,632
Notes payable to related parties 1,171,106 501,102
Notes payable 1,555,844 950,844
Deferred revenue 24,485 30,000
------------- -------------
Total current liabilities 4,837,093 3,591,197
Long term notes payable to related parties - 26,057
Commitments and contingencies
Stockholders' equity (deficit):
Common stock, $.001 par value, 80,000,000 shares authorized,
26,244,448 shares and 25,488,448 shares issued and outstanding,
respectively 26,245 25,489
Additional paid-in capital 7,651,814 7,492,270
Accumulated deficit (11,726,674) (10,796,188)
------------- -------------
Total stockholders' equity (deficit) (4,048,615) (3,278,429)
------------- -------------
Total liabilities and stockholders' equity (deficit) $ 788,478 $ 338,825
============= =============
Note: The balance sheet at December 31, 2003 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
See accompanying notes to unaudited condensed consolidated financial statements.
5
SHARP HOLDING CORPORATION AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
for the three months and six months ended June 30, 2004 and 2003
__________
Three Months Ended Six Months Ended
-------------------------- --------------------------
June 30, June 30,
---------- ---------
2004 2003 2004 2003
------------ ------------ ------------ ------------
Revenues $ 19,636 $ 30,937 $ 41,720 $ 31,898
------------ ------------ ------------ ------------
Operating expenses:
Cost of sales and services 48,290 29,052 94,910 29,052
Selling, general and administrative, including
stock-based consideration of $130,300 and
$60,000 for the three months ended June
30, 2004 and 2003, $130,300 and $69,782
for the six months ended June 30, 2004 and
2003. 513,071 261,999 821,065 464,530
------------ ------------ ------------ ------------
Total operating expenses 561,361 291,051 915,975 493,582
------------ ------------ ------------ ------------
Loss from operations (541,725) (260,114) (874,255) (461,684)
Interest expense, including stock based consider-
ation of $-0- and $11,800 for the three months ended
June 30, 2004 and 2003, $-0- and $14,800 for the six
months ended June 30, 2004 and 2003. (32,753) (197,609) (56,231) (253,434)
Gain on settlement of payables - 26,743 - 26,743
------------ ------------ ------------ ------------
Net loss, continuing operations (574,478) (430,980) (930,486) (688,375)
Discontinued operations-loss from assets held for
sale - (20,989) - (20,989)
------------ ------------ ------------ ------------
Net loss $ (574,478) $ (451,969) $ (930,486) $ (709,364)
============ ============ ============ ============
Basic and diluted net loss per common share:
Continuing operations $ (0.02) $ (0.02) $ (0.04) $ (0.04)
Discontinued operations - - - -
------------ ------------ ------------ ------------
Basic and diluted net loss per share $ (0.02) $ (0.02) $ (0.04) $ (0.04)
============ ============ ============ ============
Weighted average shares used in computing basic
and diluted net loss per share 25,857,547 22,293,844 25,674,811 19,913,205
============ ============ ============ ============
See accompanying notes to unaudited condensed consolidated financial statements.
6
SHARP HOLDING CORPORATION AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE SIX MONTHS ENDED JUNE 30, 2004
__________
TOTAL
ADDITIONAL STOCKHOLDERS'
COMMON STOCK PAID-IN ACCUMULATED EQUITY
SHARES VALUE CAPITAL DEFICIT (DEFICIT)
------------ -------- ------------ ------------- ---------------
Balance December 31, 2003 25,488,448 $ 25,489 $ 7,492,270 $(10,796,188) $ (3,278,429)
Issuance of common stock
for cash 330,000 330 29,670 - 30,000
Issuance of common stock as
compensation to consultants 426,000 426 129,874 - 130,300
Net loss - - - (930,486) (930,486)
------------ -------- ------------ ------------- ---------------
Balance at June 30, 2004 26,244,448 $ 26,245 $ 7,651,814 $(11,726,674) $ (4,048,615)
============ ======== ============ ============= ===============
See accompanying notes to unaudited condensed consolidated financial statements.
7
SHARP HOLDING CORPORATION AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
for the six months ended June 30, 2004 and 2003
__________
2004 2003
---------- ----------
Cash flows from operating activities:
Net loss $(930,486) $(709,364)
Net loss from discontinued operation - 20,989
---------- ----------
Net loss from continuing operations (930,486) (688,375)
Adjustments to reconcile net loss to net cash used in
operating activities-
Gain from settlement of payables - (26,743)
Reduction of note receivable in lieu of compensation 17,000 -
Stock-based consideration 130,300 84,582
Amortization of discount on convertible debt - 45,300
Accrual for financing costs - 125,000
Depreciation and amortization 66,300 19,807
Changes in operating assets and liabilities-
Increase in accounts receivable - (24,763)
Decrease in other current assets - 6,977
Decrease in other assets - 4,220
Increase in accounts payable and accrued liabilities 446,407 245,414
Decrease in deferred revenue (5,515) -
---------- ----------
Net cash used in operating activities (275,994) (208,581)
---------- ----------
Cash flows from investing activities:
Purchases of property, plant and equipment (4,571) -
---------- ----------
Net cash used in investing activities (4,571) -
---------- ----------
Cash flows from financing activities:
Proceeds from issuance of common stock 30,000 5,125
Proceeds from borrowings 835,000 260,500
Repayment of borrowings (56,053) (23,133)
---------- ----------
Net cash provided by financing activities 808,947 242,492
---------- ----------
Net increase in cash and cash equivalents 528,382 33,911
Cash and cash equivalents at beginning of period 7,479 13,318
---------- ----------
Cash and cash equivalents at end of period $ 535,861 $ 47,229
========== ==========
Supplemental disclosure of cash flow information:
Cash paid for interest $ 4,008 $ -
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 $ 470,000 $ 175,000
See accompanying notes to unaudited condensed consolidated financial statements.
8
SHARP HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
__________
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, 2003 included in the Company's
2003 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 six-month period ended June 30, 2004, are
not necessarily indicative of the results that may be expected for the year
ending December 31, 2004.
2. Organization and Operations
-----------------------------
The consolidated financial statements of Sharp Holding Corporation (the
"Company") include Sharp Holding Corporation ("Sharp"), a Delaware
corporation, along with its wholly owned subsidiaries Sharp Technology,
Inc. ("Sharp Technology"), a Delaware corporation; Reserve Energy
Corporation ("Reserve"), a Delaware corporation incorporated in February
2004 (which began operations in May 2004); and SCAN USA Corporation
("SCAN"), a Delaware corporation incorporated in September 2003 (which
began operations in June 2004), (collectively, the "Company").
Sharp provides capital resources, management and technical expertise to its
subsidiary companies. Sharp Technology is a developer and marketer of
internet-related software products and provides innovative marketing
solutions to strategic partners. Reserve plans to deploy proprietary
filtering technology that can turn sub-quality natural gas from shut-in and
abandoned wells into pipeline quality natural gas. SCAN is developing, with
corporate sponsors, a national alert system that will enable local police
departments and other authorities to send alerts to localized recipients.
The Company has reported recurring net losses of $574,478 and $451,969 for
the three-month periods ended June 30, 2004 and 2003, as well as losses of
$930,486 and $709,364 for the six-month periods ended June 30, 2004 and
2003, respectively. These recurring losses have produced an accumulated
deficit of $11,726,674, and a working capital deficit of $4,301,232 as of
June 30, 2004. As a result of shortfalls in anticipated funding, the
Company is delinquent on certain payroll tax deposits due the IRS as well
as certain payments due under notes payable agreements. The Company is
currently pursuing a business strategy that includes potential acquisitions
of other companies and marketing to new customers. While pursuing this
strategy, the Company expects to experience cash flow deficits, which will
necessitate additional financing. However, there can be no assurances that
future debt or equity funding will be available or have terms the Company
finds acceptable. These events raise 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, 2003, was qualified with respect
to that risk.
3. Notes Payable
-------------
Notes payable to related parties are included in related-party transactions
Footnote 4. Other notes payable outstanding at June 30, 2004 and December
31, 2003 consist of the following:
2004 2003
-------- --------
Note payable to an individual, bearing interest of 10%
per year, payable on demand, uncollateralized $245,000 $245,000
9
SHARP HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
__________
3. NOTES PAYABLE, CONTINUED
--------------------------
Note payable to an individual 465,000 465,000
Note payable to a company, bearing interest of 12% per
year, payable on December 31, 2003, uncollateralized 75,000 75,000
Note payable to an individual, bearing interest of 12% per
year, payable on September 17, 2004, uncollateralized 100,000 -
Note payable to a company, bearing interest of 6% per
year, payable on May 31, 2005, uncollateralized 370,000 -
Notes payable to one company and two individuals, bearing
interest of 8% per year, payable in May and June 2005,
collateralized by 405,000 shares of the Company's common
stock 135,000 -
Notes payable to two companies and one individual,
non-interest bearing, due in monthly installments,
with maturities in 2003 and 2004 165,844 165,844
---------- --------
$1,555,844 $950,844
========== ========
The Company is in default on $705,844 of the total notes payable balance as
a result of being past due on payments as of June 30, 2004.
4. Related-Party Transactions
--------------------------
During April and July 2000, the Company incurred a related party accounts
payable liability to a company owned by a shareholder. The total amount
owed of $68,500 is included in accounts payable at June 30, 2004.
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. As of June 30, 2004, the
outstanding balance on this note is $60,000.
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,
2004, the entire balance of both notes was past due.
On March 20, 2003, the Company entered into a note payable agreement with a
stockholder in the amount of $175,000 bearing interest at 10% per annum and
payable on June 30, 2003. On May 12, 2003, the Company extinguished this
note payable 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, 2004, the balance on this
note is $50,847.
10
SHARP HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
__________
4. Related-Party Transactions, continued
-------------------------------------
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, 2004, the balance of this note was $90,259, and the
Company was in default on the note due to non-payment of required monthly
amounts due under the note.
On May 17, 2004, the Company entered into notes payable agreements with a
director of a subsidiary and two companies owned by such director in the
amount of $700,000 bearing interest at 8% interest per annum and payable on
May 15, 2005. Such notes are callable by the Company at any time after 90
days from issue. The notes are collateralized by 2.1 million shares of the
Company's common stock. The holder of the notes received 1,869,000 Reserve
warrants to purchase shares of the subsidiary's common stock at $.75 per
share with a term of three years. The Company allocates the proceeds
received from debt with detachable warrants using the relative fair value
of the individual elements at the time of issuance. The amount allocated to
the warrants as a debt discount was calculated at $0 due to the fair value
of the warrants being $0. At June 30, 2004, the balance of these notes was
$700,000.
5. Commitments and Contingencies
-----------------------------
At June 30, 2004, 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, 2004. 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 Communications ("Qwest", then US West).
Pursuant to the provisions of this agreement, the Company completed the
development of a certain Internet software application which Qwest agreed
to advertise and actively market for a period of three years to its current
and future Internet access customers. Qwest has not performed under this
agreement. The Company is pursuing its right to binding arbitration with
Qwest for specific performance under this agreement or to be compensated
for its loss of revenue.
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 the Company 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.
In June 2004 the above legal matters between Sharp Technology and Qwest and
Navi-Gates were scheduled for an arbitration hearing to be held at the
Houston, Texas offices of the American Arbitration Association in February
2005.
6. Segment Reporting
-----------------
The Company's operating segments include two of the Company's subsidiaries,
Reserve and Scan. Each of these subsidiaries represents a discrete
operating segment upon which management evaluates and measures financial
performance. Therefore, each of these operating subsidiaries represents a
segment of the Company. A third segment encompasses the activity of the
Company's Sharp Technology subsidiary and other technology related activity
of Sharp. Each of the Company's operating segments are engaged in business
activities in the United States and, as a result, all of the Company's
revenues are generated and assets are held in this country.
The segments' accounting policies are the same as those described in the
summary of significant accounting policies in the notes to the financial
statements for the year ended December 31, 2003 included in the Company's
2003 Annual Report on Form 10-KSB filed with the Securities and Exchange
Commission. Transactions between reportable segments are reported gross in
segment reporting and are eliminated in consolidation.
The following represents selected segment information for the three months
ended June 30, 2004:
Other
Technology Reserve Scan Totals
------------ ---------- -------- ----------
Revenues from external customers $ 19,636 $ - $ - $ 19,636
Segment loss (29,358) (400,482) (9,525) (439,365)
Segment assets 247,938 509,355 475 757,768
11
SHARP HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
__________
6. Segment Reporting, continued
----------------------------
The following represents selected segment information for the three months
ended June 30, 2003:
Other
Technology Reserve Scan Totals
------------ -------- ----- ----------
Revenues from external customers $ 30,937 $ - $ - $ 30,937
Segment loss (130,188) - - (130,188)
Segment assets 434,789 - - 434,789
The following represents reconciliations from segment totals to the totals
reflected in the unaudited consolidated financial statements for the three
month periods ended June 30, 2004 and 2003:
2004 2003
---------- ----------
PROFIT OR LOSS
- --------------
Total loss for reportable segments $(439,365) $(130,188)
Corporate interest expense (24,994) (72,608)
Gain on settlement of corporate payables - 26,743
Loss from discontinued operations - (20,989)
Intercompany management fees 50,000 -
Unallocated corporate general and administrative expenses (160,119) (254,927)
---------- ----------
Loss before income taxes $(574,478) $(451,969)
========== ==========
ASSETS
- ------
Total assets for reportable segments $ 757,768 $ 434,789
Assets held by corporate:
Cash 30,122 46,501
Note receivable - 165,000
Deferred financing costs - 102,800
Other assets 588 21,023
---------- ----------
Total consolidated assets $ 788,478 $ 770,113
========== ==========
The following represents selected segment information for the six months
ended June 30, 2004:
OTHER
TECHNOLOGY RESERVE SCAN TOTALS
------------ ---------- -------- ----------
Revenues from external customers $ 41,720 $ - $ - $ 41,720
Segment loss (55,723) (400,482) (9,525) (465,730)
The following represents selected segment information for the six months
ended June 30, 2003:
OTHER
TECHNOLOGY RESERVE SCAN TOTALS
------------ -------- ----- ----------
Revenues from external customers $ 31,898 $ - $ - $ 31,898
Segment loss (136,179) - - (136,179)
12
SHARP HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
__________
6. SEGMENT REPORTING, CONTINUED
------------------------------
The following represents the reconciliations from segment profit to the
total profit reflected in the unaudited consolidated financial statements
for the six month periods ended June 30, 2004 and 2003:
2004 2003
---------- ----------
Total loss for reportable segments $(465,730) $(136,179)
Corporate interest expense (48,472) (128,434)
Gain on settlement of corporate payables - 26,743
Loss from discontinued operations - (20,989)
Intercompany management fees 50,000 -
Unallocated corporate general and administrative expenses (466,284) (450,505)
---------- ----------
Loss before income taxes $(930,486) $(709,364)
========== ==========
13
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 14, 2004.
FORWARD LOOKING STATEMENTS AND INFORMATION
We include the following cautionary statement in this Form 10-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 Form 10-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
Sharp Holding Corporation ("Sharp" or the "Company") seeks opportunities to
develop and grow early-stage technology companies that have the potential to
significantly increase shareholder value. Sharp has recently formed two new
wholly owned subsidiaries: SCANUSA Corporation ("SCAN") and Reserve Energy
Corporation ("Reserve").
SCAN and the California Organization of Police and Sheriffs and the Coalition of
Police and Sheriffs ("COPS") have entered into an agreement to broadcast safety
alerts such as the following: Amber Alerts, Sexual Predator Alerts, and
Neighborhood Crime Alerts to the computers, cell phones and PDA'S of U.S.
citizens who sign-up for the program, beginning in California in 2004 and
expanding nationwide in 2005.
In June 2004, SCAN entered into a professional services contract with SBC
Communications calling for SBC to actively market the SCAN program to their 35
million telephone customers along with participating in a marketing and public
relations press tour to promote the program. SCAN is to receive an initial
set-up fee of $300,000, contingent upon the accomplishment of certain goals,
plus fifteen cents per SBC customer who becomes a SCAN customer in SBC
territories, per year. However, no licensing fees will be earned for the first
two million customers. In August, 2004, the Company received $150,000 of the
set-up fee. The program also provides SCAN 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.
Reserve plans to deploy a proprietary and patented filtering technology that
will convert non-pipeline quality natural gas located in contaminated shut-in
wells, into saleable pipeline quality gas. One out of every three natural gas
wells contains contaminants that make the gas un-marketable. If a well produces
less than ten million cubic feet per day it is generally considered too
expensive to purchase standard filtering equipment. These low producing wells
are capped and listed as "Shut-in wells". There are currently more than 200,000
14
shut-in wells in the U.S., containing an estimated 60 trillion cubic feet of
natural gas valued at over $240 billion. Reserve plans to capture a share of
that market. Reserve has received a signed agreement for up to $1.1 million
dollars in bridge loan financing. As of June 30, 2004, $835,000 was received
under the bridge loan.
Sharp Technology Inc. ("Sharp Technology"), a wholly owned subsidiary of Sharp,
is a developer of software products that are utilized to provide marketing and
e-finance solutions for Fortune 500 companies. We anticipate that large
corporations will use our technology and distribute our software products as
premium components in their strategic marketing and e-finance campaigns.
During the past year we have completely restructured Sharp Technology. 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 nation's
largest banks to deliver an exclusive, patented optical media CD or DVD ("OMCD")
which can be personalized, containing embedded time-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 February 28, 2003,
we acquired a patented technology called Hyper CD. Effective May 29, 2003, we
sold this technology to a third party for cash and an exclusive five-year
technology license allowing us to make and sell Hyper CD products and services
in the co-branded credit card and e-finance business for 5 years. This
transaction allowed us to retain exclusivity while providing us working capital.
Last year 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.
RESULTS OF OPERATIONS FOR THE THREE AND SIX-MONTH PERIODS ENDED JUNE 30, 2004
AND 2003
During the three and six-month periods ended June 30, 2004, we had total
revenues of $20,000 and $42,000, respectively, compared to total revenues of
$31,000 and $32,000 for the same respective periods ended June 30, 2003.
Revenues during 2003 and 2004 related primarily to HyperCD Technology and
fluctuations in such revenues are due entirely to variations in customer
requirements.
Costs of sales totaled $48,000 and $95,000 for the three and six-month periods
ended June 30, 2004, respectively, compared to $29,000 and $29,000 for the same
respective periods ended June 30, 2003. The increase in cost of sales in 2004
over 2003 is due to HyperCD license fees and direct production cost of products
using the technology.
Selling, general and administrative expenses totaled $513,000 and $821,000 for
the three and six-month periods ended June 30, 2004, respectively, compared to
$262,000 and $465,000 for the same respective periods ended June 30, 2003. The
$251,000 and $356,000 increases in these expenditures between the respective
three and six-month periods ended June 30, 2004 and 2003 can be attributed
15
to higher levels of consulting expense, travel and professional fees associated
with the start-up of two new subsidiary companies during the first six months of
2004.
Interest expense totaled $33,000 and $56,000 for the three and six-month periods
ended June 30, 2004, respectively, compared to $198,000 and $253,000 for the
same respective periods ended June 30, 2003. The $165,000 and $197,000
decreases between the respective three and six month periods ended June 30, 2004
and 2003 can be attributed to the unusually high financing costs associated with
debt obtained during 2003 as well as settlement charges incurred in 2003 for not
paying a note payable when due.
LIQUIDITY AND CAPITAL RESOURCES
Through June 30, 2004 we have an accumulated deficit of $11.7 million. We have a
working capital deficit of $4.3 million at June 30, 2004. Operating losses have
continued during 2004. As a result of shortfalls in anticipated funding, we are
delinquent on certain payroll tax deposits due the IRS as well as certain
payments due under notes payable agreements. We are currently pursuing a
business strategy that includes potential acquisitions and marketing to
potential new customers. While pursuing this strategy, we expect to experience
cash flow deficits, which will necessitate additional financing. However, there
can be no assurances that future debt or equity funding will be available or
have terms we 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, 2003, was qualified with respect to
that risk.
At June 30, 2004 we have no material outstanding purchase commitments and during
fiscal years 2004 and 2003 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.
NEW ACCOUNTING PRONOUNCEMENTS
- -----------------------------
Please refer to the Annual Report Form 10-KSB for the year ended December 31,
2003 for disclosures regarding the Company's treatment of new accounting
pronouncements.
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.
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.
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OFF BALANCE SHEET ARRANGEMENTS
- -------------------------------
None
ITEM 3. CONTROLS AND PROCEDURES
As of June 30, 2004, the Company carried out an evaluation, under the
supervision and with the participation of the Company's management, including
the Company's Chief Executive Officer and Principal Financial Officer, of the
effectiveness of the design and operation of the Company's disclosure controls
and procedures (as defined in Exchange Act Rule 13a-15(e) and Rule 15d-15(e)).
Based upon that evaluation, the Company's Chief Executive Officer and Principal
Financial Officer concluded that the Company's disclosure controls and
procedures are effective at a reasonable level in timely alerting them to
material information relating to the Company that is required to be included in
the Company's periodic filings with the Securities and Exchange Commission.
There has been no change in the Company's internal control over financial
reporting that occurred during the Company's most recent fiscal quarter that has
materially affected or is reasonably likely to materially affect, the Company's
internal control over financial reporting.
The Company's management, including the Chief Executive Officer and Principal
Financial Officer, do not expect that the Company's disclosure controls or
internal controls will prevent all error and all fraud. A control system, no
matter how well conceived and operated, can provide only reasonable, not
absolute, assurance that the objectives of the control system are met due to
numerous factors, ranging from errors to conscious acts of an individual, or
individuals acting together. In addition, the design of a control system must
reflect the fact that there are resource constraints, and the benefits of
controls must be considered relative to their costs. Because of the inherent
limitations in a cost-effective control system, misstatements due to error
and/or fraud may occur and not be detected.
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PART II
ITEM 1. LEGAL PROCEEDINGS
In November 1999, Sharp Technology entered into a development and distribution
partnership agreement with Qwest Communications (then US West). Pursuant to the
provisions of this agreement, we completed the development of a certain Internet
software application which Qwest agreed to advertise and actively market for a
period of three years to its current and future Internet access customers.
Qwest has not performed under this agreement. Sharp Technology is pursuing our
right to binding arbitration with Qwest for specific performance under this
agreement or to be compensated for our loss of revenue.
In connection with that same development and distribution partnership agreement
with Qwest, Sharp Technology 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.
In June 2004 the above legal matters between Sharp Technology and Qwest and
Navi-Gates were scheduled for an arbitration hearing to be held at the Houston,
Texas offices of the American Arbitration Association in February 2005.
ITEM 2. CHANGES IN SECURITIES AND SMALL BUSINESS ISSUER PURCHASES OF EQUITY
SECURITIES
RECENT SALE OF UNREGISTERED SECURITIES
During the quarter ended June 30, 2004, 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.
(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 June 2004, we issued 276,000 shares of common stock (valued at $85,300) as
payment-in-kind to one individual for consulting services reduced by $17,000 due
the Company by the individual. This transaction was made in reliance on Section
4(2) of the Act.
In June 2004, we issued 150,000 shares of common stock (valued at $45,000) as
payment-in-kind to a company for consulting services. This transaction was made
in reliance on Section 4(2) of the Act.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
Exhibit No. Identification of Exhibit
31.1 Certification of Chief Executive Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
31.2 Certification of Principal Financial Officer Pursuant to Section 302 of
theSarbanes-Oxley Act of 2002
32.1 Certification of Chief Executive Officer Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
32.2 Certification of Principal Financial Officer 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 the Exchange Act, the Registrant has
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Sharp Holding Corporation
By: /s/ George Sharp August 20, 2004
- ------------------------------------------------
George Sharp, Director, Chief Executive Officer,
Principal Financial Officer and President
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