Securities and Exchange Commission
Washington, D.C.
FORM 10QSB
----------
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended March 31, 2005
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
---------- ------------
000-07693
---------
(Commission file number)
SoftNet Technology Corporation
------------------------------
(Exact name of small business issuer as specified in its charter)
Nevada 13-4096315
------ ----------
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
One Anderson Road, Suite 105
Bernardsville, New Jersey 07924
---------------------------- ----------
(Address of principal executive offices) (Zip Code)
(908) 204-9911
--------------
(Issuer's telephone number)
T & G2, Inc.
------------------------------------------
(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ].
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of
common equity, as of latest practicable date: Class A 117,555,774 shares of
Common Stock, $0.001 par value, as of March 31, 2005; 5,000,000 Class B $0.001
par value as of March 31, 2005.
PART I. FINANCIAL INFORMATION
-----------------------------
Item 1. Financial Statements
- ------------------------------
SOFTNET TECHNOLOGY CORP. AND SUBSIDIARIES
(FORMERLY T & G2, INC.)
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005 AND 2004
2
SOFTNET TECHNOLOGY CORP. AND SUBSIDIARIES
(FORMERLY T & G2, INC.)
INDEX TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Condensed Consolidated Balance Sheet as of March 31, 2005 4
Condensed Consolidated Statements of Operations for the Three
Months Ended March 31, 2005 and 2004 5
Condensed Consolidated Statement of Comprehensive Income (Loss)
for the Three Months Ended March 31, 2005 and 2004 6
Condensed Consolidated Statements of Cash Flows for the Three
Months Ended March 31, 2005 and 2004 8
Notes to Condensed Consolidated Financial Statements 9
3
SOFTNET TECHNOLOGY CORP. AND SUBSIDIARIES
(FORMERLY T & G2 INC.)
CONDENSED CONSOLIDATED BALANCE SHEET
MARCH 31, 2005
ASSETS
------
Current Assets:
Cash and cash equivalents $ 163,527
Accounts receivable, net 237,356
Current portion of notes receivable 325,000
Due from related parties 844
Inventory 43,285
Prepaid expenses and other current assets 17,762
--------------
Total Current Assets 787,774
--------------
Notes receivable, net of current portion 50,000
Fixed assets, net of depreciation 16,870
Deposits 3,570
Goodwill, net of impairment 2,477,595
--------------
TOTAL ASSETS $ 3,335,809
==============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
----------------------------------------------
LIABILITIES
Current Liabilities:
Accounts payable and accrued expenses $ 663,308
Liability for stock to be issued 1,350,000
Current portion of notes payable 6,155
--------------
Total Current Liabilities 2,019,463
LONG-TERM LIABILITIES
Notes payable, net of current portion 500,000
--------------
Total Liabilities 2,519,463
--------------
STOCKHOLDERS' EQUITY (DEFICIT)
Preferred Stock, Series A, $1.00 Par Value; 5,000,000 shares
authorized, 0 shares issued and outstanding -
Preferred Stock, Series B, $.001 Par Value; 5,000,000 shares
authorized, and 2,000,000 shares issued and outstanding 2,000
Common Stock, Class A, $.001 Par Value; 500,000,000
shares authorized, 267,075,469 shares issued ,
150,000,000 and 0 shares held in escrow and
and 117,075,469 shares outstanding 267,075
Common Stock, Class B, $.001 5,000,000 shares authorized
and 5,000,000 shares issued and outstanding 5,000
Subscriptions receivable (2,000,000)
Stock issued as collateral for note payable (900,000)
Warrants 62,500
Additional paid-in capital 23,149,882
Treasury stock, at cost, 281,400 shares (37,338)
Accumulated other comprehensive income (loss) 40,752
Deficit (19,773,525)
--------------
Total Stockholders' Equity (Deficit) 816,346
--------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 3,335,809
==============
The accompanying notes are an integral part of the
consolidated financial statements.
4
SOFTNET TECHNOLOGY CORP. AND SUBSIDIARIES
(FORMERLY T & G2 INC.)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004
(Reclassified)
2005 2004
---- ----
OPERATING REVENUES
Revenue $ 233,927 $ 1,275
COST OF SALES 134,509 15,000
-------------- --------------
GROSS PROFIT 99,418 (13,725)
-------------- --------------
OPERATING EXPENSES
Professional fees and compensation expenses 297,935 352,914
Advertising and marketing expenses 105,224 27,183
General and administrative expenses 255,130 25,293
Depreciation and amortization 3,269 5,202
-------------- --------------
Total Operating Expenses 661,558 410,592
LOSS BEFORE OTHER (EXPENSE) (562,140) (424,317)
OTHER (EXPENSE)
Legal settlement - (17,500)
Interest expense, net (7,689) (3,217)
-------------- --------------
Total Other (Expense) (7,689) (20,717)
-------------- --------------
NET LOSS FROM CONTINUING OPERATIONS (569,829) (445,034)
DISCONTINUED OPERATIONS
Gain from discontinued operations, net of income taxes - 45,929
-------------- --------------
Total Discontinued Operations - 45,929
-------------- --------------
NET LOSS BEFORE PROVISION FOR INCOME TAXES (569,829) (399,105)
Provision for Income Taxes - -
-------------- --------------
NET LOSS APPLICABLE TO COMMON SHARES $ (569,829) $ (399,105)
============== ==============
NET LOSS PER BASIC AND DILUTED SHARES $ (0.00215) $ (0.01084)
============== ==============
From continuing operations $ (0.00) $ (0.01)
-------------- --------------
From discontinued operations $ - $ 0.00
-------------- --------------
From sale of subsidiary $ - $ 0.00
-------------- --------------
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 265,174,636 36,831,055
============== ==============
The accompanying notes are an integral part of the
consolidated financial statements.
5
SOFTNET TECHNOLOGY CORP. AND SUBSIDIARIES
(FORMERLY T & G2, INC.)
CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS)
FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004
Deficit, December 31, 2004 $ (19,203,696)
Net loss for the three months ended March 31, 2005 (569,829)
--------------
TOTAL DEFICIT MARCH 31, 2005 $ (19,773,525)
==============
Comprehensive (loss), December 31, 2004, net of tax $ (6,691)
Other comprehensive income, net of tax:
Foreign currency gain for three months ended
March 31, 2005 47,443
--------------
Accumulated other comprehensive income $ 40,752
==============
Deficit, December 31, 2003 $ (17,145,109)
Net loss for the three months ended March 31, 2004 -
--------------
TOTAL DEFICIT MARCH 31, 2004 $ (17,145,109)
Comprehensive (loss), December 31, 2003, net of tax $ -
Other comprehensive income, net of tax:
Foreign currency gain for the three months ended
March 31, 2004 -
--------------
Accumulated other comprehensive (loss) $ -
==============
The accompanying notes are an integral part of the
consolidated financial statements.
6
SOFTNET TECHNOLOGY CORP. AND SUBSIDIARIES
(FORMERLY T & G2 INC.)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004
(Reclassified)
2005 2004
---- ----
CASH FLOW FROM OPERTING ACTIVIITES
Continuing Operations:
Net loss $ (569,829) $ (445,034)
-------------- --------------
Adjustments to Reconcile Net (Loss) to Net Cash
(used in) operating activities:
Depreciation 3,269 5,202
Common stock issued for consulting services 90,750 331,650
Common stock issued for legal - 3,300
Foreign currency change 47,443 -
Net cash provided received in acquisition of subsidiary 58,235 -
Changes in assets and liabilities
(Increase) decrease in accounts receivable 80,271 (1,125)
(Increase) decrease in prepaid expenses 20,687 1,333
(Increase) in accounts receivable (52,534)
(Increase) in inventory (43,285) -
(Decrease) in accounts payable and accrued expenses (62,246) (24,251)
-------------- --------------
Total adjustments 195,124 263,575
-------------- --------------
Net cash (used in) operating activities -
continuing operations (374,705) (181,459)
-------------- --------------
Discontinued Operations:
Gain from discontinued operations - 45,929
Adjustments to Reconcile Net Cash (used in)
discontinuing operations -
-------------- --------------
Net cash (used in) operating activities -
discontinued operations - 45,929
-------------- --------------
Net cash (used in) Operating Activities (374,705) (135,530)
CASH FLOWS FROM INVESTING ACTIVITIES:
Continuing Operations:
(Increase) decrease in amounts due to related parties (64,211) 29,486
(Increase) in notes receivable (75,000) -
Acquisition of fixed assets (1,753) -
-------------- --------------
Net cash provided by (used in) investing activities (140,964) 29,486
-------------- --------------
The accompanying notes are an integral part of the
consolidated financial statements.
7
SOFTNET TECHNOLOGY CORP., AND SUBSIDIARIES
(FORMERLY T & G2 INC.)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004
(Reclassified)
2005 2004
---- ----
CASH FLOWS FROM FINANCING ACTIVITES
Continuing Operations:
Proceeds from common stock issuances and stock
subscriptions $ 122,769 $ 106,000
Net payments from issuance of notes payable - other 506,155 45,000
-------------- --------------
Net cash provided by financing activities 628,924 151,000
-------------- --------------
NET INCREASE IN CASH
AND CASH EQUIVALENTS 113,255 44,956
CASH AND CASH EQUIVALENTS -
BEGINNING OF PERIOD 50,272 16,754
-------------- --------------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 163,527 $ 61,710
============== ==============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
CASH PAID DURING THE PERIOD FOR:
Interest expense $ 6,343 $ -
============== ==============
SUPPLEMENTAL DISCLOSURE OF NONCASH
ACTIVITIES:
Issuance of common stock for:
Consulting services $ 90,750 $ 331,650
============== ==============
Legal $ - $ 3,300
============== ==============
Accrued expenses $ - $ 7,500
============== ==============
Preferred stock issued for investment $ - $ 2,000,000
============== ==============
The accompanying notes are an integral part of the
consolidated financial statements.
8
SOFTNET TECHNOLOGY CORP. AND SUBSIDIARIES
(FORMERLY T & G2, INC.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005 AND 2004
NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION
--------------------------------------
The unaudited condensed consolidated financial statements included
herein have been prepared, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission ("SEC"). The
condensed consolidated financial statements and notes are presented
as permitted on Form 10-QSB and do not contain information included
in the Company's annual consolidated statements and notes. Certain
information and footnote disclosures normally included in financial
statements prepared in accordance with accounting principles
generally accepted in the United States of America have been
condensed or omitted pursuant to such rules and regulations,
although the Company believes that the disclosures are adequate to
make the information presented not misleading. It is suggested that
these condensed consolidated financial statements be read in
conjunction with the December 31, 2004 audited financial statements
and the accompanying notes thereto. While management believes the
procedures followed in preparing these condensed consolidated
financial statements are reasonable, the accuracy of the amounts are
in some respects dependent upon the facts that will exist, and
procedures that will be accomplished by the Company later in the
year.
These condensed consolidated unaudited financial statements reflect
all adjustments, including normal recurring adjustments which, in
the opinion of management, are necessary to present fairly the
consolidated operations and cash flows for the periods presented.
On January 12, 2002, International Mercantile Corporation acquired
Solutions Technology, Inc. ("STI"), formerly known as Clickese.com
("Clickese") for 20,511,365 shares of the Class A common stock, and
the former owners of STI acquired the 1,142,858 shares of the Class
B common stock for $1. Upon this acquisition, STI became a wholly
owned subsidiary of International Mercantile Corporation. STI
designs, develops and manufactures biometrical time clocks for
tracking employees' time and attendance.
On February 14, 2002, International Mercantile Corporation changed
its name to T & G(2) (the "Company"). In addition, the Company
changed its domicile to Nevada, which brought about a reverse 8 to 1
stock split, and a change in the par value of the stock to $0.001.
In addition to STI being a wholly owned subsidiary, the Company
acquired Zingo Sales Ltd. ("Zingo") in March 2002 in a 2,500,000
share Class A common stock acquisition. Zingo's mission is to
design, develop, manufacture and market easy to use complete
solutions using the latest available technologies. Their first
product was a fixed based bingo unit, for which sales had been
generated late in 2002. The Company sold this segment in July 2004
for $300,000. This amount is currently a note receivable on the
condensed consolidated balance sheet.
9
SOFTNET TECHNOLOGY CORP. AND SUBSIDIARIES
(FORMERLY T & G2, INC.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
MARCH 31, 2005 AND 2004
NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION (CONTINUED)
--------------------------------------------------
The Company has reflected the results of this subsidiary in the
discontinued operations section of the statements of operations, and
has reclassified the 2004 numbers to show retroactive treatment for
this disposal in accordance with SFAS 144.
In November 2002, the Company issued a board resolution authorizing
an increase to the authorized capital to 100,000,000 Class A common
shares and the Class B common shares to remain at the 2,000,000
share level. In February 2003, the Company issued another board
resolution authorizing a further increase in its authorized capital.
Under this resolution, the Company increased its Class A common
shares and Class B common shares to 250,000,000 shares and 5,000,000
shares authorized, respectively. With this change, the Company
issued a board resolution to cancel the 1,142,858 Class B common
shares, and issue to its officers 2,500,000 Class B common shares
each (5,000,000 total) at par value.
On April 25, 2001, Secure Time, Inc. merged into Clickese.com at
which time the resulting company changed its name to STI. The
transaction was valued at $1 per share for 10,500,000 shares.
International Mercantile Corporation was originally incorporated in
the State of Missouri, on March 10, 1971. Their business purpose
included among other things, maintaining an Internet based personal
computer manufacturing business selling build-to-order systems
throughout the United States to value added retailers and other
marketers of micro-computer systems. The Company has terminated all
of these business activities.
On or about March 29, 2004, the Company entered into an acquisition
agreement with Holtermann & Team, GmbH, a German Company
("Holtermann"), to acquire, effective April 1, 2004, 100% of the
assets and equity interests of Holtermann in exchange for 10,000,000
restricted shares of the Company's Class A Common Stock. Under the
terms of the Acquisition Agreement, the Company is the successor in
interest to a certain Loan Agreement under which Holtermann is to
receive $950,000 by the end of 2004. The shares of common stock were
issued in April 2004. The Company in January 2005 changed the name
of its German subsidiary to SoftNet International GmbH.
The Company acquired WholesaleByUs ("WBU") on July 9, 2004. WBU is a
technology driven company that developed proprietary technology to
sell products through the Internet. The Company acquired WBU for
$112,000 and 20,000,000 restricted Class A Common Shares of stock.
The Company issued 15,000,000 of these shares to WBU that are issued
based on sales criteria. Should this criteria not be reached, these
shares are to be returned to the Company. The shares were valued at
$800,000 and is included in goodwill on the condensed consolidated
balance sheet at March 31, 2005.
10
SOFTNET TECHNOLOGY CORP. AND SUBSIDIARIES
(FORMERLY T & G2, INC.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
MARCH 31, 2005 AND 2004
NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION (CONTINUED)
--------------------------------------------------
The Company announced on July 22, 2004 a name change to Softnet
Technology Corp.
The Company acquired Indigo Technology Services (Indigo), a
technology company based in Atlanta, Georgia for 9,000,000 shares of
restricted Class A Common Shares of stock. The Company in this
transaction acquired $14,170 of accounts receivable and $58,235 in
cash. The shares were valued at $.15 per share at the time of the
transaction for a value of $1,350,000. The remaining $1,277,595 was
recognized as goodwill. Management has determined that there is no
impairment on this goodwill as of March 31, 2005.
Indigo is a provider of business technology consulting and
technology products and solutions designed to help companies
integrate technology into everyday lives. Indigo is the creator of
Guest Worx High Speed Internet Access.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
------------------------------------------
Principles of Consolidation
---------------------------
The condensed consolidated financial statements include the accounts
of the Company and all of its wholly owned subsidiaries. All
significant intercompany accounts and transactions have been
eliminated in consolidation.
Use of Estimates
----------------
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the
condensed consolidated financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
Revenue and Cost Recognition
----------------------------
Commencing in 2002, the Company started generating revenues. The
Company currently records its revenue on the accrual basis, whereby
revenue is recognized upon the sales orders being placed.
Cost is recorded on the accrual basis, when the purchase orders are
placed, and operating costs are incurred rather than paid for.
11
SOFTNET TECHNOLOGY CORP. AND SUBSIDIARIES
(FORMERLY T & G2, INC.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
MARCH 31, 2005 AND 2004
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
------------------------------------------------------
Cash and Cash Equivalents
-------------------------
The Company considers all highly liquid debt instruments and other
short-term investments with an initial maturity of three months or
less to be cash equivalents.
The Company maintains cash and cash equivalent balances at several
financial institutions that are insured by the Federal Deposit
Insurance Corporation up to $100,000.
Fixed Assets
------------
Fixed assets are stated at cost. Depreciation is computed primarily
using the straight-line method over the estimated useful life of the
assets.
Furniture and fixtures 7 Years
Office equipment 3 to 5 Years
Time clock equipment 1.5 Years
Time clock software 3 Years
Income Taxes
------------
The income tax benefit is computed on the pretax loss based on the
current tax law. Deferred income taxes are recognized for the tax
consequences in future years of differences between the tax basis of
assets and liabilities and their financial reporting amounts at each
year-end based on enacted tax laws and statutory tax rates.
Comprehensive Income
--------------------
The Company adopted Statement of Financial Accounting Standards No,
130, "Reporting Comprehensive Income," (SFAS No. 130). SFAS No. 130
requires the reporting of comprehensive income in addition to net
income from operations.
Comprehensive income is a more inclusive financial reporting
methodology that includes disclosure of information that
historically has not been recognized in the calculation of net
income.
Advertising
-----------
Costs of advertising and marketing are expensed as incurred.
Advertising and marketing costs were $105,224 and $27,183 for the
three months ended March 31, 2005 and 2004, respectively.
12
SOFTNET TECHNOLOGY CORP. AND SUBSIDIARIES
(FORMERLY T & G2, INC.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
MARCH 31, 2005 AND 2004
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
------------------------------------------------------
Goodwill and Other Intangible Assets
------------------------------------
In June 2001, the FASB issued Statement No. 142 "Goodwill and Other
Intangible Assets". This statement addresses financial accounting
and reporting for acquired goodwill and other intangible assets and
supersedes APB Opinion No. 17, Intangible Assets. It addresses how
intangible assets that are acquired individually or with a group of
other assets (but not those acquired in a business combination)
should be accounted for in financial statements upon their
acquisition. This Statement also addresses how goodwill and other
intangible assets should be accounted for after they have been
initially recognized in the financial statements. The Company in its
acquisition of Holtermann recognized $1,249,964 of goodwill. The
Company has determined that $849,964 of this goodwill has been
impaired as of March 31, 2005. The remaining $400,000 has been
reflected as goodwill on the condensed consolidated balance sheet at
March 31, 2005.
Earnings (Loss) Per Share of Common Stock
-----------------------------------------
Historical net income (loss) per common share is computed using the
weighted average number of common shares outstanding. Diluted
earnings per share (EPS) includes additional dilution from common
stock equivalents, such as stock issuable pursuant to the exercise
of stock options and warrants. Common stock equivalents are not
included in the computation of diluted earnings per share when the
Company reports a loss because to do so would be antidilutive for
the periods presented.
The following is a reconciliation of the computation for basic and
diluted EPS:
March 31, March 31,
2005 2004
---- ----
(Reclassified)
Net Loss ($ 569,829) ($ 399,105)
-------------- --------------
Weighted-average common shares
outstanding (Basic) 265,174,636 36,831,055
Weighted-average common stock
equivalents:
Stock options - -
Warrants - -
- -
Weighted-average common shares
outstanding (Diluted) 265,174,636 36,831,055
============== ==============
13
SOFTNET TECHNOLOGY CORP. AND SUBSIDIARIES
(FORMERLY T & G2, INC.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
MARCH 31, 2005 AND 2004
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
------------------------------------------------------
Earnings (Loss) Per Share of Common Stock (Continued)
-----------------------------------------------------
Options and warrants outstanding to purchase stock were not included
in the computation of diluted EPS because inclusion would have been
antidilutive.
Software Development Costs
--------------------------
Internal use software costs are recorded in accordance with
Statement of Position (SOP) No. 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use".
Qualifying costs incurred during the application development stage,
which consist primarily of outside services are capitalized and
amortized over the estimated useful life of the asset. All other
costs are expensed as incurred. The Company has determined that all
costs for the three months ended March 31, 2005 and 2004, do not
relate to the application development stage and therefore have
expensed these costs as they were incurred.
Fair Value of Financial Instruments
-----------------------------------
The carrying amount reported in the condensed consolidated balance
sheet for cash and cash equivalents, accounts receivable, accounts
payable, accrued expenses and notes payable approximate fair value
because of the immediate or short-term maturity of these financial
instruments.
Stock-Based Compensation
------------------------
The Company has elected to follow Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" (APB No.
25), and related interpretations, in accounting for their employee
stock options rather than the alternative fair value accounting
allowed by SFAS No. 123, "Accounting for Stock-Based Compensation",
and has adopted the enhanced disclosure provisions of SFAS No. 148,
"Accounting for Stock Based Compensation - Transition and
Disclosures", an amendment of SFAS No. 123. APB No. 25 provides that
the compensation expense relative to the Company's employee stock
options is measured based on the intrinsic value of the stock
option. SFAS No. 123 requires companies that continue to follow APB
No. 25 to provide a pro-forma disclosure of the impact of applying
the fair value method of SFAS No. 123.
Reclassifications
-----------------
Certain amounts for the three months ended March 31, 2004 have been
reclassified to conform to the presentation of the March 31, 2005
amounts. The reclassifications have no effect on net income for the
three months ended March 31, 2004.
14
SOFTNET TECHNOLOGY CORP. AND SUBSIDIARIES
(FORMERLY T & G2, INC.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
MARCH 31, 2005 AND 2004
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
------------------------------------------------------
Recent Accounting Pronouncements
--------------------------------
In December 2002, the FASB issued Statement No. 148, "Accounting for
Stock-Based Compensation-Transition and Disclosure, an amendment of
FASB Statement No. 123"("SFAS 148"). SFAS 148 amends FASB Statement
No. 123, "Accounting for Stock-Based Compensation," to provide
alternative methods of transition for an entity that voluntarily
changes to the fair value based method of accounting for stock-based
employee compensation. It also amends the disclosure provisions of
that Statement to require prominent disclosure about the effects on
reported net income of an entity's accounting policy decisions with
respect to stock-based employee compensation. Finally, this
Statement amends Accounting Principles Board ("APB") Opinion No. 28,
"Interim Financial Reporting", to require disclosure about those
effects in interim financial information. SFAS 148 is effective for
financial statements for fiscal years ending after December 15,
2002. The Company will continue to account for stock-based employee
compensation using the intrinsic value method of APB Opinion No. 25,
"Accounting for Stock Issued to Employees," but has adopted the
enhanced disclosure requirements of SFAS 148.
In April 2003, the FASB issued SFAS Statement No. 149, "Amendment of
Statement 133 on Derivative Instruments and Hedging Activities",
which amends and clarifies financial accounting and reporting for
derivative instruments, including certain derivative instruments
embedded in other contracts (collectively referred to as
derivatives) and for hedging activities under FASB Statement No.
133, Accounting for Derivative Instruments and Hedging Activities.
This Statement is effective for contracts entered into or modified
after June 30, 2003, except for certain hedging relationships
designated after June 30, 2003. Most provisions of this Statement
should be applied prospectively. The adoption of this statement did
not have a significant impact on the Company's results of operations
or financial position.
In May 2003, the FASB issued SFAS Statement No. 150, "Accounting for
Certain Financial Instruments with Characteristics of both
Liabilities and Equity". This Statement establishes standards for
how an issuer classifies and measures certain financial instruments
with characteristics of both liabilities and equity. It requires
that an issuer classify a financial instrument that is within its
scope as a liability (or an asset in some circumstances). This
statement is effective for financial instruments entered into or
modified after May 31, 2003, and otherwise is effective at the
beginning of the first interim period beginning after June 15, 2003,
except for mandatorily redeemable financial instruments of nonpublic
entities, if applicable.
15
SOFTNET TECHNOLOGY CORP. AND SUBSIDIARIES
(FORMERLY T & G2, INC.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
MARCH 31, 2005 AND 2004
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
------------------------------------------------------
Recent Accounting Pronouncements (Continued)
--------------------------------------------
It is to be implemented by reporting the cumulative effect of a
change in an accounting principle for financial instruments created
before the issuance date of the Statement and still existing at the
beginning of the interim period of adoption. The adoption of this
statement did not have a significant impact on the Company's results
of operations or financial position.
In November 2002, the FASB issued Interpretation No. 45 ("FIN 45"),
Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others. FIN 45
requires a company, at the time it issues a guarantee, to recognize
an initial liability for the fair value of obligations assumed under
the guarantees and elaborates on existing disclosure requirements
related to guarantees and warranties. The recognition requirements
are effective for guarantees issued or modified after December 31,
2002 for initial recognition and initial measurement provisions. The
adoption of FIN 45 did not have a significant impact on the
Company's results of operations or financial position.
In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN
46"), Consolidation of Variable Interest Entities, an Interpretation
of ARB No. 51. FIN 46 requires certain variable interest entities to
be consolidated by the primary beneficiary of the entity if the
equity investors in the entity do not have the characteristics of a
controlling financial interest or do not have sufficient equity at
risk for the entity to finance its activities without additional
subordinated financial support from other parties. FIN 46 is
effective for all new variable interest entities created or acquired
after January 31, 2003. For variable interest entities created or
acquired prior to February 1, 2003, the provisions of FIN 46 must be
applied for the first interim or annual period beginning after June
15, 2003. The adoption of FIN 46 did not have a significant impact
on the Company' results of operations or financial position.
NOTE 3 - ACCOUNTS RECEIVABLE
-------------------
The Company extends unsecured credit to its customers in the
ordinary course of business but mitigates the associated credit risk
by performing credit checks and actively pursuing past due accounts.
An allowance for doubtful accounts has not been established at March
31, 2005, since Management is of the opinion that all accounts
receivable are fully collectible.
16
SOFTNET TECHNOLOGY CORP. AND SUBSIDIARIES
(FORMERLY T & G2, INC.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
MARCH 31, 2005 AND 2004
NOTE 4 - FIXED ASSETS
------------
Fixed assets consist of the following at March 31, 2005:
Office equipment $ 21,122
Furniture and fixtures 2,646
Time clock equipment 38,730
Time clock software 54,144
-----------
116,642
(99,772)
Total $ 16,870
===========
Depreciation expense was $3,269 and $5,202 for the three months
ended March 31, 2005 and 2004. The Company sold $133,506, net of
depreciation of Bingo Units upon the sale of Zingo Sales.
NOTE 5 - NOTES PAYABLE - BANK
--------------------
On April 3, 2001, the Company entered into a line of credit
agreement with a bank. The note, which is due on demand bears
interest at prime plus 2.25% and provides for maximum borrowings up
to $63,100. The line of credit is guaranteed by a majority
shareholder. The outstanding balance at March 31, 2005 was $0. The
line of credit was STI's, and was assigned over to the Company upon
the acquisition. There was no interest expense charged to operations
for the three months ended March 31, 2005 and 2004, respectively.
NOTE 6 - NOTES PAYABLE
-------------
The Company's subsidiary WBU, has a note payable outstanding with an
individual that is due on demand. This note represents payments made
by this individual for company expenses. WBU anticipates repayment
of this amount in its second quarter. The amount outstanding at
March 31, 2005 is $6,155, and is reflected as a current liability in
the Company's condensed consolidated balance sheet at March 31,
2005.
In February 2005, the Company entered into a loan agreement with a
foreign company in the amount not to exceed $500,000. This foreign
company funded the entire $500,000 to the Company in February 2005.
The term of the agreement is for three years, and the Company is
obligated to make quarterly payments of interest at 10% only, with a
balloon payment due on the maturity date. As of March 31, 2005, the
outstanding liability is $500,000, which is reflected as a long-term
liability in the condensed consolidated balance sheet. Interest for
the three months ended March 31, 2005 and accrued interest at March
31, 2005 is $6,219.
17
SOFTNET TECHNOLOGY CORP. AND SUBSIDIARIES
(FORMERLY T & G2, INC.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
MARCH 31, 2005 AND 2004
NOTE 7 - RELATED PARTY TRANSACTIONS
--------------------------
Amounts due from related parties at March 31, 2005 were $844 and
consists of the following:
Note receivable from a company through common ownership in the
amount of $14,497 at March 31, 2005.
Note receivables to a company through common ownership in the amount
of $7,647 at March 31, 2005, at 10% interest, payable monthly, due
on demand. At March 31, 2005, the Company has approximately $18,270
in accrued interest to this company.
The Company has $9,200 outstanding to another entity related through
common ownership at March 31, 2005. At March 31, 2005, the Company
has approximately $925 in accrued interest to this company.
The Company has a note payable due on demand with an individual who
is an officer of SoftNet International GmbH. There is no interest
due on this note, and at March 31, 2005, the amount outstanding is
$12,100.
NOTE 8 - ACQUISITIONS
------------
On January 12, 2002, the Company acquired STI as a wholly owned
subsidiary for 20,511,365 shares of common stock. At the time of the
acquisition, STI's book value of their net assets was approximately
$0. The acquisition of the 20,511,365 shares were valued at the
Company's fair value at the time of the issuance which approximated
$.15 per share, $3,177,556. In accordance with FASB 142, the Company
impaired the goodwill for that amount.
In March, 2002, Zingo was acquired as a wholly owned subsidiary by
the Company for 2,500,000 shares of common stock. Zingo Sales, Ltd.,
a relatively new company had very little activity and also had a net
book value of approximately $0. The shares issued were valued at
$1.95, the fair value of the stock at the time of issuance. The
$4,875,000, was recorded as goodwill and subsequently impaired to
$0. The impairment is included in the consolidated statements of
operations for the year ended December 31, 2002. The Company sold
Zingo in July 2004, and has accounted for this disposal in
accordance with SFAS 144.
On or about March 29, 2004, the Company entered into an acquisition
agreement with Holtermann & Team, GmbH, a German Company
("Holtermann"), to acquire, effective April 1, 2004, 100% of the
assets and equity interests of Holtermann in exchange for 10,000,000
restricted shares of the Company's Class A Common Stock.
18
SOFTNET TECHNOLOGY CORP. AND SUBSIDIARIES
(FORMERLY T & G2, INC.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
MARCH 31, 2005 AND 2004
NOTE 8 - ACQUISITIONS (CONTINUED)
------------------------
Under the terms of the Acquisition Agreement, the Company is the
successor in interest to a certain Loan Agreement under which
Holtermann was to receive $950,000 by the end of 2004. The shares of
common stock were issued in April 2004.
The Company acquired WholesaleByUs ("WBU") on July 9, 2004. WBU is a
technology driven company that developed proprietary technology to
sell products through the Internet. The Company acquired WBU for
$112,000 and 5,000,000 restricted Class A Common Shares of stock.
The shares of stock have not been issued as of March 31, 2005.
The Company acquired Indigo Technology Services (Indigo), a
technology company based in Atlanta, Georgia for 9,000,000 shares of
restricted Class A Common Shares of stock. The Company in this
transaction acquired $14,170 of accounts receivable and $58,235 in
cash. The shares were valued at $.15 per share at the time of the
transaction for a value of $1,350,000. The remaining $1,277,595 was
recognized as goodwill. Management has determined that there is no
impairment on this goodwill as of March 31, 2005.
Indigo is a provider of business technology consulting and
technology products and solutions designed to help companies
integrate technology into everyday lives. Indigo is the creator of
Guest Worx High Speed Internet Access.
NOTE 9 - STOCKHOLDERS' EQUITY (DEFICIT)
------------------------------
Preferred Stock
---------------
At March 31, 2005, there are 5,000,000 shares of Class A Preferred
Stock, par value $1.00 authorized and 0 shares issued and
outstanding. In April, 2003, the Company passed a board resolution
to re-instate the Series A Preferred Stock changing its par value to
$.001.
Additionally, the Company passed a board resolution to authorize
5,000,000 shares of Class B Preferred Stock, par value $.001. As of
March 31, 2005, the Company has 2,000,000 shares issued and
outstanding. 282,703 of these shares were issued to Mercatus
Partners, Ltd. in connection with an amended loan agreement. These
shares were issued when the Company cancelled the 66,666,667 shares
of Class A Common Stock that were issued as collateral to the
original loan agreement. The amended loan agreement was terminated
by the Company and all 282,703 shares have been cancelled of record.
As of March 31, 2005 certificates representing 117,885 have been
surrendered to the Company.
19
SOFTNET TECHNOLOGY CORP. AND SUBSIDIARIES
(FORMERLY T & G2, INC.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
MARCH 31, 2005 AND 2004
NOTE 9 - STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)
------------------------------------------
Preferred Stock (Continued)
---------------------------
An additional 668,000 shares were issued to a Bermuda company as
collateral for a promissory note. These shares were valued at the
par value and recorded against additional paid in capital as the
preferred shares have no readily determinable market value.
Effective April 9, 2004, the Company terminated this agreement due
to this company's failure to make loan advances as set forth in the
agreement. All shares have been surrendered to the Company.
The remaining 2,000,000 shares of the Class B Preferred Stock was
issued in accordance with a March 24, 2004 Investment Exchange
Agreement (the "Agreement") with Cross Capital Fund, LLC. ("Cross
Capital"). The Company entered into the Agreement that provides for
Cross Capital to make an equity investment in the Company and the
Company will receive from Cross Capital an Investor Membership
Interest in an aggregate amount equal to $2,000,000 over the next
twelve months (March 2005). The 2,000,000 shares were issued in
exchange for the Investor Membership Interest. The Company has
recorded the $2,000,000 as a subscription receivable on the
condensed consolidated balance sheet at March 31, 2005. The
Preferred shares convert to the Company's Class A Common Shares as
set forth in the agreement.
Common Stock
------------
As of March 31, 2005, there were 500,000,000 shares authorized, and
267,075,469 shares issued, 150,000,000 shares in escrow and
117,075,469 shares outstanding respectively, of the Company's common
stock A with a par value of $.001. In February 2003, the Company
upon an approved board resolution increased the authorized limit of
the Class A common shares to 250,000,000 and increased it to
500,000,000 in 2004.
As of March 31, 2005, there were 5,000,000 shares authorized, and
5,000,000 shares issued and outstanding of the Company's common
stock B with a par value of $.001, respectively. In February 2003,
the Company upon an approved board resolution increased the
authorized limit of the Class B common shares to 5,000,000.
Subsequent to this board resolution, the Company cancelled the
outstanding 1,142,858 shares and issued the entire 5,000,000 shares
to two of its officers.
The following shares of common stock Class A were issued for the
three months ended March 31, 2005 and year ended December 31, 2004:
20
SOFTNET TECHNOLOGY CORP. AND SUBSIDIARIES
(FORMERLY T & G2, INC.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
MARCH 31, 2005 AND 2004
NOTE 9 - STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)
------------------------------------------
Common Stock (Continued)
------------------------
The Company in the quarter ended March 31, 2005 issued 3,375,000
shares of common stock for cash in the amount of $67,500.
Additionally, the Company received $55,269 in cash from prior share
issuances.
The Company in the quarter ended March 31, 2005 issued 550,000
shares of common stock for services valued at $90,750 ($.165 per
share).
The Company in the quarter ended December 31, 2004 issued 12,525,000
shares of common stock for cash in the amount of $536,000.
The Company issued 20,000,000 shares of common stock in its
acquisition of WholesaleByUs. Of these shares, 15,000,000 shares
were issued based on a certain sales criteria being met. Should
those criteria not be met, the shares are to be returned. The shares
are valued at $800,000 and are reflected as goodwill on the
consolidated balance sheet at December 31, 2004.
The Company in the quarter ended September 30, 2004 issued
17,433,333 shares of common stock for cash in the amount of
$205,500.
The Company in September 2004 issued 150,000,000 shares of common
stock as collateral under a loan agreement. These shares are being
held by an escrow agent, and are restricted. The Company has
recorded these shares at the fair value of $900,000, and has
classified them in their equity section as collateral under note
agreement.
The Company in the quarter ended June 30, 2004 issued 13,858,059
shares of common stock for cash in the amount of $237,231. In
addition, the Company has a subscription receivable of $39,930 due
for a portion of these shares.
The Company in April 2004 issued 10,000,000 shares of common stock
to Holtermann valued at $1,000,000 for the acquisition of that
company. On January 14, 2004, the Company entered into a Loan and
Security Agreement and a Multiple Advance Promissory Note with a
Bermuda company. This agreement establishes a multiple advance loan
of a maximum of $2,600,000. As collateral for this note, the Company
issued 668,000 shares of its Series B Preferred Stock. Additionally,
the Company issued to the Bermuda company a warrant for the purchase
of up to 6,000,000 shares of the Company's common stock A at an
exercise price of $.15 per share. The warrants carry no registration
rights. Both the Series B Preferred Stock and the warrants have been
cancelled due to the Bermuda company's failure to fund the loan.
21
SOFTNET TECHNOLOGY CORP. AND SUBSIDIARIES
(FORMERLY T & G2, INC.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
MARCH 31, 2005 AND 2004
NOTE 9 - STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)
------------------------------------------
Common Stock (Continued)
------------------------
The Company issued 3,585,000 shares to consultants at various fair
market value prices for a total expense of $331,650 (average value
of $.09 per share) during the quarter ended March 31, 2004.
The Company issued 30,000 shares for legal services for $3,300
(value of $.11 per share) during the quarter ended March 31, 2004.
The Company issued 50,000 shares during the quarter ended March 31,
2004 in conversion of accrued expenses valued at $7,500 ($.15 per
share).
The Company received $106,000 of subscriptions receivable in the
quarter ended March 31, 2004 that related to stock issuances in
2003.
Treasury Stock
--------------
In January 2003, the Company instituted a buy back program of its
own stock. For the three months ended March 31, 2005 and year ended
December 31, 2004, the Company bought back no additional shares of
its common stock and placed it in its treasury. For the year ended
December 31, 2003, the Company bought back 281,400 shares of its
common stock and placed it in its treasury. The Company has
accounted for its treasury stock utilizing the cost method, and
such, the $37,338 at March 31, 2005 represents the cost value of the
treasury shares acquired by the Company.
NOTE 10 - NOTES RECEIVABLE
----------------
The Company sold a business segment in July 2004 for $300,000. This
amount is currently a note receivable on the condensed consolidated
balance sheet. This amount has been accruing interest at 6% and as
of March 31, 2005, there is $17,858 recognized as accrued interest
receivable. The amount is classified as a current asset as it is due
on demand.
Indigo entered into a loan agreement with Pearlnet LLC, an Atlanta,
Georgia based limited liability companion March 1, 2005. Indigo lent
Pearlnet LLC, $75,000, which is to be repaid in three annual
installments of $25,000. Interest is payable to Indigo at the rate
of .007 percent per annum, calculated monthly not in advance. As of
March 31, 2005, Indigo accrued $44 of interest receivable.
22
SOFTNET TECHNOLOGY CORP. AND SUBSIDIARIES
(FORMERLY T & G2, INC.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
MARCH 31, 2005 AND 2004
NOTE 11 - GOING CONCERN
-------------
As shown in the accompanying condensed consolidated financial
statements, the Company incurred substantial net losses for the
three months ended March 31, 2005 and 2004, as well as the years
ended December 31, 2004 and 2003. There is no guarantee whether the
Company will be able to generate enough revenue and/or raise capital
to support those operations. This raises substantial doubt about the
Company's ability to continue as a going concern.
The Company has improved its operations through its acquisitions of
Holtermann, WholesaleByUs and Indigo Technologies, and has been
affected by recent legislative mandates on the gaming industry that
has lead to a portion of the Zingo unit revenue being diminished,
which ultimately lead to the sale of that subsidiary. Management
feels that through their recent acquisitions, the Company will
develop positive operations and cash flows.
The condensed consolidated financial statements do not include any
adjustments that might result from the outcome of these
uncertainties.
NOTE 12 - COMMITMENTS
-----------
The Company has agreed to issue 9,000,000 shares of restricted Class
A Common Shares of stock to the former shareholders of Indigo in
accordance with the Stock Purchase Agreement. The Company has
recorded a liability for stock to be issued in the amount of
$1,350,000, which represents those 9,000,000 shares at a value of
$.15 per share, the fair value of the stock at the time the
agreement was entered into.
In November 2002, the Company installed its Securetime system in a
restaurant at a major Las Vegas, Nevada casino. The Company has also
received an order for the Securetime system from a Native American
business in Oklahoma and the installation was completed in late
November. Both of these installations signed contracts for
continuing and ongoing services in March 2003. In the first quarter
of 2004, Securetime has installed a biometric ID system in a bingo
facility in Wyoming. All of these systems are currently being
upgraded by the Company, and additionally, the Company has installed
a system in a legal printing facility in Los Angeles.
23
SOFTNET TECHNOLOGY CORP. AND SUBSIDIARIES
(FORMERLY T & G2, INC.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
MARCH 31, 2005 AND 2004
NOTE 13 - LITIGATION
----------
In an action commenced on or about March 28, 2002 in the Supreme
Court of the State of New York, the plaintiff seeks $40,000 in
damages from the Company as well as other defendants listed in this
action, allegedly sustained as a result of third party payments made
on behalf of all defendants, including, but not limited to the
Company. An answer denying all material allegations was served upon
the Plaintiff on May 1, 2002, within the time allotted by law to do
so. The Plaintiff as of March 25, 2004, has failed to respond to the
Company's discovery demands. The Company will seek an Order of the
Court dismissing this action due to the plaintiff's failure to
comply. Management is of the belief that all allegations involved in
this action are without merit. No liability is recorded for this
action as of March 31, 2005.
NOTE 14 - PROVISION FOR INCOME TAXES
--------------------------
Deferred income taxes will be determined using the liability method
for the temporary differences between the financial reporting basis
and income tax basis of the Company's assets and liabilities.
Deferred income taxes will be measured based on the tax rates
expected to be in effect when the temporary differences are included
in the Company's consolidated tax return. Deferred tax assets and
liabilities are recognized based on anticipated future tax
consequences attributable to differences between financial statement
carrying amounts of assets and liabilities and their respective tax
bases.
At March 31, 2005, deferred tax assets approximated the following:
Net operating loss carryforwards $ 5,932,058
Less: valuation allowance (5,932,058)
-------------
$ -0-
=============
At March 31, 2005, the Company had accumulated deficits
approximating $19,773,525 available to offset future taxable income
through 2024. The Company established valuation allowances equal to
the full amount of the deferred tax assets due to the uncertainty of
the utilization of the operating losses in future periods.
24
SOFTNET TECHNOLOGY CORP. AND SUBSIDIARIES
(FORMERLY T & G2, INC.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
MARCH 31, 2005 AND 2004
NOTE 15 - DISPOSAL OF BUSINESS
--------------------
In July 2004, the Company sold Zingo Sales. The Company's condensed
consolidated financial statements have been reclassified to reflect
these sales as discontinued operations for all periods presented.
Summarized operating results of discontinued operations for the
three months ended March 31, 2004 are as follows:
Revenues $ 303,145
----------
Income before income taxes $ 45,929
Provision for taxes -
----------
Net income $ 45,929
==========
Net income per share $ (.00)
==========
Diluted income per share $ (.00)
==========
25
Management's Discussion and Analysis of Financial Conditions
and Results of Operations
Introduction
- ------------
The following discussion and analysis highlights the financial position of
SoftNet Technology Corp (SoftNet) at March 31, 2005 compared to quarter-end
March 31, 2004. The business activities of the Company are now that of the four
wholly owned subsidiaries - Solutions Technology Inc., Wholesalebyus, LLC (WBU),
Indigo Technology Services, and SoftNet International GmbH. Comparisons are
provided in this report but the Company has made a major change to its
operations and business activity and just began to generate any type of
significant revenue. In reviewing the Company's numbers in this report, it must
be remembered that it essentially shows the first year of operations of three of
the Company's four wholly owned subsidiaries - mainly Indigo and WBU.
Certain statements in this Form 10-KSB, including information set forth under
Item 2. Management's Discussion and Analysis of Financial Condition and Result
of Operations constitute `forward-looking statements' within the meaning of the
Private Securities Litigation Reform Act of 1995 (the "Act"). Such
forward-looking statements are identified by words such as "intends,"
"anticipates," "hopes," and "expects," among others, and include, without
limitation, statements regarding the Company's plan of business operations,
anticipated revenues, related expenditures, and the results of any business
transactions. Factors that could cause actual results to differ materially
include, among others, the following: acceptability of the Company's services in
the market place, general economic conditions, political and economic conditions
in the United States and abroad, and competition. Investors are cautioned not to
put undue reliance on forward-looking statements. Except as otherwise required
by applicable securities statutes or regulations, the Company disclaims any
intent to update publicly these forward-looking statements, whether as a result
of new information, future events or otherwise.
Plan of Operation
- -----------------
The Company entered into a transaction to acquire an Atlanta, Georgia based
business entity to further strengthen SoftNet's core business of Software and
technology. Major advancements and development of Solutions Technology to bring
the SecureTime Biometric ID System to the point where it could be mass marketed
has been completed. New sales agents and a new facility in the southern
California area have been obtained and a major marketing push is just being
instituted. The development of SoftNet International is just about completed and
preparations to begin sales are in the final stages for business operations in
international markets. The Company's management entered into a transaction for
funding in the form of a debt financing. With this debt funding, SoftNet issued
150,000,000 shares of the Company's Class A Common in certificate form. These
shares are being held in escrow in certificate form in a reputable European Bank
in Switzerland. The loan if a closing occurs will have a three (3) year term at
6% interest. The loan can be paid off without penalty at anytime after the first
anniversary. SoftNet Management is highly confident that the loan can be repaid
from future cash flow within the three (3) year period. An equity financing may
be an attractive alternative to retire the loan in the next year or two given
the tremendous fundamental development of the overall Company. This loan will be
instrumental in the development of SoftNet and subsidiaries. In April of 2004,
SoftNet entered into a financing arrangement with Cross Capital Fund. Cross
Capital Fund never performed on its responsibilities and breached the agreement.
SoftNet is in the process of evaluating all potential legal rights in this
matter and will exercise all legal rights to recover any and all potential
damages that may have been caused by Cross Capital Fund.
For the following nine month period from April, 2005 to December, 2005 it is
anticipated, absent the Company's obtaining other sources of liquidity as
described above, the Company's primary funding for ongoing corporate expenses,
such as legal and accounting fees and filing fees, will be provided by the
private sale of the Company's securities and from operating activities.
Thereafter, the Company anticipates further expanding the WBU business to the
point of profitability in the coming months and generating revenues from the
sale of their time clocks. The acquisition of Indigo immediately brings positive
cash flow from that and should help SoftNet to Achieve profitability sooner
rather than later. To help expand the awareness for the SoftNet subsidiaries,
26
the Company engaged the services of TVA productions in Los Angeles, California
to build brand name awareness for the WBU online shopping site as well as
introduce the benefits of selling through WBU to other business to attract more
products for sale. Secondly, TVA will be charged with introducing Solutions
Technology and the SecureTime Biometric ID System to the business community in a
large scale way. Solutions Technology believes that the SecureTime System is
ready for this rollout. Large-scale success is anticipated. However, if
viability of the SecureTime System is not realize in the coming year, then the
operations of Solutions Technology will be terminated. Indigo will greatly
benefit as well from this product and Company promotion. Indigo has also made
great strides with a new business relationship with a company called PearlNet.
PearlNet has been able to garner many state contracts totaling in the millions
and has engaged Indigo to help to fulfill these contracts.
The Company's management has ongoing discussions with investment bankers
pertaining to additional financing as an option for repayment of the restricted
stock loan that SoftNet just entered into but not yet closed. This would include
the possibility of a private place as the first option under consideration with
the possibility of a registration statement as a second option. Such a financing
would probably not occur until 2006 or later. Management believes this would
provide for ample opportunity to build the fundamentals of the company with the
hope to perform such a financing at a much higher and non-dilutive price than
currently would be necessary. However, there can be no assurance management will
be successful in these endeavors. SoftNet has recently hired an internal
controls and procedures auditor to evaluate SoftNet and make sure the Company is
prepared for the future to be compliant with all rules and regulations. This is
also the first step in preparing the Company for a listing on a higher exchange
above the OTCBB.
Liquidity and Capital Resources
- -------------------------------
For the quarter ended March 31, 2005, the Company used ($374,705) in operating
activities from continued operations compared to ($181,459) for the quarter
ended March 31, 2004. Of this amount for quarter ended 2005, a majority is due
to the operating losses incurred in starting up the three (3) wholly owned
subsidiaries, which we believe will translate into generating increased cash.
However, a majority of the increase is attributable to the start up of
WholesaleByUs and Indigo for which contributed to the Company generating net
losses for the three months of approximately $570,000. Additionally, $90,750 in
the first quarter of 2005 and $331,650 in the first quarter of 2004 worth of
stock was issued for services. The Company has also borrowed certain amounts
from related parties as well as banks to finance the beginning production costs
for its time clocks and for the acquisition and further development of WBU. The
funding that was recently received will enable the Company to market, and
produce its products. We anticipate that going forward; we will streamline
administrative, and professional fees to conserve cash flow. The recognition of
revenues has occurred and as revenue continues to grow and the recognition of
positive cash flow is attained, certain expenses will increase, but only in
accordance with the increase in revenues.
Going Concern. The accompanying financial statements have been prepared assuming
the Company will continue as a going concern. The Company has suffered recurring
losses from operations and at March 31, 2005 and 2004 had a working capital
deficit. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
27
PART II. OTHER INFORMATION
--------------------------
Item 1. Legal Proceedings
- ---------------------------
The Company is not engaged in any legal proceedings except litigation in
the ordinary course of its business. In the opinion of management, the amount of
ultimate liability with respect to any such proceedings will not be material to
the Company's financial position or results of operations.
Item 2. Changes in Securities
- -------------------------------
None.
Item 3. Defaults Upon Senior Securities
- -----------------------------------------
None.
Item 4. Submission of Matters to a Vote of Securities Holders
- ---------------------------------------------------------------
No matters were submitted to a vote of the security holders of the Company
during its fiscal quarter ended September 30, 2004.
Item 5. Other Information
- ---------------------------
None.
Item 6. Exhibits and Reports on Form 8-K
- ------------------------------------------
(a) Exhibits
31.1 Certification of the Principal Executive Officer
and Chief Financial Officer, pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Principal Executive Officer and
Chief Financial Officer, pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K.
28
SIGNATURES
----------
In accordance with the requirements of the Securities Exchange Act, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SoftNet Technology Corporation
------------------------------
Date: May 23, 2005 By: /s/ James Farinella
-------------------------------------
James Farinella
Chairman, Chief Executive Officer and
President
29