U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
___________________
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934.
For the quarterly period ended March 31, 2002
or
[_] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934. For the transition period from ____________________
to ____________________
Commission File Number: 028836
Paradigm Advanced Technologies, Inc.
------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Delaware 33-0692466
- ------------------------------- -------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
30 Leek Crescent, Suite 103, Richmond Hill, Ontario, CANADA L4B 4N4
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(Address of Principal Executive Offices)
(905) 764-3701
----------------------------------------------------
(Registrant's Telephone Number, Including Area Code)
-----------------------------------------------------------
(Former Name, Former Address and Former Fiscal Year, if Changed Since
Last Report)
Indicate by check 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
----- -----
As of May 8, 2002 the registrant had 153,000,871 shares of its common stock, par
value $.0001 per share issued and outstanding.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PARADIGM ADVANCED TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
As of March 31, 2001
(unaudited)
(Amounts expressed in US Dollars)
TABLE OF CONTENTS
Page
----
Condensed Consolidated Balance Sheets as of March 31, 2002
and December 31, 2001....................................................... 3
Condensed Consolidated Statements of Operations and
Comprehensive Income for the three months ended March 31,
2002 and 2001............................................................... 5
Condensed Consolidated Statements of Cash Flows for the
three months ended March 31, 2002 and December 31, 2001..................... 6
Condensed Consolidated Statements of Stockholders' Equity
for the three months ended March 31, 2002 and years ended
December 31, 2001 and 2000.................................................. 8
Notes to Condensed Consolidated Financial Statements........................ 10
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................ 26
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.......... 29
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS................................................... 30
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS........................... 30
1
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
ITEM 5. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
2
PARADIGM ADVANCED TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
AS AT MARCH 31, 2002 AND DECEMBER 31, 2001
March 31, December 31,
2002 2001
----------- ------------
(unaudited) (audited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 310,844 $ 234,979
Accounts receivable 1,101,935 943,640
Inventory 370,984 282,327
Prepaid expenses and deposits 452,593 213,558
----------- -----------
TOTAL CURRENT ASSETS 2,236,356 1,674,504
----------- -----------
DEFERRED TAX (note 16) 1,849 1,996
CAPITAL ASSETS (note 4) 448,271 468,559
INTELLECTUAL PROPERTY (note 5) 12,401,573 12,775,394
INVESTMENTS (note 10) 363,550 613,550
----------- -----------
TOTAL ASSETS $15,451,599 $15,534,003
=========== ===========
See Notes to Condensed Consolidated Financial Statements.
3
PARADIGM ADVANCED TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
AS AT MARCH 31, 2002 AND DECEMBER 31, 2001
March 31, December 31,
2002 2001
------------ ------------
(unaudited) (audited)
LIABILITIES
CURRENT LIABILITIES
Accounts Payable and Accrued Liabilities $ 2,310,240 $ 4,021,509
Loans payable (note 6) 150,500 150,500
Income taxes payable 31,323 --
------------ ------------
2,492,063 4,172,009
------------ ------------
LONG TERM LIABILITIES
Promissory Note Payable (note 7) 1,360,000 1,360,000
------------ ------------
TOTAL LIABILITIES 3,852,063 5,532,009
------------ ------------
SHAREHOLDERS' EQUITY
CAPITAL STOCK (note 9)
Share Capital 14,965 12,775
Authorized
250,000,000 shares of Common Stock at $0.0001
par value
Issued and outstanding stock
149,648,900 shares as of March 31, 2002
127,751,410 shares as of December 31, 2001
Additional paid-in capital 87,162,372 83,110,567
Cumulative other comprehensive income (note 14) 266,127 262,993
DEFICIT (75,843,928) (73,384,341)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 11,599,536 10,001,994
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 15,451,599 $ 15,534,003
============ ============
See Notes to Condensed Consolidated Financial Statements.
4
PARADIGM ADVANCED TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE INCOME
For the three months ended
March 31,
-------------------------------
2002 2001
------------ ------------
(unaudited) (unaudited)
REVENUE
Sales and royalties $ 1,433,244 $ 60,705
COST OF SALES 709,180 35,199
------------ ------------
GROSS MARGIN 724,064 25,506
OPERATING EXPENSES
Research and development 270,695 4,828,391
Selling, general and administration 2,236,596 1,154,019
Interest 11,489 815,667
Amortization 407,034 390,815
Write-off of investment in subsidiary 250,000
------------ ------------
TOTAL OPERATING EXPENSES 3,175,814 7,188,892
LOSS BEFORE INCOME TAXES (2,451,750) (7,163,386)
Income tax provision 7,837 --
------------ ------------
Net loss for the period (2,459,587) (7,163,386)
============ ============
Loss per share (0.02) (0.09)
============ ============
Weighted average common share
outstanding during period 147,981,996 81,845,218
See Notes to Condensed Consolidated Financial Statements
5
PARADIGM ADVANCED TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
AS AT MARCH 31, 2002 AND MARCH 31, 2001
For the three For the three
months ended months ended
March 31, 2002 March 31, 2001
-------------- --------------
(unaudited) (unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Loss for the period (2,459,587) (7,163,386)
Items not requiring an outlay of cash
Amortization of capital assets 407,036 390,815
Research and development included
in acquisitions 80,000 4,712,762
Options issued to consultants 8,500 73,000
Common stock and options issued in
payment of expenses 704,874 --
Warrants issued -- 680,000
Write-off of investment in subsidiary 250,000 --
Net changes in non-cash working
capital items related to operations
Accounts receivable (162,622) (33,600)
Inventory (88,462) 9,092
Prepaids and deposits (239,558) 66,587
Accounts payable 915,887 260,960
---------- ----------
NET CASH FLOWS FROM OPERATING
ACTIVITIES (583,932) (1,003,770)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Loans payable -- (250,000)
Proceeds of common stock issuance 675,868 473,500
---------- ----------
NET CASH FLOWS FROM FINANCING
ACTIVITIES 675,868 223,500
---------- ----------
6
PARADIGM ADVANCED TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
AS AT MARCH 31, 2002 AND MARCH 31, 2001
For the three For the three
months ended months ended
March 31, 2002 March 31, 2001
-------------- --------------
(unaudited) (unaudited)
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of capital assets $ (12,927) $ (95,235)
----------- -----------
NET CASH FLOWS FROM INVESTING
ACTIVITIES (12,927) (95,235)
----------- -----------
Effect of foreign currency exchange
rate changes (3,144) 97,478
----------- -----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS FOR THE PERIOD 75,865 (778,027)
Cash and cash equivalents - beginning of period 234,979 1,453,858
----------- -----------
CASH AND CASH EQUIVALENTS
- - END OF PERIOD 310,844 675,831
=========== ===========
Cash and cash equivalents are comprised as follows:
Cash 310,844 534,775
Short-term investments -- 141,056
----------- -----------
310,844 675,831
----------- -----------
CASH AND CASH EQUIVALENTS
- - END OF PERIOD 310,844 675,831
=========== ===========
Note: See note 13 for supplemental information
See Notes to Condensed Consolidated Financial Statements
7
PARADIGM ADVANCED TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
AS AT MARCH 31, 2002
(UNAUDITED)
CUMULATIVE
ADDITIONAL OTHER
PAID IN COMPREHENSIVE
SHARES AMOUNT CAPITAL DEFICIT GAIN
------------ ------------ ------------ ------------ -------------
Balance at December 31, 2000 77,973,829 $ 7,797 $ 66,316,298 $(51,849,253) $ 15,461
Foreign currency transactions -- -- -- -- 247,532
Loss for the period -- -- -- (21,535,088) --
Exercise of stock options
and warrants 5,981,819 598 91,902 -- --
Issued for cash 18,839,457 1,884 3,458,093 -- --
Subscriptions receivable -- -- -- -- --
Issued on acquisition of
NaftEL assets 3,000,000 300 4,999,700 -- --
Issued for WorldLink 4,800,000 480 (480) -- --
Acquisition Exchangeable
Shares issued
re: PowerLOC acquisition 1,248,750 125 (125) -- --
Warrant feature on debentures -- -- 680,000 -- --
Conversion Feature on
Debentures -- -- 19,000 -- --
Options and warrants to
employees and consultants -- -- 6,165,689 -- --
Issued in payment of expenses 11,391,462 1,139 2,368,596 -- --
Promissory note re:
PowerLOC purchase -- -- (1,360,000) -- --
Loan converted to stock 2,484,887 249 144,986 -- --
Issued for other consideration 2,031,206 203 226,908 -- --
Balance at December 31, 2001 127,751,410 $ 12,775 $ 83,110,567 $(73,384,341) $ 262,993
8
CUMULATIVE
ADDITIONAL OTHER
PAID IN COMPREHENSIVE
SHARES AMOUNT CAPITAL DEFICIT GAIN
------------ ------------ ------------ ------------ -------------
Foreign currency transactions -- -- -- -- 3,134
Loss for the period -- -- -- (2,459,587) --
Issued for cash 5,553,024 555 675,312 -- --
Options and warrants to
employees and consultants -- -- 88,500 -- --
Issued in payment of expenses 3,845,821 385 704,489
Issued in payment of
accrued liabilities 12,448,635 1,245 2,583,509
Issued for other consideration 50,010 5 (5)
------------ ------------ ------------ ------------ ------------
Balance at March 31, 2002 149,648,900 14,965 87,162,372 (75,843,928) 266,127
See Notes to Condensed Consolidated Financial Statements
9
PARADIGM ADVANCED TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2002
(AMOUNTS EXPRESSED IN US DOLLARS)
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited financial statements for the three months ended
March 31, 2002 have been prepared in accordance with generally accepted
accounting principles for interim financial information. Accordingly, they
do not include all of the information and footnotes required by generally
accepted accounting principles for audited financial statements. The
condensed balance sheet at December 31, 2001 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. In the opinion of management,
all adjustments (consisting of normal recurring adjustments) considered
necessary for a fair presentation of the financial position and results of
operations of Paradigm Advanced Technologies, Inc. ("Paradigm" or the
"Company") have been included. Operating results for the three months ended
March 31, 2002 are not necessarily indicative of the results that may be
expected for the year ending December 31, 2002. For further information,
refer to the financial statements for the year ended December 31, 2001 and
footnotes thereto which were included in the Company's annual report on
Form 10-K dated April 1, 2002.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
These consolidated financial statement have been prepared in accordance
with generally accepted accounting principles in the United Stated of
America. Because a precise determination of assets and liabilities, and
correspondingly revenues and expenses, depend on future events, the
preparation of consolidated financial statements for any period necessarily
involves the use of estimates and assumptions. Actual amounts may differ
from these estimates. These consolidated financial statements have, in
management's opinion, been properly prepared within reasonable limits of
materiality and within the framework of the accounting policies summarized
below.
PRINCIPLES OF CONSOLIDATION
The Company's consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. All significant inter-company
accounts and transactions have been eliminated. Consolidation commenced
with the effective dates of the acquisition of the operations of the
wholly-owned subsidiaries and these consolidated financial statements
include the financial results of the wholly-owned subsidiaries to March 31,
2002.
10
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash balances with banks and
short-term investments with maturities of less than three months.
CAPITAL ASSETS
Capital Assets are recorded at cost less accumulated depreciation.
Amortization is provided using the following annual rates:
Furniture and Fixture 20% - declining balance method
Computer Equipment 30% - declining balance method
Computer software 50% - straight-line method
Leasehold improvements over the initial term of the lease
INTELLECTUAL PROPERTY
Intellectual Property is recorded at cost less accumulated amortization.
Amortization is provided over their estimated useful lives. Patent Rights
are amortized over 10 years using the straight-line method. The Company has
adopted the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 142. "Goodwill and Other Intangible
Assets (SFAS No. 142). and Statement of Financial Accounting Standard No.
144. "Accounting for the Impairment or Disposal of Long-Lived Assets" (SFAS
No. 144).
INVESTMENTS
The Company has a 50% non-controlling investment in a private company,
which is accounted for using the equity method of accounting. Under the
equity method, the pro-rata share of the investee's earnings since
acquisition is recorded as income and added to the carrying value of the
investment shown on the balance sheet. Dividends received are considered a
return of capital and are accordingly deducted from the carrying value of
the investment. The Company monitors this investment for impairment and
makes appropriate reductions in carrying values when appropriate.
FINANCIAL INSTRUMENTS
The carrying amount of cash and cash equivalents, accounts receivable,
accounts payable and loans payable approximates fair value at the period
end. Foreign Currency Translation
Wholly-owned subsidiaries of the Company maintain their books and records
in Canadian dollars and New Israeli Shekels. Foreign currency transactions
are reflected using the temporal method. Under this method, all monetary
items are translated into the home currency at the rate of exchange
prevailing at balance sheet date. Non-monetary items are translated at
historical rates. Income and expenses are translated at the rate in effect
on the transaction dates. Transaction gains and losses are included in the
determination of earnings for the year.
The translation of the consolidated financial statements of these
wholly-owned subsidiaries from their respective foreign currencies into
United States dollars is performed for the convenience of the reader.
Balance sheet accounts are translated using
11
closing exchange rates in effect at the balance sheet date and income and
expense accounts are translated using an average exchange rate prevailing
during each reporting period. No representation is made that the foreign
amounts could have been or could be realized at the conversion rates.
Adjustments resulting from the translation are included in cumulative other
comprehensive income in stockholders' equity.
LOSS PER SHARE
The Company is required to present basic and diluted earnings or loss per
share. The Company has issued potentially dilutive shares, but, because the
Company has a loss, the potentially dilutive shares are deemed anti-
dilutive and only the basic loss per share is presented. Loss per share is
computed by dividing net income by the weighted average number of shares
outstanding during the period.
INCOME TAXES
The Company accounts for income taxes by recognizing deferred tax assets
and liabilities for the future tax consequences of events that have been
include in the consolidated financial statements or tax returns. Deferred
income taxes are provided using the liability method. Under the liability
method, deferred income taxes are recognized for all significant temporary
differences between the tax and financial statement bases of assets and
liabilities.
Current income tax expense (recovery) is the amount of income taxes
expected to be payable (recoverable) for the current year. A deferred tax
asset and/or liability is computed for both the expected future impact of
differences between the financial statement and tax bases of assets and
liabilities and for the expected future tax benefit to be derived from tax
losses. Valuation allowances are established when necessary to reduce
deferred tax asset to the amount expected to be "more likely than not"
realized in future returns. Tax law and rate changes are reflected in
income in the period such changes are enacted.
STOCK-BASED COMPENSATION PLAN
The Company uses a fair value-based method of accounting for stock-based
compensation. The Company recognizes stock-based compensation expenses to
employees based on the new fair value accounting rules.
12
For the three months ended
March 31,
-----------------------------
2002 2001
---------- ----------
Net loss applicable to common shares
Reported (2,459,587) (7,163,386)
Pro-forma (3,431,285) (7,791,981)
Basic loss per common share:
Reported (0.02) (0.09)
Pro-forma (0.02) (0.10)
RESEARCH AND DEVELOPMENT
Research and development costs, other than capital expenditures, but
including acquired research and development costs, are charged against
income in the period incurred.
REVENUE RECOGNITION
Revenues from the sale of products, and licenses for the rights to use and
sell those products, are recognized upon shipment of the goods and the
passage of title to the customer and where collection is reasonably
assured.
Revenue from the sale of software is recognized upon delivery and
acceptance by the customer and in accordance with Statement of Position
Number 97-2 (SOP 97-2).
Patent royalty fees are recognized as income over the term of the
applicable licenses.
COMPREHENSIVE INCOME
The Company discloses comprehensive income in its consolidated financial
statements. In addition to items included in net income, comprehensive
income includes items currently charged or credited directly to
stockholders' equity, such as foreign currency translation adjustments.
GOVERNMENT ASSISTANCE
Government assistance towards research and development expenditures has
been received as grants from National Research Council Canada, Industrial
Research Assistance Program and in the form of investment tax credits. All
assistance is credited against the related expenditures, when received.
Inventory
Inventories are valued at the lower of cost, calculated on an average cost
basis, or market determined by the selling price less a normal gross
margin.
13
LONG-LIVED ASSETS
Long-lived assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Management used its best estimate of the undiscounted cash
flows to evaluate the carrying amount and has determined that no impairment
has occurred.
CONCENTRATION OF CREDIT RISKS
The Company's receivables are unsecured and are generally due in 30 days.
Currently, the Company's customers are primarily purchasers of location
devices. As of March 31, 2002, two customers combined comprised 59% of the
company's revenues. The Company has only recently commenced generating
revenue. As revenues and the number of customers increase, the risk from
concentration of credit will likely decrease.
RECENT ACCOUNTING PRONOUNCEMENTS
In April 2001, the EITF reached a consensus with respect to EITF Issue No.
00-25, "Vendor Income Statement Characterization of Consideration to a
Purchaser of the Vendor's Products or Services." The consensus included a
conclusion that consideration from a vendor to a retailer is presumed to be
a reduction to the selling prices of the vendor's products and, therefore,
should be characterized as a reduction of revenue when recognized in the
vendor's income statement. That presumption can be overcome, and the
consideration may be characterized as a cost, if certain conditions are
met. Such reclassification will reduce sales and gross margin, but will
have no impact on operating income or net earnings. The Company is
currently evaluating the impact of adoption of this EITF consensus.
In June 2001, the Financial Accounting Standards Board, or FASB, issued
Statement of Financial Accounting Standards, or SFAS, No. 141, "Business
Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets."
SFAS No. 141 requires that the purchase method of accounting be used for
all business combinations initiated after June 30, 2001 and no longer
permits the use of the pooling-of-interests method. SFAS No. 142 requires
that amortization of goodwill cease and the carrying value of goodwill be
evaluated for impairment at least annually using a fair value test.
Identifiable intangible assets will continue to be amortized over their
useful lives and reviewed at least annually for impairment using a method
appropriate to the nature of the intangible asset. We adopted SFAS No. 141
and SFAS No. 142. We do not expect our adoption of SFAS No. 141 or SFAS No.
142 to have a material impact on our financial position or results of
operations.
In August 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard No. 143, "Accounting for Asset Retirement
Obligation" (SFAS No. 143). SFAS No. 143 is effective for fiscal years
beginning after June 15, 2002, and will require companies to record a
liability for asset retirement obligations in the period for which they are
incurred, which typically could be upon completion or shortly thereafter.
The FASB decided to limit the scope to legal obligation and the liability
will be recorded at fair value. The effect of adoption of this standard on
the Company's results of
14
operations and financial position will be evaluated.
On October 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard No. 144. "Accounting for the Impairment or
Disposal of Long-Lived Assets" (SFAS No. 144). SFAS No. 144 is effective
for fiscal years beginning after December 15, 2001. It provides a single
accounting model for long-lived assets to be disposed of and replaces SFAS
No. 121 "Accounting for the Impairment of Long-Lived Assets and Long-Lived
Assets to Be Disposed Of." The effect of adoption of this standard on our
results of operations and financial positions is being evaluated.
3. GOING CONCERN
The Company is in the initial stages of developing its market, has been
selling products and services since March of 2001, and has not yet achieved
profitability. The Company has incurred losses since its incorporation in
1996. The Company has funded its operations to date through the issuance of
shares and debt.
The Company plans to continue its efforts to acquire equity partners, to
make private placements, and to seek both private and government funding
for its projects. In the period December 31, 2001 to March 31, 2002, the
Company raised approximately $675,000 through the issuance of common shares
for cash.
4. CAPITAL ASSETS
March 31, December 31,
2002 2001
--------- -----------
Furniture, fixtures and computers $ 617,497 $ 604,570
Less: accumulated amortization (169,226) (136,011)
--------- ---------
448,271 468,559
========= =========
5. INTELLECTUAL PROPERTY
March 31, December 31,
2002 2001
----------- -----------
Patent Rights $14,954,437 $14,954,437
----------- -----------
Less: accumulated amortization (2,552,864) (2,179,043)
----------- -----------
12,401,573 12,775,394
=========== ===========
Patent Rights - During the year ended December 31, 2000 the Company issued
4,500,000 common shares, valued at $10,543,500 to acquire the licensing
rights to US Patent # B1 5,043,736. The patent is for a broad based process
patent, which covers the apparatus and method of transmitting position
information from satellite navigational signals (such as GPS) over cellular
systems to a base unit and displays the location of a person or object, so
equipped.
15
The vendor was also issued 4,200,000 common shares subject to an escrow
agreement, which the Company has recorded as a subscription receivable. The
vendor may, at any time after July 16, 2001, require the escrow agent to
sell the shares, and remit to the Company from the proceeds at a price per
share of $2.20, up to July 16, 2002, and that amount plus $0.20 per share
per year, thereafter.
The Company also issued 3,000,000 options for common shares for services
rendered in acquiring the licensing rights to the patent. The fair value of
the options granted was estimated at $4,350,000 on the date of grant using
the Black-Scholes pricing model using the following assumptions:
Risk-free interest rate 6.7%
Dividend yield 0%
Expected life 4 years
Stock price volatility 100%
In February, 2001, as part of the acquisition of the assets of NaftEL (note
10), the Company acquired six patents to which it allocated a value of
$30,000.
6. LOANS PAYABLE
Loans payable include loans amounting to $150,500 (December 31, 2001 -
$150,500) which are payable on demand and are secured by a pledge over all
the assets of the Company, with interest at a rate of prime plus 4%.
Accounts Payable and accrued liabilities at March 31, 2002 includes
$131,464 of interest accrued on these loans. Interest expense for related
party loans for the three months ended March 31, 2002 is $0 and for the
three months ended March 31, 2001 is $ 71,886.
7. PROMISSORY NOTE PAYABLE
On August 20, 2001 the Company issued a promissory note to the original
shareholders of PowerLOC for $1,360,000. The note has a 2 year term and is
secured by a pledge over all the assets of the Company. This note relates
to the acquisition of PowerLOC Technologies (see Note 10).
8. RELATED PARTY TRANSACTIONS
In March of 2002 150,000 restricted shares were issued to a director of the
corporation for services resulting in a charge to the income statement of
approximately $19,500.
9. CAPITAL STOCK
The following table summarizes activity under the Company's stock option
plan:
16
Weighted
average
Number of Price exercise
Options per share price
----------- ------------ --------
Options outstanding, December 31, 1999 23,038,201 $0.01-$ 0.40 $0.06
- Options granted 31,725,666 $0.05-$12.50 $1.58
- Options expired (668,334) $0.05-$ 3.00 $0.87
- Options exercised (5,513,867) $0.01-$ 2.00 $0.06
Options outstanding, December 31, 2000 48,481,666 $0.05-$12.50 $1.04
- Options granted 47,548,695 $0.05-$ 4.00 $0.64
- Options cancelled (34,149,000) $0.40-$ 4.00 $1.64
- Options expired (4,021,666) $0.25-$ 4.00 $1.09
- Options exercised (6,350,000) $0.05-$ 0.08 $0.05
Options outstanding, December 31, 2001 51,509,695 $0.05-$12.50 $0.40
- - Options granted 50,000 $0.26 $0.26
----------- ------------ -----
- - Options outstanding, March 31, 2002 51,559,695 $0.05-$12.50 $0.40
=========== ============ =====
The following warrants were outstanding at March 31, 2002:
Number of
Expiry date Price range Warrants
----------- ----------- ----------
2002 $0.05-$0.25 7,259,000
2003 $0.04-$2.50 9,259,917
2004 $0.05-$2.00 30,671,050
2005 $0.20-$2.75 8,067,468
2006 $0.20-$0.45 10,900,000
2008 $3.00-$9.00 7,000,000
2010 $1.00 12,500,000
----------
Total warrants outstanding 85,657,435
==========
Employee Stock Option Plan
The 1996 stock option plan provides for the grant of incentive stock
options for the purchase of the Company's common stock to officers,
directors, employees and consultants of the Company or any subsidiary
corporation. The total number of shares which may be issued under the plan
is 10,000,000. A committee, appointed by the board of directors,
administers the plan. The committee sets the price at which the option is
granted, the dates on which it shall be exercisable and the expiration
date. The company is in the process of filing a prospectus for its 2001
stock option plan. The 2001 stock option plan provides for the grant of
incentive stock options for the purchase of the Company's shares of Common
Stock to officers, directors, members of the advisory
17
board, employees and consultants of the Company or any subsidiary
corporation. The total number of shares that may be issued under the plan
is 40,000,000. A committee, appointed by the board of directors,
administers the plan. The committee sets the price at which the option is
granted, the dates on which it shall be exercisable and the expiration
date. The 2001 stock option plan has been approved in principle by the
Board of Directors and should be filed shortly. It is subject to
ratification by the shareholders of the Company.
10. BUSINESS ACQUISITIONS
a) NaftEL acquisition
In February 2001 the Company entered into an asset purchase agreement to
purchase all of the assets of an Israeli company, NaftEL Technologies Ltd.
("NaftEL"). NaftEL is engaged in the development, manufacturing and
marketing of interactive navigational and fleet management devices,
including, inter alia, a map compression format, and owns certain
intellectual property rights pertaining thereto. The Company has accounted
for the acquisition using the purchase method. Consideration given was as
follows:
Issuance of 3,000,000 common shares at $1.66 $5,000,000
==========
The purchase price has been allocated as follows:
Capital assets $ 30,000
Patents 30,000
Research and development expenses 4,940,000
----------
$5,000,000
==========
Included in the assets acquired was software and technology for the
interactive navigational and fleet management devices, including, inter
alia, a map compression format and intellectual property rights pertaining
thereto. These development costs were allocated to research and development
expenses.
The agreement provides for additional consideration as follows:
o When 3,000,000 common shares above, or part thereof, become free
trading or eligible for registration, should the market value of those
shares at that time not be at least $1.66 each, up to a maximum of
2,000,000 additional common shares will be issued in order to, when
combined with the 3,000,000 common shares issued, bring the total
market value of the consideration to $5,000,000.
o 10,000,000 warrants for common shares are held in escrow for the
vendors and are subject to a vesting schedule, based on the Company
achieving specified progressive revenue targets, ranging from
$1,000,000 to $5,000,000, from the commercialization of the purchased
assets. The exercise prices of the warrants range from $1 to $9, based
on the revenue targets achieved. On
18
March 15, 2002 2,000,000 warrants at an exercise price of $1.00 were
released from escrow. On March 31, 2002, an additional 1,000,000
warrants were released from escrow. These warrants resulted in a
charge to the income statement of $80,000.
b) PowerLOC acquisition
On March 29, 2000, the Company completed the acquisition of 100% of Power
Point Micro Systems Inc. and PowerLOC Technologies, Inc. ("PowerLOC"). The
acquisition has been accounted for using the purchase method. PowerLOC
Technologies, Inc. is a research and development company that has developed
a low-cost, miniature mobile-location GPS unit that transmits its position
to a base station through existing PCS, pager or cellular phone wireless
networks. Power Point Micro Systems, Inc. is an international
telecommunications consulting firm specializing in wireless and wireline,
voice and data systems integration. Consideration was as follows:
Cash $ 300,000
Issuance of 3,650,000 common shares at market
value of $1.72 6,278,000
Issuance of 1,350,000 exchangeable shares at
market value of $1.72 2,322,000
Issuance of 4,166,666 options for common shares
at market value of $1.42 5,916,666
Costs incurred 29,731
-----------
$14,846,397
===========
The definitions of beneficial ownership and the number of shares
outstanding apply to shares of common stock and exchangeable shares as
though they were the same security.
The purchase price was allocated to research and development expenses.
The shares of the acquired companies have been pledged as security for the
performance of the Company under the terms of the agreement.
The fair value of the options granted was estimated on the date of grant
using the Black-Scholes pricing model using the following assumptions:
Risk-free interest rate 6.7%
Dividend yield 0%
Expected life 3 years
Stock price volatility 100%
Under the terms of the original agreement, the Company agreed to provide
the original PowerLOC shareholders (comprising Eduardo Guendelman and
Watson & Associates International Corp.) with common shares of the Company
at the end of each quarter following the closing of the transaction. In the
event that the value of the shares provided was less than $500,000, the
Company was obligated to "top-up" the shares by making a cash payment to
those PowerLOC shareholders. The third party (Harry Zarek in trust) elected
to accept common shares of the Company as the entire compensation for his
role
19
in PowerLOC transaction. The amount of $640,000 was advanced to the Eduardo
Guendelman and Watson & Associates. Originally the $640,000 was paid as an
advance and treated as a reduction in capital. The repayment of this loan
was to be contingent upon future share price fluctuations of the value of
the 3,650,000 common shares issued as above.
On August 20, 2001, the Company and Eduardo Guendelman and Watson &
Associates agreed to clarify the terms of the original agreement by the
Company agreeing that it was obligated to provide those PowerLOC
shareholders with the balance of moneys not previously paid ($1.36 million)
and the shareholders agreeing to return a portion of the shares previously
issued to them. The Company agreed to provide those shareholders with a
promissory note. The note has a 2 year term, (commencing August 20, 2001)
is interest free and is secured by a pledge over all the assets of the
Company. Of this loan, $85,000 was owing to Eduardo Guendelman and the
balance to Watson & Associates. Watson & Associates is a Bahamas
corporation that is owned and controlled by Lily Berlin, a cousin of
Eduardo Guendelman.
c) WorldLink acquisition
In 2000 the Company entered into an agreement ("the Agreement") with Pangea
Petroleum Corporation ("Pangea") to form a strategic alliance. The primary
activity of the joint venture will be to act as an incubator in seeking out
companies with technologies in which WorldLink can make appropriate
investments in new and complimentary technologies. As part of the
Agreement, the Company and Pangea agreed as follows:
i) The Company acquired all of the Class B membership units of
WorldLink USA, L.L.C. ("WorldLink") for 7,500,000 common shares
and 12,500,000 warrants, issued to WorldLink. Of the 7,500,000
common shares issued, 2,700,000 were issued in 2000 and 4,800,000
were issued in 2001. These units represent 50% of the membership
units of WorldLink. WorldLink is a development stage company that
owns or licenses video streaming, a library of concerts and Audio
Streaming Format production.
ii) Pangea acquired all of the Class A Membership Units of WorldLink
in exchange for 12,500,000 warrants of Pangea, issued to
WorldLink. These units also represent 45% of the membership units
in WorldLink.
iii) Marc Nathan, originally an officer of a company affiliated with
Pangea, acquired a 5% share of the Class A Membership Units of
World Link in exchange for the transfer of all Class B Membership
Units to Paradigm.
iv) The Company issued 1,000,000 common shares, valued at $35,000, in
payment of professional and consulting fees.
v) In the event of the liquidation of WorldLink, the Class A
membership units have a liquidation preference in and to the
Paradigm securities, and
20
the Class B membership units have a liquidation preference in and
to the Pangea securities.
vi) As of May of 2002, Pangea has agreed to allow Marc Nathan or a
company controlled by him to acquire all Class Membership Units
of WorldLink.
The acquisition has been accounted for using the purchase method. The
assets of WorldLink acquired and the consideration given by the Company are
summarized as follows:
a) Assets acquired (50% interest):
Equipment $ 1,000
Investments 612,550
--------
$613,550
========
b) Consideration given:
8,500,000 common shares $297,500
12,500,000 warrants 300,000
Costs incurred 16,050
--------
$613,550
========
The fair value of the options granted was estimated on the date of grant
using the Black-Scholes pricing model using the following assumptions:
Risk-free interest rate 6.6%
Dividend yield 0%
Expected life 10 years
Stock price volatility 100%
The fair value of the options granted was recalculated as of March 31, 2002
using the Black-Scholes pricing model using the following assumptions:
Risk-free interest rate 5.35%
Dividend yield 0%
Expected life 8.5 years
Stock price volatility 100%
Based on this calculation it was determined that there was a permanent
impairment in the value of the investment and therefore the Company took a
write-down of the investment value of $250,000.
21
11. LEGAL PROCEEDINGS
Legal proceedings have been threatened against the Company by an individual
claiming an entitlement to 400,000 shares for services rendered to the
Company. Additionally, legal proceedings have been threatened against the
company by an individual claiming an entitlement to 625,000 shares as a
result of monies allegedly invested in the Company. The Company believes
that these claims are without merit and intends to vigorously defend any
lawsuits filed against the Company in connection with these claims. It is
neither possible at this time to predict the outcome of any lawsuit,
including whether the Company will be forced to issue shares, or to
estimate the amount or range of potential loss, if any.
12. GOVERNMENT ASSISTANCE
Under an agreement with National Research Council Canada, Industrial
Research Assistance Program, a project was approved in 2000 for
Pre-commercialization Assistance of up to $327,000 for research and
development. This contribution will be repayable in the form of a royalty
of 1% of gross revenues for the year ending December 31, 2004, and is
limited to a maximum of $490,000. If the full amount of the assistance is
not repaid at January 1, 2005 the royalty continues until the earlier of
full repayment, or for ten years.
No amounts have been accrued with regard to this project as the conditions
for repayment have not yet been met.
Government assistance has been applied to reduce research and development
expense as follows:
For the three months ended
March 31,
--------------------------
2002 2001
---------- -----------
Research and development $ 270,695 $ 5,090,869
Government assistance -- $ 262,478
---------- -----------
$ 270,695 $ 4,828,391
========== ===========
22
13. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Non-monetary transactions:
For the three For the three
months ended months ended
March 31, 2002 March 31, 2001
-------------- --------------
Shares issued for acquisitions -- 5,000,000
Exercise of stock options and warrants -- 17,500
Loan converted to stock -- 47,876
Stock issued for other consideration -- 59,529
Subscription receivable -- 218,840
Shares issued for accounts payable and accrued 2,584,754 --
liabilities
14. COMPREHENSIVE LOSS
For the three months ended
March 31,
---------------------------
2002 2001
--------- ---------
Net loss 2,459,587 7,163,386
Foreign currency translation adjustment (3,134) (124,069)
--------- ---------
2,456,453 7,039,317
========= =========
The components of cumulative other comprehensive income are as follows:
Cumulative other comprehensive income - December 31, 2001 262,993
Foreign currency translation adjustments for the
three months ended March 31, 2002 3,134
--------
Cumulative other comprehensive income - March 31, 2002 266,127
========
23
15. COMMITMENTS
The Company leases premises under an operating lease with a ten year term
and a separate lease which commitment terminates in May of 2002 for GPSoft
operations in Israel. Rent expense during the three months ended March 31,
2002 was $40,261 (2001 - $36,872). Minimum lease commitments under the
lease at March 31, 2002 were:
12 months 85,565
24 months 84,932
36 months 84,932
48 months 87,506
60 months 111,684
Thereafter 344,610
-------
799,229
=======
16. INCOME TAXES
The tax effect of significant temporary differences representing deferred
tax assets is as follows:
March 31, March 31,
2002 2001
---------- ----------
Deferred tax assets:
Operating loss carry-forwards 6,257,849 3,366,000
Valuation allowance (6,256,000) (3,366,000)
---------- ----------
Net deferred tax assets 1,849 0
========== ==========
The Company has determined that realization is not likely and therefore a
valuation allowance has been recorded against this deferred income tax
asset.
The Company's statutory and effective tax rate is 34%.
The Company has certain non-capital losses of $18,400,000 available, which
can be applied against future taxable income and which expire from 2007 to
2022.
17. SEGMENTED INFORMATION
The Company operates two product segments; one is the sale of GPS based
location technology, and the second is GPS based navigation technology. The
Company also operates in three Geographic Areas. Revenue by Geographic Area
is determined based on the customer's location. The Revenue by Geographic
Area for the first quarter of the 2002 fiscal year is as follows:
24
North America South America Europe Total
------------- ------------- --------- ----------
Location $246,946 $78,797 $ 0 $ 325,743
Navigation 140,732 1,995 964,774 1,107,501
-------- ------- -------- ----------
Total $387,678 $80,792 $964,774 $1,433,244
======== ======= ======== ==========
The revenue for the quarter ended March 31, 2001 was all for Location
Technology and can be broken down as follows:
North America $ 53,417
South America $ 7,288
Management is of the opinion that the proportion of net loss based
principally on sales, presented below, would fairly present the results of
operations by geographic area and by product segment for the period ended
March 31, 2002. In the quarter ended March 31, 2001 all loss is
attributable to North America.
North America South America Europe Total
-------------- ------------- ----------- -----------
Location (423,784) $(135,223) $ 0 (559,007)
Navigation (241,510) (3,424) (1,655,646) (1,900,580)
--------- --------- ---------- -----------
Total $(665,294) $(138,647) (1,655,646) $(2,459,587)
========= ========= ========== ===========
There are no material total assets located outside of North America.
18. CREDIT FACILITIES
In November 2001, the Company secured a $2.5 million purchase order and an
accounts receivable financing facility for its PowerLOC division from
Production Finance International, LLC of Spokane, Washington and KBK
Financial, Inc. of Fort Worth, Texas. This combined financing facility has
been set up in order to finance the fulfillment of the purchase orders
received from its customers. As of March 31, 2002 the company has drawn
down a total of $259,000 in the quarter from Production Finance, of which
$199,000 remains owing. There have been no drawdowns from the facility with
KBK Financial.
25
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
CAUTIONARY NOTE REGARDING FORWARD LOOKING STATEMENTS
This Form 10-Q contains forward-looking statements that reflect the
Company's current expectations about its future operating results,
performance, and opportunities that involve substantial risks and
uncertainties. When used in this Form 10-Q, the words "anticipate,"
"believe," "estimate," "plan," "intend," and "expect," and similar
expressions, as they relate to the Company or its management, are
intended to identify such forward-looking statements. These forward
looking statements are based on information currently available to the
Company and are subject to a number of risks, uncertainties, and other
factors that could cause the Company's actual results, performance,
prospects, and opportunities to differ materially from those expressed
in, or contribute to such differences include, but are not limited to,
limited capital resources, lack of operating history, intellectual
property rights, reliance on one product line for revenue, and other
factors discussed under "Risk Factors." in the Company's Form 10-K
which was filed on April 1, 2002. Except as required by the federal
securities law, the Company does not undertake any obligation to
release publicly any revisions to any forward-looking statements to
reflect events or circumstances after the date of this Form 10-Q or for
any other reason.
RESULTS OF OPERATIONS
The discussion below contains certain forward-looking statements (as such term
is defined in Section 21E of the Securities Exchange Act of 1934) that are based
on the beliefs of the Company's management, as well as assumptions made by, and
information currently available to, the Company's management. The Company's
results, performance and achievements in 2001 and beyond could differ materially
from those expressed in, or implied by, any such forward-looking statements. See
"Cautionary Note Regarding Forward-Looking Statements" below.
a) Overview
The Company designs, develops, manufactures and markets software and
hardware using state of the art technologies that allows for real time delivery
of information regarding the location of a person or an asset for the purposes
of tracking that person or asset or assisting them in navigation. The Company
does this by integrating Global Positioning System (GPS) technology, wireless
communications and the internet to enable users to efficiently manage their
mobile resources (whether vehicles, assets or persons) with relevant location
based information on a real time basis. As such, the Company supplies
location-based services; primarily in the areas of tracking, security,
navigation, communication and information devices and software, most of which
are enabled GPS technology.
Our diverse family of products have been designed and developed to use
GPS technology for the purposes of tracking, security, navigation, communication
and general information purposes. Each of the Company's location based products
utilizes a proprietary combined circuit
26
and receiver designed to collect, calculate and display and communicate a
person's or asset's location, direction, speed and other information in a
variety of formats depending upon the specific consumer requirements. The
Company's tracking, security and communications service allows users to access
information from their website to track the location and movement of vehicles,
goods, services and persons and to be able to communicate with that resources.
This service is a cost effective and easy-to-use service that uses the internet
to provide users with services including the location of a resource, its speed,
its direction together with the ability to report about, dispatch and
communicate with that resource and to effectively and efficiently manage that
resource.
The Company's intellectual property assets include patents, copyrighted
materials, trademarks and trade secrets, as well as confidentiality agreements,
which establish and protect our proprietary rights. The Company's primary
intellectual property asset is a patent that covers process of combining GPS
locating technology and the transmission of the geographic location of objects
or people using cellular telephone technology to a remote unit which allows for
the identification of their location by a base station which may be, for
example, a response center or any computer that is capable of displaying the
location of the remote unit. In addition, the Company owns a variety of other
patents that relate to navigation-based applications and are in the process of
patenting the proprietary compression technology that is used in the Company's
Destinator navigation based product. Included in this portfolio are: map
compression and optimization algorithms, routing and maneuvering algorithms, map
attachment algorithms as well as multi-user on-board vehicle display systems.
To date, the Company has sold its products and services both
domestically and internationally. The Company is expanding its service offerings
to additional countries during the year 2002, now serving Sweden and Spain.
THREE MONTHS ENDED MARCH 31, 2002 COMPARED TO THREE MONTHS ENDED MARCH 31, 2001
PRODUCT SALES AND ROYALTIES REVENUES
The Company recorded sales and royalties of $1,433,244 for the three months
ended March 31, 2002 as compared to $60,705 for the three months ended March 31,
2001 as a result of the continued sales of PowerLOC L-BIZ(TM) products and the
continued growth in sales of Destinator products.
The Company earned revenues of $1,107,501 through the sale and licensing of is
navigation products (Destinator(TM)) as well as $325,743 through the sale of its
tracking products (PowerLOC). In addition, it is anticipated that the Company
will be able to realize more revenues from the licensing of its patents and
proprietary rights.
GROSS MARGIN
The gross margin for the quarter ended March 31, 2002 was 51% as compared to 42%
for the quarter ended March 31, 2001. The gross margin percentage should
continue to increase as higher volume of higher margin Destinator sales are
processed.
27
OPERATING EXPENSES
Overall operating expenses for the three months ended March 31, 2002 were down
56% over the three months ended March 31, 2001 from $7,188,892 during the first
quarter of 2001 to $3,175,814 during the first quarter of 2002. The operating
expenses are comprised of the Selling General and Administrative Expenses,
Research and Development Expenses, Depreciation and Amortization and Write down
of Investments.
SELLING GENERAL AND ADMINISTRATIVE EXPENSES
Selling General and Administration Expenses for the three months ended March 31,
2002 were $2,236,596 as compared to $1,154,019 for the three months ended March
31, 2001. The expenses for the period ended March 31, 2002 include a non cash
component of $713,374 for the issuance of stock and options to consultants and
employees and in payment of other expenses. The non cash component for the
period ended March 31, 2001 was $73,000. The cash component of expenses for the
3 months ended March 31, 2002 was $1,523,222 as compared to $1,081,019 for the
same period ended March 31, 2001. This represents an increase of approximately
40% and can be attributed to a full quarter of operations for GPSoft, the
Company's Israeli R & D subsidiary for navigation, which commenced operations in
February 2001, and the increased costs associated with marketing and selling our
products.
RESEARCH AND DEVELOPMENT EXPENSES
Research and Development Expenses for the three months ended March 31, 2002 were
$270,695 as compared to $4,828,391 for the three months ended March 31, 2001.
The expense for the three months ended March 31, 2002 includes a non cash
component of $80,000 relating to the warrants issued as a result of the
acquisition of NaftEL. The expense for the three months ended March 31, 2001
includes a non cash component of $4,712,762 relating to the acquisition of the
assets of NaftEL. The cash component of the expense for the three months ended
March 31, 2002 is $190,695 as compared to $115,629 for the quarter ended March
31, 2001. The increase is a result of a full quarter of research and development
at GPSoft. Research and Development Expenses are net of grants received from the
National Research Council of Canada through the Industrial Research Assistance
Program. This contribution will be repayable in the form of a royalty of 1% of
gross revenues for the year ending December 31, 2004. If the full amount of the
assistance is not repaid at January 1, 2005, the royalty continues until the
earlier of full repayment of for ten years.
DEPRECIATION AND AMORTIZATION CHARGES
Depreciation and amortization charges for the three months ended March
31, 2002 were $407,034 as compared to $390,815 for the three months ended March
31, 2001. The increase in depreciation and amortization charges is a result of
the addition of fixed assets during the year and the depreciation of assets
acquired from NaftEL for a full quarter in 2002 as compared to 2001.
WRITE DOWN IN LONG TERM INVESTMENT
28
In the three months ended March 31, 2002 the Company had a write down of its
investment in Worldlink USA of $250,000. There was no write-down in the three
months ended March 31, 2001.
NET INCOME (OR LOSS) BEFORE TAXES
The net loss for the three months ended March 31, 2002 was $2,451,750 as
compared to $7,163,386 for the three months ended March 31, 2001. This
represents a reduction of 67% compared to the previous period. The loss for the
three months ended March 31, 2002 includes the expensing of charges of
$1,450,410 for non-cash charges recorded for the issuance of stock options to
consultants and employees and for other associated expenses. The loss for the 3
months ended March 31, 2001 includes the expensing of a charge of $4,712,762
representing the one time cost of the acquisition of the NaftEL assets that was
allocated to Research and Development expense and $1,143,815 for issuing of
stock options to consultants and for other associated expenses. Net loss before
non-cash charges for the three months ended March 31, 2002 was $1,001,340 as
compared to $1,306,809 for the three months ended March 31, 2001. The decrease
in the net loss of 27% can be attributed to an increase in gross margin in 2002
which resulted in a decrease in net loss, offset by an increase in the expenses
due to the factors discussed above.
LIQUIDITY AND CAPITAL RESOURCES
The Company had cash and cash equivalents on hand of $310,844 at March
31, 2002. The Company raised $675,000 in cash during the three months ended
March 31, 2002, through the sale of common shares. The Company intends to raise
additional funds on an as-needed basis to finance its future activities through
the issuance and sale of additional shares of stock and the assumption of
additional debt and government funding. The Company does not have any
commitments for capital expenditures and believes that its current cash
balances, combined with its financing activities and operating cash flows and
the credit resources mentioned below, will be sufficient to meet its operating
and development needs for at least the next three months. If the Company has not
obtained additional financing prior to that time, it will need to delay or
eliminate some of its development activities.
RESEARCH AND DEVELOPMENT
A significant amount of time and effort was placed on research and development
at the Company's inception. The Company has hired a number of software and
hardware engineers for its PowerLOC and Destinator businesses and also uses
contractors and third party companies to continue its research and development
activities. The Company may hire additional engineers and is planning, as
required, to increase its research and development activities in order to
increase the capabilities of its existing location tracking and navigation
solutions for a variety of applications.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk related to fluctuations in foreign currency
exchange rates. Our exposure to market risk due to fluctuations in foreign
currency exchange rates relates primarily to sales of our products in Europe and
other foreign markets and the fact that most of our
29
employees work in Canada and are paid in Canadian dollars. Although we transact
business in various foreign countries, settlement amounts are usually based on
the U.S. dollar or New Israeli Shekels. Transaction gains or losses resulting
from sales revenues have not been significant in the past and we are not engaged
in any hedging activity on New Israeli Shekels or other currencies. Based on our
revenues derived from markets other than the United States for the three months
ended March 31, 2002, a hypothetical 10% adverse change in New Israeli Shekels
or the Canadian dollar against the U.S. dollar would not result in a material
foreign exchange loss. Consequently, we do not expect that reductions in the
value of such sales denominated in foreign currencies resulting from even a
sudden or significant fluctuation in foreign exchange rates would have a direct
material impact on our financial position, results in operations or cash flows.
Notwithstanding the foregoing, the indirect effect of fluctuations in interest
rates and foreign currency exchange rates could have a material adverse on our
business, financial condition and results of operations. For example, foreign
currency exchange rate fluctuations may affect international demand for our
products. In addition, interest rate fluctuations may affect our customers'
buying patterns. Furthermore, interest rate and currency exchange rate
fluctuations may broadly influence the United States and foreign economies
resulting in a material adverse effect on our business, financial condition and
results of operations.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Legal proceedings have been threatened against the Company by an individual
claiming an entitlement to 400,000 shares for services rendered to the Company.
Additionally, legal proceedings have been threatened against the company by an
individual claiming an entitlement to 625,000 shares as a result of monies
allegedly invested in the Company. The Company believes that these claims are
without merit and intends to vigorously defend any lawsuits filed against the
Company in connection with these claims. It is neither possible at this time to
predict the outcome of any lawsuit, including whether the Company will be forced
to issue shares, or to estimate the amount or range of potential loss, if any.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
RECENT SALES OF UNREGISTERED SECURITIES
The following information is provided for all securities sold by the Company for
the three months ended March 31, 2002 without registering the securities under
the Securities Act of 1933. There were no underwriters involved in the sales.
Dollar Value
30
PERSON OR CLASS OF
PERSONS CASH DOLLAR VALUE OF OTHER
DATE TO WHOM SOLD NUMBER OF SHARES CONSIDERATION TYPE OF CONSIDERATION
--------------------- ------------------ ---------------- ------------- ---------------------
January 2002 Eduardo Guendelman 1,031,031(1) $113,413
January 2002 David Kerzner 1,241,157(2) $136,587
January 2002 Watson & Associates 3,600,000(3) $1,194,267
January 2002 Triple Five Financial 2,640,670(4) $287,833
January 2002 Piper Marbury Rudnick 189,111(5) $44,401
January 2002 Shay David 1,000,000(6) $221,000
January 2002 Ron Yekutiel 2,000,000(7) $442,000
January 2002 Jacob International 400,000(8) $109,200
January 2002 Eduardo Guendelman 130,000(9) $9,750
January 2002 David Kerzner 108,333(10) $8,125
January 2002 Selwyn Wener 108,333(11) $8,125
March 6, 2002 Gordon Sharwood 150,000(12) 19,500
March 11,2002 Cheshire Estates Trust 1,234,567(13) $200,000
January 2002 JAE Investments 31,000(14) $9,610
February 15, 2002 Mendel Raskin 80,000(15) $21,600
January 23, 2002 MentorINC 100,000(16) $19,960
January 16, 2002 Eastern Investments 12,000(17) $2,184
January 16, 2002 Eastern Investments 1,500,000(17) $273,000
January 10, 2002 Eastern Investments 1,488,000(17) $270,816
January 11, 2002 Paul J. Lagassey 480,000(18) $87,360
February to March 2002 Consultants 54,821(19) $13,344
January to March 2002 Pacific Continental 4,318,457(20) $475,867
- ---------------------------
1. These shares were issued to this accredited investor as a settlement of
accrued liabilities. The shares were issued pursuant to the exemption from
registration provided by Regulation D, Rule 506. Mr. Guendelman was an
officer and a director of the Company at the time of the sale
2. These shares were issued to this accredited investor as a settlement of
accrued liabilities. The shares were issued pursuant to the exemption from
registration provided by Regulation D, Rule 506. Mr. Guendelman was an
officer and a director of the Company at the time of the sale
3. These shares were issued to this accredited investor to cancel indebtedness
owed to this person accrued liabilities. The shares were issued pursuant to
the exemption from registration provided by Regulation D, Rule 506. No
public solicitation or public advertising was employed. Watson was provided
with an opportunity to review information concerning formation and
operations of the Company and had the opportunity to verify the
information. It was given an opportunity to ask questions of management
concerning Paradigm's affairs. It was sophisticated and had sufficient
knowledge and experience in financial and business matters to allow it to
evaluate the merits and risks of the investment.
4. These shares were issued to this accredited investor as a settlement of
accrued liabilities. The shares were issued pursuant to the exemption from
registration provided by Regulation D, Rule 506. Triple Five Financial is
partially controlled by David Ghermazian a director of the Company at the
time of the sale.
5. These shares were issued to this law firm, an accredited investor, as
payment for accrued liabilities for legal services rendered to the Company.
The shares were issued pursuant to the exemption from registration provided
by Regulation D, Rule 506. No public solicitation or public advertising was
employed. It was provided with an opportunity to review information
concerning formation and operations of the Company and
31
had the opportunity to verify the information. It was given an opportunity
to ask questions of management concerning Paradigm's affairs. It was
sophisticated and had sufficient knowledge and experience in financial and
business matters to allow it to evaluate the merits and risks of the
investment.
6. These shares were issued to this non-accredited investor as a settlement of
accrued liabilities for consulting fees. The shares were issued pursuant to
the exemption from registration provided by Regulation D, Rule 506. Mr.
Shay was an employee and officer of the Company at the time of the sale
7. These shares were issued to this non-accredited investor as a settlement of
accrued liabilities for consulting fees. The shares were issued pursuant to
the exemption from registration provided by Regulation D, Rule 506. Mr.
Yekutiel was an employee and officer of the Company at the time of the sale
8. These shares were issued to this accredited investor as a result of a
private placement. The shares were issued pursuant to the exemption from
registration provided by Regulation D, Rule 506. No public solicitation or
public advertising was employed. Jacob International was provided with an
opportunity to review information concerning formation and operations of
the Company and had the opportunity to verify the information. It also had
an opportunity to review the audited financial statements for 1999 and
2000. It was given an opportunity to ask questions of management concerning
Paradigm's affairs. Jacob International is sophisticated and had sufficient
knowledge and experience in financial and business matters to allow it to
evaluate the merits and risks of the investment.
9. These shares were issued to this accredited investor as a settlement of
accrued liabilities for consulting fees. The shares were issued pursuant to
the exemption from registration provided by Regulation D, Rule 506. Mr.
Guendelman was an officer and a director of the Company at the time of the
sale
10. These shares were issued to this accredited investor as a settlement of
accrued liabilities for consulting fees. The shares were issued pursuant to
the exemption from registration provided by Regulation D, Rule 506. Mr.
Kerzner was an officer and a director of the Company at the time of the
sale
11. These shares were issued to this accredited investor as a settlement of
accrued liabilities for consulting fees. The shares were issued pursuant to
the exemption from registration provided by Regulation D, Rule 506.
12. These shares were issued to this accredited investor as a settlement of
accrued liabilities for consulting fees. The shares were issued pursuant to
the exemption from registration provided by Regulation D, Rule 506. Mr.
Sharwood was a director of the Company at the time of the sale
13. These shares were issued to this non-accredited investor to cancel
indebtedness owed to this person for accrued liabilities. The shares were
issued pursuant to the exemption from registration provided by Regulation
D, Rule 506. No public solicitation or public advertising was employed.
They were provided with an opportunity to review information concerning
formation and operations of the Company and had the opportunity to verify
the information. It was given an opportunity to ask questions of management
concerning Paradigm's affairs. It was sophisticated and had sufficient
knowledge and experience in financial and business matters to allow it to
evaluate the merits and risks of the investment
14. These shares were issued to JAE Investments Limited, a non-accredited
investor, for consulting fees. The shares were issued pursuant to the
exemption from registration provided by Regulation D, Rule 506. No public
solicitation or public advertising was employed. JAE was provided with an
opportunity to review information concerning formation and operations of
the Company and had the opportunity to verify the information. It also had
an opportunity to review the audited financial statements for 1999 and
2000. It was given an opportunity to ask questions of management concerning
Paradigm's affairs. The investor was sophisticated and had sufficient
knowledge and experience in financial and business matters to allow it to
evaluate the merits and risks of the investment
15. These shares were issued to Mendel Raskin, a non-accredited investor, for
consulting fees. The shares were issued pursuant to the exemption from
registration provided by Regulation D, Rule 506. No public solicitation or
public advertising was employed. Mr. Raskin was provided with an
opportunity to review information concerning formation and operations of
the Company and had the opportunity to verify the information. It also
32
had an opportunity to review the audited financial statements for 1999 and
2000. He was given an opportunity to ask questions of management concerning
Paradigm's affairs. The investor was sophisticated and had sufficient
knowledge and experience in financial and business matters to allow it to
evaluate the merits and risks of the investment
16. These shares were issued to MentorInc, a non-accredited investor, for
consulting fees. The shares were issued pursuant to the exemption from
registration provided by Regulation D, Rule 506. No public solicitation or
public advertising was employed. It was provided with an opportunity to
review information concerning formation and operations of the Company and
had the opportunity to verify the information. It also had an opportunity
to review the audited financial statements for 1999 and 2000. It was given
an opportunity to ask questions of management concerning Paradigm's
affairs. The investor was sophisticated and had sufficient knowledge and
experience in financial and business matters to allow it to evaluate the
merits and risks of the investment.
17. These shares were issued to Eastern Investments, a accredited investor, for
consulting fees. The shares were issued pursuant to the exemption from
registration provided by Regulation D, Rule 506. No public solicitation or
public advertising was employed. It was provided with an opportunity to
review information concerning formation and operations of the Company and
had the opportunity to verify the information. It was given an opportunity
to ask questions of management concerning Paradigm's affairs. The investor
was sophisticated and had sufficient knowledge and experience in financial
and business matters to allow it to evaluate the merits and risks of the
investment
18. These shares were issued to Paul Lagassey, a accredited investor, for
consulting fees. The shares were issued pursuant to the exemption from
registration provided by Regulation D, Rule 506. No public solicitation or
public advertising was employed. He was provided with an opportunity to
review information concerning formation and operations of the Company and
had the opportunity to verify the information. He was given an opportunity
to ask questions of management concerning Paradigm's affairs. The investor
was sophisticated and had sufficient knowledge and experience in financial
and business matters to allow it to evaluate the merits and risks of the
investment
19. These shares were issued to various consultants, a non-accredited
investors, for consulting fees. The shares were issued pursuant to the
exemption from registration provided by Regulation D, Rule 506. No public
solicitation or public advertising was employed. They were provided with an
opportunity to review information concerning formation and operations of
the Company and had the opportunity to verify the information. He also had
an opportunity to review the audited financial statements for 1999 and
2000. They were given an opportunity to ask questions of management
concerning Paradigm's affairs. The investors were sophisticated and had
sufficient knowledge and experience in financial and business matters to
allow it to evaluate the merits and risks of the investment
20. These shares were issued to this non-accredited investor as a result of a
private placement. The shares were issued pursuant to the exemption from
registration provided by Regulation D, Rule 506. No public solicitation or
public advertising was employed. Pacific Continental was provided with an
opportunity to review information concerning formation and operations of
the Company and had the opportunity to verify the information. It was given
an opportunity to ask questions of management concerning Paradigm's
affairs. It was sophisticated and had sufficient knowledge and experience
in financial and business matters to allow it to evaluate the merits and
risks of the investment.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
33
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit No. Description of Exhibit
----------- ----------------------
None
(b) Reports on Form 8-K
None
34
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Date: May 13, 2002
Paradigm Advanced Technologies, Inc.
By: /s/ Gordon Sharwood
--------------------------------------
Gordon Sharwood
Chairman of the Board of Directors
By: /s/ David Ellis
--------------------------------------
David Ellis Chief Financial Officer
35