SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark one)
[X] Quarterly Report Under Section 13 or 15(d) of Securities Exchange
Act of 1934
[ ] Transition Report Under section 13 or 15(d) of the Securities Exchange
Act of 1934
for the transition period from ______________ to ___________________
For Period ended December 31, 2002
Commission File Number 0-26839
SNAP2 CORPORATION
(f/k/a White Rock Enterprises, Ltd.)
(Exact name of registrant as specified in its charter)
NEVADA 88-0407246
(State of Incorporation) (I.R.S. Employer Identification No.)
10641 JUSTIN DRIVE, URBANDALE, IOWA 50322
(Address of Principal Executive Offices) (Zip Code)
(515) 331-0560
(Registrant's telephone number, including area code)
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 [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock at the latest practicable date.
As of December 31, 2002, the registrant had 26,942,500 shares of common stock,
$.001 par value, issued and outstanding.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
PART I FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
SNAP2 Corporation
Balance Sheets
December 31, 2002 and September 30, 2002
(Unaudited) (Audited)
December 31, September 30,
2002 2002
----------- -----------
ASSETS
Cash $ 68,987 $ 47,107
Accounts receivable 344,894 196,729
Prepaid expenses 6,500 8,058
----------- -----------
Total current assets 420,381 251,894
Equipment, net of accumulated depreciation 31,931 35,651
Other assets 300 300
----------- -----------
Total assets $ 452,612 $ 287,845
=========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Line of credit $ 130,000 $ 160,000
Current portion of long-term debt 133,000 113,000
Accounts payable 62,693 69,014
Accrued payroll and related liabilities 226,924 238,752
Accrued royalty 37,000 33,000
Accrued interest payable 23,190 21,465
Deferred income 18,749 31,031
----------- -----------
Total current liabilities 631,556 666,262
Long-term liabilities:
Long-term debt 91,615 111,615
Deferred compensation - fair value of vested stock options 315,900 694,575
----------- -----------
Total liabilities 1,039,071 1,472,452
Stockholders' deficit:
Common stock - $0.001 par value; 50,000,000 shares
authorized; 26,942,500 shares issued and outstanding 26,943 26,943
Convertible preferred stock - $0.001 par value; 20,000,000
shares authorized; 0 shares issued and outstanding respectively -- --
Additional paid-in capital 1,435,771 1,450,239
Accumulated deficit (2,044,704) (2,642,305)
Unearned compensation (4,469) (19,484)
----------- -----------
Total stockholders' deficit (586,459) (1,184,607)
----------- -----------
Total liabilities and stockholders' deficit $ 452,612 $ 287,845
=========== ===========
2
SNAP2 Corporation
Statements of Operations (Unaudited)
For the Three Months Ended December 31, 2002 and 2001
2002 2001
------------ ------------
REVENUE
License fees $ 286,055 $ 93,184
Consulting 179,432 378,418
Maintenance and other income -- 4,375
------------ ------------
Total revenue 465,487 475,977
Cost of Revenue 135,792 237,298
------------ ------------
GROSS PROFIT 329,695 238,679
EXPENSES
Research and development 200 114,925
Sales and marketing 177 57,162
General and administrative 104,668 163,455
Compensation expense related to fair value
of granted and repriced stock options (378,675) --
------------ ------------
Total operating expenses (273,630) 335,542
------------ ------------
Income (loss) from operations 603,325 (96,863)
Interest expense (5,725) (7,209)
Gain on sale and license of IFE assets -- 300,000
------------ ------------
Net income $ 597,600 $ 195,928
============ ============
Net income per share -
Basic $ 0.02 $ 0.01
============ ============
Diluted $ 0.02 $ 0.01
============ ============
Weighted average shares outstanding -
Basic 26,942,500 17,856,000
============ ============
Diluted 28,232,500 27,856,000
============ ============
3
SNAP2 Corporation
Statements of Cash Flows (Unaudited)
For the Three Months Ended December 31, 2002 and 2001
2002 2001
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 597,600 $ 195,928
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation 4,420 4,556
Amortization of unearned compensation 547 3,682
Deferred income (12,282) (46,809)
Compensation expense related to fair value of
vested stock options (378,675) --
Changes in:
Accounts receivable and prepaid expenses (146,606) (71,669)
Accounts payable and accrued expenses (12,422) (154,397)
--------- ---------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 52,582 (68,709)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of equipment (702) (1,864)
--------- ---------
NET CASH USED IN INVESTING ACTIVITIES (702) (1,864)
CASH FLOWS FROM FINANCING ACTIVITIES
Checks written in excess of bank balance -- 59,781
Principal payments on the line of credit (30,000) --
--------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES (30,000) 59,781
--------- ---------
INCREASE (DECREASE) IN CASH 21,880 (10,792)
CASH AT BEGINNING OF PERIOD 47,107 10,792
--------- ---------
CASH AT END OF PERIOD $ 68,987 $ --
========= =========
SUPPLEMENTAL DISCLOSURES:
Cash paid for interest $ 2,583 $ 1,530
========= =========
4
SNAP2 Corporation
Notes to Financial Statements
For the Three Months Ended December 31, 2002 and 2001
(Unaudited)
1. BASIS OF PRESENTATION
These unaudited financial statements were prepared in accordance with
instructions for Form 10-QSB and therefore, do not include all disclosures
necessary for a complete presentation of the statements of financial
condition, operations and cash flows in accordance with accounting
principles accepted in the United States of America. However, in the
opinion of management, all adjustments for a fair presentation of the
financial statements have been included. Results for interim periods are
not necessarily indicative of results expected for the year.
These financial statements should be read in conjunction with the financial
statements and related notes, which are incorporated by reference from the
Company's Annual Report on Form 10-KSB for the year ended September 30,
2002.
2. REVENUE RECOGNITION
Software license fees are recognized as revenue upon contract signing and
shipment of the software master copy or download of software by the
customer. Consulting revenues are derived primarily from custom contract
engineering work and training and consulting services. Revenues from custom
contract engineering work are recognized using the percentage of completion
method. Revenues from training and consulting services are recognized as
the services are rendered. Maintenance revenues are recognized ratably over
the term of the related agreements.
3. EARNINGS PER SHARE
Basic earnings per share are computed based on the weighted-average common
shares outstanding (plus shares committed to be issued) during the period.
Diluted earnings per share are computed by considering the weighted-average
common shares outstanding (plus shares committed to be issued) and dilutive
potential common shares as a result of outstanding stock options.
4. STOCK OPTIONS AND STOCK-BASED COMPENSATION
The Company accounted for stock-based compensation using the intrinsic
value method prescribed in Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," (APB No. 25) and related
interpretations, through September 30, 2002. Under APB No. 25, compensation
cost is measured as the excess, if any, of the quoted market price of the
Company's stock at the date of grant over the exercise price of the option
granted. Compensation cost for stock options, if any, is recognized ratably
over the vesting period for those options granted to employees and
directors.
Effective September 30, 2002, the Company's Board of Directors, in
conjunction with public opinion and new accounting pronouncement
interpretations which were released in December 2002, elected to expense
5
the imputed compensation cost related to stock options repriced or newly
granted during Fiscal 2002. The calculations to estimate the fair value of
the options were made using the Black-Scholes pricing model. Compensation
cost for stock options issued other than to employees and directors, if
any, is recognized at the date of grant.
During the three months ended December 31, 2002, the Company cancelled
employee stock options for 475,000 shares of common stock due to employment
terminations. Any remaining stock options will be exercisable in conformity
with a stock option plan that was approved by the Board of Directors and a
majority of the shareholders of the Company on March 15, 2000. Stock
options are generally granted at fair value and vest over a four-year
period. The plan is more restrictive for any options granted to
shareholders owning in excess of ten percent of outstanding common stock.
No options were exercised during the period. The Company has outstanding
options for 1,290,000 shares of common stock at December 31, 2002.
5. LINE OF CREDIT AND LONG-TERM DEBT
On June 20, 1999, the Company entered into a promissory note with a related
party of the Company's president whereby $135,000 was borrowed by the
Company. The note bears an interest rate of 9% per annum on the unpaid
principal balance. Under the terms of the note, principal payments of
$10,385 along with interest are due in quarterly installments beginning
July 1, 2001. The Company has not paid the $62,310 due under this note, as
well as the accrued interest, since July 1, 2000. Principal payments have
not been accelerated under this note by the noteholder.
On August 17, 1999 the Company entered an agreement with the Iowa
Department of Economic Development (IDED) whereby the Company would receive
$100,000 of financial assistance under the Community Economic Betterment
Account (CEBA). Under the terms of the agreement, the Company shall pay an
annual royalty equal to 1.5% of the prior year total gross revenues to IDED
in semi-annual payments each June 1 and December 1, until a repayment
amount of $200,000 has been reached. Approximately $66,000 was due under
this agreement at December 31, 2002.
The Company had a $200,000 line of credit with a bank bearing interest at
the bank's commercial base rate. This line was guaranteed by a
director/officer of the Company. Funds advanced were secured by the
Company's accounts receivable and equipment. At December 31, 2002, $130,000
was outstanding under the agreement. The line of credit matured February
10, 2003 at which time the Company was able to repay the amounts due. The
line was not renewed.
6. GAIN ON SALE AND LICENSE OF IFE ASSETS
On November 26, 2001 the Company entered into an Amended and Substituted
Asset Purchase Agreement ("Agreement") with Inflight Digital Limited, a
company incorporated under the laws of England and Wales ("Buyer") which
superceded an earlier Asset Purchase Agreement between the parties dated
September 6, 2001. Pursuant to the Agreement, the Company agreed to sell to
the Buyer all of Company's IFE assets. The IFE assets include all of the
Company's rights and obligations under its contracts with airline operators
for the licensing of IFE products and services, the Company's rights and
obligations under license and distribution agreements relating to its IFE
business, Company's files, books and records relating to its IFE assets and
other tangible property and physical assets used by the Company solely in
connection with IFE business. The Company also granted Buyer a perpetual,
royalty free, exclusive worldwide license for IFE business. Terms include a
total purchase price for the sale and license of the IFE assets of $300,000
6
plus (i) fifty percent (50%) of all revenue received by Buyer from certain
existing customers for a period of three (3) years after the closing; (ii)
twenty-five percent (25%) of all revenues received by Buyer under certain
new business generated by Buyer; (iii) an amount not to exceed $100,000 of
the existing contract with British Airways as assigned to Buyer plus fifty
percent (50%) of all revenue received by Buyer from British Airways during
the three (3) years after closing; and (iv) $75,000 upon receipt of the
consent of Air France that it will expand the number of aircraft using the
software and fifty percent (50%) of the revenues received from Air France
during the three (3) years after closing. In November 2001, the Company
received $300,000 as a result of this transaction, which was recorded as a
gain on sale. Additional amounts to be received will be recorded as license
fees.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
FORWARD-LOOKING STATEMENTS
The discussion in this Report on Form 10-QSB contains forward-looking statements
that have been made pursuant to the provisions of the Private Securities
Litigation Reform Act of 1995. Such forward-looking statements are based on
current expectations, estimates and projections about the Company's business,
based on management's current beliefs and assumptions made by management. Words
such as "expects", "anticipates", "intends", "believes", "plans", "seeks",
"estimates" and similar expressions or variations of these words are intended to
identify such forward-looking statements. Additionally, statements that refer to
the Company's estimated or anticipated future results, sales or marketing
strategies, new product development or performance or other non-historical facts
are forward-looking and reflect the Company's current perspective based on
existing information. These statements are not guarantees of future performance
and are subject to certain risks, uncertainties and assumptions that are
difficult to predict. Therefore, actual results and outcomes may differ
materially from what is expressed or forecasted in any such forward-looking
statements. Such risks and uncertainties include those set forth herein below
under "Risk Factors That May Affect Future Results of Operations" as well as
previous public filings with the Securities and Exchange Commission. The
discussion of the Company's financial condition and results of operations should
also be read in conjunction with the financial statements and related notes
included in Item 1 of this quarterly report. The Company undertakes no
obligation to update publicly any forward-looking statements, whether as a
result of new information, future events or otherwise.
OVERVIEW
SNAP2 Corporation (f/k/a White Rock Enterprises, Ltd.) (the "Company") is a
software product developer and software service provider for in-flight
entertainment systems (IFE) for passenger aircraft and interactive set-top boxes
(STB) for interactive television. The Company was incorporated on October 8,
1998 under the laws of the State of Nevada originally for the purpose of
developing and marketing its only product, a boot dryer that dries both boots
and shoes for commercial and consumer use. Effective February 28, 2000 the
Company merged with ISES Corporation (an Iowa corporation originally
incorporated on May 14, 1997) ("ISES") with the Company being the survivor. In
connection with the merger, the Company disposed of its boot dryer product to
the original owner. The Company's name was subsequently changed to SNAP2
Corporation pursuant to Articles of Amendment filed July 12, 2000.
The resulting Company's activities to date have consisted of:
* Developing the Airsoft Travel Kit software product which includes
destination information, language training, games and airline
information for IFE systems.
7
* Licensing and installing the Airsoft Travel Kit Games on international
and domestic airlines with IFE equipped aircraft.
* Providing interactive television set-top box manufacturers with
professional software design, programming and graphic design services.
* Research and development strategies to productize its intellectual
property assets for interactive television.
* Contracting with interactive television suppliers to support
promotional efforts of their related products.
* The Company is registered with the SEC as SNAP2 Corporation and is
traded on the over-the-counter bulletin board: OTCBB:SSNP.
On November 26, 2001, the Company entered into an Amended and Substituted Asset
Purchase Agreement ("Agreement") with Inflight Digital Limited, a company
incorporated under the laws of England and Wales ("Buyer") which superceded an
earlier Asset Purchase Agreement between the parties dated September 6, 2001.
Pursuant to the Agreement, the Company sold to the Buyer all of the Company's
IFE assets. The IFE assets included all of the Company's rights and obligations
under its contracts with airline operators for the provision of IFE products and
services, the Company's rights and obligations under license and distribution
agreements relating to its IFE business, the Company's files, books and records
relating to its IFE assets and other tangible property and physical assets used
by the Company solely in connection with IFE business. The Company also granted
Buyer a perpetual, royalty free, exclusive worldwide license to use, for IFE
business only, the Company's intangible properties and rights relating to its
IFE business. The Company has focused on providing consulting services and has
significantly reduced its development of software to the STB industry as well as
exploring emerging markets for embedded software technologies in an effort to
reduce its operating loss. The Company will pursue additional product
opportunities in these markets as resources become available, however, there are
no assurances additional resources will become available.
MANAGEMENT. The Company's management positions are now held by:
Rick Grewell (44) -- President, CEO and CFO
Currently the Company's sole director is Mr. Grewell.
OPERATIONS. The Company operates from its headquarters located at 10641 Justin
Drive, Des Moines, Iowa 50322. The Company was previously located at 2600 72nd
Street and moved to its expanded facilities on May 23, 2000 to accommodate its
growth and development.
PRODUCTS. Prior to the sale of the IFE assets, the Company marketed software
applications for the IFE and interactive television markets. Its Airsoft Travel
Kit software targeted IFE systems manufactured by Rockwell Collins, Matsushita
Avionics and Sony Trans Com. The Travel Kit is comprised of digital information
and entertainment software that airline passengers can access from video
displays at their passenger seats while traveling. The complete Travel Kit
consists of destination information, language training and games and customized
airline information. The package can be sold as a complete package or as
individual components. The Company has sold packages of Travel Kit Games to Air
8
France, Delta Air Lines, LanChile, Airtours, Aer Lingus and AOM French airlines.
The Company has licensed destination information and language training from
Lonely Planet Publishing based in Australia. Airsoft Travel Kit Games are
created, copyrighted, owned and licensed by the Company. The Company has also
licensed Tetris(R) game content from Blue Planet Software, San Francisco,
California for use in its In-Flight Tetris(TM) game for in-flight entertainment.
The game suite consists of 18 assorted board, card, arcade, children's games and
games of chance. See Note 5 to the financial statements for detailed description
of the sale of IFE assets. Due to past operating losses, the Company has
discontinued most of its research and development efforts related to products in
the STB and embedded software industries.
Management believes the sale of the IFE assets will enhance the Company's plans
to focus its software product offering for the interactive television market and
the Internet appliance market. The Company intends to sell interactive
television and Internet appliance software products to original equipment
manufacturers, technology providers and network operators in these markets. For
the quarter ended December 31, 2002, the Company has made its initial sale of
the HAVi Level 2 UI and Gear for DVB-MHP software to Vidiom Systems Corporation
which relates to the interactive television market.
CONSULTING SERVICES. The Company is staffed with software engineers experiencesd
in software design and programming for emerging embedded computer systems and
digital graphic artists experienced in graphical user interfaces and display for
consumer electronic applications. The Company has provided embedded software
services to Motorola, Microsoft, IBM and Panasonic for interactive television
and Internet appliances. For IFE, the Company has provided services to Rockwell
Collins and to the airlines that required graphics customization for their SNAP2
Travel Kit Games.
The Company emphasizes embedded software consulting services for revenue
generation and strategic positioning of developing intellectual property for the
interactive television, Internet appliance and embedded systems markets.
REVENUE RECOGNITION. Software license fees are recognized as revenue upon
contract signing and shipment of the software master copy or download of
software by the customer. Consulting revenues are derived primarily from custom
contract engineering work and training and consulting services. Revenues from
custom contract engineering work are recognized using the percentage of
completion method. Revenues from training and consulting services are recognized
as the services are rendered. Maintenance revenues are recognized ratably over
the term of the related agreements.
REVENUES. Through December 31, 2002, the Company's revenues were derived from
software and engineering consulting services provided to interactive television
equipment manufacturers and technology providers, and license fees and renewals
of its SNAP2 Travel Kit Games for the IFE market as well as its initial sale of
the HAVi Level 2 UI and Gear for DVB-MHP software to the interactive television
market. Consulting services are recognized using the invoice amount for labor
hours as services are performed. Consulting services are typically performed
under contracts of up to six months in duration and are renewable. The Company's
IFE revenues were comprised of two types: (i) license fees from airlines for
Airsoft Travel Kit Game products previously sold; and (ii) OEM initial product
sales to IFE equipment manufacturers for SNAP2 Travel Kit Game products. License
fees are recognized as revenue upon contract signing and shipment of the
software master copy or download of software by the customers since the Company
does not incur significant additional support costs at the time of sale.
Maintenance fees from the Company's software products are recognized (based on
software license fee at time of license commencement or renewal) ratably over
the term of the maintenance contract, which is typically one year in duration.
9
The Company intends to derive the primary portion of its revenue growth through
Company software and engineering consulting services. The Company intends to
continue engaging in consulting services with original equipment manufacturers
(OEMs), network operators and technology providers. The service engagements are
strategic to the Company as it provides licensing opportunities for software
product and product development.
On November 26, 2001 the Company sold its IFE assets; however, during the three
years after the sale, the Company will receive a certain percentage of certain
revenues collected by the Buyer.
COST OF REVENUE. Primarily consists of payroll and related costs (salaries,
payroll taxes, employee health insurance and employer 401(k) contributions), and
consulting expenses incurred in performing software and engineering consulting
services. The Company allocates certain research and development costs to cost
of revenue, based on utilization of its employees and consultants.
RESEARCH AND DEVELOPMENT. Primarily consists of payroll and related costs
(salaries, payroll taxes, employee health insurance and employer 401(k)
contributions) of engineering and software development staff, as well as,
amounts paid to independent development consultants, to develop software and
graphic arts owned and utilized by the Company. During the three months ended
December 31, 2002, the Company reduced its research and development and
consulting staff from 8 employees to 6 employees, in an effort to reduce its
operating loss.
SALES AND MARKETING. Primarily consists of payroll and related costs (salaries,
payroll taxes, employee health insurance and employer 401(k) contributions),
travel, various marketing efforts, promotional materials and public relations
activities. The Company expects sales and marketing costs will remain low until
the Company is in a financial position to expand its sales and marketing
efforts. The Company's CEO has assumed this sales function..
GENERAL AND ADMINISTRATIVE. Primarily consists of payroll and related costs
(salaries, payroll taxes, employee health insurance and employer 401(k)
contributions), legal fees, travel costs, facilities-related expenses, bad debt
expense, depreciation and other administrative costs. The Company expects that
general and administrative expense will continue to be minimized until the
Company is in a financial position to expand.
STOCK-BASED COMPENSATION. Effective September 30, 2002, the Company's Board of
Directors, in conjunction with public opinion and new accounting pronouncement
interpretations which were released in December 2002, elected to expense the
imputed compensation cost related to stock options repriced or newly granted
during the fiscal year ended September 30, 2002. The calculations to estimate
the fair value of the options were made using the Black-Scholes pricing model.
RESULTS OF OPERATIONS
Since inception, the Company has been engaged primarily in the business of
developing and licensing software products and providing engineering and
software and software consulting services. . During the three months ended
December 31, 2002 the Company was not able to meet its obligations to pay
various short-term liabilities and has also delayed paying certain vendors. In
an effort to improve its liquidity, the Company has increased its consulting
activities and sold its IFE assets on November 26, 2001. The Company used the
initial proceeds from this transaction to become current on its payroll
10
obligations and become more current on its vendor obligations. Recently, the
Company has again reduced its workforce by another 2 employees in an effort to
reduce cash flow shortages. See additional comments in "Liquidity and Capital
Resources". Accordingly, historical results of operations are not indicative of
and should not be relied upon as an indicator of future performance.
THREE MONTHS ENDED DECEMBER 31, 2002 AND 2001
REVENUES
Total revenues decreased 2% to $465,000 for the quarter ended December 31, 2002,
compared to $476,000 for the quarter ended December 31, 2001. The decrease was
related primarily to an decrease in software and engineering consulting services
due to staff reductions. License fees represented 61% and 20% of revenues for
the quarters ended December 31, 2002 and 2001, respectively. This was mainly due
to the initial sale of the HAVi Level 2 UI and Gear for DVB-MHP software to the
interactive television market. Consulting services represented 39% and 80% of
revenues for the quarters ended December 31, 2002 and 2001, respectively. During
the quarter ended December 31, 2002, transactions with Vidiom Systems and
Microsoft accounted for 54% and 33% respectively, of the Company's total
revenues.
COST OF REVENUE
Cost of revenue decreased 43% to $136,000 for the quarter ended December 31,
2002, compared to $237,000 for the quarter ended December 31, 2001. The large
decrease was mainly related to one large license fee sale that had lower costs,
as a percent of revenue, than consulting services.
GROSS PROFIT
Gross profit increased as a percentage of revenue to 71% for the quarter ended
December 31, 2002, compared to 50% for the quarter ended December 31, 2001. This
increase was mainly related to one large license fee sale that had lower costs,
as a percent of revenue, than consulting services..
RESEARCH AND DEVELOPMENT
Research and development expense decreased 100% to less than $1,000 for the
quarter ended December 31, 2002, compared to $115,000 for the quarter ended
December 31, 2001. The decrease was related to the Company's continued focus on
consulting services and elimination of all research and development work during
the quarter.
SALES AND MARKETING
Sales and marketing expense decreased 100% to less than $1,000 for the quarter
ended December 31, 2002, compared to $57,000 for the quarter ended December 31,
2001. The decrease was related to the elimination of sales and marketing staff
and expenditures in an effort to streamline the Company's marketing efforts and
reduce expenses.
11
GENERAL AND ADMINISTRATIVE
General and administrative expense decreased 36% to $105,000 for the quarter
ended December 31, 2002, compared to $163,000 for the quarter ended December 31,
2001. This decrease was due to continued cost and staff reductions in an effort
to streamline the Company.
STOCK-BASED COMPENSATION
Effective September 30, 2002, the Company's Board of Directors, in conjunction
with public opinion and new accounting pronouncement interpretations which were
released in December 2002, elected to expense the imputed compensation cost
related to stock options repriced or newly granted during the fiscal year ended
September 30, 2002. The calculations to estimate the fair value of the options
were made using the Black-Scholes pricing model. For the quarter ended December
31, 2002, compensation expense related to the fair value of granted and repriced
stock options represented a partial reversal of the prior quarters expense
attributable to the Company's cancellation of stock options due to employment
terminations.
INTEREST EXPENSE
Interest expense decreased 21% to $6,000 for the quarter ended December 31,
2002, compared to $7,000 for the quarter ended December 31, 2001. This decrease
was due to the payoff of some of the line of credit by the Company during the
quarter.
GAIN ON SALE AND LICENSE OF IFE ASSETS
For the quarter ended December 31, 2001 the gain on sale and license of IFE
assets represented the initial $300,000 payment under the terms of the agreement
dated November 26, 2001. Additional amounts to be received will be recorded as
license revenue.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2002, the Company had cash of $69,000, accounts receivable of
$345,000 and current liabilities of $632,000. Of the current liabilities, the
Company is not paying the current portion of long-term debt, accrued commissions
(the largest portion of accrued payroll), accrued royalty and accrued interest
expense. In order to continue as a going concern, the Company must continue to
defer payment of its current liabilities and continue delaying payment to
vendors. The Company's current monthly payroll is about $55,000 per month, after
the recent reduction in the workforce, and the Company anticipates existing
business will be adequate to fund payroll and minimal overhead during the next
three months. Since its inception, the Company has experienced losses from
operations and negative cash flows. At December 31, 2002, the Company had an
accumulated deficit of $2,045,000 and a stockholders' deficit of $586,000.
During the three months ended December 31, 2002, the Company has delayed paying
vendors, delayed making certain debt payments and has not made its 401(k) match.
Recently, the Company reduced its workforce from 9 to 7 employees in an effort
to reduce its operating loss. The Company will continue to assess its operations
to determine if these employees will be re-hired or if additional layoffs are
required. If business conditions warrant re-hiring these employees, there are no
assurances they will be available.
At its inception on February 28, 2000, (the date of filing of a Certificate of
Merger with the Nevada Secretary of State), the Company merged with ISES
Corporation with the Company as the surviving corporation. The merger was
arranged for the Company by Investment Capital Corporation and Pursuit Capital
12
LLC, venture capital firms located in Scottsdale, Arizona in accordance with
understandings these entities reached with ISES Corporation to raise capital in
private transactions. According to their agreement, these entities were to raise
$2,000,000 to fund the Company's post-merger research and development, marketing
and overall expansion. Pursuant to and in consideration of this arrangement and
the identification of the potential merger as an investment opportunity, the
Company issued 2,200,000 shares of its $.001 par value per share common stock to
these entities and/or their designees. During the fiscal quarter ended March 31,
2000 these entities conducted a private placement on behalf of the Company and
raised $760,000, the proceeds of which have been given to the Company. For these
funds, the Company issued an additional 760,000 shares of its $.001 per share
common stock. These entities are obligated to provide the Company with an
additional $2,000,000 in equity (without further issuance of equity securities
by the Company) of which $615,650 was received through December 31, 2001,
leaving a balance of $1,384,350 to be provided by these entities. None of such
shares of common stock was or will be registered under the Securities Act of
1933, as amended. As of September 30, 2002, 1,221,000 shares have been
surrendered by those entities in lieu of additional capital contributions.
During the three months ended June 30, 2002, the Company transferred 307,500 of
these shares to a consultant in lieu of cash payment. As of September 30, 2002,
the 913,500 remaining shares were cancelled and returned to authorized but
unissued shares.
On November 26, 2001 the Company entered into an Amended and Substituted Asset
Purchase Agreement with Inflight Digital Limited, a company incorporated under
the laws of England and Wales ("Buyer") which superceded a previous agreement
between the parties dated September 6, 2001. The Company used the initial
proceeds from this transaction to become current on its payroll obligations and
become more current on its vendor obligations. Terms of the IFE sale include a
total purchase price for the sale and license of the IFE assets of $300,000 plus
(i) fifty percent (50%) of all revenue received by Buyer from certain existing
customers for a period of three (3) years after the closing; (ii) twenty-five
percent (25%) of all revenues received by Buyer under certain new business
generated by Buyer; (iii) an amount not to exceed $100,000 of the existing
contract with British Airways as assigned to Buyer plus fifty percent (50%) of
all revenue received by Buyer from British Airways during the three (3) years
after closing; and (iv) $75,000 upon receipt of the consent of Air France that
it will expand the number of aircraft using the software and fifty percent (50%)
of the revenues received from Air France during the three (3) years after
closing. Air France has indicated it will terminate its contract in favor of
another vendor. Consequently, future revenue from this customer, if any, will
not be significant. British Airways has indicated they would begin installations
of the IFE products on certain of its airplanes; however, some or all of any
fees received from this contract may be refunded if British Airways does not
install or de-installs the IFE products.
The Company is investigating several other business opportunities with
companies, but there is no assurance any of these opportunities will
materialize, or if they materialize, that the terms will be favorable. Also, the
Company has focused its efforts on increasing revenues, primarily consulting
revenues, in an effort to generate positive cash flow. The Company is dependent
on two (2) key customers and the related contracts with these customers. If
these customers do not renew, there would be an adverse effect on the Company's
operations. Due to the continued losses and the inability to pay its debts as
they come due, the Company has recently adjusted its costs and expenses in an
effort to fund payroll and minimize overhead. Also, the Company continues to
seek and investigate potential transactions that may generate cash; however,
there are no assurances that any such transactions will be identified or
successfully closed.
Since incorporation, ISES (the Company's predecessor in interest pursuant to the
merger) and the Company after the merger, have experienced various levels of
losses and negative cash flow from operations and notwithstanding the merger,
expects to experience negative cash flows in the foreseeable future. In
addition, the Company needs to raise additional capital to meet its obligations
and to continue product development efforts, and there can be no assurance the
13
Company will be able to obtain additional financing on favorable terms, if at
all. If additional capital cannot be obtained on acceptable terms, if and when
needed, the Company may not be able to continue as a going concern, further
develop or enhance its products, take advantage of future opportunities or
respond to competitive pressures or unanticipated requirements, any of which
could have a material adverse effect on the Company's business.
RISK FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS
In addition to the other risk factors contained herein and within other filings
with the Securities and Exchange Commission, the Company believes the following
additional risk factors should be taken into consideration in evaluating its
business:
ADDITIONAL FUNDING NEEDED
The Company needs additional funding to pay its obligations as they come due,
further develop or enhance its products, and take advantage of future
opportunities or respond to competitive pressures or unanticipated requirements.
Without additional funding, the Company may not be able to continue as a going
concern.
The Company's original financing plans were to obtain funding of approximately
$2,000,000 as a result of the merger with ISES Corporation on February 28, 2000.
Only $615,650 of funding was received. As a result of the unfunded commitment,
the Company entered into a $200,000 line of credit with a bank, which was
guaranteed by a stockholder, and entered into other debt arrangements of
approximately $235,000. Also, the Company sold certain assets, delayed paying
vendors and employees and making its 401(k) match.
On November 26, 2001, the Company entered into an Amended and Substituted Asset
Purchase Agreement ("Agreement") with Inflight Digital Limited, a company
incorporated under the laws of England and Wales ("Buyer") which superceded an
earlier Asset Purchase Agreement between the parties dated September 6, 2001.
Pursuant to the Agreement, the Company sold to the Buyer all of Company's IFE
assets. The IFE assets included all of the Company's rights and obligations
under its contracts with airline operators for the licensing of IFE products and
services, the Company's rights and obligations under license and distribution
agreements relating to its IFE business, Company's files, books and records
relating to its IFE assets and other tangible property and physical assets used
by the Company solely in connection with IFE business. The Company also granted
Buyer a perpetual, royalty free, exclusive worldwide license for IFE business.
Terms include a total purchase price for the sale and license of the IFE assets
of $300,000 plus (i) fifty percent (50%) of all revenue received by Buyer from
certain existing customers for a period of three (3) years after the closing;
(ii) twenty-five percent (25%) of all revenues received by Buyer under certain
new business generated by Buyer; (iii) an amount not to exceed $100,000 of the
existing contract with British Airways as assigned to Buyer plus fifty percent
(50%) of all revenue received by Buyer from British Airways during the three (3)
years after closing; and (iv) $75,000 upon receipt of the consent of Air France
that it will expand the number of aircraft using the software and fifty percent
(50%) of the revenues received from Air France during the three (3) years after
closing. In November 2001, the Company received $300,000 as a result of this
transaction, which was recorded as a gain on sale. Additional amounts to be
received will be recorded as license fees. Air France has indicated its
intention to terminate the existing contract and utilize the services and
products of another vendor. Consequently, it is unlikely that the Company will
receive substantial additional revenues resulting from this customer. British
Airways has indicated they would begin installations of the IFE product on
certain of its airplanes; however, some or all of any fees received from this
contract may be refunded if British Airways does not install or de-installs the
IFE products.
14
THE COMPANY EXPECTS TO INCUR OPERATING AND NET LOSSES
The Company has a limited operating history, has incurred significant losses in
the past year and, at December 31, 2002, had an accumulated deficit of
$2,045,000 and a stockholders' deficit of $586,000. To date, the Company has
recognized growing revenue, however; its ability to generate revenue is subject
to substantial uncertainty and it has been unable to generate profitable
operations. The Company will need to generate significant revenues to achieve
profitability and positive operating cash flows and there are no assurances this
revenue level can be obtained. Even if profitability and positive operating cash
flow are achieved, the Company may not be able to achieve, sustain or increase
profitability or positive operating cash flow on a quarterly or annual basis.
DEPENDENCE ON KEY CUSTOMERS
The Company's revenue is dependent on consulting services performed for and
license fees received from 2 key customers. For the three months ended December
31, 2002, 87% of the Company's revenue was generated from these two customers.
Due to the sale of the IFE assets, the Company will become more dependent on
these customers.
THE COMPANY'S LIMITED OPERATING HISTORY AND THE EMERGING MARKET FOR INTERACTIVE
TELEVISION MAKE ITS FUTURE FINANCIAL RESULTS UNPREDICTABLE
The Company's business and prospects depend on the development and market
acceptance of interactive television The market for interactive television
software is new, unproven and subject to rapid technology change. This market
may never develop or may develop at a slower rate than anticipated. In addition,
the Company's success in marketing the Company as a supplier of interactive
television application software is dependent upon developing and maintaining
relationships with industry-leading computer and consumer electronics
manufacturers, network operators and Internet content providers. There is
already competition in the market to provide interactive television software.
Companies such as Liberate, Intellocity, Microsoft, and AOL have established a
market presence and have significantly greater financial, marketing and
technical resources than the Company. These companies who offer interactive
television application software may capture a larger portion of the market than
the Company. Any failure to establish relationships with interactive television
equipment manufacturers and network operators will have a material adverse
effect on the Company's business and prospects.
THE COMPANY HAS SIGNIFICANTLY REDUCED RESEARCH AND DEVELOPMENT AND SALES AND
MARKETING EFFORTS
Due to continued operating losses, the Company has significantly reduced its
research and development efforts by reducing its research and development
workforce, and focusing the remaining employees on consulting services. If the
Company, which operates in an emerging technology industry, is not able to
increase its research and development efforts in the near future, the Company's
technologies could become obsolete. The Company has also significantly reduced
its sales and marketing efforts by reducing its sales and marketing workforce.
If the Company, which operates in an emerging technology industry, is not able
to increase its sales and marketing efforts in the near future, the Company's
future sales may be significantly impacted.
15
THE COMPANY'S BUSINESS IS DEPENDENT UPON THE SUCCESSFUL DEPLOYMENT OF DIGITAL
SET TOP BOXES FOR INTERACTIVE TELEVISION TARGETED BY THE COMPANY
The Company's software products target specific interactive television systems
and the opportunity to generate revenue can be directly related to the number
and the timing of systems deployed. It is the Company's intent to pursue and
support the most popular system platforms for these markets. If the platforms
targeted fail to establish significant and timely deployment in the market it
will have a material adverse effect on the Company's business and prospects.
THE COMPANY FACES COMPETITION FROM COMPANIES WITH SIGNIFICANTLY GREATER
FINANCIAL, MARKETING, AND TECHNICAL RESOURCES
The market for interactive television systems is competitive. Companies that
offer competing software applications and services for interactive television
include Liberate, Intellocity, Microsoft, AOL and others. These entities each
have a larger customer base, a greater number of applications, and greater brand
recognition, market presence and financial, marketing and distribution resources
than the Company. As a result, the Company will have difficulty increasing the
number of design "wins" for its products and services.
THE COMPANY MAY NOT BE ABLE TO RESPOND TO THE RAPID TECHNOLOGICAL CHANGE IN THE
MARKETS IN WHICH IT COMPETES
The Company currently participates in markets that are subject to:
* rapid technology change;
* frequent product upgrades and enhancements;
* changing customer requirements for new products and features; and
* multiple, competing, and evolving industry standards
The introduction of the software applications targeting interactive television
containing new technologies and the emergence of new industry standards could
render the Company's products less desirable or obsolete. In particular, the
Company expects that changes in the operating system environment including
client and server middleware will require it to rapidly evolve and adapt its
products to be competitive. As a result, the life cycle of each release of the
Company's products is difficult to estimate. To be competitive, the Company will
need to develop and release new products and upgrades that respond to
technological changes or evolving industry standards on a timely and
cost-effective basis. There can be no assurance that the Company will
successfully develop and market these types of products and upgrades or that the
Company's products will achieve market acceptance. If the Company fails to
produce technologically competitive products in a timely and cost-effective
manner, its business and results of operations could suffer materially.
VOLATILITY OF STOCK PRICE
The market price of the Company's common stock is likely to fluctuate in the
future. The Company believes that various factors, including quarterly
fluctuations in results of operations, announcements of new products or partners
by the Company or by its competitors, changes in interactive television and
in-flight entertainment markets in general, or general economic, political and
market conditions may significantly affect the market price of its common stock
16
ITEM 3: CONTROLS AND PROCEDURES
As required by Rule 13a-15 under the Exchange Act, within the 90 days prior to
the filing date of this report, the Company carried out an evaluation of the
effectiveness of the design and operation of the Company's disclosure controls
and procedures. This evaluation was carried out under the supervision and with
the participation of the Company's management, including the Company's
President, Chief Executive Officer and Chief Financial Officer. Based upon that
evaluation, the Company's President, Chief Executive Officer and Chief Financial
Officer concluded that the Company's disclosure controls and procedures are
effective. There have been no significant changes in the Company's internal
controls or in other factors, which could significantly affect internal controls
subsequent to the date the Company carried out its evaluation.
Disclosure controls and procedures are controls and other procedures that are
designed to ensure that information required to be disclosed in Company reports
filed or submitted under the Exchange Act is recorded, processed, summarized and
reported, within the time periods specified in the Securities and Exchange
Commission's rules and forms. Disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure that information
required to be disclosed in Company reports filed under the Exchange Act is
accumulated and communicated to management, including the Company's Chief
Executive Officer and Chief Financial Officer as appropriate, to allow timely
decisions regarding required disclosure.
PART II OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS.
The Company currently is not aware of any pending legal proceedings to which it
is a party or to which any of its property is subject. The Company currently is
not aware that any governmental authority is contemplating any proceedings
against the Company or its property.
ITEM 2: CHANGES IN SECURITIES AND USE OF PROCEEDS
In connection with the merger of ISES with and into the Company, the Acquisition
Agreement and Plan of Merger (previously filed as Exhibit 1.1 to the Company's
Current Report on Form 8-K filed March 1, 2000) provided for the issuance of (i)
10,000,000 shares of common stock and (ii) 10,000 shares of convertible
preferred stock which are automatically convertible into 10,000,000 shares of
common stock of the Company two (2) years after the Closing Date of the Merger
which was February 28, 2000. The preferred shares were converted on February 28,
2002.
An additional 2,200,000 shares of common stock were issued to various designees
of Investment Capital Corporation and Pursuit Capital, LLC in connection with
the merger, in exchange for the commitment of these entities to raise $2,000,000
to fund working capital needs and general corporate purposes, including, but not
limited to, expansion of sales and marketing efforts, research and development
activities, licensing of new technology and payment of additional legal and
accounting services occasioned by the merger of the Company and ISES. These
entities conducted a private placement of the Company's $.001 par value common
stock during the fiscal quarter ended March 31, 2000 and raised $760,000, in
consideration of which the Company issued an additional 760,000 shares of its
common stock. These entities are obligated to provide the Company with an
additional $2,000,000 in equity (without further issuance of equity securities
by the Company) of which $615,650 was received through December 31, 2002 leaving
a balance of $1,384,350 to be provided by these entities. None of such shares of
common stock or preferred stock was or will be registered under the Securities
17
Act of 1933, as amended. The funds received have been used for working capital.
As of September 30, 2002, approximately 1,221,000 shares have been surrendered
by these entities in lieu of additional capital contributions. During the year
ended September 30, 2002, the Company transferred 307,500 of these to a
consultant in lieu of cash payment. As of September 30, 2002, the 913,500
remaining shares were cancelled and returned to authorized but unissued shares.
ITEM 3: DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5: OTHER INFORMATION
The Company does not believe there is any information to report under this item.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
2 Amended and Restated Asset Purchase Agreement dated November 26,
2001 by and among Company and ISES Canada (a wholly-owned
subsidiary of Company), as Sellers and Inflight Digital
Entertainment Ltd. as Buyer (Incorporated by reference to the
Company's Form 8-K/A filed on December 10, 2001 with respect to
an event which occurred November 26, 2001)
3.1 Articles of Incorporation, as amended (Incorporated by reference
to the Company's 10-KSB for the fiscal year ended September 30,
2000)
3.2 Bylaws, as amended (Incorporated by reference to the Company's
10-KSB for the fiscal year ended September 30, 2000)
10.4 Investment Capital Corporation - Letter agreement regarding
Merger of White Rock Enterprises, Ltd. and ISES Corporation
(Incorporated by reference to the Company's 10-QSB for the
period ended March 31, 2000)
10.5 Investment Capital Corporation - Memo regarding proposed new
capital structure of White Rock Enterprises, Ltd. reflecting the
merger (Incorporated by reference to the Company's 10-QSB for
the period ended March 31, 2000)
10.8 License and Distribution Agreement dated October 1, 1999
pursuant to which ISES Corporation appoints Licensee Rockwell
Collins, Inc. and End User Air France (Incorporated by reference
to the Company's 10-QSB for the period ended March 31, 2000)
10.12 First Amendment to SNAP2 Corporation Stock Option Plan (Amending
Stock Option Plan previously filed as Exhibit 10.12 to the
Company's 10-QSB for the period ended June 30, 2000)
18
10.21 Master Consulting Agreement effective as of August 1, 2001, as
amended effective as of August 1, 2001, together with related
Work Plans between SNAP2 Corporation and Microsoft Corporation
(Incorporated by reference to the Company's 10-KSB for the
fiscal year ended September 30, 2001)
10.23 Support Services Agreement No. 4500601442 with Rockwell Collins
dated November 2, 2001, together with related Statement of Work
(Incorporated by reference to the Company's 10-QSB for the
period ended December 31, 2001)
10.24 Support Services Agreement No. 4500601445 with Rockwell Collins,
dated November 7, 2001, together with related Statement of Work
(Incorporated by reference to the Company's 10-QSB for the
period ended December 31, 2001)
10.25 Support Services Agreement No. 4500549310 with Rockwell Collins
dated December 6, 2001, together with related Statement of Work
(Incorporated by reference to the Company's 10-QSB for the
period ended December 31, 2001)
10.26 Support Services Agreement No. 4500667599 with Rockwell Collins
dated February 14, 2002, together with related Statement of
Work. (Incorporated by reference to the Company's 10-QSB for the
period ended March 31, 2002)
*10.27 Source Code License Agreement with Vidiom Systems Corporation
dated November 18, 2002.
*99 Certification of Financial Information
- ----------
* Filed herewith
(b) Report on Form 8-K:
On December 13, 2002 the Company filed a Current Report on Form 8 K
with respect to its decision on December 4, 2002 to replace its
existing independent auditors KPMG, LLC and to utilize the services of
S.W. Hatfield, CPA, Dallas, Texas as its independent auditors for
fiscal year-ended September 30, 2002.
19
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
SNAP2 CORPORATION
Date: February 19, 2003 By: /s/ Dean R. Grewell, III
------------------------------
Dean R. Grewell, III, President
20
CERTIFICATION
I, Dean R. ("Rick") Grewell III, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of SNAP2
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. I am responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the
registrant and have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this annual report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. I have disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of registrant's board of directors
(or persons performing the equivalent functions):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified
for the registrant's auditors any material weaknesses in internal controls;
and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. I have indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: February 19, 2003. /s/ Dean R. ("Rick") Grewell III
----------------------------------------
Dean R. ("Rick") Grewell III, President,
President and Chief Executive Officer and
Treasurer and Chief Financial Officer
21