As filed with the Securities and Exchange Commission on August 31, 2004
Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
-------------------
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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MOBILE REACH INTERNATIONAL, INC.
(Name of small business issuer in its charter)
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Delaware 4812 20-01221007
(State or other jurisdiction of (Primary Standard Industrial (IRS Employer
incorporation or organization) Classification Code Number Identification No.)
Mobile Reach International, Inc. Alan Christopher Johnson
8000 Regency Parkway, Suite 660 8000 Regency Parkway, Suite 660
Cary, North Carolina 27511 Cary, North Carolina 27511
(919) 469-6997 (919) 469-6997
(Address, including zip code, and (Name, address, including zip code,
telephone number, including area code, and telephone number, including area
of registrant's principal code, of agent for service)
executive offices)
-------------------
Copies of all communications, including all communications sent to the agent
for service, should be sent to:
Larry E. Robbins
Wyrick Robbins Yates & Ponton LLP
4101 Lake Boone Trail, Suite 300
Raleigh, North Carolina
(919) 781-4000
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Approximate date of commencement of proposed sale to public: From time to
time after the effective date of this registration statement until such time
that all of the shares of common stock hereunder have been sold.
If any of the securities being registered on this form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, as amended (the "Securities Act") other than securities offered only in
connection with dividend or interest reinvestment plans, please check the
following box: |X|
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of earlier effective
registration statement for the same offering. |_|
If this form is a post-effective amendment filed pursuant to the Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. |_|
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. |_|
CALCULATION OF REGISTRATION FEE
=====================================================================================================================
Proposed Maximum Proposed Maximum
Amount to be Offering Price Per Aggregate Amount of
Registered (1) Share (2) Offering Price (2) Registration Fee
- ----------------------------------------------------------------------------------------------------------------------
Common stock, par value
$.0001 per share
3,267,390 $0.06 $ 163,369.50 $ 20.70
202,208(3) $0.32 $ 64,706.56 $ 8.20
732,129(4) $0.32 $ 234,281.28 $ 29.68
5,660,157(5) $0.16 $ 905,625.12 $114.74
1,464,260(6) $0.32 $ 468,563.20 $ 59.37
Total 11,326,144 $1,869,219.50 $232.69
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(1) Pursuant to Rule 416 under the Securities Act of 1933, as amended, this
Registration Statement also covers such indeterminate number of additional
shares of common stock as may be issuable upon conversion of convertible
debentures and exercise of warrants to prevent dilution resulting from
stock splits, stock dividends or similar transactions. We have also
registered for resale our good faith estimate of the number of shares that
we may be required to issue either (i) in the event that, on or prior to
the ninetieth day after the effective date of this registration, we
subsequently offer or issue securities at a price lower than $0.15 per
share or warrants having an exercise price below the exercise price of the
warrants held by certain of the selling stockholders or (ii) in the event
that the filing of this registration statement or the effective date of
this registration is later than certain dates specified in our agreement
with certain selling shareholders or if the effectiveness of this
registration statement is suspended after effectiveness for periods in
excess of those specified in that agreement.
(2) Offering price per share of common stock is based on the average of the
high and low price of the common stock on August 24, 2004 pursuant to Rule
457(c). Offering price per share of common stock issuable upon exercise of
warrants or debentures is based on the exercise price therefore on the
date hereof pursuant to Rule 457(g).
(3) Represents 150% of the 134,805 shares of our common stock that are
issuable to certain security holders upon exercise of warrants issued in
exchange for cancellation of certain debt, which include our good faith
estimate of the number of shares of common stock, if any, issuable to
these selling security holders as a result of adjustments contemplated by
certain provisions of their warrants.
(4) Represents 150% of the 488,086 shares of our common stock that are
issuable to selling security holders upon exercise of the warrants issued
as placement warrants in connection with our $525,000 of 5% Convertible
Debenture financing on March 15, 2004, which include our good faith
estimate of the number of shares of common stock, if any, issuable to
these selling security holders as a result of adjustments contemplated by
certain provisions of their warrants.
(5) Represents 150% of the 3,773,438 shares that are issuable are to certain
selling security holders upon conversion of the 5% Convertible Debentures
dated March 15, 2004, which include our good faith estimate of the number
of shares of common stock, if any, issuable to these selling security
holders as liquidated damages or as a result of adjustments contemplated
by certain provisions of the respective Securities Purchase Agreement or
related Registration Rights Agreement entered into in connection with the
purchase of those debentures.
(6) Represents 150% of the 976,173 shares that are issuable to selling
security holders upon exercise of the warrants issued to the purchasers of
our 5% Convertible Debenture dated March 15, 2004, which include our good
faith estimate of the number of shares of common stock, if any, issuable
to these selling security holders as liquidated damages or a s a result of
adjustments contemplated by certain provisions of the respective
Securities Purchase Agreement or related Registration Rights Agreement
entered into in connection with the purchase of those debentures.
---------------
The Registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall become effective in accordance with Section 8(a) of the
Securities Act of 1933, or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to Section 8(a), may
determine.
Subject to completion, dated August 31, 2004
PROSPECTUS
[MOBILE REACH INTERNATIONAL LOGO](TM)
11,326,144 Shares of Common Stock
---------------
This prospectus relates to the sale of up to 11,326,144 shares of our
common stock by certain persons who are stockholders of Mobile Reach. All of the
shares of common stock are being offered for sale by the selling stockholders at
prices established on the OTC Bulletin Board during the term of this offering.
These prices will fluctuate based on the demand for the shares of common stock.
Our common stock is quoted on the OTC Bulletin Board under the symbol "MBRI."
The last reported sale price of our common stock on the OTC Bulletin Board was
$0.07 per share on August 26, 2004.
We will not receive any proceeds from sale of shares from the selling
stockholders.
Each of the selling stockholders may be deemed to be an "underwriter," as
such term is defined in the Securities Act of 1933.
---------------
Investing in our common stock involves certain risks. See "Risk Factors"
beginning on page 4.
Neither the SEC nor any state securities commission has approved or
disapproved these securities, or determined if this prospectus is truthful or
complete. Any representation to the contrary is a criminal offense.
---------------
The date of this prospectus is __________, 2004
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TABLE OF CONTENTS
Page
----
PROSPECTUS SUMMARY........................................................ 1
RISK FACTORS.............................................................. 4
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS...................... 10
USE OF PROCEEDS........................................................... 11
DIVIDEND POLICY........................................................... 11
DESCRIPTION OF THE AGREEMENTS WITH THE CONVERTIBLE DEBENTURE HOLDERS...... 12
MANAGEMENT'S.............................................................. 16
BUSINESS.................................................................. 22
MANAGEMENT................................................................ 28
EXECUTIVE COMPENSATION.................................................... 30
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT............ 34
SELLING STOCKHOLDERS...................................................... 35
DESCRIPTION OF SECURITIES................................................. 39
PLAN OF DISTRIBUTION...................................................... 40
EXPERTS................................................................... 41
LEGAL MATTERS............................................................. 41
WHERE YOU CAN FIND ADDITIONAL INFORMATION................................. 41
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS................................ F-1
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus. The selling stockholders are offering to sell, and
seeking offers to buy, shares of our common stock only in jurisdictions where
offers and sales are permitted. The information contained in this prospectus is
accurate only as of the date of this prospectus.
PROSPECTUS SUMMARY
This is only a summary and does not contain all of the information that
may be important to you. You should carefully read the entire prospectus,
especially "Risk Factors" and our financial statements and the related notes
included in this prospectus, before deciding to invest in shares of our common
stock.
Mobile Reach International, Inc.
We sell software products and services to clients who desire to increase
the efficiency by which their employees access, utilize and exchange data using
mobile networks. Our solutions are not dependent upon any single product or
system. Currently, most mobile network hardware falls into one of two
categories. Some networks serve mobile devices that are always on and are always
connected to the network. Other networks serve mobile devices that are connected
to the network only when users desire to access or input information. We believe
most companies could be best served by having networks that serve both mobile
users whose devices are always on and other devices that are occasionally
connected computers (OCC). Over time, we expect equipment manufacturers and
infrastructure providers to begin to introduce networks and systems that serve
both types of users on various networks.
Our Objective
We believe there are several key sectors in which middleware software for
mobile business processes are projected to grow exponentially. Consequently, we
have already identified, researched and tested these industry-specific
applications. We believe this will assist us to achieve our long-term vision of
becoming a mobile delivery platform capable of being used across multiple
products and systems. We intend to try to protect specific mobility processes of
our software by filing process and delivery patents to maintain our market
position. To date we do not hold any patents on our intellectual property.
We have developed extensive trade secret processes and intellectual
property. We intend to continue to develop new products and to improve existing
products, such as our upcoming application compatibility and intelligent
tools-sets features. We believe developing new technologies and combining
technologies with our unique customizable approach to providing mobility
solutions will be key features in competing in the emerging mobile middleware
sector. Over the past two years, we have not spent a significant amount of money
on intellectual property development. Rather, all monies spent have been for
minimal equipment and employing a development team. Most all technological
improvements in our technologies are of customization to the end user. Therefore
those costs are directly billed to the end user and not recognized as research
and development.
About Us
We were incorporated in the State of Delaware in July 2003. At the time of
incorporation, were a wholly-owned subsidiary of Asphalt Paving International,
Inc., or API, a company incorporated in the State of Florida in January 1998.
API's shares were publicly traded, but API conducted no active business.
Immediately following our incorporation, API merged into us and the shareholders
of API owned all of our capital stock. We were the surviving corporation in the
merger. In connection with the merger, the state of incorporation of the
corporate entity owned by API's shareholders was changed to Delaware and our
shares became publicly traded on the Over-the-Counter Bulletin Board.
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Immediately after the merger with API, we acquired all the shares of
Mobile Reach Technologies, Inc., a North Carolina corporation, in a share
exchange. As a result of the share exchange, Mobile Reach Technology, Inc., or
MRT, became our wholly owned subsidiary. We conduct all of our business through
MRT. We and MRT are also hereafter collectively referred to as Mobile Reach or
the Registrant.
Our principal office is located at 8000 Regency Parkway, Suite 660, Cary,
North Carolina 27511.
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THE OFFERING
Common stock offered by the selling
stockholders 11,326,144 shares
Common stock outstanding 35,133,501 shares
Use of proceeds The shares of common stock offered by
this prospectus are being registered for
the account of the selling stockholders
named in this prospectus. As a result,
all proceeds from the sales of the
common stock will go to the selling
stockholders and we will not receive any
proceeds from the resale of the common
stock by the selling stockholders. We
will, however, incur all costs
associated with this registration
statement and prospectus.
Dividend policy We anticipate that any earnings will be
retained for development and expansion
of our business and we do not anticipate
paying any cash dividends in the
foreseeable future. Our board of
directors has sole discretion to pay
cash dividends based on our financial
condition, results of operations,
capital requirements, contractual
obligations and other relevant factors.
See "Dividend Policy."
OTC Bulletin Board symbol MBRI
3
RISK FACTORS
Investing in our common stock involves a high degree of risk. You should
carefully consider the risks and uncertainties described below before you
purchase our shares. These risks and uncertainties are not the only ones we
face. Unknown additional risks and uncertainties, or ones that we currently
consider immaterial, may also impair our business operations. If any of these
risks or uncertainties actually occur, our business, financial condition or
results of operations could be materially adversely affected. In this event, you
could lose all or part of your investment.
Risks Associated with Our Business and Our Industry
We have a limited operating history and are not yet profitable.
We are a relatively new company that is not yet profitable. We expect to
continue to have substantial expenses before we earn significant income in
excess of our expenses. The establishment of any new business involves problems,
expenses, difficulties, complications and delays. It is not possible for anyone,
including us, to predict with certainty what all of these expenses,
complications and delays will be. We cannot guarantee to you that we will be
able to overcome these obstacles, and we cannot guarantee to you that we will
ever be profitable.
We have a history of operating losses and we expect these losses to continue for
the foreseeable future.
Since inception, we have incurred significant operating losses. We
incurred operating losses of $622,152 and $536,859 for the years ended July 31,
2003 and December 31, 2002, respectively. As of April 30, 2004, we had an
accumulated deficit of $2,043,788. We expect to continue to incur net losses for
the foreseeable future as we continue to further develop and further the
commercialization of or products and services. We have been funding our
operations through the sale of our securities and expect to continue doing so
for the foreseeable future. Our ability to generate and sustain significant
additional revenues or achieve profitability will depend upon the factors
discussed elsewhere in this "Risk Factors" section. We cannot assure you that we
will achieve or sustain profitability or that our operating losses will not
increase in the future. If we do achieve profitability, we cannot be certain
that we can sustain or increase profitability on a quarterly or annual basis in
the future.
In our financial statements filed with herewith, our independent auditors
Scharf Pera & Co., PLLC, expressed substantial doubt about our ability to
continue as a going concern given our recurring losses from operations, negative
working capital and net stockholder's deficit. You should consider our auditor's
comments when determining if an investment in us is suitable.
We depend upon a limited number of customers.
We anticipate that a significant portion of our revenues in 2004 will be
derived from orders from a limited number of customers. In particular, we are
highly dependent on our relationship with Duke University Medical Center. The
timing of receipt, fulfillment and deployment of orders from Duke University
Medical Center and other significant customers is likely to cause significant
fluctuations in our operating results, especially on a quarterly basis. Further,
if we were to lose any of these customers there would be a significant impact on
our financial status.
We are dependent on certain key personnel, including our Chief Technology
Officer, Mark Lloyd.
We are highly dependent on certain key individuals, including Mark Lloyd,
our Chief Technology Officer, for management and operation. Our operations would
suffer significantly if some or all of these individuals were to terminate their
relationship with us for any reason. Retaining these relationships will become
even more important as we grow. We cannot assure you that we would be able to
replace a key individual who terminated his or her relationship with us. It
would cost us more to replace a key individual than it costs us to retain these
4
relationships. There is strong competition for recruitment of new technical
personnel, in particular, and if we are unable to attract qualified personnel,
we will be unable to grow or sustain our business. We currently do not have any
key-man life insurance on any of our employees.
We are dependent on proprietary intellectual property, and our measures to
protect such property may be insufficient.
We rely on a combination of trade secrets, copyright and trademark laws,
nondisclosure and other contractual provisions and technical measures to protect
our proprietary rights in our products, such as Splitware/Harmony. We have not
registered our copyrights or trademarks and instead we are relying on common law
to protect our rights. We cannot assure you that these protections are adequate
or that our competitors will not independently develop technologies that are
substantially equivalent or superior to our technology. We believe that our
products, trademarks and other proprietary rights do not infringe upon the
proprietary rights of third parties, but we cannot assure you that third parties
will not assert infringement claims against us in the future.
The wireless communications industry is highly competitive and we may be unable
to compete effectively.
The industry of providing mobile solutions for information technology
systems is highly competitive. Many companies compete nationwide to provide
mobile solutions to businesses and entities using information technology systems
and communications networks. If a competitor offers products and services that
are equal to or superior to our products and services, or offers products and
services at lower prices than we do, it may be difficult or impossible for us to
sell our products and services in sufficient volumes to sustain operations. We
cannot assure you that market demand will continue to grow, and increases in
capacity by us and our competitors may lead to greater competition in the
market, which competition would adversely affect our ability to sells our
products and services in sufficient volume to sustain operations.
Our market is changing rapidly and we may not be able to move fast enough to
accommodate the market's changes.
The market for information technology systems and communications networks
is changing rapidly as new technologies are introduced and old ones are
abandoned. While we will try to make changes in our products and services to
keep up with the changing market, we cannot assure you that rapid changes in
products and services will not make our products and services obsolete, such
that we will be unable to compete in the market.
Demand for our products may fail to materialize as expected.
The market for the products and services we offer is relatively new and
there is little hard data to validate market demand or predict how this demand
will be segmented. There could be much lower demand than believed, or interest
in our products and services could decline or die out, which would adversely
affect our ability to sustain operations.
Failure to adapt to technological change and to achieve broad adoption and
acceptance of our new products and services could adversely affect our earnings.
If we fail to keep pace with technological change in our industry, such
failure would have an adverse effect on our revenue and earnings. We operate in
a highly competitive industry characterized by evolving technologies and
industry standards, changes in customer requirements and frequent new product
introductions and enhancements. Our ability to compete effectively and our
growth prospects depend upon many factors, including the success of our existing
5
software products and services to address the changing needs of our customers,
the timely introduction and success of future software products and services and
releases and the ability of our products to perform well with existing and
future technologies. We cannot be certain that our new products or future
enhancements to existing products will meet customer performance needs or
expectations. If they do not meet customer needs or expectations, for whatever
reason, our revenue, gross margin and operating results would be adversely
affected.
We rely on third-party suppliers, and supply-chain failures could harm our
business.
Our products and services use and rely on components (products or
technology, including software) obtained from a number of suppliers. If the
components from any of these suppliers do not work properly, or are not
delivered on time, or if the supplier of a component decides for any reason that
it does not wish to continue to license our components to us or our customers,
we could be prevented from providing our products and services and making
sufficient revenue to sustain operations.
We may be subject to product liability or breach of contract claims if our
wireless solutions do not work as promised.
The mobile solutions we provide for information technology systems are
designed to facilitate information flows over such systems. If our mobile
solutions fail to work as anticipated, customers may bring claims against us,
despite limitations on such claims in our contracts and agreements with
customers. Defending against such claims can be costly and time consuming, and
could have a material adverse effect on our operations, even if we are found not
to have been at fault. We have liability insurance and anticipates that we will
continue such coverage if it is available at a reasonable cost. Future increases
in insurance premiums may prevent us from maintaining adequate insurance
coverage. A large damage award against us could exceed our insurance coverage
and adversely affect our financial condition.
Increasing government regulation could affect our business.
We are subject not only to regulations applicable to businesses generally
but also to laws and regulations directly applicable to electronic commerce.
Although there are currently few such laws and regulations, state, Federal and
foreign governments may adopt laws and regulations applicable to our business.
Any such legislation or regulation could dampen the growth of the Internet and
decrease its acceptance. If such a decline occurs, companies may decide in the
future not to use our products and services. Any new laws or regulations in the
following areas could affect our business:
o user privacy;
o the pricing and taxation of goods and services offered over the
Internet:
o the content of websites;
o copyrights;
o consumer protection, including the potential application of "do not
call" registry requirements on our customers and consumer backlash
in general to direct marketing efforts of our customers;
o the online distribution of specific material or content over the
Internet; and
o the characteristics and quality of products and services offered
over the Internet.
Risks Related to Owning Our Common Stock
Our stock price could be volatile, and your investment could suffer a decline in
value.
The trading price of our common stock is likely to be highly volatile and
could be subject to wide fluctuations in price in response to various factors,
many of which are beyond our control, including:
6
o trading volume of our shares;
o number of securities analysts, market makers and brokers following our
shares;
o changes in, or failure to achieve, financial estimates by securities
analysts;
o new products or services introduced or announced by us or our competitors;
o announcements of technological innovations by us or our competitors;
o actual or anticipated variations in quarterly operating results;
o conditions or trends in the biotechnology and pharmaceutical industries;
o announcements by us of significant acquisitions, strategic partnerships,
joint ventures, or capital commitments;
o additions or departures of key personnel; and
o sales of our common stock.
In addition, the stock market has recently experienced significant price
and volume fluctuations. Volatility in the market price for particular companies
has often been unrelated or disproportionate to the operating performance of
those companies. These broad market and industry factors may seriously harm the
market price of our common stock, regardless of our operating performance. In
addition, securities class action litigation has often been initiated following
periods of volatility in the market price of a company's securities. A
securities class action suit against us could result in substantial costs,
potential liabilities and the diversion of management's attention and resources
from our business. Further, our shares are currently traded on the NASD
Over-the-Counter Bulletin Board and are considered a "penny stock." Price
fluctuations in such shares are particularly volatile and subject to
manipulation by market makers, short sellers and option traders.
Unless an active trading market develops for our common stock, you may not be
able to sell your shares.
Although we are a reporting company and our common stock is listed on the
Over-the-Counter Bulletin Board, there is no active trading market for our
common stock. An active trading market may never develop or, if developed, it
may not be maintained. Failure to develop or maintain an active trading market
will negatively affect the price of our securities, and you may be unable to
sell your shares or such sales may lower the market price, and therefore your
investment could be a complete or partial loss.
Our founders, officers and directors beneficially own approximately 23% of our
stock on a fully diluted basis; their interests could conflict with yours;
significant sales of stock held by any or all of them could have a negative
effect on our stock price; stockholders may be unable to exercise control.
As of April 30, 2004, our founders, officers and directors beneficially
owned approximately 23% of our common stock on a fully diluted basis. In
addition, our employees own additional shares and rights to acquire shares. As a
result, the founders, officers and directors will have significant ability to:
(1) elect or defeat the election of our directors; (2) amend or prevent
amendment of our articles of incorporation or bylaws; (3) effect or prevent a
merger, sale of assets or other corporate transaction; and control the outcome
of any other matter submitted to the stockholders for vote.
As a result of this ownership and position, our founders, officers and
directors are able to significantly influence all matters requiring stockholder
approval, including the election of directors and approval of significant
corporate transactions. In addition, sales of significant amounts of shares held
by any or all of our founders, officers and directors, or the prospect of these
sales, could adversely affect the market price of our common stock. Stock
ownership by our founders and management may discourage a potential acquirer
7
from making a tender offer or otherwise attempting to obtain control of us,
which in turn could reduce our stock price or prevent our stockholders from
realizing a premium over our stock price.
Future sales of our common stock may depress our stock price and dilute your
interest.
The market price of our common stock could decline as a result of sales of
substantial amounts of common stock by current stockholders, especially by our
officers and directors, in the public market, or the perception that these sales
could occur. We may want to issue additional shares of our common stock in
future financings and may grant stock options to our employees, officers,
directors and consultants under our stock award plan, subsequent to its approval
by our stockholders. These factors could make it more difficult for us to raise
funds through future offerings of our common stock. If a trading market for such
shares of common stock were to develop, sales of substantial amounts of such
shares or the availability of substantial amounts of such shares for sale could
adversely affect prevailing stock market prices. In addition, we could issue
series or classes of preferred stock having rights, preferences and powers
senior to those of our common stock, including the right to receive dividends
and/or preferences upon liquidation, dissolution or winding-up in excess of, or
prior to, the rights of the holders of our common stock. This could depress the
value of our common stock and could reduce or eliminate the amounts that would
otherwise have been available to pay dividends on our common stock or to make
distributions on liquidation.
There are 35,133,501 shares of our common stock outstanding. All of the
shares sold in the offering will be freely transferable without restriction or
further registration under the Securities Act of 1933, except for any shares
purchased by our "affiliates," as defined in Rule 144 of the Securities Act of
1933. These shares may be sold in the future without registration under the
Securities Act of 1933 to the extent permitted by Rule 144 or other exemptions
under the Securities Act of 1933.
We might need to raise capital, which might not be available.
We will not receive any of the proceeds from the sale of shares by the
selling stockholders in this offering. Accordingly, the proceeds from this
offering will not be available to us to finance our operations, capital
expenditures or investment activities. We might need to raise funds to meet
these or other needs, and we might not be able to obtain such financing on
favorable terms, if at all. Our independent accountants have included a "going
concern" exception in their audit reports on our 2003 financial statements. The
going concern exception may make it more difficult for us to raise funds than if
we did not have a "going concern" exception. If we need capital and cannot raise
it on acceptable terms, we might not be able to:
o develop enhancements and additional features for our products;
o develop new products and services;
o hire, train and retain employees;
o enhance our infrastructure;
o respond to competitive pressures or unanticipated requirements; or
o continue to fund our operations.
If any of the foregoing consequences occur, our stock price might fall and you
might lose some or all of your investment.
Shares eligible for public sale may adversely affect the price of our stock.
As of April 30, 2004, we had 35,133,501 shares of our common stock issued
and outstanding. We are registering up to 8,058,754 shares of our common stock,
which could be issued upon the conversion of the Convertible Debenture, payment
of interest as well as upon exercise of the Warrants being issued in connection
8
with these debentures. Under certain conditions, we can require a mandatory
conversion of the outstanding Convertible Debentures. We are also registering
3,267,390 shares of common stock currently held by certain selling stockholders.
See "Description of the Agreements with the Convertible Debenture Holders."
Sales of substantial amounts of our common stock in the public market,
whether by purchasers in this offering or stockholders holding shares of our
registered common stock, or the perception that such sales could occur, may
adversely affect the market price of our common stock.
The "penny stock" rules could make selling our common stock more difficult.
Our common stock is considered a "penny stock," which generally is a stock
trading under $5.00 and not registered on national securities exchanges or
quoted on the national NASDAQ market. The Securities and Exchange Commission has
adopted rules that regulate broker-dealer practices in connection with
transactions in penny stocks. This often has the result of reducing trading in
such stocks and making it more difficult for investors to sell their shares.
Prior to a transaction in a penny stock, a broker-dealer is required to:
o deliver a standardized risk disclosure document that provides
information about penny stocks and the nature and level of risks in
the penny stock market;
o provide the customer with current bid and offer quotations for the
penny stock;
o explain the compensation of the broker-dealer and its salesperson in
the transaction;
o provide monthly account statements showing the market value of each
penny stock held in the customer's account; and
o make a special written determination that the penny stock is a
suitable investment for the purchaser and receive the purchaser's
written agreement to the transaction.
These requirements may have the effect of reducing the level of trading activity
in the secondary market for a stock that is subject to the penny stock rules.
Since our common stock is subject to the penny stock rules, investors may find
it more difficult to sell their shares.
We may not qualify for continued listing on the NASD Over-the-Counter Bulletin
Board; any market for the shares that does develop may become illiquid.
If we are unable to satisfy the requirements for quotation on the NASD
Over-the-Counter Bulletin Board, any trading in our common stock would be
conducted in the over-the-counter market in what are commonly referred to as the
"pink sheets." As a result, you may find it more difficult to dispose of, or to
obtain accurate quotations as to the price of, the shares. In addition, the
price of the shares, after the offering, can vary due to general economic
conditions and forecasts, our general business condition, the release of our
financial reports, and because our principals may sell shares they owned before
the offering into any market that develops.
If you require dividend income, you should not rely on an investment in Mobile
Reach.
We do not anticipate paying cash dividends in the foreseeable future. Our
ability to pay dividends is dependent upon our ability to operate profitably. We
may never become profitable. Even if we do become profitable, we expect that any
earnings will be retained for development and expansion of our business.
We have relied on the private placement exemption to raise substantial amounts
of capital and could suffer substantial losses if that exemption was determined
not to have been properly relied upon.
9
We have raised substantial amounts of capital in private placements from
time to time. The securities offered in such private placements were not
registered with the SEC or any state agency in reliance upon exemptions from
such registration requirements. Such exemptions are highly technical in nature
and if we inadvertently failed to comply with the requirements of any of such
exemptive provisions, investors would have the right to rescind their purchase
of our securities or sue for damages. If one or more investors were to
successfully seek such rescission or institute any such suit, we could face
severe financial demands that could materially and adversely affect our
financial position.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains certain financial information and statements
regarding our operations and financial projections of a forward-looking nature.
Although these statements accurately reflect management's current understanding
and beliefs, we caution you that certain important factors may affect our actual
results and could cause such results to differ materially from any
forward-looking statements which may be deemed to be made in this prospectus.
For this purpose, any statements contained in this prospectus which are not
statements of historical fact may be deemed to be forward-looking statements.
Without limiting the generality of the foregoing, words such as "may", "will",
"intend", "expect", "believe", "anticipate", "could", "estimate", "plan" or
"continue" or the negative variations of those words or comparable terminology
are intended to identify forward-looking statements. There can be no assurance
of any kind that such forward-looking information and statements will be
reflective in any way of our actual future operations and/or financial results,
and none of such information and statements should be relied upon, either in
whole or in part, in connection with any decision to invest in the shares.
10
USE OF PROCEEDS
The shares of common stock offered by this prospectus are being registered
for the account of the selling stockholders named in this prospectus. As a
result, all proceeds from the sales of the common stock will go to the selling
stockholders and we will not receive any proceeds from the resale of the common
stock by the selling stockholders. We will, however, incur all costs associated
with this registration statement and prospectus.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our common stock. We
anticipate that any earnings will be retained for development and expansion of
our business and we do not anticipate paying any cash dividends in the
foreseeable future. Our board of directors has sole discretion to pay cash
dividends based on our financial condition, results of operations, capital
requirements, contractual obligations and other relevant factors.
11
DESCRIPTION OF THE AGREEMENTS WITH THE
CONVERTIBLE DEBENTURE HOLDERS
We are registering the shares offered hereby in order to satisfy our
obligations to the holders of our Convertible Debentures.
Pursuant to a Securities Purchase Agreement, dated as of February 27,
2004, between us and each of the holders of the Convertible Debentures, those
holders advanced to us on March 15, 2004 an aggregate of $525,000, repayment of
which is represented by our Convertible Debentures. The Convertible Debentures
are convertible into shares of our common stock at a conversion rate equal to
$0.16 per share. The conversion right was first effective on or after the
earlier of the (i) sixty-fifth (65th) day following the issue date or (ii)
effective date of the Registration Statement; as the first of those dates has
passed, the Convertible Debentures are now convertible at any time, subject to
certain limitations described below. The conversion price is subject to
adjustment if there are certain capital adjustments or similar transactions,
such as a stock split or merger. Interest at 5% per annum is due on the earlier
to occur of the conversion of such debenture or the maturity date. On conversion
or at maturity, we have the option to pay accrued interest in cash or shares of
our common stock valued at the conversion price in effect at that time. The
option to pay interest in shares of our common stock, however, is subject to the
following conditions: the Registration Statement covering the resale of such
shares must be in effect at the time of issuance and the issuance of such shares
of common stock to the holder of a debenture cannot result in such holder and
its affiliates beneficially owning more than 4.99% of the then outstanding
shares of our common stock. This limitation is further discussed below in this
section.
In connection with the issuance of the Convertible Debentures, we issued
Warrants to purchase 976,173 shares of our common stock. The Warrants were first
exercisable on or after the earlier of the (i) sixty-fifth (65th) day following
their issue date or (ii) effective date of the Registration Statement; as the
earlier of those dates has passed, the Warrants are now exercisable, subject to
certain limitations described below. The Warrant are exercisable at a per share
exercise price equal to $0.32. This exercise price is also subject to adjustment
if there are certain capital adjustments or similar transactions, such as a
stock split or merger. The Warrants expire approximately two years after
issuance. The Warrants provide that in lieu of paying the exercise price, the
holder is entitled, at its option, to elect to make a "cashless exercise". If
the holder elects this option, it will receive, instead of the full number of
shares then being exercised under the Warrant, a lesser number of shares, but we
will not receive any cash proceeds from that exercise.
The number of shares which the holder will receive if it elects a
"cashless exercise" is based on a formula which takes into account the average
closing sale price of our stock for the five trading days immediately before the
Warrant exercise. That price is multiplied by the full number of shares then
being exercised. The result is reduced by the total exercise price for those
shares which the holder would have paid if it had not elected a cashless
exercise. The number of shares actually issued for the cashless exercise is
equal to the balance amount divided by that closing price.
The terms of the Convertible Debentures and Warrants specify that the
beneficial owner can convert such debenture or exercise such warrant by giving
notice to us. Each conversion or warrant exercise is subject to the following
limitations: The conversion or exercise right was first available on the earlier
of 65 days after the debenture or warrant was originally issued or the effective
date of the registration statement of which this Prospectus is a part; as that
date has passed, the conversion and exercise rights are now exercisable, subject
to the following condition. Additionally, the holder may not convert the
Convertible Debentures or exercise its Warrant to the extent that such
conversion or exercise would result in such owner and its affiliates
beneficially owning more than 4.99% of our then outstanding stock (after taking
into account the shares of our common stock issuable upon such conversion or
warrant exercise). If the holder then disposes of some or all of its holdings,
12
it can again convert its debenture or exercise its warrant. Similarly, we cannot
require the holder to convert the Convertible Debentures at maturity or on an
earlier mandatory conversion date or issue shares in payment of interest on the
debenture where that limit would be exceeded.
Pursuant to the Securities Purchase Agreement, the purchasers of the
Convertible Debentures and Warrants are entitled to certain protections in the
event that we enter into any offer or sale of our common stock (or securities
convertible into common stock) with any third party on any date which is earlier
than 90 days after the effective date of this Prospectus (plus the number of
days, if any, during which the registration statement is suspended in the
interim). The additional shares, if any, which might be issued to a holder on
account of any of the adjustments referred to in the preceding paragraphs are
covered by the registration statement and this prospectus.
Under the Registration Rights Agreement we entered into with the lenders
at the same as the Securities Purchase Agreement, we might be required to pay
liquidated damages to the holders if we are unable to comply with certain filing
requirements for the registration statement or if the effectiveness of the
registration statement is suspended for more than two (2) permitted periods,
which together may not aggregate more than fifty (50) days, in any consecutive
12-month period. Each permitted period should neither be more than thirty-five
(35) days nor begin less than ten (10) business days after the last day of a
previous permitted period. Under certain circumstances, the liquidated damages
may be paid in the form of shares of our Common Stock based on the conversion
price. The additional shares, if any, which might be issued to a holder on
account of the liquidated damages referred to in this paragraph are covered by
the registration statement and this prospectus. Additional obligations regarding
our registration obligations are described below in this section.
As contemplated by the Securities Purchase Agreement and a Registration
Rights Agreement executed and delivered at the same time, we are registering
150% of the number of shares issuable on conversion of the full aggregate
principal amount of the Convertible Debentures plus interest thereon accrued
through the maturity date thereof and 150% of the number of shares of common
stock issuable upon exercise of the Warrants issued in connection with such
Convertible Debentures. Such shares include our good faith estimate of the
number of shares of common stock that we may be required to issue (i) in the
event that, on or prior to the ninetieth day after the effective date of this
registration, we subsequently offer or issue securities at a price lower than
$0.15 per share or warrants having an exercise price below the exercise price of
the warrants held by certain of the selling stockholders or (ii) in the event
that the filing of this registration statement or the effective date of this
registration is later than certain dates specified in our agreement with certain
selling shareholders or if the effectiveness of this registration statement is
suspended after effectiveness for periods in excess of those specified in that
agreement.
We are also obligated to keep the Registration Statement of which this
Prospectus forms a part effective until the earliest of the date on which the
holders may sell without restriction all shares registered on their behalf under
this Prospectus under Rule 144 promulgated under the Securities Act of 1933, or
the date on which such holders no longer own any of those shares. If at any time
the number of shares of common stock to which the holders of our Convertible
Debentures and Warrants are entitled exceeds 80% of the number of shares of
common stock actually included or registered under the Registration Statement,
then we are required to amend the Registration Statement or file a new
registration statement for additional shares of our common stock in an amount
equal to (i) the number of shares theretofore issued on conversion of the
Convertible Debentures (including any shares issued in respect of accrued
interest) and the exercise of the Warrants plus (ii) 150% of the number of
shares issuable (y) on conversion of the full aggregate principal amount of the
then unconverted Convertible Debentures, plus interest thereon accrued through
the maturity date thereof and (z) upon exercise of the then unexercised
Warrants.
We are also registering 453,125 shares of common stock and a number of
shares equal to 150% of the 622,891 shares of common stock issuable upon
13
exercise of certain other warrants held by certain other selling stockholders.
These shares and warrants were also issued on March 15, 2004. The warrants held
by these selling shareholders have terms similar to those of the Warrants held
by the holders of the Convertible Debentures, with respect to when they are
first exercisable, the limitation on exercise if as result the holder would own
more than 4.99% of the then outstanding shares, cashless exercise rights, and
adjustments for certain events. The additional shares, if any, which might be
issued to any of these warrant holders on account of any of such adjustments are
covered by the registration statement and this prospectus.
Reference is made to the forms of Convertible Debentures, the Warrants,
the Securities Purchase Agreement and the Registration Rights Agreement that are
filed as exhibits to the Registration Statement for more complete description of
the complex provisions that are summarized under this caption.
14
Price Range of Common Stock
Our common stock is traded on the OTC Electronic Bulletin Board of the
National Association of Securities Dealers, Inc., Automated Quotation System
under the symbol "MBRI". Although trading in our common stock has occurred on a
relatively consistent basis, the volume of shares traded has been sporadic.
There can be no assurance that an established trading market will develop,
that the current market will be maintained or that a liquid market for our
common stock will be available in the future. Investors should not rely on
historical stock price performance as an indication of future price performance.
The following table shows the quarterly high and low bid prices and high
and low ask prices for our common stock over the last two fiscal years, as
reported on the OTC Bulletin Board. The closing price of our common stock on
August 26, 2004 was $0.07 per share.
High Low
---- ---
Fiscal year ended July 31, 2003
First quarter $0.45 $0.17
Second quarter $0.40 $0.11
Third quarter $0.25 $0.13
Fourth quarter $1.01 $0.48
Fiscal year ending July 31, 2004
First quarter $0.90 $0.13
Second quarter $0.65 $0.20
Third quarter $0.40 $0.20
Fourth quarter $0.30 $0.08
Fiscal year ended July 31, 2005
First quarter to date $0.09 $0.05
As of April 30, 2004, there were approximately 160 holders of record of
our common stock. We believe that a significant number of shares of our common
stock are held in either nominee name or street name brokerage accounts and,
consequently, we are unable to determine the number of beneficial owners of our
stock.
15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of our financial condition and results of
operations should be read in conjunction with the financial statements and the
notes to those statements included elsewhere in this prospectus. This discussion
may contain forward-looking statements that involve risks and uncertainties. As
a result of many factors, such as those set forth under "Risk Factors" and
elsewhere in this prospectus, our actual results may differ materially from
those anticipated in these forward-looking statements.
Background
We sell our software products and services to clients who desire to
increase the efficiency by which their employees access, utilize and exchange
data using mobile networks. Our solutions are not dependent upon any single
product or system. Currently, most mobile network hardware falls into one of two
categories. Some networks serve mobile devices that are always on and are always
connected to the network. Other networks serve mobile devices that are connected
to the network only when users desire to access or input information. We believe
most companies could be best served by having networks that serve both mobile
users whose devices are always on and other devices that are occasionally
connected computers (OCC).
Over time, we expect equipment manufacturers will begin introducing
networks that serve both types of users on the same network. We anticipate the
market will move toward standardized networks. By being ahead of this trend, we
believe our platform and adaptable online-offline connection features will
result in increased sales and greater market penetration.
We sell our mobile infrastructure applications primarily to enterprises,
original equipment manufacturers, application developers and resellers both
directly and through our partner network. We derive revenue from:
o Software license fees and royalties;
o Support and maintenance fees;
o Professional services, including non-recurring development fees that
we generate when we adapt products to customers' specifications and
consulting/mobility strategy services; and
o Related mobile equipment, devices and related carrier pass through
incentives or commissions
Our future results of operations will be highly dependent upon the success
of our software products and services, specifically our Mobile Infrastructure
Platform as well our accompanying Wizard Tools, and Mobile Strategy
Implementations. We expect the license fees, services and royalties generated by
these products and services to continue to constitute the majority of our
revenue. We see key signs in certain sectors maturing at a greater rate than
expected, thus we intend to capitalize on these sectors and deliver best of
breed mobility solutions. By executing against this verifiable traction, we
expect to garner the competitive advantage within the specific sector.
We sell our products directly to end-users and also markets and sell many
of our products through multiple indirect channels, primarily distributors and
resellers. For the seven-month period ending July 31, 2003, we had no customer
that accounted for greater than 10% of revenues.
We intend to pursue strategic acquisitions of, or strategic investments
in, companies with complementary products, technologies or distribution networks
in order to broaden our mobility offerings. We currently have no commitments or
16
agreements regarding any material transaction of this kind; however, we may
acquire businesses, products or technologies in the future. As a result, we may
require additional financing in the future and, if we were required to obtain
additional financing in the future, sources of capital may not be available on
terms favorable to us, if at all.
We compete with:
o mobile data management companies, such as iAnywhere (a division of
Sybase), Infowave;
o application mobilization companies, including Everypath, iAnywhere,
Extended Systems;
o mobile enterprise solutions companies, including Aether Systems,
Dexterra, and Telispark; and
o Service Consulting and Implementation, such as Lawson and Selectica.
As the markets for mobile information management products grow, we expects
competition from existing competitors to intensify. Additionally, if existing or
new competitors were to merge or form strategic alliances, our market share may
be reduced or pressure may be put on us to reduce prices resulting in reduced
revenue and margins.
We have put forth certain initiatives in the sector to commercialize our
mobility product offering. Great strides are being noted by resellers, partners
and customers as we have gained both customers and traction in the marketplace.
Additionally, we are committed to investing in our mobility processes and best
practices so that the strategic goal of becoming the "go-to mobility leader" is
executed as the management team has put forth.
CRITICAL ACCOUNTING POLICIES
In preparing our consolidated financial statements in conformity with
accounting principles generally accepted in the United States, we make
estimates, assumptions and judgments that can have a material impact on our net
revenue, operating income and net income (loss), as well as on the value of
certain assets on our consolidated balance sheet. Actual results may differ from
these estimates. We believe that the estimates, assumptions and judgments
involved in the accounting policies described below have the greatest potential
impact on our consolidated financial statements, so we consider these to be our
critical accounting policies. The policies described below are not intended to
be a comprehensive list of all our accounting policies. In many cases, the
accounting treatment of a particular transaction is specifically dictated by
generally accepted accounting principles, with no need for management's judgment
in their application. There are also areas in which management's judgment in
selecting any available alternative would not produce a materially different
result. Our audited consolidated financial statements and notes thereto contain
our significant accounting policies and other disclosures required by generally
accepted accounting principles. The accounting policies that we consider
critical to an understanding of the consolidated financial statements are
highlighted below.
Revenue Recognition
To recognize revenues we apply the provisions of Statement of Position
97-2, SOFTWARE REVENUE RECOGNITION (SOP 97-2), as amended by SOP 98-9, and
generally recognize revenue when all of the following criteria are met: (1)
persuasive evidence of an arrangement exists, (2) delivery has occurred, (3) the
fee is fixed or determinable and (4) collection of the resulting receivable is
reasonably assured.
At the time of the transaction, we assess whether the fee associated with
our revenue transactions is fixed or determinable, based on the payment terms
associated with the transaction. If a significant portion of a fee is due after
the shorter of our normal payment terms or 90 days, we account for the fee as
17
not being fixed or determinable. In these cases, we recognize revenue as the
fees become due and payable. If we had assessed the fixed or determinable
criterion differently, the timing and amount of our revenue recognition may have
differed materially from that reported.
At the time of the transaction we also assess whether or not collection is
reasonably assured based on a number of factors, including past transaction
history with the customer and credit-worthiness of the customer. If we determine
that collection of a fee is not reasonably assured, we defer recognition of the
fee as revenue, and recognize revenue at the time collection becomes reasonably
assured, which is generally upon receipt of cash. If we assessed collectibility
differently, the timing and amount of our revenue recognition may have differed
materially from that reported.
We recognize revenue for support and maintenance services over the
contract term, which is usually 12 months, and we generally, recognize revenue
from training services as these services are performed. Revenues from software
licensing is generally recognized as payments become due at the times monies are
received; for professional services that involve significant implementation,
customization, or modification that is essential to the functionality of
systems, we generally recognize the service revenue over the period of the
engagement, using the percentage-of-completion method. In cases where our
professional services involve customizations for which the amount of
customization effort cannot be reasonably estimated, where significant
uncertainty about the project completion exists, or where an arrangement
provides for customer acceptance, we defer the contract revenue under the
completed contract method of accounting until the uncertainty is sufficiently
resolved or the contract is complete. If we were to make different judgments or
utilize different estimates of the total amount of work we expect to be required
to complete an engagement, the timing of our revenue recognition from period to
period, as well as the related margins, might differ materially from that
previously reported.
Principles of Consolidation
Our consolidated financial statements include the accounts of Mobile Reach
Technologies, Inc. and its subsidiary company Mobile Reach Technologies, GmbH,
(German Company) after elimination of inter-company accounts and transactions.
Cash and cash equivalents
We consider all highly liquid investments having an original maturity of
three months or less to be cash equivalents. Amounts invested may exceed
federally insured limits at any given time.
Property and equipment
Property and equipment are recorded at cost and depreciated using the
straight-line method over the estimated useful lives of the assets ranging from
three to seven years.
Income taxes
Deferred income taxes are provided for temporary differences between the
basis of our assets and liabilities for financial reporting and income tax
purposes. We have not filed income tax returns for 2002 and 2001. As of December
31, 2002 and 2001, we had a deferred tax asset of approximately $940,000 and
$730,000, respectively, resulting primarily from net operating loss
carryforwards. As of December 31, 2002, we had a net operating loss carryforward
of approximately $2,700,000, which begins to expire in 2020, dependent on the
filing of 2002 and 2001 income tax returns. The deferred tax asset has been
fully offset by a valuation allowance due to the uncertainty of realizing any
future taxable income.
The Tax Reform act of 1986 contains provisions which limit the ability to
utilize net operating loss, capital loss, and various tax credit carryforwards
in the case of certain events including significant changes in ownership
18
interest. If our tax carryforwards are limited, and we have taxable income which
exceeds the permissible yearly net operating loss carryforward, we would incur a
federal income tax liability even though these loss carryforwards would be
available in future years.
Fair value of financial instruments
Our financial instruments include cash, accounts receivable, accounts
payable, accrued liabilities, credit facilities and long-term debt. The carrying
amounts of these financial instruments approximate fair value due to their short
maturities and variable rates of interest. The carrying amounts of long-term
debt approximate their fair values based on current rates available for similar
types of instruments. We do not have any outstanding financial derivative
instruments.
Accounting for stock-based compensation
Employee stock awards under our compensation plans are accounted for in
accordance with Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" ("APB 25"), and related interpretations. We provide
the disclosure requirements of Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation" ("SFAS 123"), and related
interpretations. Stock-based awards to nonemployees are accounted for under the
provisions of SFAS 123. SFAS 123 allows and we have elected to continue to only
disclose the effects on net income or loss of the fair value of the options.
RESULTS OF OPERATIONS
Three Months Ended January 31, 2004 Compared To Three Months Ended October 31,
2003.
Gross income for the three months ended January 31, 2004 was $310,092 as
compared to $52,111 for the three months ended October 31, 2003, an increase of
approximately $258,000 (500%). We believe this increase is directly attributed
to both our product offerings beginning to gain traction in specific verticals
surrounding asset management, as well as our expanded offerings from the
acquisition of Waves Consulting Group (now Mobile Reach Solutions). The trend
indicates that our revenues will increase over the short and long term because
of both these factors in addition to newly opened markets and verticals we have
not had a presence in.
Cost of good sold for the three months ended January 31, 2004 were
$474,497 as compared to $98,837 for the three months ended October 31, 2003, an
increase of approximately $376,000 (380%). This dramatic increase was due in
part to the cost associated of ramping up sales and development staff to gain
market penetration in key accounts and partnerships.
General and Administrative expenses for the for the three months ended
January 31, 2004 were $533,989 as compared to $649,601 for the three months
ended October 31, 2003, a decrease of approximately $115,000 (18%). Of this,
expense, approximately 178,000 (33%) was attributable to sales and marketing.
Total operating expenses for the three months ended January 31, 2004 was
$712,174 as compared to $758,500 for the three months ended October 31, 2003 a
decrease of approximately $46,000 (6%).
As a result of the foregoing, we sustained a net loss of $639,330 for the
three months ending January 31, 2004 as compared to a net loss of $805,226, for
the three months ending October 31, 2003 for a decrease of our losses of
approximately $166,000 (21%).
19
Results of Operation For the Seven Months Ended July 31, 2003 Compared To The
Year Ended December 31, 2002
Total revenue for the seven-month period ended July 31, 2003 was $94,312
compared to $776,622 reported for the year ended December 31, 2002. Total net
loss for the seven-month period was $1.9 million, or $.08 per diluted common
share. In the execution of our operating plan, during the first seven months of
2003, we focused on the merger with API, as well as adding key the management in
order to execute and delivery on the business plan.
The cost of sales associated with the delivery of our solutions is
expected to be proportioned as the repeatable model is implemented with future
customers. As a result, we recognized an above average cost associated for the
seven months ending July 31, 2003.
Our sales and marketing expenses consist primarily of compensation and
related costs for ramping up efforts around product marketing, associated
personnel, travel and entertainment and other related costs. We expect sales and
marketing expenses to decrease as a percentage of sales as we continue to
leverage our reseller relationships and strategic clients to further our sales
and marketing initiatives.
SG&A for the seven months ending July 31, 2003 consisted primarily of
compensation and related costs associated with the merger. We expect our general
and administrative expenses to decrease as a percentage of our annual revenues
primarily due to traction our products are receiving in the marketplace.
Liquidity and Capital Resources
As of January 31, 2004, we had current assets and liabilities of $629,722.
Our independent auditors, who audited our financial statements for the period
ended July 31, 2003, have expressed substantial doubt about our ability to
continue as a going concern given our recurring losses from operations, negative
working capital and net stockholders' deficit. In addition, we must deal with
the litigation and claims described under the heading "Legal Proceedings" on
page 32 of this prospectus. In response to these issues, we have raised
$1,761,000 in additional funds since July 31, 2003. Management believes it is
imperative that we raise additional funds, to fund our operations and sales and
marketing efforts, including the costs of compliance with the continuing
reporting requirements of the Securities Exchange Act of 1934, as amended.
Our failure to raise capital would likely to have a material adverse
effect on our business and might cause our stockholders to lose their entire
investment. There can be no assurance we will be successful in our capital
raising efforts. In addition, the terms required by new investors if we are
successful may harm the interests of existing investors, including by causing
substantial dilution and by downward pressure on the market price of our common
stock resulting from re-sales of securities by new investors.
Since July 31, 2003, operations have been financed principally through
sales of common stock, the exercise of warrants and options to purchase common
stock, the issuance of convertible notes payable and notes payable. Net proceeds
from financing activities amounted to approximately $180,000 for the three
months ended October 31 2003 and $1,581,0000 for fiscal 2004. As of April 30,
2004 we have outstanding convertible notes payable totaling $525,000.
On February 7, 2004 we entered into Stock Purchase Agreement where we
issued $525,000 worth of debentures convertible into common stock at $0.16 per
share. We also issued 3,281,250 warrants to the debenture holders at a strike
price of $0.32 per share, subject to cashless exercise rights. See "DESCRIPTION
OF THE AGREEMENTS WITH THE CONVERTIBLE DEBENTURE HOLDERS."
20
We need to raise at least $500,000 on an immediate basis in order to keep
current essential suppliers and vendors and to maintain our operations as
presently conducted. While we are actively seeking to raise additional capital,
we have no commitments for any such financing, and there can be no assurance
that additional capital will be available to us on commercially acceptable
terms. Management is presently investigating potential financing transactions
that it believes can provide additional cash for operations and lead to
profitability in both the short and long-term. Management also intends to
attempt to raise funds through private sales of common stock and borrowings. The
inability to obtain such financing will have a material adverse effect on our
business, our operations and future business prospects. It is also anticipated
that any successful financing will have a significant dilutive effect on
existing stockholders.
Going Concern Consideration
Our financial statements filed with herewith reflect substantial losses.
Scharf Pera & Co., PLLC, our independent auditors, has expressed substantial
doubt about our ability to continue as a going concern given our recurring
losses from operations, negative working capital and net stockholder's deficit.
This opinion could materially limit our ability to raise additional funds by
issuing new debt or equity securities or otherwise. You should consider our
auditor's comments when determining if an investment in us is suitable.
We have been able to continue based upon our receipt of funds from the
issuance of equity securities and borrowings, and by acquiring assets or paying
expenses by issuing stock. Our continued existence is dependent upon our
continued ability to raise funds through the issuance of our securities or
borrowings, and our ability to acquire assets or satisfy liabilities by the
issuance of stock. Management's plans in this regard are to obtain other debt
and equity financing until profitable operation and positive cash flow are
achieved and maintained. See "RISK FACTORS."
Effects of Foreign Currency Exchange Rates
We derive a portion of our net revenue from international sales,
principally through our international subsidiary and through a limited number of
resellers. Sales made by our international subsidiary are generally denominated
in each country's respective currency. Fluctuations in exchange rates could
cause our results to fluctuate when we translate revenue and expenses
denominated in other currencies into U.S. dollars. Fluctuations in exchange
rates also may make our products more expensive to resellers or customers who
purchase our products in U.S. dollars.
21
BUSINESS
History
We were incorporated in the State of Delaware in July 2003. At the time of
incorporation, we were a wholly-owned subsidiary of Asphalt Paving
International, Inc., or API, a publicly traded company incorporated in the State
of Florida in January 1998. Immediately following our incorporation, we merged
into API and a result of the merger, our shares became publicly traded on the
OTCBB, trading under the symbol MBRI on August 6, 2003. Immediately after the
merger with API, we acquired all the shares of Mobile Reach Technologies, Inc.,
or MRT, a North Carolina corporation, in a share exchange with all the
shareholders of MRT. As a result of the share exchange, MRT became our
wholly-owned subsidiary. MRT continues to conduct the business conducted prior
to the share exchange. MRT has developed and sold mobile technology and services
for information systems and communications networks. In late 2000, MRT acquired
Mobile Reach Technologies, GmbH ("MRT-GERMANY"), which is located in Germany, to
market our products and services to the European market. We continue to conduct
business through MRT and MRT-Germany.
On December 17, 2003 we entered into an Agreement and Plan of Merger with
Waves Consulting Group. The agreement was completed on January 2, 2004. Waves
Consulting Group now operates as our wholly owned subsidiary under the new name
Mobile Reach Solutions (MRS). MRS business model is targeted toward the Small to
Medium Business Marketplace (SMB) offering services and solutions focused around
IT infrastructure with mobile components.
We conduct all our business through our subsidiaries, Mobile Reach
Technologies, Inc. (MRT) and Mobile Reach Solutions (MRS) which was formally
known as Waves Consulting Group.
Overview
We sell software products and services to clients who desire to increase
the efficiency by which their employees access, utilize and exchange data using
mobile networks. Our solutions are not dependent upon any single product or
system. Currently, most mobile network hardware falls into one of two
categories. Some networks serve mobile devices that are always on and are always
connected to the network. Other networks serve mobile devices that are connected
to the network only when users desire to access or input information. We believe
most companies could be best served by having networks that serve both mobile
users whose devices are always on and other devices that are occasionally
connected computers (OCC). Over time, we expect equipment manufacturers will
begin introducing networks that serve both types of users on the same network.
We anticipate the market will move toward standardized networks. By being ahead
of this trend, we believe our platform and adaptable online-offline connection
features will result in increased sales.
We commenced selling products and services in the middle of 2000 as a
mobile solution provider. Our products and services were based on one of the
leading enterprise platforms, called Remedy. Since that time, we have
established offices in the United States and Germany. Today, we have expanded
our goals beyond Remedy-based enterprise platforms. Our expanded business model
is to deliver the products and services as a complete solution to customers who
want to deploy enterprise-wide solutions to their businesses in a mobile
environment.
Customer Needs and Solutions
Although many industries can benefit from efficient mobile networks, we
intend to initially focus our efforts within the industries we believe are
likely to reap the highest returns on investment by deploying efficient mobile
22
solutions. We believe these industries include: pharmaceutical and healthcare,
transportation and logistics, financial services and K-12 education.
What problems do we help our customers solve? Most customers have invested
substantial amounts in enterprise application software, from providers such as
Seibel, SAP, Oracle and Remedy. Enterprise applications software usually resides
on servers that are designed to allow access to a network only from desktop
computers, not from hand held mobile units of employees, vendors and partners.
Simply put, we assist customers to expand access to existing and future
enterprise applications software from desktops to mobile devices, utilizing our
processes and software technologies.
We believe our software tools allow us to efficiently solve many of the
mobility problems of our clients and constitute one of our primary competitive
advantages. We also believe that customers are no longer willing to just buy
"cool" technology. Today, customers will invest in technology only if they
believe the investment will help them solve critical business processes.
Consequently, our strategy combines our mobile technologies with consulting
services that assist customers to identify their business problems, develop
solutions and then deploy mobile solutions that are integral parts of their
everyday business process. By focusing our products and services solely around
mobility, we seek to position to become a mobile solutions leader.
Services
A key component of our business strategy is to provide professional
services based on industry recognized best practices that enable our customers
to understand mobility solutions, define solutions that achieve specific goals
that will work for their business, and then successfully develop and implement
solutions. We plan to meet these objectives by providing the following services:
Mobile Strategy Assessment. Our Mobile Strategy Assessment assists
customers in developing mobile strategies that fit their business needs. The
Mobile Strategy Assessment services provide customers with an impartial
evaluation of how successfully their current mobile strategy will support their
business needs as well as how to implement and support the strategy. We believe
this service offering is valuable to our customers, because many aspects of
mobile technologies are in the formative stage. Consequently, many customers may
not understand the impact of one decision verses another.
Business Process Analysis and Improvement. The analysis portion of our
service documents the current business processes of customers and shows how
different mobile strategies will impact their business processes. Additionally,
the process improvement component of our services identifies how their current
way of doing business should change, as well as how they can improve their
operations by implementing mobile strategies. This service provides our
customers with several benefits, including a foundation for the development of a
Return on Investment (ROI) analysis that is required by many businesses before
management will approve funds to move forward. Another benefit of this service
is to prepare the customer's workforce and management for the changes the mobile
strategy will bring and thereby improve its success and acceptance.
Application Systems Development and Integration. This service addresses
three major success factors of any mobile strategy: (1) providing an application
system to support the strategy; (2) providing an application system that works
efficiently; and (3) providing an application system that is compatible with the
customer's existing computer network. By utilizing, a structured approach to
application systems development and integration based on clearly understood
business processes, we provide our customers with solutions that meet these
success factors.
23
Software Products
We offer the following software products:
HealthReach(TM) is a mobile application software designed to present
medical caregivers with the information necessary to deliver excellent care in
each of many patient encounters. Caregivers make decisions every hour about the
diagnosis, treatment and on-going therapy for patients. At each decision point,
the quality and timeliness of the information about that patient influences the
quality of patient care decisions, the success of treatment and the efficiency
of physicians and other caregivers. The HealthReach Suite has been deployed to
enhance the timeliness and quality of information available to caregivers at the
point of care and thus to improve patient care. Currently, Duke University
Health System is running HealthReach in several areas, including emergency and
cardiac care.
Harmony m-ARS Suite provides significant productivity increases to
customer organizations via a suite of mobile applications tied to back-office
systems of Remedy-based enterprise platforms. Existing ARS (Action Request
System) based business processes are quickly mobilized via the "plug & play"
applications listed below. The Harmony m-ARS Suite has three modules that can be
customized to the customer's business needs, HelpReach, AssetReach and
ServicePulse.
HelpReach is a wireless extension of Remedy Corporation's Help Desk
Product. HelpReach enables information technology support staff to bring the
power of Remedy's Action Request System directly to the point of customer
service.
AssetReach extends the power of Remedy's Asset Management System by tying
together the Remedy product, bar code scanning and networking within the same
mobile device.
ServicePulse is a powerful application in the Harmony m-ARS Suite that
provides wireless real-time results tracking, giving managers the ability to
monitor and react to services indicators while they are away from their desk or
their computer. The Harmony m-ARS Suite was formerly named Splitware. The new
product naming is part of our strategy to expand our mobile offering and
platform.
Competitive Factors
Our core mobile software platform competes in the Mobile Middleware
Marketplace. Middleware includes software that enables back office systems and
mobile devices to communicate with one another. We believe the following factors
will be essential to our successfully competing in this market:
Market Vision
We believe there are several key sectors in which Mobile Middleware is
projected to grow exponentially. Consequently, we have already identified,
researched and tested these industry-specific applications. We believe this will
assist us to achieve our long-term vision of becoming a mobile delivery platform
capable of being used across multiple products and systems. We intend to try to
protect specific mobility processes of our software by filing process and
delivery patents to maintain our market position. To date we do not hold any
patents on our intellectual property.
We have developed extensive trade secret processes and intellectual
property. We intend to continue to develop new products and to improve existing
products, such as our upcoming application compatibility and intelligent
tools-sets features. We believe developing new technologies and combining
technologies with our unique customizable approach to providing mobility
solutions will be key features in competing in the emerging mobile middleware
24
sector. Over the past two years, we have not not spent a significant amount of
money on developing the actual Intellectual Property, all monies spent have been
for minimal equipment and burden associated with employing a development team.
Most all technological improvements in our technologies are of customization to
the end user. Therefore those costs are directly billed to the end user and not
recognized as research and development.
Strategic Relationships
We have identified and secured numerous relationships with channel,
solution and technology companies. We believe these relationships will enable
(i) our branded software products to power the products of other companies; (ii)
our product and services to be a part of turn-key solutions; and (iii) our
technology to be ahead of the curve with regard to enterprise-grade mobility
products.
Focus
Our core technology initially targeted one of the leading enterprise
platforms, called Remedy. In the future, we will leverage our experience with
Remedy to work with several other industry platforms, such as Oracle, Siebel,
SAP and PeopleSoft. By leveraging proven tool-sets from these larger enterprise
vendors, we believe we will be able to roll-out specific, much needed mobile
solutions to vertical specific enterprises. We believe customers are ready to
accept a scaleable mobile solution that harnesses the power of existing back
office systems for which our potential customers have already spent millions of
dollars.
Business Strategy
Customers seek solutions that can be used with multiple products and
systems to better meet their growing needs. There can be no assurance, however,
that the larger Enterprise Resource Planning (ERP) and Custom Relationship
Management (CRM) companies will allow or support this much needed change.
Proprietary based technologies often try to hide, elude or disassociate
themselves from standardization.
We intend to become one of the first mobility solutions companies with a
software platform that works with multiple products and systems. One example of
this collaborative approach is Siebel's Systems - Universal Application Network
(UAN). Siebel has opened its architecture platform to encourage vertical
integration by other companies. We believe open architecture will provide Siebel
with competitive advantages in the mobile market. We intend to seek a strategic
partnership with Siebel to develop applications within Siebel's Universal
Application Network for devices, such as Java phones, as well as other specialty
devices that will emerge in the marketplace, both on an enterprise and consumer
levels.
Our strategy is based on the following general assumptions about the
mobile industry:
o Other e-business enterprise software vendors will adopt the same
principals Siebel has adopted.
o Wireless networks will advance at the rates projected by industry
analysts.
o Large customers will be inclined to select a platform that works
with multiple products and systems, as research indicates from
Gartner, Aberdeen and ITC.
o We will be able to gain sales by heavily marketing to specific niche
markets, such as Healthcare.
Sales
Our mission is to a significant provider of products and services that
enable mobile workers to enter and access to information when they need it. To
accomplish this mission, we intend to listen to prospects, customers,
applications software companies, hardware companies, and value added resellers
to identify their key needs, develop products and services to address their
25
needs and then communicate the value proposition our products and services
offer.
We will primarily focus our sales efforts on industries that have a high
number of mobile workers that need to enter and access information to function
effectively. We believe the following industries will benefit most from our
products and services and they can receive a return on investment in a short
amount of time: Pharmaceutical and Healthcare, Transportation and Logistics,
Financial Services, Utility and Energy, Sales Force Automation (SFA) and field
services.
We are transitioning from a pure product sales structure to a sales
structure based on a complete offering of mobile products, solutions and
services. The core components of the structure will include the following:
o Business Development. Our business development organization will
prospect, identify, qualify, and possibly close certain
opportunities.
o Account Managers. Each territory-based account manager will
primarily focus on new customers in the manager's regions.
o Strategic Account Managers. Each strategic account manager will
proactively manage 10-15 specific strategic accounts.
o Channel Managers. Channel managers will be responsible for improving
our channel relationships and driving leads and revenue through our
channel partners.
Intellectual Property
We are preparing two provisional patent applications for submittal,
encompassing the bulk of our core technology processes. These applications have
not yet been filed. We expects to file these applications soon and to file
additional applications as we continue to develop proprietary technologies and
processes behind them. There can be no assurance any patents will be granted as
a result of our applications, or if granted that they will provide us with
significant competitive advantages.
We have not registered any trademarks used with our products nor any of
our copyrights. We rely on our common law rights to our trademarks and on the
laws relating to trade secrets and proprietary know-how for protection of our
copyrights. Our practice is to require each of our key employees, consultants
and advisors to execute a confidentiality agreement. These agreements generally
provide that the individuals must keep confidential and not disclose to other
parties any confidential information developed or learned by the individuals
during the course of their relationship with us except in limited circumstances.
These agreements also generally provide that we own all copyrights and
inventions conceived or developed by the individuals in the course of rendering
services to us.
Research and Development
Over the past two years, we have not spent a significant amount of money
on research and development. Rather, all monies spent have been for minimal
equipment and employing a development team. Most all technological improvements
in our technologies are of customization to the end user. Therefore those costs
are directly billed to the end user and not recognized as research and
development. However, future operations could be affected if we fail to timely
enhance existing products or introduce new products to meet customer demands.
26
Our Employees
We have 27 total employees. Of these, seven are in technology development,
six are mobility strategy consultants, six are in sales and marketing and eight
are management and administrative.
We anticipate that we will need to identify, attract, train and retain
other highly skilled managerial, technical, sales and marketing personnel.
Hiring for such personnel is competitive, and there can be no assurance that we
will be able to retain our key employees or attract, assimilate or retain the
qualified personnel necessary for the development of our business.
We owe our employees approximately $114,000 of accrued salary.
Description of Property
We own no real property. Our corporate headquarters is currently located
at Regency Park, located specifically at 8000 Regency Parkway Suite 430, Cary,
NC 25711. This property is occupied under a five-year lease that commenced on
November 1, 2003. Additionally, we have a fleet of five vehicles that are used
as service vehicles.
Legal Proceedings
We are involved in various legal proceedings and claims incident to the
normal conduct of our business, none of which we believe, individually or in the
aggregate, are likely to have a material adverse effect on our financial
position or results of operations.
On August 27, 2003, Aquent Partners, Inc. filed a complaint against us
seeking damages for payment of $115,412.75 pursuant to a promissory note entered
into by MRT; a judgment was awarded by the courts to Aquent for this complaint
on April 7, 2004. We have not yet satisfied the judgment.
Two former employees have filed complaints against us seeking damages for
services and expenses preformed for one of our subsidiaries. We are vigorously
defending and negotiating this action.
A former board member and current shareholder of the company entered into
a consulting agreement on January 3, 2003 and February 13, 2003 with the company
to provide consulting services under a one (1) year term. As of July 1, 2004,
the company and consultant are in default and are in negotiations to settle the
dispute through the AAA (American Arbitration Association) for $375,000.00.
Additionally, the consultant has certain registration rights that are apart of
this registration statement that are in default based on a registration rights
agreement entered into on May 23, 2003 between company and shareholder.
27
MANAGEMENT
Executive Officers and Directors
The following table sets forth our executive officers and directors, and their
ages and positions, as of August 6, 2004.
- --------------------------------------------------------------------------------
Name Age Position
- ---- --- --------
Michael Le 49 Chairman of the Board of Directors
Alan Christopher Johnson 35 Interim Chief Executive Officer and Director
Mark Lloyd 39 Chief Technical Officer, Vice President of
Business Development, Secretary and Director
Brian R. Balbirnie 32 Chief Operating Officer
Michael Le is a Director and our Chairman of the Board and has held these
positions since our inception. Michael has more than 30 years of IT experience
and has successfully started, grown and exited from technology companies.
Michael worked with IBM for over 10 years as a senior consultant leading a
variety of projects from Artificial Intelligence utilizing Object Oriented
technology to sales force automation utilizing SAP. Mr. Le was a founder and CEO
of LKSP Technologies, Inc. a ERP consulting firm which had partnerships with
Fortune 500 companies such as IBM, SAP, Goodyear, Panasonic, Tenneco, PWC,
Phillip Morris. In July 2000, he co-founded our subsidiary, Mobile Reach
Technologies, Inc. and served as Chief Executive Officer during its first 6
months of existence. During this time, Michael put together the management team
and set up an office in Germany. Michael continues to serve as Chairman of the
Board of MRI but is no longer active in the day-to-day operations.
Alan Christopher Johnson has been a member of our board of directors since
inception, and became our interim Chief Executive Officer in August 2004. Mr.
Johnson is currently Head Trader for Index Trading for CMT London, a firm he
joined in March 1999 to set up trading operations on the LIFFE. Mr. Johnson has
an extensive financial banking career that involves several international
derivative trading firms. Prior to joining CMT, in 1996 he co-founded S & J
Derivatives Trading GmbH, a market making firm in Germany that traded on the
Deutshe Terminborse. Mr. Johnson established trading operations for major
international banks in Japan and Germany. He has extensive risk management and
trading skills in equity options, future options, fixed income options, market
making, structuring derivative products and volatility trading. Previously, Mr.
Johnson worked for BNP Securities in Tokyo Japan and was in charge of
re-structuring the Nikkei Index trading operation.
Mark Lloyd is a Director and our Vice President, Secretary, Chief
Technical Officer and Vice President of Business Development since our
inception. Mr. Lloyd founded Mobile Reach Technologies in 2000 as a mobile
middleware company. He is responsible for understanding key mobility technology
trends across mobile devices and wireless networks, and how these technologies
can be effectively applied to deliver high-value solutions for Mobile Reach's
clients. Mark works both internally with staff members to set technical
direction, as well as directly with clients to identify areas where mobile and
wireless technologies can provide true business benefit to them. Mr. Lloyd has
several years of mobility experience including wireless device and network
experience with Ericsson, Nortel & AT&T Bell Laboratories in a wide array of
technologies including PDAs, SmartPhone, WAP Browsers, GSM digital cellular
phones, dual-mode cellular phones and SS7 switching systems. In addition, Mr.
Lloyd has a deep background in Software Processes and Object-Oriented
development. In 1992, he founded a company which developed and commercialized a
specialized CASE tool that enabled true Software Engineering via automated
support of domain separation, graphical modeling & source code generation.
28
Brian R. Balbirnie has been our Chief Operating Officer since December
2003 and is responsible for our day to day operations. His duties include
directing corporate compliance, investor relations as well as overseeing
different business units of ours. Prior to Chief Operating Officer, Mr.
Balbirnie was the Vice President of Operations for Mobile Reach. Before joining
us, Mr. Balbirnie was a vice president and managing director with Ivue
Corporation and during his tenure, Mr. Balbirnie was involved in the design and
beta of one of the industries first Internet Broadcast player-less technologies.
Preceding Ivue, Mr. Balbirnie spent two years consulting with several
telecommunications companies in the Tampa Bay area, including GCS Telecom and
Target Television, assisting in operations and M&A to build strong stockholder
values and exit strategies. Mr. Balbirnie attended St. Petersburg College
majoring in Business Administration and Marketing.
Board of Directors; Election of Officers
All of our directors hold office until the next annual meeting of the
security holders or until their successors have been elected and qualified. Our
officers are appointed by our board of directors and hold office until their
death, resignation or removal from office.
Board Compensation and Committees
Currently we do not have a policy in place to compensate our directors for
board related activities until our financial condition improves. We do not have
any Audit Committee. No member of our board of directors has the level of
experience required to be considered a financial expert for the purpose of
Securities and Exchange Commission rules related to Audit Committees. Currently,
Over-the-Counter Bulletin Board companies, such as ours, are not required to
have an Audit Committee or an "financial expert." Nevertheless, we are in the
process of identifying people to add to our board of directors and will be
seeking candidates for an Audit Committee.
We do not currently have a nominating committee. Nominations for election
to the board of directors may be made by the board of directors, or by any
stockholder entitled to vote for the election of directors. Special meetings may
be held from time to time to consider matters for which approval of the board of
directors is desirable or is required by law.
Code of Ethics
We do not currently have a Code of Ethics, but intend to evaluate provisions for
a code of ethics in the future.
29
EXECUTIVE COMPENSATION
The following table sets forth summary information relating to
compensation paid for services rendered for our fiscal year ended July 31, 2003,
with respect to the compensation paid and bonuses granted to our Chief Executive
Officer as well as each of our other three most highly compensated executive
officers whose aggregate compensation during the last fiscal year was greater
than $100,000. For purposes of this prospectus, we will refer to the executive
officers named in the table below as the named executive officers.
Summary Compensation Table
Annual Compensation (1) Long-Term Compensation
----------------------- ----------------------
Restricted Securities
Fiscal Salary ($) Stock Underlying Other
Name and Principal Position Year (2) (3) Bonus Awards(1) Options Compensation
- --------------------------- -------- ---------- ----- --------- ------- ------------
Michael J. Hewitt 2003 $200,000 -- $1,886,277 -- --
President & Chief Executive Officer 2002 -- -- -- -- --
2001 -- -- -- -- --
Mark J. Lloyd 2003 $120,000 -- -- 1,088,792 --
Chief Technical Officer 2002 120,000 -- -- -- --
2001 118,850 -- -- -- --
Major Lackey 2003 $160,000 -- -- -- --
Vice President of Sales 2002 -- -- -- -- --
2001 -- -- -- -- --
Brian Balbirnie 2003 $120,000 -- -- -- --
Chief Operating Officer 2002 -- -- -- -- --
2001 -- -- -- -- --
(1) Excludes perquisites and other personal benefits, the aggregate annual
amount of which for each officer was less than the lesser of $50,000 or 10% of
the total salary and bonus reported.
(2) The fiscal years for 2001 and 2002 were twelve-month periods ended December
31. Fiscal year 2003 was a seven-month period ended July 31, 2003.
(3) The salary for the seven-month fiscal year 2003, represents the annualized
salary that would have been paid during a 12-month year.
Employment and Severance Agreements
Michael J. Hewitt was our Chief Executive Officer, President and Treasurer
until August 2004. On August 2, 2004 the Board of Directors along with Mr.
Hewitt reaches a mutual agreed upon resignation and separation of Mr. Hewitt
employment with Mobile Reach. We are still finalizing the conditions for the
resignation and separation with Mr. Hewitt. Mr. Hewitt will remain in a
consulting role with the company going forward for an undefined period of time.
Mark J. Lloyd, our Vice President and Secretary, receives a base salary of
$120,000 per year. Upon our raising over $2 million in financing, Mr. Lloyd will
receive a cash bonus equal to $93,600 and his base salary will increase to
$175,000 per year. Mr. Lloyd will also receive a bonus equal to twelve and
one-half percent (12.5%) of the net sales we receive on certain of our
contracts. In the event of termination of Mr. Lloyd's employment for any reason,
30
Mr. Lloyd is eligible for a severance payment of $93,600 in lieu of the cash
bonus referenced above, plus three months of his then-current salary. Mr. Lloyd
is eligible for options under our Equity Compensation Plan at the discretion of
the board of directors.
Major Lackey was our Vice President of Sales until April 2004. Mr. Lackey
was eligible for options under our Equity Compensation Plan at the discretion of
the board of directors.
Brian Balbirnie, our Vice President of Operations, receives a base salary
of $120,000 per year. On December 23, 2003, Mr. Balbirnie was promoted to Chief
Operating Officer and received an increase in annual compensation to $160,000.
Mr. Balbirnie is eligible for options under our Equity Compensation Plan at the
discretion of the board of directors. As part of management's aggressive cost
cutting measures, Mr. Balbirnie voluntarily agreed in March 2004 to decrease in
his annual salary from $160,000 to $120,000, a 25% decrease on a non-accrual
basis.
Option Grants in Last Fiscal Year
The following table summarizes all option grants during the fiscal year
ended July 31, 2003 to the Named Executive Officers:
Potential Realizable
% of Total Value at Assumed
Number of Options Annual Rates of Stock
Shares Granted to Exercise Price Appreciation for
Underlying Employees in Or Base Option Term (2)
Options Fiscal Year Price Per Expiration ---------------
Name Granted 2003 (1) Share Date 5% 10%
- ---- ------- -------- ----- ---- -- ---
Michael J. Hewitt -- -- -- -- --
Mark J. Lloyd 1,088,792 44% $.018 03/15/2013 $123,251 $312,374
Major Lackey -- -- -- -- --
Brian Balbirnie -- -- -- -- --
- ----------
(1) Stock options were originally granted by our subsidiary, MRT, as
nonqualified options or under MRT's 2000 Stock Award Plan as incentive stock
options at an exercise price equal to the fair market value of MRT's common
stock on the date of grant. We assumed the options under our 2003 Equity
Compensation Plan pursuant to the share exchange transaction with MRT during
which MRT became our wholly owned subsidiary. Option shares and exercise prices
have been adjusted using the exchange ratio in the share exchange transaction
and to account for a subsequent stock dividend we declared.
(2) Amounts reported in these columns represent amounts that may be realized
upon exercise of the options immediately prior to the expiration of their term
assuming the specified compounded rates of appreciation (5% and 10%) on the
market value of our common stock on the date of option grant over the term of
the options. These numbers are calculated based on rules promulgated by the SEC
and do not reflect our estimate of future stock price growth. Actual gains, if
any, on stock option exercises and common stock holdings are dependent on the
timing of such exercise and the future performance of our common stock. There
can be no assurance that the rates of appreciation assumed in this table can be
achieved or that the amounts reflected will be received by the individuals.
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option
Values
The following table sets forth information with respect to options to
purchase our common stock granted to the Named Officers, including (i) the
number of shares of common stock purchased upon exercise of options in the
fiscal year ended July 31, 2003; (ii) the net value realized upon such exercise;
31
(iii) the number of unexercised options outstanding at July 31, 2003; and (iv)
the value of such unexercised options at July 31, 2003.
Value of
Number of Unexercised Unexercised
Options In-the-Money
Shares As of Options
Acquired on Value July 31, 2003 At July 31, 2003 (1)(2)
Name Exercise (#) Realized ($) Exercisable Unexercisable Exercisable Unexercisable
---- ------------ ------------ ----------- ------------- ----------- -------------
Michael J. Hewitt -- -- -- -- -- --
Mark J. Lloyd -- -- 257,076 831,716 $77,123 $249,515
Major Lackey -- -- -- -- -- --
Brian Balbirnie -- -- -- -- -- --
- ----------
(1) Amounts disclosed in this column do not reflect amounts actually received by
the Named Officers but are calculated based on the difference between the fair
market value of our common stock on the date of exercise and the exercise price
of the options. The Named Officers will receive cash only if and when they sell
the common stock issued upon exercise of the options, and the amount of cash
received by such individuals is dependent on the price of our common stock at
the time of such sale.
(2) Value is based on the difference between the option exercise price and the
fair market value at July 31, 2003, the fiscal year-end ($0.48 per share as
quoted on the Over-the-Counter Bulletin Board), multiplied by the number of
shares underlying the option.
Employee Benefit and Stock Plans
The following table sets forth, as of July 31, 2003, the number of shares
of common stock authorized to be issued, the weighted average exercise price of
such shares and the number of shares remaining available for future issuance,
aggregated as follows: (i) All compensation plans previously approved by our
stockholders and (ii) all compensation plans not previously approved by our
stockholders and (iii) total of (i) and (ii).
Equity Compensation Plan Information
(a) (b) (c)
---------------------- ---------------- --------------------
Number of securities
remaining available
Number of securities Weighted- for issuance under
to be issued upon average price of equity compensation
exercise of outstanding plans (excluding
outstanding options, options, warrant securities reflected
Plan Category warrant and rights and rights in column (a))
---------------------- ---------------- --------------------
Equity compensation plans approved by security holders 3,912,030 $0.18 8,869,119
Equity compensation plans not approved by security holders 854,442 $0.06 0
Total 4,766,472 $0.16 8,869,119
32
2003 Equity Compensation Plan
We adopted our 2003 Equity Compensation Plan on July 29, 2003. The plan
provides for the grant of options intended to qualify as "incentive stock
options", options that are not intended to so qualify or "non-statutory stock
options", and restricted stock. The total number of shares of common stock
reserved for issuance under the plan is 11,662,540, subject to adjustment in the
event of a stock split, stock dividend, recapitalization or similar capital
change. As of April 30, 2004, 5,602,500 shares have been issued under the plan,
and options to purchase 6,060,040 shares of common stock are outstanding under
the plan.
The plan is administered by our board of directors, which selects the
eligible persons to whom options shall be granted, determines the number of
common shares subject to each option, the exercise price therefore and the
periods during which options are exercisable, interprets the provisions of the
plan and, subject to certain limitations, may amend the plan. Each option
granted under the plan shall be evidenced by a written agreement between us and
the optionee. Grants may be made to employees (including officers), directors,
and certain of our consultants and advisors.
The exercise price for incentive stock options granted under the plan may
not be less than the fair market value of the common stock on the date the
option is granted, except for options granted to 10% stockholders which must
have an exercise price of not less than 110% of the fair market value of the
common stock on the date the option is granted. The exercise price for
non-statutory stock options is determined by the board of directors. Incentive
stock options granted under the plan have a maximum term of ten years, except
for 10% stockholders who are subject to a maximum term of five years. The term
of non-statutory stock options is determined by the board of directors. Options
granted under the plan are not transferable, except by will and the laws of
descent and distribution.
33
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the
beneficial ownership of our common stock as of April 30, 2004 for the following:
o each person or entity known to own beneficially more than 5% of the
outstanding common stock;
o each director;
o each of the executive officers named in the Summary Compensation
table; and
o all directors and executive officers as a group.
Applicable percentage ownership is based on 35,133,501 shares of common stock
outstanding as of April 30, 2004, together with applicable options for each
stockholder. Beneficial ownership is determined in accordance with the rules of
the SEC, based on factors including voting and investment power with respect to
shares. Common stock subject to options currently exercisable, or exercisable
within 60 days after April 30, 2004, are deemed outstanding for the purpose of
computing the percentage ownership of the person holding those options, but are
not deemed outstanding for computing the percentage ownership of any other
person.
Shares Percentage
Beneficially Beneficially
Five Percent Stockholders, Directors and Executive Officers Owned Owned
- ----------------------------------------------------------- ----- -----
Mark J. Lloyd (1) 2,474,825 6.95%
Michael J. Hewitt (1) 2,474,298 6.94%
Michael Le 2,209,636 6.29%
Dave Revord (2) 1,914,026 5.45%
Paige E. Bendixsen (3) 1,700,000 4.78%
Alan Christopher Johnson 1,319,410 3.76%
Brian R. Balbirnie (3) 400,000 1.13%
- ----------
(1) For each reporting person, includes 500,000 shares of common stock
obtainable upon the exercise of stock options.
(2) Consists entirely of shares of common stock obtainable upon the exercise
of stock options.
(3) Includes 400,000 shares of common stock obtainable upon the exercise of
stock options.
Certain Relationships and Related Transactions
One of our directors, Alan Christopher Johnson, entered into a Secured Bridge
Note dated May 31, 2004 for $100,000. As of the date of this filing, the Bridge
Note has reached maturity and remains outstanding. The Bridge Note was secured,
pledged, and guaranteed, from our then current accounts receivable along with
personal guarantees from certain of our officers, which can be further
guaranteed under the Uniform Commercial Code or comparable law of any
jurisdiction, with the prior written consent of both Company and certain of the
Company's investors if default should occur.
In a prior related transaction, David C. Prange and Jeffrey C. Beehler,
associates to Mr. Johnson, entered into the same Secured Bridge Note on May 21,
2004 for $100,000, due July 21, 2004. As of the date of this filing, the Bridge
Note has reached maturity and remains outstanding. The Bridge Note was secured,
pledged, and guaranteed, from our then current accounts receivable along with
personal guarantees from certain of our officers, which can be further
guaranteed under the Uniform Commercial Code or comparable law of any
jurisdiction, with the prior written consent of both Company and certain of the
Company's investors if default should occur.
34
SELLING STOCKHOLDERS
The following table sets forth the shares beneficially owned, as of April
30, 2004, by the selling stockholders prior to the offering contemplated by this
prospectus, the number of shares each selling stockholder is offering by this
prospectus and the number of shares which each would own beneficially if all
such offered shares are sold. The selling stockholders acquired their beneficial
interests in the shares being offered hereby in private placements in which each
such selling stockholder advised us that it purchased the relevant securities
solely for investment and not with a view to or for resale or distribution of
such securities.
Beneficial ownership is determined in accordance with SEC rules and
includes voting or investment power with respect to the securities. This
includes shares which a person or entity has the right to acquire in the next 60
days. However, certain of the selling stockholders are subject to certain
limitations on the conversion of their convertible debentures, if any, or the
exercise of their warrants, if any. The most significant of these limitations is
that such selling security holder may not convert its debenture or exercise its
warrants, if such conversion or exercise would cause such holder's beneficial
ownership of our common stock (excluding shares underlying any of their
unexercised debentures or warrants) to exceed 4.99% of the outstanding shares of
common stock. Also, the table below also includes the number of shares which
might be issuable on the occurrence of certain events which have not yet
occurred and may not occur. Therefore, although they are included in the table
below, the number of shares of common stock for some listed selling stockholders
may include shares that are not subject to purchase during the 60-day period.
- --------------------------------------------------------------------------------------------------------------------
Number of Shares Beneficially
Owned and Percent of Total Issued
Number of Number of and Outstanding if All Shares
Shares Shares Registered are Sold
Beneficially to be Registered -----------------------------------
Owned Prior to Pursuant to this # of % of
Selling Stockholder Offering Prospectus Shares Class
- --------------------------------------------------------------------------------------------------------------------
Bara Limited (1) 1,357,031 1,357,031 -- --
- --------------------------------------------------------------------------------------------------------------------
Zenny Trading Limited (2) 1,130,860 1,130,860 -- --
- --------------------------------------------------------------------------------------------------------------------
Redwood Capital Partners, Inc. (3) 904,688 904,688 -- --
- --------------------------------------------------------------------------------------------------------------------
Yokim Asset Management (3) 904,688 904,688 -- --
- --------------------------------------------------------------------------------------------------------------------
Mayer & Associates, LLC (4) 502,344 452,344 50,000 *
- --------------------------------------------------------------------------------------------------------------------
vFinance Invesments, Inc. (5) 466,053 466,053 -- --
- --------------------------------------------------------------------------------------------------------------------
David Stefansky (6) 267,047 157,047 110,000 *
- --------------------------------------------------------------------------------------------------------------------
Richard Rosenblum (7) 157,047 157,047 -- --
- --------------------------------------------------------------------------------------------------------------------
Samuel Krieger (8) 91,094 91,094 -- --
- --------------------------------------------------------------------------------------------------------------------
Ronald Nussbaum (8) 91,094 91,094 -- --
- --------------------------------------------------------------------------------------------------------------------
Daniel M. Bacardi (9) 79,686 79,686 -- --
- --------------------------------------------------------------------------------------------------------------------
Jonathan C. Rich (10) 33,994 33,994 -- --
- --------------------------------------------------------------------------------------------------------------------
Dave Revord 3,789,746 1,875,720 1,914,026 5.4%
- --------------------------------------------------------------------------------------------------------------------
Brad Drewyor 795,130 245,196 549,934 1.6%
- --------------------------------------------------------------------------------------------------------------------
Reed Clevenger 234,636 63,210 171,426 *
- --------------------------------------------------------------------------------------------------------------------
Phil Westreich 242,218 107,506 134,712 *
- --------------------------------------------------------------------------------------------------------------------
Reno Vitale 169134 103,306 65,828 *
- --------------------------------------------------------------------------------------------------------------------
Michael Shumaker 205,630 148,031 57,599 *
- --------------------------------------------------------------------------------------------------------------------
Jeanne Leidner 148,031 90,432 57,599 *
- --------------------------------------------------------------------------------------------------------------------
Edward Sobota 148,031 90,432 57,599 *
- --------------------------------------------------------------------------------------------------------------------
John Fiorina 148,031 90,432 57,599 *
- --------------------------------------------------------------------------------------------------------------------
TOTAL 11,866,173 8,639,851 3,226,322 9.2%
- --------------------------------------------------------------------------------------------------------------------
- ----------
* Less than 1%
35
(1) Represents the shares of our common stock that are issuable to the selling
stockholder upon conversion of the $150,000 convertible debenture plus accrued
interest through the maturity date of that debenture and upon exercise of the
warrant to purchase 278,906 shares of common stock issued to the selling
stockholder on March 15, 2004 in connection with the Securities Purchase
Agreement dated February 27, 2004. We are registering 150% of these shares to
include our good faith estimate of the number of that we might be required to
issue to the selling stockholder either (i) in the event that, on or prior to
the ninetieth day after the effective date of this registration, we subsequently
offer or issue securities at a price lower than $0.15 per share or warrants
having an exercise price below the exercise price of the warrants held by the
selling stockholder or (ii) in the event that the filing of this registration
statement or the effective date of this registration is later than certain dates
specified in our agreement the selling shareholder or if the effectiveness of
this registration statement is suspended after effectiveness for periods in
excess of those specified in that agreement, as contemplated by the Securities
Purchase Agreement and the related Registration Rights Agreement - see
"DESCRIPTION OF THE AGREEMENTS WITH THE CONVERTIBLE DEBENTURE HOLDERS."
(2) Represents the shares of our common stock that are issuable to the selling
stockholder upon conversion of the $125,000 convertible debenture plus accrued
interest through the maturity date of that debenture and upon exercise of the
warrant to purchase 232,422 shares of common stock issued to the selling
stockholder on March 15, 2004 in connection with the Securities Purchase
Agreement dated February 27, 2004. We are registering 150% of these shares to
include our good faith estimate of the number of that we might be required to
issue to the selling stockholder either (i) in the event that, on or prior to
the ninetieth day after the effective date of this registration, we subsequently
offer or issue securities at a price lower than $0.15 per share or warrants
having an exercise price below the exercise price of the warrants held by the
selling stockholder or (ii) in the event that the filing of this registration
statement or the effective date of this registration is later than certain dates
specified in our agreement the selling shareholder or if the effectiveness of
this registration statement is suspended after effectiveness for periods in
excess of those specified in that agreement, as contemplated by the Securities
Purchase Agreement and the related Registration Rights Agreement - see
"DESCRIPTION OF THE AGREEMENTS WITH THE CONVERTIBLE DEBENTURE HOLDERS."
(3) For each selling stockholder, represents the shares of our common stock that
are issuable to the selling stockholder upon conversion of the $100,000
convertible debenture plus accrued interest through the maturity date of that
debenture and upon exercise of the warrant to purchase 185,938 shares of common
stock issued to the selling stockholder on March 15, 2004 in connection with the
Securities Purchase Agreement dated February 27, 2004. We are registering 150%
of these shares to include our good faith estimate of the number of that we
might be required to issue to the selling stockholder either (i) in the event
that, on or prior to the ninetieth day after the effective date of this
registration, we subsequently offer or issue securities at a price lower than
$0.15 per share or warrants having an exercise price below the exercise price of
the warrants held by the selling stockholder or (ii) in the event that the
filing of this registration statement or the effective date of this registration
36
is later than certain dates specified in our agreement the selling shareholder
or if the effectiveness of this registration statement is suspended after
effectiveness for periods in excess of those specified in that agreement, as
contemplated by the Securities Purchase Agreement and the related Registration
Rights Agreement - see "DESCRIPTION OF THE AGREEMENTS WITH THE CONVERTIBLE
DEBENTURE HOLDERS."
(4) Represents the shares of our common stock that are issuable to the selling
stockholder upon conversion of the $50,000 convertible debenture plus accrued
interest through the maturity date of that debenture and upon exercise of the
warrant to purchase 92,969 shares of common stock issued to the selling
stockholder on March 15, 2004 in connection with the Securities Purchase
Agreement dated February 27, 2004. We are registering 150% of these shares to
include our good faith estimate of the number of that we might be required to
issue to the selling stockholder either (i) in the event that, on or prior to
the ninetieth day after the effective date of this registration, we subsequently
offer or issue securities at a price lower than $0.15 per share or warrants
having an exercise price below the exercise price of the warrants held by the
selling stockholder or (ii) in the event that the filing of this registration
statement or the effective date of this registration is later than certain dates
specified in our agreement the selling shareholder or if the effectiveness of
this registration statement is suspended after effectiveness for periods in
excess of those specified in that agreement, as contemplated by the Securities
Purchase Agreement and the related Registration Rights Agreement - see
"DESCRIPTION OF THE AGREEMENTS WITH THE CONVERTIBLE DEBENTURE HOLDERS."
(5) Includes 298,709 shares of our common stock that are issuable to the selling
stockholder upon exercise of warrants. We are registering 150% of those shares
to include our good faith estimate of the number of shares of our common stock
that we might be required to issue to the selling stockholder in the event that,
on or prior to the ninetieth day after the effective date of this registration,
we subsequently offer or issue securities at a price lower than $0.15 per share
or warrants having an exercise price below the exercise price of the warrants
held by the selling stockholder, as contemplated by warrant issued to the
selling stockholder - see "DESCRIPTION OF THE AGREEMENTS WITH THE CONVERTIBLE
DEBENTURE HOLDERS." Also includes 328,125 shares of common stock owned directly
by the selling stockholder.
(6) Includes 97,066 shares of our common stock that are issuable to the selling
stockholder upon exercise of warrants. We are registering 150% of those shares
to include our good faith estimate of the number of shares of our common stock
that we might be required to issue to the selling stockholder in the event that,
on or prior to the ninetieth day after the effective date of this registration,
we subsequently offer or issue securities at a price lower than $0.15 per share
or warrants having an exercise price below the exercise price of the warrants
held by the selling stockholder, as contemplated by warrant issued to the
selling stockholder - see "DESCRIPTION OF THE AGREEMENTS WITH THE CONVERTIBLE
DEBENTURE HOLDERS." Also includes 89,981 shares of common stock owned directly
by the selling stockholder and 80,000 shares held by the selling stockholder's
spouse of which he disclaims beneficial ownership except to the extent of his
pecuniary interest therein.
(7) Includes 97,066 shares of our common stock that are issuable to the selling
stockholder upon exercise of warrants. We are registering 150% of those shares
to include our good faith estimate of the number of shares of our common stock
that we might be required to issue to the selling stockholder in the event that,
on or prior to the ninetieth day after the effective date of this registration,
we subsequently offer or issue securities at a price lower than $0.15 per share
or warrants having an exercise price below the exercise price of the warrants
held by the selling stockholder, as contemplated by warrant issued to the
selling stockholder - see "DESCRIPTION OF THE AGREEMENTS WITH THE CONVERTIBLE
DEBENTURE HOLDERS." Also includes 59,981 shares of common stock owned directly
by the selling stockholder.
37
(8) For each selling stockholder, includes 28,594 shares of our common stock
that are issuable to the selling stockholder upon exercise of warrants. We are
registering 150% of those shares to include our good faith estimate of the
number of shares of our common stock that we might be required to issue to the
selling stockholder in the event that, on or prior to the ninetieth day after
the effective date of this registration, we subsequently offer or issue
securities at a price lower than $0.15 per share or warrants having an exercise
price below the exercise price of the warrants held by the selling stockholder,
as contemplated by warrant issued to the selling stockholder - see "DESCRIPTION
OF THE AGREEMENTS WITH THE CONVERTIBLE DEBENTURE HOLDERS." Also includes 62,500
shares of common stock owned directly by each selling stockholder.
(9) Includes 51,073 shares of our common stock that are issuable to the selling
stockholder upon exercise of warrants. We are registering 150% of those shares
to include our good faith estimate of the number of shares of our common stock
that we might be required to issue to the selling stockholder in the event that,
on or prior to the ninetieth day after the effective date of this registration,
we subsequently offer or issue securities at a price lower than $0.15 per share
or warrants having an exercise price below the exercise price of the warrants
held by the selling stockholder, as contemplated by warrant issued to the
selling stockholder - see "DESCRIPTION OF THE AGREEMENTS WITH THE CONVERTIBLE
DEBENTURE HOLDERS." Also includes 28,613 shares of common stock owned directly
by the selling stockholder.
(10) Includes 21,788 shares of our common stock that are issuable to the selling
stockholder upon exercise of warrants. We are registering 150% of those shares
to include our good faith estimate of the number of shares of our common stock
that we might be required to issue to the selling stockholder in the event that,
on or prior to the ninetieth day after the effective date of this registration,
we subsequently offer or issue securities at a price lower than $0.15 per share
or warrants having an exercise price below the exercise price of the warrants
held by the selling stockholder, as contemplated by warrant issued to the
selling stockholder - see "DESCRIPTION OF THE AGREEMENTS WITH THE CONVERTIBLE
DEBENTURE HOLDERS." Also includes 12,206 shares of common stock owned directly
by the selling stockholder.
38
DESCRIPTION OF SECURITIES
Our authorized capital stock currently consists of 50,000,000 shares of
common stock, par value $0.0001 per share, and 10,000,000 shares of preferred
stock, par value $0.0001 per share, the rights and preferences of which may be
established from time to time by our board of directors. As of April 30, 2004,
there were 35,133,501 shares of our common stock and no shares of our preferred
stock issued and outstanding. In addition, we have granted options and warrants
to purchase 8,883,750 shares of common stock and have issued debentures
convertible into 3,281,250 shares of common stock as of April 30, 2004.
The description of our securities contained herein is a summary only and
may be exclusive of certain information that may be important to you. For more
complete information, you should read our Certificate of Incorporation, together
with our corporate bylaws.
Common Stock
Holders of our common stock are entitled to one vote for each share held
on all matters submitted to a vote of stockholders and do not have cumulative
voting rights. Accordingly, holders of a majority of the shares of our common
stock entitled to vote in any election of directors may elect all of the
directors standing for election. Subject to preferences that may be applicable
to any shares of preferred stock outstanding at the time, holders of our common
stock are entitled to receive dividends ratably, if any, as may be declared from
time to time by our board of directors out of funds legally available therefore.
Upon our liquidation, dissolution or winding up, the holders of our common stock
are entitled to receive ratably, our net assets available after the payment of:
o all secured liabilities, including any then outstanding secured debt
securities which
o we may have issued through such time;
o all unsecured liabilities, including any then unsecured outstanding
secured debt
o securities which we may have issued through such time; and
o all liquidation preferences on any then outstanding preferred stock.
Holders of our common stock have no preemptive, subscription, redemption
or conversion rights. There are no redemption or sinking fund provisions
applicable to the common stock. The outstanding shares of our common stock are,
and the shares offered by us in this offering will be, when issued and paid for,
duly authorized, validly issued, fully paid and nonassessable. The rights,
preferences and privileges of holders of common stock are subject to, and may be
adversely affected by, the rights of the holders of shares of any series of
preferred stock, which we may designate, and issue in the future.
Preferred Stock
Our board of directors is authorized, without further stockholder
approval, to issue up to 10,000,000 shares of preferred stock in one or more
series and to fix the rights, preferences, privileges and restrictions of these
shares, including dividend rights, conversion rights, voting rights, terms of
redemption and liquidation preferences, and to fix the number of shares
constituting any series and the designations of these series. These shares may
have rights senior to our common stock. The issuance of preferred stock may have
the effect of delaying or preventing a change in control of us. The issuance of
preferred stock could decrease the amount of earnings and assets available for
distribution to the holders of common stock or could adversely affect the rights
and powers, including voting rights, of the holders of our common stock. At
present, we have no plans to issue any shares of our preferred stock.
39
PLAN OF DISTRIBUTION
The shares covered by this prospectus may be offered and sold from time to
time by the selling stockholders. The term "selling stockholders" includes
donees, pledges, transferees, or other successors-in-interest selling shares
received after the date of this prospectus from a selling stockholder as a gift,
pledge, partnership distribution, or other non-sale related transfer. The
selling stockholders will act independently of us in making decisions with
respect to the timing, manner, and size of each resale. Such resales may be made
on one or more exchanges or in the over-the-counter market or otherwise, at
prices and under terms then prevailing or at prices related to the then current
market price or in negotiated transactions. The selling stockholders may resell
their shares by one or more of, or a combination of, the following methods:
o purchase by a broker-dealer as principal and resale by such
broker-dealer for its own account pursuant to this prospectus:
o ordinary brokerage transactions and transactions in which the broker
solicits purchases;
o in privately negotiated transactions;
o in options transactions; and
o any other method permitted pursuant to applicable law.
In addition, any shares that qualify for sale pursuant to Rule 144 may be
sold under Rule 144 rather than pursuant to this prospectus.
To the extent required, this prospectus may be amended or supplemented
from time to time to describe a specific plan of distribution. In connection
with distribution of the shares or otherwise, the selling stockholders may enter
into hedging transactions with broker-dealers or other financial institutions
pursuant to the provisions of the Securities Act of 1933. In connection with
such transactions, broker-dealers or other financial institutions may engage in
short sales of our common stock in the course of hedging the positions they
assume with the selling stockholders. The selling stockholders may also sell our
common stock short and redeliver the shares to close out such short positions.
The selling stockholders may also enter into option or other transactions with
broker-dealers or other financial institutions which require the delivery to
such broker-dealer or other financial institution of shares offered by this
prospectus, which shares such broker-dealer or other financial institution may
resell pursuant to this prospectus (as supplemented or amended to reflect such
transaction). The selling stockholders may also pledge shares to a broker-dealer
or other financial institution, and, upon a default, such broker-dealer or other
financial institution, may effect sales of the pledged shares pursuant to this
prospectus (as supplemented or amended to reflect such transaction).
In effecting sales, broker-dealers or agents engaged by the selling
stockholders may arrange for other broker-dealers to participate. Broker-dealers
or agents may receive commissions, discounts, or concessions from the selling
stockholders in amounts to be negotiated immediately prior to the sale.
In offering the shares covered by this prospectus, the selling stockholders and
any broker-dealers who execute sales for the selling stockholders may be deemed
to be "underwriters" within the meaning of the Securities Act of 1933 in
connection with such sales. Any profits realized by the selling stockholders and
the compensation of any broker-dealer may be deemed to be underwriting discounts
and commissions. One of the selling stockholders, vFinance, is a broker-dealer,
and other of the selling stockholders, Messrs. Stefansky, Rosenblum, Bacardi and
Rich, are officers of employees of vFinance. These selling stockholders acquired
the securities included in this registration statement for investment purposes,
and not for the purpose of causing or facilitating a distribution. However, in
the view of the staff of the SEC, a
40
broker-dealer offering securities acquired from an issuer should be considered
to be an underwriter, and while the SEC staff's view is not dispositive,
vFinance and their officers and employees that are selling stockholders may be
liable as an underwriter for securities sold by it or them pursuant to this
registration statement.
In order to comply with the securities laws of certain states, if
applicable, the shares must be sold in such jurisdictions only through
registered or licensed brokers or dealers. In addition, in certain states the
shares may not be sold unless they have been registered or qualified for sale in
the applicable state or an exemption form the registration or qualification
requirement is available and is complied with.
We have advised the selling stockholders that the anti-manipulation rules
of Regulation M under the Exchange Act may apply to sales of shares in the
market and to the activities of the selling stockholders for the purpose of
satisfying the prospectus delivery requirements of the Securities Act of 1933.
The selling stockholders may indemnify any broker-dealer that participates in
transactions involving the sale of the shares against certain liabilities,
including liabilities arising under the Securities Act of 1933.
At the time a particular offer of shares is made, if required, a
prospectus supplement will be distributed that will set forth the number of
shares being offered and the terms of the offering, including the name of any
underwriter, dealer, or agent, the purchase price paid by any underwriter, any
discount, commission, and other item constituting compensation, any discount,
commission, or concession allowed or re-allowed or paid to any dealer, and the
proposed selling price to the public.
We have agreed to indemnify the selling stockholders against certain
liabilities, including certain liabilities which might accrue under the
Securities Act of 1933.
EXPERTS
Scharf Pera & Co., PLLC, independent certified public accountants, audited
our financial statements as of July 31, 2004. In including those financial
statements in this prospectus, we have relied on the authority of Scharf Pera &
Co., PLLC, as an expert in accounting and auditing.
LEGAL MATTERS
The validity of the issuance of our shares of common stock offered by this
prospectus will be passed upon for us by Wyrick Robbins Yates & Ponton LLP.
Krieger & Prager LLP has acted as counsel for certain of the selling
stockholders.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We have filed this registration statement on Form SB-2 with the Securities
and Exchange Commission covering the sale of the shares we and the selling
stockholders are offering. The registration statement and the exhibits and
schedules to the registration statement include additional information not
contained in this prospectus. Statements in this prospectus about the contents
of any contract or other document referred to are not necessarily complete and
in each instance the appropriate exhibit containing the contract or document
should be consulted for complete information. The registration statement,
exhibits, and schedules also contain further information about us and the shares
we are offering. Anyone may inspect a copy of the registration statement without
charge at the Commission's principal office located at 450 Fifth Street, N.W.,
Washington, D.C. 20549. Copies of all or any part of the registration statement
may be obtained from the Public Reference Branch of the Commission by paying the
fees prescribed by the Commission. The Commission also maintains a site on the
World Wide Web at http://www.sec.gov that contains information about companies
that file electronically with the Commission.
41
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Report of independent auditors' F-2
Consolidated balance sheets as of December 31, 2003 and 2002 F-3
Consolidated statements of income for the years ended December 31,
2003, 2002 and 2001 F-4
Consolidated statements of stockholders' equity for the years ended
December 31, 2003, 2002 and 2001 F-5
Consolidated statements of cash flows for the years ended December
31, 2003, 2002 and 2001 F-6
Notes to consolidated financial statements F-8
Consolidated Balance Sheet as of April 30, 2004 (unaudited) F-16
Consolidated Statement of Operations for the three and six months
Ended April 30, 2004 and January 31, 2003 (unaudited) F-17
Consolidated Statement of Cash Flows for the Period Ended April 30,
2004 and 2003 (unaudited) F-19
Notes to Financial Statements F-20
F-1
INDEPENDENT AUDITORS' REPORT
We have audited the accompanying balance sheets of Mobile Reach
International, Inc. and Subsidiaries as of July 31, 2003, and the related
statements of operations and stockholders' deficit and cash flows for the seven
months ended July 31, 2003 and the year ended December 31, 2002. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Mobile Reach
International, Inc. and Subsidiaries as of July 31, 2003, and the results of its
operations and its cash flows for the seven months ended July 31, 2003 and the
year ended December 31, 2002 in conformity with accounting principles generally
accepted in the United States of America.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in Note
2 to the consolidated financial statements, the Company has suffered recurring
losses from operations, has negative working capital, and has net stockholders'
deficit, which raise substantial doubt about its ability to continue as a going
concern. Management's plans regarding those matters also are included in Note 2.
The consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
October 1, 2003
Scharf Pera & Co., PLLC
Charlotte, North Carolina
F-2
MOBILE REACH INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JULY 31, 2003
ASSETS
CURRENT ASSETS:
Cash $ 37,248
Accounts receivable 17,955
-----------
Total current assets $ 55,203
PROPERTY AND EQUIPMENT - at cost less accumulated depreciation 35,653
-----------
$ 90,856
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Current portion of long-term debt 4,075
Notes payable 315,321
Accounts payable 220,518
Accrued expenses 278,279
Accrued taxes and withholdings 56,097
Deferred income 612
-----------
Total current liabilities 874,902
LONG-TERM DEBT 435,248
COMMITMENTS AND CONTINGENCIES 105,000
STOCKHOLDERS' DEFICIT:
Preferred stock; $.0001 par value; 10,000,000 shares authorized --
Common stock, $.0001 par value, 50,000,000 shares authorized 3,321,288
Accumulated deficit (4,645,582)
-----------
(1,324,294)
-----------
See Notes to Consolidated Financial Statements
F-3
MOBILE REACH INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SEVEN MONTHS ENDED JULY 31, 2003 AND
THE YEAR ENDED DECEMBER 31, 2002
Seven
months Year
ended ended
07/31/2003 12/31/2002
NET REVENUES $ 94,312 $ 776,622
------------ -----------
OPERATING EXPENSES:
Cost of Revenues 185,284 423,228
Sales and Marketing 238,957 368,260
General and administrative 1,417,642 484,682
Depreciation 11,560 16,716
------------ -----------
Total operating expenses 1,853,443 1,292,886
------------ -----------
LOSS FROM OPERATIONS (1,759,131) (516,264)
------------ -----------
OTHER (EXPENSE) INCOME:
Interest (expense) income (34,285) 103,745
Contingency loss (105,000) --
Loss on disposal of assets -- 2,276
Interest income 100 133
------------ -----------
Total other (expense) income (139,185) 105,888
------------ -----------
NET LOSS $ (1,898,316) $ (622,152)
============ ===========
NET LOSS PER SHARE -- BASIC AND DILUTED $ (0.14) $ (0.10)
============ ===========
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 13,482,257 6,070,376
============ ===========
See Notes to Consolidated Financial Statements
F-4
MOBILE REACH INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
FOR THE SEVEN MONTHS ENDED JULY 31, 2003 AND
THE YEAR ENDED DECEMBER 31, 2002
Preferred Stock Common Stock
--------------------- -------------------------- Accumulated
Shares Amount Shares Amount Deficit Total
-------- --------- ----------- ----------- ----------- -----------
Balances at December 31, 2001 768,000 $ 192,000 22,109,037 $ 1,173,556 $(2,125,114) $ (759,558)
Redemption of common stock -- -- (6,000,000) (395,000) -- (395,000)
Net loss -- -- -- -- (622,152) (622,152)
-------- --------- ----------- ----------- ----------- -----------
Balances at December 31, 2002 768,000 192,000 16,109,037 778,556 (2,747,266) (1,776,710)
-------- --------- ----------- ----------- ----------- -----------
Issuance of common stock -- -- 17,646,522 1,058,788 -- 1,058,788
Conversion of debt and interest -- -- 12,256,783 735,407 -- 735,407
Issuance of stock as compensation -- -- 5,730,953 343,857 -- 343,857
Issuance of stock for note payable
and fee for services -- -- 3,000,000 180,000 -- 180,000
Accrued wages converted to
stock options -- -- -- 32,680 -- 32,680
Net loss -- -- -- -- (1,898,316) (1,898,316)
-------- --------- ----------- ----------- ----------- -----------
Balance prior to merger 768,000 192,000 54,743,295 3,129,288 (4,645,582) (1,324,294)
Conversion of common stock in merger -- -- (36,725,131) -- -- --
Conversion of preferred stock (768,000) (192,000) 505,555 192,000 -- --
Common stock owned by Asphalt Paving
International, Inc. stockholders -- -- 5,112,461 -- -- --
-------- --------- ----------- ----------- ----------- -----------
Balance July 31, 2003 -- $ -- 23,636,180 $ 3,321,288 $(4,645,582) $(1,324,294)
-------- --------- ----------- ----------- ----------- -----------
See Notes to Consolidated Financial Statements
F-5
MOBILE REACH INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SEVEN MONTHS ENDED JULY 31, 2003 AND
THE YEAR ENDED DECEMBER 31, 2002
Seven
months ended Year ended
07/31/2003 12/31/2002
Cash flows from operating activities:
Net loss $(1,898,316) $(622,152)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation 11,560 16,716
Loss on disposal of asset -- 2,276
Contingency loss 105,000 --
Stock issued for compensation and fees 448,759 --
Changes in operating assets and liabilities:
Decrease (increase) in prepaid expenses 1,056 (1,056)
Decrease in accounts receivable 16,979 30,436
Increase in accounts payable 14,874 96,853
Increase in notes payable to vendors 265,413 --
Increase in accrued expenses, taxes & withholdings 5,123 410,358
(Decrease) increase in deferred income (7,560) 7,276
----------- ---------
Net cash used in operating activities (1,037,112) (59,293)
----------- ---------
Cash flows from investing activities:
Purchases of property and equipment (13,924) (26,099)
----------- ---------
Net cash used in investing activities (13,924) (26,099)
----------- ---------
Cash flows from financing activities:
Proceeds from note payable -- 46,500
Principal payments on long-term debt (1,442) (1,849)
Proceeds from common stock issuance 1,058,788 --
Proceeds from long-term debt 12,037 --
----------- ---------
Net cash provided by financing activities 1,069,383 44,651
----------- ---------
Net increase (decrease) in cash 18,347 (40,741)
Cash - beginning of year 18,901 59,642
----------- ---------
Cash - end of year $ 37,248 $ 18,901
=========== =========
See Notes to Consolidated Financial Statements
F-6
MOBILE REACH INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SEVEN MONTHS ENDED JULY 31, 2003 AND
THE YEAR ENDED DECEMBER 31, 2002
(continued)
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Seven months
ended Year ended
07/31/2003 12/31/2002
Cash payments for:
Interest $ 12,440 $ 348
Cash received from:
Interest 100 134
Conversion of accrued wages to notes payable 49,908 153,308
Conversion of debt and interest to common stock 735,407 --
Conversion of note payable for wages and interest to common stock 75,098 --
See Notes to Consolidated Financial Statements
F-7
MOBILE REACH INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SEVEN MONTHS ENDED JULY 31, 2003 AND
THE YEAR ENDED DECEMBER 31, 2002
Note 1 -- Business Combination:
Mobile Reach International, Inc. (the Company), a Delaware Corporation,
was formed in July 2003. The Company completed a share exchange agreement with
Asphalt Paving International, Inc. ("API") on July 30, 2003. The Company
completed a share exchange agreement with Mobile Reach Technologies, Inc.
("MRT") (including its German subsidiary, Mobile Reach Technologies, GmbH) on
July 31, 2003. Former stockholders of MRT received 18,523,720 shares of common
stock of the Company, and the former stockholders of API received 5,112,460
shares of common stock of the Company. The share exchange agreements and mergers
have been treated as a reverse acquisition of API by MRT, due to the
stock-holders of MRT receiving the larger portion of the voting rights of the
combined entity (Mobile Reach International, Inc.). The Company has accounted
for the acquisition of API as prescribed by statement of Financial Accounting
Standards No. 141, Business Combination (SFAS 141). The Company did not record
any amount for goodwill on the acquision of API, as API had no assets or
liabilities on the date of acquisition. The Company has adopted a July 31 fiscal
year end. The consolidated financial statements include the results from
operation of MRT for the seven months ended July 31, 2003 and the twelve months
ended December 31, 2002. The consolidated financial statements include the
results from operations of API from the date of acquisition, July 30, 2003, to
July 31, 2003
Note 2 -- Going Concern:
The accompanying financial statements have been prepared in conformity
with accounting principles generally accepted in the United States of America,
which contemplates continuation of the Company as a going concern. However, the
Company has sustained substantial operating losses in the seven months ended
July 31, 2003 and the twelve months ended December 31, 2002 of $1,898,316 and
$622,152, respectively. The Company, as of October 1, 2003, is in default on
certain notes payable, payroll taxes and other payables. In addition, the
Company has used substantial amounts of working capital in its operations.
Further, at July 31, 2003, the Company's current liabilities exceed current
assets by $819,699, and the Company has an accumulated deficit of $4,645,582.
In view of these matters, management has sought out additional investment
sources to raise additional funds. However, no assurances can be given that the
newly merged company will continue as a going concern without the successful
completion of additional financing. The accompanying consolidated financial
statements do not include any adjustments that might be necessary if the Company
is unable to continue as a going concern.
Note 3 -- Summary of Significant Accounting Policies:
The Company:
The Company sells mobility software products and development services in
the United States of America and Europe to clients who are attempting to
increase the efficiency by which their employees access, utilize and exchange
data using mobile networks.
Principles of consolidation:
The accompanying consolidated financial statements include the accounts of
Mobile Reach Technologies, Inc. and its subsidiary company, Mobile Reach
F-8
Technologies, GmbH (German Company), after elimination of inter-company accounts
and transactions.
Cash and cash equivalents:
The Company considers all highly liquid investments having an original
maturity of three months or less to be cash equivalents. Amounts invested may
exceed federally insured limits at any given time.
Property and equipment:
Property and equipment are recorded at cost and depreciated using the
straight-line method over the estimated useful lives of the assets ranging from
three to seven years.
Income taxes:
Deferred taxes are provided on a liability method whereby deferred tax
assets are recognized for temporary differences, operating loss and tax credits
carryforwards, and deferred tax liabilities are recognized for taxable temporary
differences. Temporary differences are the differences between the reported
amounts of assets and liabilities and their tax bases. Deferred tax assets are
reduced by a valuation allowance when, in the opinion of management, it is more
likely than not that some portion or all of the deferred tax assets may not be
realized. Deferred tax assets and liabilities are adjusted for the effects of
changes in tax laws and rates on the date of enactment
Loss per share:
The Company calculates loss per share in accordance with Statement of
Financial Accounting Standards No. 128 (SFAS 128), Earnings per share, which
requires the presentation of basic and diluted and diluted earnings per share.
Basic loss per share excludes dilution and is computed by dividing loss by the
weighted-average number of common shares outstanding for the period. Diluted
loss per share reflects the potential dilution that could occur if securities or
other contracts to issue common stock were exercised or converted into common
stock or resulted in the issuance of common stock that then shared in the
earnings of the entity. Potential common shares are excluded from the
computation of diluted earnings per share when a loss exists because the effect
would be antidilutive (Note 13).
Use of accounting estimates:
The preparation of Consolidated Financial Statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of certain assets and liabilities and disclosures. Accordingly, the
actual amounts could differ from those estimates. Any adjustments applied to
estimated amounts are recognized in the year in which such adjustments are
determined.
Fair value of financial instruments:
The Company's financial instruments include cash, accounts receivable,
accounts payable, accrued liabilities, credit facilities and long-term debt. The
carrying amounts of these financial instruments approximate fair value due to
their short maturities and variable rates of interest. The carrying amounts of
long-term debt approximate their fair values based on current rates available
for similar types of instruments.
The Company did not have any outstanding financial derivative instruments.
F-9
Advertising and product development:
Costs for advertising and research and development are expensed as
incurred.
Accounting for stock-based compensation:
Employee stock awards under the Company's compensation plans are accounted
for in accordance with Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees" ("APB 25"), and related interpretations. The
Company provides the disclosure requirements of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS
123"), and related interpretations. Stock-based awards to nonemployees are
accounted for under the provisions of SFAS 123. SFAS 123 allows and the Company
has elected to continue to only disclose the effects on net income or loss of
the fair value of the options.
Note 4 -- Property and Equipment:
The principal categories and estimated useful lives of property and
equipment are as follows:
Estimated
Useful Lives
------------
Office equipment $ 8,602 2 - 5 years
Computer equipment and software 67,285 3 years
--------
75,887
Less: accumulated depreciation 40,234
--------
$ 35,653
--------
Note 5 -- Notes Payable:
Notes payable at July 31, 2003 consisted of the following:
Note payable dated July 25, 2003 for Legal fees; bearing interest at
12.15 percent through September 30, 2003; in default at October 1,
2003 as all principal and interest was due September 30, 2003; bears
interest at 15 percent when in default; collateralized by all
tangible and intangible assets of the Company; 164,565 warrants
issued to holder of note to purchase common stock of the Company
(Note 11). $ 150,000
Note payable dated July 17, 2003 to vendor; bearing interest at 5
percent; in default at October 1, 2003 as all principal and interest
was due August 18, 2003. 115,413
Note payable for accrued wages; bearing interest at 6 percent; due
and payable with interest at the earliest of (a) Company obtaining
debt or equity funding greater than $1,000,000 in a quarter or (b)
Company earns revenues of $1,000,000 in a quarter. 49,908
---------
$ 315,321
---------
F-10
Note 6 -- Accrued Expenses:
Accrued expenses at July 31, 2003 consisted of the following:
Accrued salaries and wages $ 250,180
Accrued interest 28,099
---------
$ 278,279
---------
Accrued salaries and wages arise from the Company's inability to pay
certain employees their full salaries and wages at certain periods throughout
2003, 2002 and 2001. In July 2003, $32,680 of accrued salaries were converted
into 107,491 options to purchase shares of common stock of Mobile Reach
International, Inc.
Note 7 -- Accrued taxes and withholdings:
Accrued taxes and withholdings at July 31, 2003 of $56,097 is comprised of
employee withholdings, payroll taxes, interest, and penalties. The Company is in
arrears in remitting withholdings and payroll taxes as required by the Internal
Revenue Service.
Note 8 -- Long-Term Debt:
Long-term debt at July 31, 2003 consisted of the following:
Capitalized leases dated January 2001; payable in 36 installments of
$249 including interest at approximately 20 percent; collateralized
by office equipment costing $5,981 $ 918
Note payable to assignees of a former officer in redemption of
6,000,000 shares of common stock; interest at 5 percent; payable in
three annual installments including interest beginning April 30,
2005 395,000
Note payable to assignees of a former officer and director for
accrued salary; interest at 5 percent; payable in three annual
installments including interest beginning April 30, 2005 31,450
Note payable dated March 2003; payable in 36 installments of $203
including interest at approximately 20 percent collaterialized by
office equipment costing $4,981 4,899
Note payable dated June 2003; payable in 36 installments of $129
including interest at approximately 20 percent; collaterialized by
office equipment costing $3,173 3,173
Note payable dated June 2003; payable in 48 monthly installments of
$128 including interest at approximately 20 percent; collaterialized
by office equipment costing $3,883 3,883
--------
439,323
Less current portion 4,075
--------
$435,248
--------
F-11
At July 31, 2003, long-term debt is due in aggregate annual installments
as follows:
Year ending July 31,
2004 $ 4,075
2005 146,191
2006 145,870
2007 143,187
Thereafter --
$ 439,323
-----------
Note 9 -- Common Stock:
During 2003, 12,256,783 pre-merger shares were sold at $0.06 per share,
resulting in $1,058,788 proceeds from the shares issued. Upon completion of the
merger, these shares were converted into 5,808,224 shares of the Company.
During 2003, $735,407 of principal and interest of convertible debt of MRT
were converted into 12,256,783 pre-merger shares at a rate of $0.06 per share.
Upon completion of the merger, these shares were converted into 4,034,167 shares
of the Company.
In March 2003, the Chief Executive Officer of the Company was issued
5,730,953 pre-merger shares as a signing bonus in connection with the employment
agreement with the Chief Executive Officer. The Company recorded compensation
expense of $343,857 ($0.06 pr share) in connection with this issuance of stock.
Upon completion of the merger, these shares were converted into 1,886,272 shares
of the Company.
In July 2003, the Company issued 3,000,000 pre-merger shares to a
consultant and former employee. The shares were issued in exchange for the
cancellation of a promissory note dated September 12, 2002, with a balance,
including interest, of $75,098, and for financial advisory services provided to
the Company. The Company recorded consulting fee expenses of $104,902 in
connection with this issuance. The issuance of 3,000,000 pre-merger shares
represents $0.06 per share for the total $180,000 consideration. Upon completion
of the merger, these shares were, converted into 987,413 shares of the Company.
In connection with the merger 768,000 shares of Series A convertible
Preferred stock of MRT were converted into 505,555 shares of the Company.
Note 10 -- Preferred Stock:
In 2003, the Company authorized 10,000,000 shares of Preferred stock. At
July 31, 2003 there was no preferred stock issued or outstanding.
Note 11 -- Stock Options and Warrants:
In July 2003, the Company adopted an Equity Compensation Plan for the
benefit of the Company's employees, directors, officers, consultants and
advisors. The Company appointed a Stock Award committee to administer the Plan
and the issuance of stock options. The Company converted options issued by MRT
into stock options of the Company. There have been no options exercised under
the Plan.
F-12
The following is a summary of the plan options granted:
Weighted-
Number of Average
Options Exercise Price
------- --------------
Outstanding December 31, 2002 4,560,000 $0.04
Options issued 7,836,204 0.09
Options expired (510,500) 0.16
----------
Balance prior to merger 11,885,704 0.07
Options converted (7,974,119) 0.07
----------
Outstanding July 31, 2003 3,911,585 0.07
----------
The Company has adopted the disclosure only provisions of SFAS 123
"Accounting for Stock-Based Compensation". The Company determined that the
options issued in 2003 and 2002 had no value using the Black Scholes pricing and
a 50 percent volatility factor at the date of grant. Accordingly, the net loss
of $1,898,316 and $622,152 for the years ended December 31, 2002 and 2001,
respectively, would be unchanged because no compensation would be recognized.
In July 2003, The Company issued a warrant to purchase 2,000,000 shares at
an exercise price of $0.01 per share. Upon completion of the merger, this
warrant was converted into a warrant to purchase 658,275 shares at an exercise
price of $0.01 per share. This warrant was issued to a consultant and former
employee in connection with financial advisory services provided to the Company
(Note 9). The warrant is contingent upon the consultant raising $1,000,000 in
capital for the Company. Using the Black Scholes pricing model and a 50 percent
volatility factor, the Company determined the warrant had no value and there was
no expense recorded in 2003 for the grant of the warrant. The warrant had not
been exercised at July 31, 2003
In July 2003, the Company issued warrants to purchase 164,565 shares at an
exercise price of $0.18 per share. The warrants were issued in connection with a
note payable (Note 5) to a provider of legal services to the Company. Using the
Black Scholes pricing model and 50 percent volatility factor, the Company
determined the warrants had no value and there was no expense recorded in 2003
for the grant of the warrant. The warrants had not been exercised at July 31,
2003.
In April 2001, the Company issued a warrant to purchase 96,000 shares at
an exercise price of $0.01 per share. The warrant was issued in connection with
a consulting agreement. Upon completion of the merger, this warrant was
converted into a warrant to purchase 31,597 shares at an exercise price of
$0.0833 per share. The warrant had not been exercised at July 31, 2003.
Note 12 -- Contingency Loss:
The Company recorded a contingency loss of $105,000 in connection with a
possible claim arising from the merger with API.
F-13
Note 13 -- Loss per share:
A reconciliation of basic loss per share to diluted earnings per share is
presented below.
Per share
Net Loss Shares Amount
Seven months ended July 31, 2003:
Basic EPS
Loss available to common shareholders $ (1,898,316) 13,482,257 $ (0.14)
Effect of Dilutive Securities Stock options and warrants -- -- --
$ (1,898,316) 13,482,257 $ (0.14)
Year ended December 31, 2002:
Basic EPS
Loss available to common shareholders $ (622,152) 6,070,376 $ (0.10)
Effect of Dilutive Securities Stock options and warrants -- -- --
$ (622,152) 6,070,376 $ (0.10)
Note 14 -- Income Taxes:
Deferred income taxes are provided in recognition of temporary differences
in reporting certain revenues and expenses for financial statement and income
tax purposes.
Net deferred tax assets/(liabilities) consisted of the following
components as of July 31, 2003:
Current Long-Term Total
Seven months ended July 31, 2003:
Deferred tax assets:
Net operating loss carryforwards $ -- $1,600,000 $1,600,000
Deferred tax liabilities -- -- --
-- 1,600,000 1,600,000
Valuation allowance -- 1,600,000 1,600,000
Net deferred tax asset $ -- $ -- $ --
The ultimate realization of these assets is dependent upon the generation
of future taxable income sufficient to offset the related deductions and loss
carryforwards within the applicable carryforward period. The valuation is
allowance is based on the uncertainty of the Company's ability to generate
sufficient taxable income in future years to fully utilize the net operating
loss carryforwards.
The income tax provision differs from the amount of income tax determined
by applying the U.S. Federal income tax rate to pretax income for the seven
months ended July 31, 2003 and the year ended December 31, 2003 due to the
following:
Seven
months Year
ended ended
07/31/2003 12/31/2002
Computed "expected" tax (expense)/benefit $ 664,411 $ 217,753
Increase /(decrease) in income taxes resulting from:
Temporary differences (664,411) (217,753)
---------
$ -- $ --
The Company has not filed tax returns for 2002 and 2001. Dependant upon
the filing of the 2002 and 2001 tax returns, the Company will have net operating
loss carryforwards of approximately $4,600,000, which begin to expire in 2002.
F-14
The Tax Reform act of 1986 contains provisions which limit the ability to
utilize net operating loss, capital loss, and various tax credit carryforwards
in the case of certain events including significant changes in ownership
interest. If the Company's tax carryforwards are limited, and the Company has
taxable income which exceeds the permissible yearly net operating loss
carryforward, the Company would incur a federal income tax liability even though
these loss carryforwards would be available in future years.
Note 15 -- Pro-Forma Financial Information:
The following pro-forma data summarizes the results of operations for the
seven months ended July 31, 2003 and the year ended December 31, 2002, as if the
mergers with API had been completed January 1, 2002:
Seven months
ended Year ended
07/31/2003 12/31/2002
Net revenue $ 94,312 $ 776,622
Operating loss $(1,912,754) $(536,859)
Loss per share -- basic and diluted $ (0.08) $ (0.02)
Note 16 -- Other Matters:
Advertising costs:
Advertising costs are expensed as incurred. Total advertising costs were
approximately $40,000 and $96,412 for the seven months ended July 31, 2003 and
the year ended December 31, 2002, respectively.
Foreign Cash and Operations:
The Company's subsidiary Mobile Reach Technologies, GmbH maintains
deposits in foreign accounts, not insured, in the amount of $20,541 and $11,419
at July 31, 2003 and December 31, 2002, respectively. This subsidiary had
foreign sales $55,757 and $438,539 for the seven months ended July 31, 2003 and
the twelve months ended December 31, 2002, respectively.
Operating Leases:
The Company leases office space and furnishings on a month to month basis.
Rent expense incurred was $21,000 and $46,625 for the seven months ended July
31, 2003 and the year ended December 31, 2002, respectively.
F-15
MOBILE REACH INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
APRIL 30, 2004
4/30/04 7/31/03
(Unaudited) (Audited)
Current Assets
Cash 46,241 37,249
Allowance For Bad Debt (14,962) --
Accounts Receivable 667,530 17,955
Total Other Current Assets 4,328 --
Total Current Assets 703,137 --
Property and Equipment
Computer Equipment 133,147 75,888
Furniture and Fixtures 21,783 --
Vehicles 120,747 --
Accumulated Depreciation 92,526 (40,235)
Total Fixed Assets 183,152 35,653
----------
Other Assets
Total Deposits 34,000 --
----------
TOTAL ASSETS 920,288 90,856
==========
LIABILITIES & EQUITY
Accounts Payable 654,003 11,121
Accounts Payable - Stockholder 45,070 --
Other Current Liabilities
Other - Credit Cards -- --
Payroll Liabilities 386,673 56,097
Current Portion - L/T Debt 35,781 14,460
Deferred Salaries 191,416 250,180
Wages Payable 57,655 --
Notes Payable (3/4) 625,496 315,321
Accrued Interest Payable 77,710 28,099
Accrued Expenses 33,517 199,013
Total Deferred Revenue 39,773 612
Sales Tax Payable 3,551 --
Contingencies (6) -- 105,000
----------
Total Current Liabilities 2,150,645 979,903
----------
Long Term Debt - Net of Current Portion
Notes Payable - L/T Debt 507,264 423,147
Convertible Debentures (5%) 525,000 --
Notes Payable - L/T - Equipment 12,100 12,100
Stock Warrants Issued 160 --
Total Long Term Liabilities 1,044,524 435,247
----------
Total Liabilities 3,195,169 1,415,150
Equity
Retained Earnings (4,645,582) (4,645,582)
Common Stock (5) 4,414,489 3,321,288
Net Income (LOSS) (2,043,788) --
Total Equity (2,274,881) (1,324,294)
TOTAL LIABILITIES & EQUITY 920,288 90,856
==========
See Notes to consolidated financial statements
F-16
MOBILE REACH INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
THREE MONTH ENDED APRIL 30, 2004 AND APRIL 30, 2003.
NINE MONTHS ENDED APRIL 30, 2004 AND NINE MONTHS ENDED APRIL 30, 2003
(UNAUDITED)
Three Mos Three Mos Nine Mos Nine Mos
Ended Ended Ended Ended
4/30/2004 4/30/2003 4/30/2004 4/30/2003
Ordinary Income/Expense
Income
License Revenue 68,531 188,393
Software Licenses - Others -- 37,900
Reseller Fees -- 11,070
Product Revenue 635,599 690,551
Product(H/W&S/W) Revenue -- 12,834
Annual Support Maintenance 17,729 33,374
Commission Income 554 554
Professional Services 163,912 273,841
-------- ----------
Total Income 886,325 1,248,517
Cost of Goods Sold
Development Salaries 78,076 331,524
Product (H/W)413,361 413,361
Finders Fee 2,534 2,534
Sub-Contractors (Consultants) 6,963 6,963
COGS - Other Product Licenses 215,088 305,183
-------- ----------
Total Cost of Goods Sold 716,023 1,059,565
-------- ----------
Total COGS 716,023 1,059,565
Gross Profit 170,302 188,952
Sales & Marketing
Sales Salaries 96,021 318,963
Commissions 18,300 58,300
Marketing (36,663) (12,522)
Total Sales & Marketing 77,658 364,742
----------
Total G&A Expense 657,113 1,834,822
-------- ----------
Total Expense 734,771 2,199,564
-------- ----------
Net Ordinary Income (loss) (564,468) (2,010,611)
F-17
Mobile Reach International, Inc. And Subsidiaries
Consolidated Statement of Operations
Three Month Ended 4/30/04 and 4/30/03
Nine Months Ended 4/30/04 and 4/30/03
(Unaudited), Continued
Three Mos Three Mos Nine Mos Nine Mos
Ended Ended Ended Ended
4/30/2004 4/30/2003 4/30/2004 4/30/2003
Other Income/Expense
Other Expense 25,037 26,937
Depreciation Expense 15,207 33,249
Interest Expense 57,400 78,934
Interest Income (154) (154)
Other Expense -- 26,148
Other Income (105,000) (105,000)
-------- --------
Total Other (Income) Expense (32,546) (25,037) 33,177 (26,937)
-------- -------- -------
Net Other Income 32,546 25,037 (33,177) 26,937
-------- ---------- -------
Net Loss (531,922) (25,037) (2,043,788) (26,937)
Weighted average
number of shares of
common stock outstanding 31,310,743 20,020,373 26,422,589 9,499,191
Loss per share (0.02) (0.00) (0.077) (0.00)
See Notes to consolidated financial statements
F-18
MOBILE REACH INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
NINE MONTHS ENDED APRIL 30, 2004 AND APRIL 30, 2003
(UNAUDITED)
Nine months Nine months
Ended Ended
4/30/04 4/30/03
OPERATING ACTIVITIES
Net Income (loss) (2,043,788) (26,937)
Net cash provided by Operating Activities: 469,568 2,400
Common stock issued for services -- 24,537
Total Adjustments -- 26,937
INVESTING ACTIVITIES
Net cash provided by Investing Activities (54,005) --
FINANCING ACTIVITIES
Net cash provided by Financing Activities 1,634,294 --
---------
Net cash increase for period 6,069 --
Cash at beginning of period 40,172 --
Cash at end of period 46,241 --
See Notes to consolidated financial statements
F-19
NOTES TO FINANCIAL STATEMENTS
for Period Ended April 30, 2004
Note 1 - Summary of Significant Accounting Policies:
Principles of consolidation:
The accompanying consolidated financial statements include the accounts of
Mobile Reach Solutions, Inc, Mobile Reach Technologies, Inc. and its subsidiary
company, Mobile Reach Technologies, GmbH (German Company), after elimination of
inter-company accounts and transactions. The consolidation of Mobile Reach
Solutions, Inc. into Mobile Reach International, Inc. does not include
recognition of goodwill.
Note 2 - Going Concern:
As shown in the accompanying financial statements, the Company has
sustained a substantial net loss of $531,922 during the nine months ended April
30, 2004. Also, the Company, as of October 1, 2003, is in default on certain
notes payable, payroll taxes and other payables. As a result, cash available is
not sufficient to support the Company's operations for the next year. In order
to meet the cash requirements for the remainder of the year, the Company needs
to raise more capital through public or private financing. At the present time,
the Company does not know if additional financing will be available or, if
available, whether it will be available on attractive terms. If the Company
raises capital in the future, it is probable that it will result in substantial
dilutions to stockholders interests. These factors create substantial doubt as
to the Company's ability to continue as a going concern.
The Company continues its efforts to complete the necessary steps in order
to meet its cash flow requirements throughout the fiscal year 2004 and to
continue the development and commercialization of its products and services.
Management's plans in this regard include, but are not limited to, the
following:
1. The company has continued to raise capital to address its cash flow
issue. The company is also seeking solutions by way of accounts
receivable factoring and bridge note or notes to fund the company's
cash needs. Although there can be no guarantee the company can raise
the necessary funds to cash flow its business, its management has
undergone cost cutting measures operationally during the reporting
quarter. The management also is of believe its going forward
business plan and strategic direction will improve the company's
cash flow problems.
2. The Company has utilized the credit facilities of personal
management to secure products for company customers. Additionally
the company is utilizing receivable factoring services from one of
the company's board members as well as a factoring finance company.
Management believes that actions presently being taken will generate sufficient
revenues to provide positive cash flows from operations and that sufficient
capital will be available, when required, for future realization of its plans.
However, no assurances can be given that the newly merged company will continue
as a going concern without the successful completion of additional financing.
The accompanying consolidated financial statements do not include any
adjustments that might be necessary if the Company is unable to continue as a
going concern.
F-20
Note 3 - Notes Payable:
Notes payable at April 30, 2004 consisted of the following:
Note payable dated December 10, 2003; bearing interest $ 40,000
at 6.00 percent through January 9, 2004; in default at
April 30, 2004 as all principal and interest was due
January 9, 2003;
Note payable dated September 9, 2003; bearing a fixed $230,000
interest from September 10, 2003 to November 9th 2003
and additional interest of 6.00 percent from November 1
2003 through April 30, 2004; in default at April 30,
2004 as all principal and interest was due November 9,
2003;
Note payable dated November 10, 2003; bearing interest $ 50,000
at 6.00 percent through April 16, 2004; in default at
April 30, 2004 as all principal and interest was due
April 16, 2004;
Note payable dated August 1,, 2003; bearing interest at $ 35,000
6 percent; in default at April 30, 2004 as all principal
and interest was due January 10, 2004
Note payable dated July 17, 2003 to vendor; bearing $115,413
interest at 5 percent; in default at October 1, 2003 as
all principal and interest was due August 18, 2003
Note payable for accrued wages; bearing interest at 6 $ 49,908
percent; due and payable with interest at the earliest
of (a) Company obtaining debt or equity funding greater
than $1,000,000 in a quarter or (b) Company earns
revenues of $1,000,000 in a quarter
Note payable to the former owner of Waves Consulting Group, Inc. $105,464
--------
$625,496
========
Note 4 - Long-Term Debt:
Long-term debt at April 30, 2004 consisted of the following:
Capitalized leases dated January 2001; payable in 36 $ 918
installments of $249 including interest at $918
approximately 20 percent; collateralized by office
equipment costing $5,981 Note payable to assignees of a
former officer in redemption of 6,000,000 shares of common
stock; interest at 5 percent; payable in three annual
installments including interest beginning April 30, 2005
Note payable to assignees of a former officer and director $ 395,000
for accrued salary; interest at 5 percent; payable in three
annual installments including interest beginning April 30, 2005
Note payable dated March 2003; payable in 36 $ 31,450
installments of $203 including Interest at approximately
20 percent collateralized by office equipment costing $ 4,981
Note payable dated June 2003; payable in 36 installments $ 4,899
of $129 including interest at $3,173 approximately 20
percent; collateralized by office equipment costing $ 3,173
Note payable dated June 2003; payable in 48 monthly $ 3,173
installments of $128 including interest at approximately
20 percent; collateralized by office equipment costing $ 3,883
Notes payable for 60 month installments including $ 3,883
interest at approximately 6.99 percent interest,
collateralized by company vehicles costing $104,750
Convertible Debentures dated February 27, 2004 accruing $ 104,750
five percent interest, maturing in 2007
Warrants associated with financing dated February 27, 2004 $ 525,000
Company (Mobile Reach Technologies, GmbH) subsidiary - 160
other current liabilities $ 11,072
----------
$1,080,305
Less current portion $ 35,781
----------
$1,044,524
==========
F-21
Note 5 - Shares Outstanding:
During the period ended April 30, 2004 the company issued 9,994,340 shares
through equity investments, employee stock options, incentive options and
warrants. For the period ended January 31, 2004 the Company had 25,699,918
shares issued and outstanding. For the period ended October 31, 2003 the Company
had 23,636,180 shares issued and outstanding, not accounting for 911,355 shares
that were part of the quarter end January 31, 2004 in common stock carryover.
For the nine month period ended April 30, 2004, the Company has raised
$1,112,556 in equity and $525,000., in convertible debentures. See item 2 Change
in Securities and use of Proceeds.
Note 6 - Contingent Liability:
The company has removed the contingent liability from its April 30, 2004 Balance
Sheet in the amount of $105,000.00. The Company has been indemnified by the
former majority holder of Asphalt Paving to defend against and accept any
possible liability. The original potential claim is from the Administrative
Receivers for Advance Banking Solutions Limited, a United Kingdom company, for
potential claims by Advanced Banking Solutions against Asphalt Paving
International, Inc. ("API"), which claims were transferred to the Company when
API merged into the Company and are for certain license fees alleged to be owed
by API in the amount of 65,000 (UK pounds), plus interest.
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion of our business and results of
operations in conjunction with the consolidated financial statements included
herein. The results shown in this 10-QSB are not necessarily indicative of the
results we will achieve in any future periods.
REVENUES
Our revenues primarily comprise of licensing and services fees, which we
recognize as revenue when the product or services are provided to the client.
The unaudited consolidated financial data; is provided for comparative purpose
only and does not claim to be indicative of the actual financial position or
results of the Company's carry forward operations.
Revenues for the period ended April 30, 2004 was $886,325 representing an
increase 185% from $310,092 in the period ended January 31, 2004. The Companies
deferred Revenues for the same period slightly decreased from $40,141 to
$39,773.
Total Net losses for the three-month period ending April 30, 2004 decreased by
$136,541 to $ 531,922, or $0.02 per diluted common share; compared to $668,463
or $.026 per diluted common share for the three-month ending period January 31,
2004.
F-22
Revenue mix for the three months ended April 30th, 2004 was attributable to
7.73% from software license fees, 2.0% from maintenance and support, 71.71% from
products made up of hardware related goods and 18.49% from Professional
Services. This compares to 43.31% from software license fees, 4.57% from
maintenance and support fees, and 30.26% from professional service fees for the
three month period ended January 31st, 2004. The increase in license revenue was
due to higher volume of sales and product compatibility is further developed
compared to the previous quarter.
The Cost of Sales associated with the delivery of our solutions is expected to
decrease as the repeatable model is implemented with future customers. As a
result, the company recognized an above average cost associated for the
three-months ended April 30th 2004, due in part to higher than average hardware
sales typically resulting in lower industry average margins.
Our sales and marketing expenses consist primarily of compensation and related
costs for ramping up efforts around sales, marketing, associated personnel,
travel and entertainment and other related costs. We expect sales and marketing
expenses to decrease as a percentage of sales as we continue to leverage our
reseller relationships and strategic clients to further our sales and marketing
initiatives.
SG&A for the three-month period ended April 30th 2004 was $734,771.00 consisting
primarily of compensation, Professional fees including both legal and
accounting. We expect our general and administrative expenses to decrease as a
percentage of our annual revenues in the future if and as revenues increase.
LIQUIDITY AND CAPITAL RESOURCES
As of April 30, 2004, the Company had assets and liabilities of $920,288. Our
independent auditors, who audited our financial statements for the period ended
July 31, 2003, have expressed substantial doubt about our ability to continue as
a going concern given our recurring losses from operations, negative working
capital and net stockholders' deficit. In addition, the Company must deal with
the litigation and claims described in Part II Item I of this Form 10-QSB under
the heading "Legal Proceedings." In response to these issues, the Company has
raised $525,000 in convertible debentures on February 27th 2004. Management
believes it is imperative that the Company raise additional funds, to fund the
Company's operations and sales and marketing efforts, including the costs of
compliance with the continuing reporting requirements of the Securities Exchange
Act of 1934, as amended, for itself and its subsidiaries.
RISK FACTORS
Investing in our common stock involves a high degree of risk. You should
carefully consider the risks and uncertainties described below before you
purchase any of our common stock. These risks and uncertainties are not the only
ones we face. Unknown additional risks and uncertainties, or ones that we
currently consider immaterial, may also adversely affect our business
operations.
If any of these risks or uncertainties actually occurs, our business, financial
condition or results of operations could be materially adversely affected. In
this event, you could lose all or part of your investment.
We have a limited operating history and are not yet profitable. We are a
relatively new public company that is not yet profitable. We expect to continue
to have substantial expenses before we earn significant income in excess of our
expenses. The establishment of any new business involves expenses, difficulties,
complications and delays. It is not possible for anyone, including the company,
to predict with certainty what all of these expenses, complications and delays
will be. The Company cannot guarantee that it will be able to overcome these
obstacles, and cannot guarantee that it will ever be profitable. We continue to
F-23
incur substantial losses We incurred a loss in the quarter ending April 30th
2004 of $531,922. and our cumulative losses for the nine months period ended
April 30, 2004 is $2,043,788.
In the Past we depended upon a limited number of customers. The Company use to
depend upon a limited number of customers in the period ended January 30, 2004,
and prior. However with the recent acquisition of Waves Consulting Group, (Now
Mobile Reach Solutions, Inc.) the Company has taken great strides to minimize
that risk during the period ending January 31, 2004 and going forward. The
Company anticipates that with the diverse customer based both in the enterprise
and small to medium marketplace it's able to withstand customer churn in each of
the sectors it's selling too. The Company is however highly dependant upon
vendors to supply them with the goods and services it purchases for its
customers as part of its complete mobile solution. Examples of some of these
vendors are IBM, DELL, Cisco, and Microsoft. Service delays from these vendors
might have am impact on the companies' revenues and ability to withstand market
shift and supply's level out.
Unless an active trading market develops for our common stock, you may not be
able to sell your shares. Although we are a reporting company and our common
stock is listed on the Over-the-Counter Bulletin Board, there is no active
trading market for our common stock. An active trading market may never develop
or, if developed, it may not be maintained even after we register the shares you
purchase. Failure to develop or maintain an active trading market will
negatively affect the price of our securities, you may be unable to sell your
shares or such sales may lower the market price, and therefore your investment
would be a complete or partial loss.
We are subject to the penny stock rules, and therefore you may find it more
difficult to sell your securities. Broker-dealer practices in connection with
transactions in "penny stocks" are regulated by certain rules adopted by the
Securities and Exchange Commission. Penny stocks generally are equity securities
with a price of less than $5.00 (other than securities registered on certain
national securities exchanges or quoted on the NASDAQ Stock Market provided that
current price and volume information with respect to transactions in such
securities is provided by the exchange or system). The rules require that a
broker-dealer, prior to a transaction in a penny stock not otherwise exempt from
the rules, deliver to the buyer a standardized risk disclosure document that
provides information about penny stocks and the risks in the penny stock market.
The broker-dealer also must provide the customer with current bid and offer
quotations for the penny stock, the compensation of the broker-dealer and its
salesperson in connection with the transaction and monthly account statements
showing the market value of each penny stock held in the customer's account. In
addition, the rules generally require that prior to a transaction in a penny
stock; the broker-dealer must make a special written determination that the
penny stock is a suitable investment for the purchaser and receive the
purchaser's written agreement to the transaction. These disclosure requirements
may have the effect of reducing the liquidity of penny stocks. Our securities
are subject to the penny stock rules, and thus investors in the offering may
find it difficult to sell their securities.
Our founders, officers and directors beneficially own approximately 34% of our
stock on a fully diluted basis; their interests could conflict with yours;
significant sales of stock held by any or all of them could have a negative
effect on our stock price; shareholders may be unable to exercise control. As of
April 30th, 2004, our founders, officers and directors beneficially owned
approximately 34% of our common stock on a fully diluted basis. In addition,
employees of the Company own additional shares and rights to acquire shares. As
a result, the founders, officers and directors will have significant ability to:
o elect or defeat the election of our directors;
o amend or prevent amendment of our articles of incorporation or
bylaws;
F-24
o effect or prevent a merger, sale of assets or other corporate
transaction; and
o control the outcome of any other matter submitted to the
stockholders for vote.
As a result of this ownership and position, our founders, officers and directors
are able to significantly influence all matters requiring stockholder approval,
including the election of directors and approval of significant corporate
transactions. In addition, sales of significant amounts of shares held by any or
all of our founders, officers and directors, or the prospect of these sales,
could adversely affect the market price of our common stock. Stock ownership by
our founders and management may discourage a potential acquirer from making a
tender offer or otherwise attempting to obtain control of us, which in turn
could reduce our stock price or prevent our stockholders from realizing a
premium over our stock price.
We do not expect to pay dividends. Therefore, you may not rely on your ownership
of our stock as a source of income. We do not anticipate paying cash dividends
in the foreseeable future. Therefore, you may not rely on ownership of our stock
as a source of income.
Employees
During the period ended April 30, 2004 the Company re-aligned its employees as
part of both a cost cutting measure and subsidiary restructuring. We reduced our
workforce from 32 employees down to 26 during the period. Of these, twenty-six
employees the company has broken them down into their respective subsidiaries:
9 work directly within Mobile Reach Technologies, Inc., as follows:
- - One in Management & Administrative
- - Two in Sales and Marketing
- - Six in Development and Technology
9 work within the second subsidiary, Mobile Reach Solutions, Inc. formally Waves
Consulting Group, Inc., as follows:
- - Two Management & administrative
- - Four in Telecom Engineers and Support Staff.
- - Three in Sales and Marketing
The balance of the companies' employees (eight), work for the parent company,
Mobile Reach International, Inc. as executive and administrative. The Company
continues to owe some of its past employees approximately $191,000 of accrued
salary. The Company continues to raise capital and generate revenues to pay
accrued salary and future salaries of current and future employees as necessary
to retain and recruit the personnel the Company requires to achieve its goals.
The Company Accounts Receivable for the period ended April 30, 2003, increased
$256,939.00 from $395,629.00 to $652,568.00. The increase in the Companies
receivables is a directly attributed to the increase in new customers both
subsidiaries garnered during the quarter. See the Management Discussion and
Analysis for additional notes.
F-25
PART II. Information not Required in Prospectus
ITEM 24. Indemnification of Directors and Officers.
Section 145 of the Delaware General Corporation Law (the "DGCL") provides,
in effect, that any person made a party to any action by reason of the fact that
he is or was a director, officer, employee or agent of the Company may and, in
certain cases, must be indemnified by the Company against, in the case of a
non-derivative action, judgments, fines, amounts paid in settlement and
reasonable expenses (including attorneys' fees) incurred by him as a result of
such action, and in the case of a derivative action, against expenses (including
attorneys' fees), if in either type of action he acted in good faith and in a
manner he reasonably believed to be in or not opposed to the best interests of
the Company. This indemnification does not apply, in a derivative action, to
matters as to which it is adjudged that the director, officer, employee or agent
is liable to the Company, unless upon court order it is determined that, despite
such adjudication of liability, but in view of all the circumstances of the
case, he is fairly and reasonably entitled to indemnity for expenses, and, in a
non-derivative action, to any criminal proceeding in which such person had
reasonable cause to believe his conduct was unlawful.
The Company's certificate of incorporation provides that no director of
the Company shall be liable to the Company or its stockholders for monetary
damages for breach of fiduciary duty as a director to the fullest extent
permitted by the DGCL.
The Company's bylaws provide that the Company shall indemnify to the
fullest extent permitted by Delaware law any and all of its directors and
officers, or former directors and officers, or any person who may have served at
the Company's request as a director or officer of another corporation,
partnership, joint venture, trust or other enterprise.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to our directors, officers and controlling persons
pursuant to the foregoing provisions, or otherwise, we have been advised that in
the opinion of the Commission such indemnification is against public policy as
expressed in the Securities Act of 1933 and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than the
payment by us of expenses incurred or paid by a director, officer or controlling
person of ours in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with the
securities being registered, we will, unless in the opinion of our counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act of 1933 and will be
governed by the final adjudication of such issue.
ITEM 25. Other Expenses of Issuance and Distribution
SEC Registration Fee.............................. $236.83
Blue Sky Fees and Expenses*....................... $3,000.00
Legal Fees and Expenses........................... $20,000.00
Printing and Engraving Expenses................... $1,000.00
Accountants' Fees and Expenses.................... $31,812.00
Miscellaneous..................................... $499.17
Total............................................. $56,548.00
- ----------
* Estimated.
II-1
ITEM 26. Recent Sales of Unregistered Securities.
During the past three years, the Company has issued unregistered
securities in the transactions described below. Securities issued in such
transactions were offered and sold in reliance upon the exemption from
registration under Section 4(2) of the Securities Act of 1933 and/or Rule 701
promulgated thereunder, relating to sales by an issuer not involving any public
offering. The sales of securities were made without the use of an underwriter
and the certificates evidencing the shares bear a restricted legend permitting
the transfer thereof only upon registration of the shares or an exemption under
said Act.
On July 25, 2003, the Company was incorporated in the State of Delaware.
On July 30, 2003, Asphalt Paving International, Inc., a Florida corporation,
("API") merged into the Company, with the Company as the surviving company of
the merger. Immediately after the merger all the 5,112,460 shares of the
Company's common stock were owned by the shareholders of API in the same
percentage ownership they owned shares of API immediately prior to the merger.
On July 31, 2003, Mobile Reach International acquired all the outstanding
shares of Mobile Reach Technologies, Inc., a North Carolina corporation ("MRT"),
through a share exchange in which it issued 18,523,628 shares of its common
stock to the shareholders of MRT. The effect of the share exchange was to make
MRT a wholly-owned subsidiary of MRT and to change control of the Company. In
addition, the Company assumed outstanding options and warrants to purchase
4,766,472 shares of common stock, which are held by former holders of options
and warrants to purchase MRT common stock.
During the fiscal quarter ended October 31, 2003, the Company issued a
total of 911,335 shares of its common stock to four accredited investors, with
142,857 shares issued at a price per share equal to $0.21, 192,308 shares issued
at a price per share equal to $0.13, 476,190 shares issued at a price per share
equal to $0.21 and 100,000 shares issued at a price per share equal to $0.25.
During the fiscal quarter ended January 31, 2004, the Company issued a
total of 866,670 shares of its common stock to 12 accredited investors at a
price per share equal to $0.21 and 1,150,000 shares to five accredited investors
at a price per share equal to $0.20. The Company also issued a total of 400,000
shares of its common stock to two employees who had exercised options granted
pursuant to the Company's 2003 Equity Compensation Plan (the "Equity Plan") with
an exercise price of $0.0001 per share. In addition, the Company granted options
to purchase 3,350,000 shares of common stock under the Equity Plan to certain of
its employees, directors and/or consultants during this time period.
On March 15, 2004, pursuant to a Securities Purchase Agreement, dated as
of February 27, 2004 the Company issued 5% Convertible Debentures in the
aggregate principal amount of $525,000, with a conversion price equal to $0.16
per share. In connection therewith the Company issued 453,125 shares of common
stock in satisfaction of certain debt and warrants to purchase 1,599,064 shares
of common stock with an exercise price equal to $0.32.
During the fiscal quarter ended April 30, 2004, the Company issued a total
of 2,320,000 shares of its common stock to four accredited investors at a price
per share equal to $0.20. The Company issued 1,300,000 shares of its restricted
common stock to an officer, Mr. Bendixsen, at a price per share equal to
$0.0001. The Company also issued a total of 433,299 shares of its common stock
to seven employees who had exercised options granted pursuant to the Equity Plan
with an exercise price of $0.0001 per share and an additional 16,666 shares of
common stock to an employee who exercised an option under the Equity Plan with
an exercise price of $0.23 per share. In addition, the Company granted options
to purchase 990,000 shares of common stock to certain of its employees,
directors and/or consultants during this time period as well as one-year
warrants to purchase 1,200,000 shares of common stock to three consultants.
II-2
During the fiscal quarter ended July 31, 2004, the Company granted options
to purchase 286,666 shares of common stock to certain of its employees,
directors and/or consultants.
ITEM 27. Exhibits.
Exhibit No. Description
- ----------- -----------
Incorporated by Reference To
----------------------------
Exhibit Registrant's Exhibit Filed
No. Description Form Filed Number Herewith
--- ----------- ---- ----- ------ --------
2.1 Articles of Merger dated July 30, 2003 between
Registrant and Asphalt Paving International, Inc. 8-K 08/14/03 2.1
2.2 Articles of Share Exchange dated July 31, 2003 between
Registrant and Mobile Reach Technologies, Inc. 8-K 08/14/03 2.2
2.3 Agreement and Plan of Merger dated December 17, 2003 by
and among the Registrant, Waves Consulting Group, Inc.,
MRI Acquisition Corp. and the sole shareholders of Waves
Consulting Group, Inc 8-K 12/29/04 2.3
3.1 Certificate of Incorporation of Registrant. 8-K 08/14/03 3.1
3.2 Bylaws of Registrant. 8-K 08/14/03 3.2
10.1 2003 Equity Compensation Plan of Registrant. 8-K 08/14/03 10.1
10.2 Executive Employment Agreement between Mobile Reach
Technologies, Inc. and Michael Hewitt dated December 23,
2002. 8-K 08/14/03 10.2
10.3 Special Terms and Conditions of Employment between
Mobile Reach Technologies, Inc. and Michael Hewitt dated
December 23, 2002. 8-K 08/14/03 10.3
10.4 Amended Standard Terms of Employment between Mobile
Reach Technologies, Inc. and Mark Lloyd dated January 1,
2003 8-K 08/14/03 10.4
10.5 Amended Special Terms and Conditions of Employment
between Mobile Reach Technologies, Inc. and Mark Lloyd,
dated January 1, 2003 8-K 08/14/03 10.5
10.6 Securities Purchase Agreement dated February 27, 2004
among the Registrant and the investors signatory thereto. X
10.7 Registration Rights Agreement dated February 27, 2004
and the investors signatory thereto. X
10.8 Form of Debenture issued pursuant to the February 27,
2004 Securities Purchase Agreement. X
10.9 Form of Warrant issued pursuant to the February 27, 2004
Securities Purchase Agreement. X
16.1 Letter of Independent Auditor. 8-K 10/03/03 16.1
21.1 Subsidiaries. 10-K 10/30/03 21.1
II-3
ITEM 28. Undertakings
The undersigned registrant hereby undertakes:
(1) To file, during any period in which it offers or sells securities, a
post-effective amendment to this registration statement to:
(i) Include any prospectus required by Sections 10(a)(3) of the
Securities Act of 1933, as amended (the "Securities Act");
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the Registration
Statement. Notwithstanding the foregoing, any increase or decrease in volume of
securities offered (if the total dollar value of securities offered would not
exceed that which was registered) and any deviation from the low or high end of
the estimated maximum offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than 20 percent change in the
maximum aggregate offering price set forth in the "Calculation of Registration
Fee" table in the effective registration statement;
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the Registration Statement or any
material change to such information in the Registration Statement;
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be a bona fide
offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
(4) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of the small business issuer pursuant to the foregoing provisions, or otherwise,
the small business issuer has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the small business issuer of expenses incurred or paid by a director,
officer or controlling person of the small business issuer in the successful
defense of any action, suit or proceeding) is asserted by such director, officer
or controlling person in connection with the securities being registered, the
small business issuer will, unless in the opinion of its counsel the matter has
been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
II-4
SIGNATURES
In accordance with the Securities Act of 1933, as amended, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form SB-2 and authorized this registration statement
to be signed on its behalf by the undersigned, in the city of Cary, State of
North Carolina, on August 31, 2004.
MOBILE REACH INTERNATIONAL, INC.
By:
--------------------------------
Alan Christopher Johnson
Interim Chief Executive Officer
KNOW ALL MEN BY THESE PRESENTS, that each individual whose signature
appears below constitutes and has appointed Mark J. Lloyd and Alan Christopher
Johnson, and each of them acting alone, his or her true and lawful
attorney-in-fact and agent, with full power of substitution and resubstitution,
for him or her and in his or her name, place and stead, in any and all
capacities, to sign in any and all capacities, to sign any and all amendments
(including post-effective amendments) to this Registration Statement, and to
file the same and all exhibits thereto, and all documents in connection
therewith, with the Securities and Exchange Commission, granting said
attorney-in-fact and agent full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he or she might or could do in
person, hereby ratifying and confirming all that said attorney-in-fact and
agent, his or her substitute or substitutes, may lawfully do or cause to be done
by virtue hereof.
In accordance with the requirements of the Securities Act of 1933, as
amended, this registration statement was signed by the following persons in the
capacities and on the dates stated.
Signature Title Date
--------- ----- ----
/s/ Alan Christopher Johnson Interim Chief Executive August 31, 2004
- ---------------------------- Officer and Director
Alan Christopher Johnson (Principal Executive
Officer)
/s/ Michael Le Chairman of the Board August 31, 2004
- ---------------------------- of Directors
Michael Le
/s/ Mark J. Lloyd Director August 31, 2004
- ----------------------------
Mark J. Lloyd
S-1