UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2004
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the transition period from to
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Commission File Number: 000-49954
Maximum Dynamics, Inc.
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(Exact name of registrant as specified in its charter)
Colorado 84-1556886
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2 North Cascade Avenue, Suite 1100, Colorado Springs, Colorado 80903
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(Address of principal executive offices) (Zip Code)
(719) 381-1728 in the U.S.A and 011.27.21.556.1155 in South Africa
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(Registrant's Telephone Number, Including Area Code)
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practical date. As of August 16, 2004 there were
84,110,294 shares of the issuer's no par value common stock issued and
outstanding.
1
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MAXIMUM DYNAMICS, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
June 30, 2004
ASSETS
Current assets:
Cash..................................................... $ 18,705
Accounts receivable...................................... 72,161
Employee advances........................................ 6,154
Inventory................................................ 135,112
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Total current assets....................... 232,132
Property and Equipment................................... 170,656
Accumulated depreciation................................. (69,463)
Intangible assets........................................ 531,950
Accumulated amortization................................. (74,669)
Other assets............................................. 53,424
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Total assets............................... $ 844,030
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts and notes payable .............................. $ 444,799
Other current liabilities ............................... 1,781
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Total current liabilities.................. 446,580
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Convertible debentures (Note 4).......................... 200,000
----------------
Total liabilities........................ 646,580
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Minority interest............................................ (6,263)
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Shareholder's equity:
Common stock............................................. 6,462,633
Additional paid-in capital............................... 579,892
Retained deficit......................................... (6,841,254)
Accumulated other comprehensive income:
Cumulative translation adjustment..................... 2,442
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Total shareholders' equity................. 203,713
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$ 844,030
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See accompanying notes to condensed consolidated financial statements.
2
MAXIMUM DYNAMICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------------- -------------------------------
2004 2003 2004 2003
-------------- -------------- -------------- --------------
Revenue............................................. 98,345 37,599 $ 363,143 $ 117,973
-------------- -------------- -------------- --------------
Cost of Revenue................................. 73,370 2,486 73,370 38,657
Stock based compensation (Note 2)............... 475,000 --- 1,489,000 127,250
Selling, general and administrative............. 302,694 24,780 683,206 193,342
Contributed services............................ --- 60,350 --- 109,725
Depreciation and amortization................... 47,410 132,870 95,166 265,575
-------------- -------------- -------------- --------------
Total operating expenses............. 898,474 220,486 2,340,742 734,549
-------------- -------------- -------------- --------------
Operating loss....................... (800,129) (182,887) (1,977,599) (616,576)
Gain on forgiveness of debt..................... --- --- 426,900 ---
Gain on collection of receivables
peviously written off......................... 5,000 --- 95,500 ---
Interest Expense................................ 3,428 166,998 9,737 215,961
-------------- -------------- -------------- --------------
Loss before income taxes and
minority interest.................. (798,557) (349,885) (1,464,936) (832,537)
Income tax provision (Note 3)....................... --- --- --- ---
-------------- -------------- -------------- --------------
Loss before minority interest........ (798,557) (349,885) (1,464,936) (832,537)
Minority interest in income of
consolidated subsidiaries ...................... 2,934 --- --- ---
-------------- -------------- -------------- --------------
Net loss............................. (795,623) (349,885) $ (1,464,936) $ (832,537)
============== ============== ============== ==============
Basic and diluted loss per share.................... (0.01) (0.01) $ (0.02) $ (0.02)
============== ============== ============== ==============
Weighted average common shares outstanding.......... 77,119,166 33,615,000 76,213,142 31,494,167
============== ============== ============== ==============
See accompanying notes to condensed consolidated financial statements.
3
MAXIMUM DYNAMICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(UNAUDITED)
OTHER
COMPREHENSIVE
LOSS
ADDITIONAL CUMULATIVE
COMMON STOCK PAID-IN RETAINED TRANSLATION
SHARES AMOUNT CAPITAL DEFICIT ADJUSTMENT TOTAL
------------- ------------ ------------ ------------ -------------------------
December 31, 2003......................... 61,809,687 $ 4,542,719 $ 573,225 (5,597,547) $ 264 $ (481,339)
============= ============ ============ ============ ============ ===========
Common stock issued in lieu of compensation to
officers and employees (Note 2 and Note 6) 7,581,146 755,414 6,667 --- --- 762,081
Common stock issued in exchange for
consulting services (Note 6).............. 6,895,000 689,500 --- --- --- 689,500
Common stock issued in E-Sap
acquisition agreement (Notes 6 and 9)..... 2,000,000 200,000 200,000
Comprehensive loss............................ (448,084) (448,084)
Common stock cancelled in E-Sap
acquisition agreement..................... (2,000,000) (200,000) --- --- --- (200,000)
Sale of common stock (Note 6)................. 2,500,000 475,000 --- --- --- 475,000
Comprehensive loss:
Net loss.................................. --- --- --- (795,623) --- (795,623)
Cumulative translation adjustment......... --- --- --- --- 2,178 2,178
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Comprehensive loss............................ --- --- --- --- --- (793,445)
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Balance at
June 30, 2004............................. 78,785,833 $ 6,462,633 $ 579,892 $(6,841,254) $ 2,442 $ 203,713
============= ============ ============ ============ ============ ===========
See accompanying notes to condensed consolidated financial statements.
4
MAXIMUM DYNAMICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE SIX MONTHS ENDED
JUNE 30,
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2004 2003
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Net cash (used in) provided by
operating activities.......................... $ 20,831 $ (143,964)
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Cash flows from investing activities:
Purchases of equipment............................................. (30,527) (2,076)
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Net cash used in
investing activities.......................... (30,527) (2,076)
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Cash flows from financing activities:
Capital contributed by an officer.................................. 6,667 ---
Proceeds from issuance of long-term borrowings..................... 200,000 165,000
Repayment of notes payable (Note 4)................................ (299,425) (20,000)
Payments for offering costs (Note 5)............................... (2,700) ---
Proceeds from sale of common stock (Note 5)........................ 95,000 ---
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Net cash provided by
financing activities.......................... (458) 145,000
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Effect of exchange rate on cash........................................ 2,442 ---
Net change in cash............................ (7,712) (1,040)
Cash, beginning of year................................................ 26,417 2,813
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Cash, end of period.................................................... $ 18,705 $ 1,773
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Supplemental disclosure of cash flow information:
Cash paid during the year for:
Income taxes.................................................... $ --- $ ---
================== ==================
Interest........................................................ $ --- $ ---
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Non-cash investing and financing transactions:
Common stock issued as payment of debt and
accrued interest payable (Note 4)............................ $ 138,614 $ ---
================== ==================
Common stock issued to acquire Datalus
technology (Note 6).......................................... $ 200,000 $ ---
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Common stock issued to acquire 20 percent
interest in E-SAP (Note 7)................................... $ 200,000 $ ---
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See accompanying notes to condensed consolidated financial statements.
5
MAXIMUM DYNAMICS, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
NOTE 1: BASIS OF PRESENTATION
The financial statements presented herein have been prepared by the Company in
accordance with the accounting policies in its Form 10-KSB with financial
statements dated December 31, 2003, and should be read in conjunction with the
notes thereto.
In the opinion of management, all adjustments (consisting only of normal
recurring adjustments) which are necessary to provide a fair presentation of
operating results for the interim period presented have been made. The results
of operations for the periods presented are not necessarily indicative of the
results to be expected for the year.
FINANCIAL DATA PRESENTED HEREIN ARE UNAUDITED.
NOTE 2: RELATED PARTY TRANSACTIONS
During the period ended June 30, 2004, we issued 2,500,000 shares of our par
value common stock to certain officers, advisory board members and employees as
payment for salaries. The shares issued in the transaction were valued based on
contemporaneous stock sales to unrelated third parties, or $0.19 per share.
Stock-based compensation expense of $475,000 is recognized in the accompanying
consolidated financial statements for the period ended June 30, 2004.
During the period ended June 30, 2004 we entered into transactions with regard
to the rental of computer equipment and motor vehicles from an affiliate. The
affiliate is a closely held corporation formed in South Africa whose sole member
is our Chief Executive Officer. The related party transaction expenses totaled
$57,758, which are based on prevailing market rates less 20% for such rentals.
The outstanding amount of $38,458 owned to the related party is carried in the
balance sheet for the period ended June 30, 2004
In May 2004, we purchased computer consulting services from an affiliate based
in Colorado, USA. Our Chief Technical Officer is a director of the Colorado
firm. The transaction amount totaled $40,000. This transaction has been included
in outside services in the consolidated financial statements.
NOTE 3: INCOME TAXES
The Company records its income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes". The Company incurred net operating losses during
all periods presented resulting in a deferred tax asset, which was fully allowed
for; therefore, the net benefit and expense resulted in $-0- income taxes.
NOTE 4: CONVERTIBLE DEBENTURES
In April 2004, we received a funding commitment of $500,000 from Cornell Capital
Partners in the form of convertible debentures. The debentures are convertible
at Cornell's option any time up to maturity at a conversion price equal to the
lower of (i) 120% of the closing bid price of our common stock as of the closing
date or (ii) 80% of the lowest closing bid price of our common stock for the 5
trading days immediately preceding the conversion date. At maturity, we have the
option to either pay the holder 120% of the outstanding principal balance and
accrued interest or to convert the debentures into shares of common stock at a
conversion price equal to the lower of (i) 120% of the closing bid price of the
common stock as of the closing date or (ii) 80% of the lowest closing bid price
of the common stock for the lowest trading days of the 5 trading days
immediately preceding the conversion date. The convertible debentures are
collateralized by all of our assets. In the event the debentures are redeemed,
we will issue to Cornell a warrant to purchase 50,000 shares of our common stock
for every $100,000 redeemed at an exercise price of $0.258 per share. Cornell
purchased the convertible debentures from us in a private placement in April
2004. We plan to register 12,019,231 shares of our common stock underlying the
convertible debentures.
6
NOTE 5: INVENTORY
Inventory consists of 43 Mobile Point of Sales Units and various computer
components, which have been accounted for at cost. We have made no provision for
inventory obsolescence, as our directors have deemed this unnecessary.
Mobile point-of-sale units $ 28,705
Computer components 106,406
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$ 135,111
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NOTE 6: INTERNAL-USE COMPUTER SOFTWARE COSTS
Software that is internally developed, or modified solely to meet our internal
needs is capitalized in the accompanying financial statements. We capitalized
software development cost and production tool cost totaling $99,185 during the
period ended June 30, 2004. No substantive plans exist or are being developed to
market the software externally.
NOTE 7: SUBSEQUENT EVENT
On the July 2, 2004, we borrowed an additional $200,000 under our convertible
debenture financing arrangement with Cornell. The total outstanding on July 2,
2004 is $406,734.
7
ITEM 2. MANAGEMENT'S DISCUSSION AND PLAN OF OPERATION
THIS FOLLOWING INFORMATION SPECIFIES CERTAIN FORWARD-LOOKING STATEMENTS OF
MANAGEMENT OF THE COMPANY. FORWARD-LOOKING STATEMENTS ARE STATEMENTS THAT
ESTIMATE THE HAPPENING OF FUTURE EVENTS ARE NOT BASED ON HISTORICAL FACT.
FORWARD-LOOKING STATEMENTS MAY BE IDENTIFIED BY THE USE OF FORWARD-LOOKING
TERMINOLOGY, SUCH AS "MAY", "SHALL", "COULD", "EXPECT", "ESTIMATE",
"ANTICIPATE", "PREDICT", "PROBABLE", "POSSIBLE", "SHOULD", "CONTINUE", OR
SIMILAR TERMS, VARIATIONS OF THOSE TERMS OR THE NEGATIVE OF THOSE TERMS. THE
FORWARD-LOOKING STATEMENTS SPECIFIED IN THE FOLLOWING INFORMATION HAVE BEEN
COMPILED BY OUR MANAGEMENT ON THE BASIS OF ASSUMPTIONS MADE BY MANAGEMENT AND
CONSIDERED BY MANAGEMENT TO BE REASONABLE. OUR FUTURE OPERATING RESULTS,
HOWEVER, ARE IMPOSSIBLE TO PREDICT AND NO REPRESENTATION, GUARANTY, OR WARRANTY
IS TO BE INFERRED FROM THOSE FORWARD-LOOKING STATEMENTS.
THE ASSUMPTIONS USED FOR PURPOSES OF THE FORWARD-LOOKING STATEMENTS SPECIFIED IN
THE FOLLOWING INFORMATION REPRESENT ESTIMATES OF FUTURE EVENTS AND ARE SUBJECT
TO UNCERTAINTY AS TO POSSIBLE CHANGES IN ECONOMIC, LEGISLATIVE, INDUSTRY, AND
OTHER CIRCUMSTANCES. AS A RESULT, THE IDENTIFICATION AND INTERPRETATION OF DATA
AND OTHER INFORMATION AND THEIR USE IN DEVELOPING AND SELECTING ASSUMPTIONS FROM
AND AMONG REASONABLE ALTERNATIVES REQUIRE THE EXERCISE OF JUDGMENT. TO THE
EXTENT THAT THE ASSUMED EVENTS DO NOT OCCUR, THE OUTCOME MAY VARY SUBSTANTIALLY
FROM ANTICIPATED OR PROJECTED RESULTS, AND, ACCORDINGLY, NO OPINION IS EXPRESSED
ON THE ACHIEVABILITY OF THOSE FORWARD-LOOKING STATEMENTS. NO ASSURANCE CAN BE
GIVEN THAT ANY OF THE ASSUMPTIONS RELATING TO THE FORWARD-LOOKING STATEMENTS
SPECIFIED IN THE FOLLOWING INFORMATION ARE ACCURATE, AND WE ASSUME NO OBLIGATION
TO UPDATE ANY SUCH FORWARD-LOOKING STATEMENTS.
CRITICAL ACCOUNTING POLICY AND ESTIMATES. Our Management's Discussion and
Analysis of Financial Condition and Results of Operations section discusses our
condensed consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States of
America. The preparation of these financial statements requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. On an on-going basis,
management evaluates its estimates and judgments, including those related to
revenue recognition, accrued expenses, financing operations, and contingencies
and litigation. Management bases its estimates and judgments on historical
experience and on various other factors that are believed to be reasonable under
the circumstances, the results of which form the basis for making judgments
about the carrying value of assets and liabilities that are not readily apparent
from other sources. Actual results may differ from these estimates under
different assumptions or conditions. The most significant accounting estimates
inherent in the preparation of our financial statements include estimates as to
the appropriate carrying value of certain assets and liabilities which are not
readily apparent from other sources. These accounting policies are described at
relevant sections in this discussion and analysis and in the notes to the
condensed consolidated financial statements included in our Quarterly Report on
Form 10-QSB for the period ended June 30, 2004.
Background
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Maximum Dynamics, Inc. ("Maximum Dynamics," "we," "MXDY" or the "Company") was
incorporated on August 23, 2000 in Colorado. In August 2000, we secured a
five-year exclusive license of a software system from Europa Global, Inc., or
Europa, a non-U.S. technology company in exchange for 2,000,000 shares of common
stock as an upfront payment for the five-year exclusive license of the software
system. Europa initially developed the software system before licensing it to
us, where we continued development of the software under the name Datalus. In
February 2004, we purchased the Datalus software from Europa Global, Inc. in
exchange for 2,000,000 shares of our common stock. Included with the software
purchase was the platform, all associated technology and proprietary rights to
the Datalus software.
8
We initially designed Datalus to be a web-based software system we would utilize
for the fund administration for fund managers. Because it automates so many
processes, we believe it allows us to provide a service for fund managers with
three critical value propositions: lower overhead, computation and tracking, and
security/control. While it is our plan to continue to offer fund administration
services utilizing Datalus, we have spent the last nine months incorporating
other software and technology. We believe our new system enables us to take
virtually any business process and automate through the customization of
workflows.
As a result of this new platform and as we have grown and expanded, we have
increased our scope and focus beyond fund administration to become a projects
management services company. To that end, we utilize a fully functional back
office and global operations center located in Cape Town, South Africa to manage
business projects in four continents. Currently, MXDY manages 21 projects as
direct project managers, relationship managers or deal brokers. These projects
include mobile logistics and tracking (TagNet), mobile commerce and point of
sale solutions, village banking, business process management, enterprise
application integration, supply chain management and procurement, back office
services, wireless Internet communications in urban and rural settings,
commodities trading, energy and alternative fuel, and economic development
businesses.
As opportunities have emerged, we have pursued them through partnerships, joint
ventures and acquisitions. Through this growth, we have built a large base of
infrastructure, technology solutions, back office services, and business
management resources. Taking this infrastructure and our projects management
model collectively, we then choose to manage projects that must meet strict
criteria. We identify and research products and services that are introduced to
us or that we identify to enhance other projects on which we are already
working. Because of our deal flow and extensive network of partners, we have
built a business model wherein we focus on owning the customer relationship and
then providing the solution needed for that customer. As a result, we pick
projects that complement, enhance or support other projects we have, thereby
achieving economies of scale from the perspective of resources required to
service the solution while at the same time providing in some cases a one-stop
shop for the customer. The projects are managed either by Maximum Dynamics, one
of its subsidiaries, joint venture or strategic partners.
Acquisitions
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On October 8, 2002, we acquired the assets of Barrington Gap, Inc., a Colorado
corporation and our first customer, for $47,000 in cash and stock. In that
acquisition, we believe we gained effective Internet marketing software, a sales
force, prospecting software, web data integration/sales and marketing software,
maintenance contracts and software development for three (3) Internet Service
Providers (ISPs), customer contracts that generated about $150,000 in revenue
since the date of acquisition, a partnership agreement with a technology
development center in South Africa, and a partnership agreement with a call
center in South Africa.
The acquired software applications from Barrington Gap, Inc. are compatible with
Datalus and were integrated into the system so that a complete package can be
offered or alternatively can be offered as individual product/service offerings.
The relationship with the technology development and call centers in South
Africa played a large part in us setting up our main base of operations in Cape
Town, South Africa. These two partners helped us to identify many of the
strategic partners, joint venture partners, and subsidiaries that we have today.
The Company has acquired equity stakes in Maximum Dynamics, Inc SA (formerly
"Unilogic Solutions (Pty), Ltd), TagNet International A/S (formerly "Maseco
Denmark A/S"), and E-SAP Project Management and Consulting (Pty), Ltd. Maximum
has mutual revenue sharing partnerships with Intesol Corporation (Pty) Ltd.,
Easy Time (Pty) Ltd., Cooperative Development Agency CC, FutureLoad (Pty) Ltd.,
Naf-Cel (Pty) Ltd., Startrack Communications Africa (Pty), Ltd., Kulani Africa
Gas (Pty) Ltd., Hiper Systems de Mexico S.A. de C.V., Solucionarte S.C., and
Herstedvester Innovation ApS.
On December 12, 2002, we acquired The Mini-Cap Sector, a group of assets valued
at approximately $2 million. The Mini-Cap Sector includes proprietary trading
models, proprietary research methodologies, published research on more than 100
companies, a mini-cap index, the world's first mini-cap database, a financial
consulting and investment banking service, and fully integrated websites that
contain subscriber bases and access to research reports. While we wrote off
these assets as an impairment charge, we partnered with a technical trading
company to begin work on this trading technology in March 2004 with the goal of
creating a commercial trading solution.
9
In April 2003, we moved our main operations center to Cape Town, South Africa,
which became operational in September 2003. The operations center in Cape Town
was established to service customers and to provide accounting, back office
administration, client side support and call center services. In order to bring
the operations on-line, we turned to strategic partnerships, joint ventures and
acquisitions to build out our infrastructure. Our first partnership was formed
with Unilogic Solutions (Pty), Ltd. (www.unilogic.co.za) in June 2003. Unilogic
has developed a suite of electronic document management systems (EDMS) and
business workflow software applications that overlap in functionality with
Maximum's software system Datalus. These software applications target other
markets not currently being addressed by Datalus, such as human resource
management, insurance claims processing, corporate procurement and supply chain
management, employee labor relations, debt management, contracts management and
loan application process management.
We decided to acquire Unilogic so that we could have ownership of the
intellectual property and software applications as well as to be able to pursue
some of these other markets not being addressed by us. As such, we acquired 51%
of Unilogic on September 18, 2003 in exchange for $72,000 in cash (payable over
12 months) and 6,000,000 shares of restricted common stock. On January 20, 2004,
we acquired the remaining 49% of Unilogic for 1,000,000 shares of restricted
common stock. In March 2004, we changed Unilogic's name to Maximum Dynamics,
Inc. SA ("Maximum SA"). We have positioned Maximum SA as the central hub for
projects management services and the main back office. Maximum SA's business
process management, workflow automation and EDMS systems represent the glue that
holds our model together. We believe Maximum SA will also be able to utilize
these systems to offer customized technology solutions to other companies in
Africa, the United States, Europe and Asia.
From July through October 2003, we focused primarily on securing contracts for
Unilogic's technology solutions because of Unilogic's pre-existing client base
that includes companies such as Old Mutual, Laser Transport Group, Bidvest Group
(Visual Information Systems), Expressed Solutions and the Angolan Government. By
December 2003, Unilogic had submitted more than twenty four proposals with about
fifteen under consideration by potential customers.
Due to the black economic empowerment (BEE) 1 charters in South Africa, most of
these contracts required that we submit our bids through a BEE company that is a
government approved BEE Company. Since most of the proposals were for supply
chain management and procurement workflow automation solutions, we had partnered
with IntData (Pty), Ltd., a BEE Company that was contributing the workflow
mapping required for supply chain and procurement solutions. In October 2003,
IntData (Pty), Ltd. began experiencing problems that caused us to question the
soundness of utilizing them as a value added reseller (VAR).
In September 2003, we had developed another strategic partnership with a BEE
company called Maseco Systems Integrators (MSI) to be a VAR and assist with
integration and implementation of the Unilogic contracts. After working together
for several months, we signed a Letter of Intent to acquire a 40% equity stake
in MSI on October 9, 2003. We were interested in acquiring MSI for several
reasons. First, MSI is a technology integration and infrastructure support
company which we believe to have strong IT solutions, ERP implementation
projects and systems integration capabilities. These capabilities are exactly
what our management believes is needed to service our Unilogic contracts.
Secondly, MSI was a 66% owner in a $10 million joint venture with Bytes
Technology Networks called Maseco Bytes, which was an infrastructure and systems
integration technology company. Maseco Bytes had an excellent reputation as a
solid BEE company due to MSI's track record and reputation. Lastly, MSI was
working on developing some cutting edge technology in the mobile logistics
arena.
- -----------
1 The government of South Africa has implemented a nationwide charter that
mandates the redistribution of wealth to individuals that were previously
disadvantaged (PDIs) under Apartheid. Companies owned and managed by PDIs and
that conduct skills transfer to other PDIs receive top consideration. When a
company puts a project out to bid, it needs to make sure that at least one BEE
Company bids on the project, unless no BEE Company exists to bid on the project.
10
However, shortly after our LOI, Bytes Technology Networks maneuvered to gain
control of Maseco Bytes, forcing MSI's two managing directors out of the
company. In November 2003, Bytes Technology Networks began a series of legal
maneuvers that resulted in Maseco Byte's liquidation in February 2004.
As a result of our intention to acquire MSI and during the due diligence
process, however, management learned that one of the shareholders of MSI, Maseco
Denmark A/S, owned the intellectual property for a real-time tracking device
called TagNet. After a thorough review of the technology and a feasibility study
of the technology's applications, management became more interested in TagNet
than in MSI. Therefore, on October 31, 2003, we acquired 89% of Maseco Denmark
A/S (which has now been changed to TagNet International A/S) for six million
shares of restricted common stock. Since TagNet International has a 33% stake in
MSI, we felt we "killed two birds with one stone" by obtaining the TagNet
technology as well as a stake in MSI in case it resolved its legal battle with
Bytes Technology Networks.
While MSI sorted through its legal issues with Bytes Technology Networks, we
focused on bringing to market TagNet International's suite of mobile logistics
solutions. Several of these applications have been in use in Demark and parts of
Europe for a number of years. By making some engineering modifications and
slight system redesigns, we were able to introduce a unique solution called
TagNet, which is a system wherein cell phone communications technology is used
to track the location of a module that can also identify and monitor small
credit card size devices, or "Tags". In our estimation, these cost effective tag
reading devices and tags can be tracked anywhere where there is cell phone
coverage. By extending the network through other means, the solution can even be
tracked outside of a cell phone network, which our management believes makes the
tracking technology unique. (A more thorough description of TagNet and the
services surrounding the technology is found later).
As a result of MSI's instability coupled with our concern about IntData, we
began working on forming relationships with existing BEE companies through which
we could go back to these potential customers and submit our proposals under
this new company. Therefore, management entered into discussions with E-SAP
Project Management and Consulting (Pty), Ltd. (E-SAP) about an acquisition.
Management had already formed a strategic partnership with E-SAP and had
identified E-SAP as a possible candidate to provide for the infrastructure
requirements we had. On March 4, 2004, we acquired a 20% equity stake in E-SAP
in March 2003. E-SAP represented to us that it was a 157 person end-to-end
products and solutions company that has experience in diverse business areas and
technology domains in the telecommunications, banking, financial services,
insurance and logistics industries. E-SAP also represented to us that it had
generated revenues of $10,413,692 and net income of $1,225,617 in fiscal year
2003. (March 1, 2003 through February 28, 2004 at an exchange rate of US$1 to
R6.5).
However, our management is in the process of determining the validity of
financial statements provided to us by the principals of E-Sap. After deeper
investigation beyond our initial due diligence, our management has been unable
to verify the information represented in E-Sap's financial statements that were
provided to us, and its management has been uncooperative in this regard. This
information was included in our financial statements incorporated into our
quarterly report for the period ended March 31, 2004. Therefore, the actual
value of E-Sap and our ownership stake in that entity that we reported for that
period may not be reliable. As a result, we have undertaken to restate our
financial statements for that period by writing off our investment in E-Sap.
Moreover, we are considering legal action against E-Sap and its principals for
their failure to accurately represent the value of E-Sap to us. A legal firm,
who is a strategic partner of ours that specializes in technology law, is
handling the legal proceedings for us.
With the need for more infrastructure, we also signed a term sheet to acquire
40% of Intesol Corporation (Pty) Ltd. ("Intesol"), a 54% South African Black
Economic Empowerment (BEE) technology company on April 14, 2004. The
consolidated revenues for Intesol and its joint ventures for the financial year
are still being consolidated and are expected to reveal revenues of over
$10,937,500 with a net income estimated to be over $2,187,500 USD. Intesol is
comprised of a group of subsidiaries that fall under the umbrella of Intesol
Corporation (referred to collectively as the Intesol Group of Companies).
Intesol specializes in integrated security solutions, systems design, electronic
security, data recovery and erasing, digital storage, security risk analysis,
engineering consulting, radio frequency identification tag integration, banking
security, technology law, Energy Power Management and other forms of
communications.
11
In addition to being a solid infrastructure company, we believe that Intesol
Group of Companies has intellectual property rights and patents that include:
ATM access control, a bank card identification system, a credit card
identification system, cell ads, a vehicle identification system, an asset
integrated monitoring identification system, and information security software.
While both companies are still open to completing this acquisition, our
management determined that with the number of subsidiaries Intesol has spread
out over the continent of Africa that timely reporting would represent a
problem. To that end, both companies agreed that an acquisition would not be
completed at this time. Our management is working with Intesol to help
facilitate a consolidation of the valuable subsidiaries and sell of assets or
unwind from those that are not producing.
In the meantime, both companies agreed to further business cooperation by
signing a revised partnership agreement in July 2004 in which the two companies
agreed to revenue and resource sharing terms that are comparable to what
management believes it would have generated through an acquisition. For example,
Intesol is working on generating business for Maximum in its call center, TagNet
and mobile point of sale solutions businesses. In return, Maximum is proactively
working to sell some of Intesol's solutions in security,
We wish to remind investors that until the acquisition closes, there can be no
assurance that it will close or that the business combination will be
successful.
On April 12, 2004, we signed a term sheet to acquire 40% of Khumo (Pty) Ltd., a
South African banking technology solutions company. In May 2004, we restructured
Khumo and invited other partners to join the joint venture so that the newly
named entity, Cooperate Development Agency (Pty) Ltd., will be the main focal
point of the roll-up of 96 village banking branches nationwide. For our
contribution to the joint venture, we are providing the funds management,
banking regulatory requirements management systems, financial integration
systems, and the software and infrastructure required to service and operate the
village branches. One of the other joint venture partners is contributing its
project management of 37 South African community bank branches as well as
relationships with 59 other branches nationwide. Because this entity will be
positioned to merge banking functions and possibly operations in the future with
an established bank in South Africa, we are operating in stealth mode until the
relationships are finalized. However, management believes that in the next two
to three months it should have formalized and completed that agreements required
to begin the roll-up process. Should we be successful at this roll-up,
management estimates that we should have an equity stake of between 15% and 25%
in the first modernized and institutionalized village bank in South Africa.
On June 22, 2004, we signed a Memorandum of Understanding (MOU) with Startrack
Communications Africa (Pty), Ltd. (Startrack) to form a new venture under the
name TagNet Southeast (Pty), Ltd. ("TagNet SE") that would hold Super
Distributor rights to TagNet solutions in Africa, Southeast Asia and Australia.
We have decided to unwind from this MOU with Startrack for several reasons with
the primary one being that we do not believe that Startrack is able to carry out
the funding commitment it had made to the joint venture. Rather than terminating
our relationship completely, however, we have offered to appoint them as a Value
Added Reseller (VAR) instead. Based upon initial feedback from Startrack, the
VAR status may actually expedite them turning up sales for TagNet as they can
operate without the risks associated with the funding to which they had
committed. Another reason for unwinding is that we now believe that some of the
groups to whom we have talked recently can take us to large global players in
the logistics and transportation industries. The companies we are targeting
would be a better fit as a strategic partner in these regions.
12
We have focused most of our resources from November 2003 through February 2004
on our two flagship projects: Mobile Commerce and TagNet.
Operations
Mobile Commerce
We consider mobile commerce to encompass anything that allows a retailer to be
freed from a physical desk with an electrical outlet in order to conduct
business. The key piece of hardware and software that facilitates this for
entrepreneurs and retailers alike is a mobile point of sale ("POS") terminal
that can sell any closed-end payment service (such as pre-paid airtime, pre-paid
electricity, loyalty programs, credit card transactions, ATM/Debit card
processing, etc.) These terminals are provided to customers as a fully
functioning terminal integrated to a back-end transaction processing system.
These terminals communicate with the backend through GSM/GPRS network coverage
or through regular landline telephony. We derive a percentage of each
transaction from hosting the back-end sytem and providing the terminal
applications. Besides supporting the POS terminals, regular cellular telephones
can be used to sell and buy airtime through our backend pre-payment transaction
server. This business model is ideal for the developing economies on the African
and South American continents where we have identified significant demand.
In September 2003, we were introduced to a Hong Kong based company called M.POS
Holdings Limited (http://www.mpos.net), which provides mobile commerce
solutions, through one of the consultants we engaged for business development.
M.POS provides mobile commerce services and products in the People's Republic of
China and Hong Kong. Their flagship product is the M.POS2002, which is a
wireless point of sale (POS) terminal designed to allow merchants to accept
payments by means of debit or credit cards in any location through GSM/GPRS
communication capability embedded in the unit. M.POS2002 is capable of
processing magnetic cards or smart card payments in real time from any location.
The M.POS terminal can also capture and transmit data for corporate
applications, make voice calls and even offer fingerprint verification. It has
messaging capabilities that include sending, receiving and printing short
message services (SMS), sending and receiving email messages, and instant text
messages. As a result, in our estimation, merchants now are no longer
constrained to the location of their telephone lines, nor the narrow services on
offer from their traditional electronic funds transfer (EFT) POS terminals. Our
management believes that this highly portable device is perfectly suited to
drive payment acceptance, prepaid voucher sales, inventory tracking and a host
of other applications.
After consulting our partners, value added resellers, and Unilogic, we acquired
the exclusive rights to distribute M.POS' communications hardware and
electronics solutions into the continent of Africa with a right of first refusal
for the exclusive distribution rights into the United States and Mexico. As part
of the agreement with M.POS, we now have office space and sharing of human
resources in Hong Kong and Beijing, China. We signed the agreement on October
17, 2003 in exchange for 1,000,000 shares of restricted common stock.
We decided to secure these exclusive rights because management believes that the
M.POS2002 is a good strategic fit into our current product and service offering
in the banking, supply chain management, mobile commerce and procurement
industries.
In November 2003, we started the process of getting the M.POS2002 certified for
the banking system in South Africa, which means the banks will approve of the
device and its interfacing with the banking gateways in South Africa.
Certification from the banks is also important in South Africa because the
market is largely accustomed to the banks subsidizing the devices or providing
the devices for free, similar to how cell phone companies provide the phone for
free if the cellular service is secured for two years. Therefore, certification
by the banks means that they have approved of the device and will add it to
their list of POS vendors, which management believes will translate into sales
of the M.POS unit. Even though bank certification is a costly and overhead
intensive process, management believes that the overall financial benefit of
gaining it is worth the cost and effort that it takes to achieve it.
13
While we have been pursuing banking certification in South Africa and Mexico, we
have deployed what we believe is a top-down, bottom-up approach. We started at
the top by working on obtaining certification and approval from the banks and
worked our way down the value chain. While we were spending resources and time
on this, we also started at the bottom and went directly to the merchants to
ascertain what types of solutions and services would appeal to them.
As a result of our findings, we have been working with our strategic partners to
get the M.POS terminal programmed for applications that will enable the M.POS
unit to sell pre-paid voucher products such as cellular air time, electricity
and water. The M.POS terminal is now programmed and able to sell air time for
the major cellular companies in South Africa, which has allowed us to begin
ramping up sales aggressively this month. In addition to these applications, we
also have applications being developed for loyalty programs. In fact, in early
August 2004, we submitted a proposal to two different retailers for development
of their loyalty program and integration with POS terminals.
Now that we have a terminal selling airtime we are finding that there is more
openness from the banks to provide us with means to offer banking services on
the terminal as well. In fact, we believe that by mid-October we will be able to
have our own back-end system for electronic funds transfer transactions (such as
credit card, ATM and smart card transactions) on any terminal, which will
immediately begin to add to our revenue stream. Due to the competitiveness of
the industry, we are not disclosing who our banking partner is at this time.
We believe being able to offer the specific banking capabilities solution we
have put together with our bank partner is incredibly significant as, if
accepted by our bank partner, it would enable us to offer our terminals to
end-users without having to go through the rigorous process of certifying our
terminals. Management wishes to remind investors that there can be no assurance
that our banking partner or any other bank will certify the M.POS terminal or
offer us this type of a solution.
In February 2004, M.POS changed its manufacturing partner which resulted in
pushing back the schedule for when terminals would be available. We utilized the
delay as an opportunity to diversify our strategy from that of selling terminals
to that of selling a point of sale solution that includes applications for
pre-paid vouchers and banking running on our own back-end system. As a result,
we can now generate on-going revenue from every transaction done on a terminal
whether it is pre-paid airtime or a bank card charge. By selling terminals to
customers who will utilize our back-end, we are better able to control the "foot
print" of terminals. We are able to then manage that foot print as a network of
terminals, which we expect makes it easier to maintain and update applications
on the terminals remotely. More importantly, this strategy lowers our break-even
point from about 10,000 terminals sold to about 1,000 terminals running through
our back-end. In addition, we believe that this provides us with annuity income
for as long as a terminal is placed in the field running through our back-end.
From June to August 2004, we worked diligently to secure this end-to-end
solution running through our back-end. To achieve this, we had to sink
significant resources and time into building out the needed infrastructure, a
lot of which we have achieved through revenue sharing agreements with back-end
and technology partners. If we are successful in obtaining banking capabilities
on our terminals by mid-October, then we believe we will be able to capitalize
on significant demand in South Africa that is not being met. We believe this
because we would be one of the first providers positioned with an end-to-end
offering that allows someone to offer both pre-paid services and banking
transactions all on the same terminal.
Our marketing research and initial contact with our target market indicated that
a rental model or financing terms for the sale of terminals would help overcome
hurdles in securing orders. Therefore, we have also looked for financing
partners so that we can offer a rental model to potential customers thereby
reducing the cash outlay required to purchase a terminal. We have a relationship
with two financing companies in South Africa who have approved our rental model.
As a result, we are actively working on qualifying potential customers who have
applied to rent our terminals.
14
With banking capabilities on the horizon and pre-paid services for cellular,
electricity and water already working and being sold on our terminals, we have
begun securing orders. One example is a recent partnership we formed with
Naf-Cell (Pty) Ltd., a black economic empowered master service provider for
Vodacom (the second largest cellular provider in Africa and the largest in South
Africa). In July 2004, we signed a revenue sharing partnership with Naf-Cell
wherein they will purchase mobile point of sale solutions from us and we will
re-sell their range of products. Naf-Cell has committed to a standing order of
500 terminals from us. They are currently qualifying their top prospects through
our financing process and we expect to receive payment of the first batch of
orders in the next few weeks. For every terminal sold through Naf-Cell, we will
share the revenues generated from the sale of cellular contracts and pre-paid
airtime on the terminal. We wish to remind investors that there can be no
assurance that Naf-Cell will fulfill its standing order of 500 units.
We are also working on selling our mobile point of sale solutions package to
retail customers, most of whom are particularly interested in our banking
offering once it is available. Some of these retail customers are national
chains that we believe are looking for hundreds of terminals to be placed in
their locations. We believe that once the banking can be offered on the
terminals that we should see a dramatic increase in the number of orders. Our
management estimates that we need between 700 and 750 terminals processing
pre-paid vouchers and banking transactions on our back-end in order for us to
become profitable. However, we wish to remind investors that there can be no
assurance that we will reach profitability or sell enough terminals to
break-even.
TAGNET
On October 31, 2003, we acquired 89% of Maseco Denmark A/S (which has now been
changed to TagNet International A/S) for six million shares of restricted common
stock. TagNet owns a suite of mobile logistics solutions, of which several
applications have been in use in Demark and parts of Europe for a number of
years. By making some engineering modifications and slight system redesigns, we
were able to introduce a unique solution called TagNet, which is a system
wherein cell phone communications technology is used to track the location of a
module that can also identify and monitor small credit card size devices, or
"Tags". In our estimation, these cost effective tag reading devices and tags can
be tracked anywhere where there is cell phone coverage. By extending the network
through other means, the solution can even be tracked outside of a cell phone
network, which our management believes makes the tracking technology unique.
The technology behind the new device has been used successfully by TagNet
International for a number of years and the customer list includes names like
The Danish Police force, The Danish Civil Defense and the European Commission.
We believe that the new generation of the device offers a substantial
improvement in "total cost of ownership" and has the potential to expand the
number of customers that will get good returns on investments.
A typical solution of the new generation of technology consists of two
components: tags and tag readers. More complex TagNet solutions could also
include bar-code scanners, touch screen monitors, printers and telemetric
measuring devices. Tags (also known as transponders) incorporate a chip and an
antenna. Active tags, which include a battery, can transmit hundreds of feet and
cost upward of $5. Passive tags are much cheaper, smaller, require no battery
and usually have a range of only a few feet. Passive tags can also be disposable
and can be packaged as bar-code labels. Readers are mobile, mini computers that
operate software developed by TagNet that is used to identify tags, compute the
instructions contained in the software, and perform the required function based
on these instructions.
Radio Frequency Identification is a form of automatic identification technology
that uses radio waves (wireless) to communicate among a system of integrated
circuits, tags, readers and software to identify items. Radio waves transmitted
from an antenna interact with an integrated circuit embedded on an RF tag, which
sends radio waves back to a reader. The reader turns those waves into digital
information, allowing the item that responded to be instantly identified.
Tagnet is supplied in a modular format with three primary modules. The first is
the Base Module, which is a tracking device in line with a number of other
products in the market. It can read a Global Position or a TAG ID and relay the
information to a data center. The Base Module can be connected to a laptop or PC
and with the right drivers installed the laptop can communicate with or through
the center. The Base Module can easily be upgraded to the Smart Module to allow
local applications to run on the equipment.
15
The next grade up is the Smart Module Processor, which can handle one or two on
board applications with a few peripherals. If the processes get to complicated
or if too many processes or too many peripherals need to be added, it is
necessary to upgrade to the Business Module. We expect to be able to handle the
bulk of our customer application on the Smart Module.
The Business Module has the same capability and flexibility as a PC but can
handle more complex interfaces for peripheral equipments. It has full
multitasking capability and a vast library of software functions all reducing
the programming cost on more complex systems.
Our `Daisy Chain TAG Reader' is a radio frequency (RF) Transceiver (both
transmitter and receiver) and is a unique product to TagNet. Just like the
normal tag, it sends out its unique ID number every 2 seconds. Additionally it
will work as a repeater for readers of the same type. We believe that this
enables us to build a cheaper wireless chain of TAG readers for applications
like guard routes, train wagon readers etc.
In January 2004, we secured a pilot project with the National United Local and
Long Distance Taxi Association (NULLDTA), a 12,000 member organization in South
Africa. NULLDTA is one of three main taxi cab associations in South Africa and
there is an intense rivalry among the three. NULLDTA's members can use the
devices to manage a fleet of taxis more effectively, optimize route coordination
and coverage areas, deter vehicle theft, reduce the ability for drivers to be
unproductive, reduce unreported cab fares, assist in determining what the cause
of an accident may have been, and monitor engine performance and efficiency.
Presentations were done to members to this effect and there was an overwhelming
response rate of about 80%.
While interest within NULLDTA remains high, however, we have refocused our
efforts on other contracts. The primary reason is that the taxi cab associations
in South Africa are managed from the top down making direct customer contact
practically impossible. Therefore, we have had to be very dependent upon the
leaders of NULLDTA. NULLDTA's leadership has been focused on major legislation
currently in the works that would make drastically alter the taxi industry
landscape. Our management believes that eventually we should see orders from
NULLDTA because its members have shown such a strong interest and continue to
send such a message to us.
In January 2004, we presented TagNet to the Department of Transportation (DOT)
in Mexico who invited us to do a demonstration of TagNet, which was completed on
May 19, 2004. The Mexican DOT liked the technology's potential for substantial
cost savings and increased security for the DOT, especially compared to other
solutions that currently exist. The DOT has requested the project specifications
for a pilot project for two vehicles spread over a couple of routes. The pilot
project concept plan involves monitoring how cement is disappearing from trucks
along its routes. We have put together the required components and are working
on presenting the project plan sometime during the next two weeks. Upon
successful implementation, the DOT would require the companies with which it
contracts to utilize the TagNet system on its vehicles. The DOT has communicated
that there are over 40,000 registered trucks that would need to convert if it
approved the pilot. There can be no assurance the DOT will approve of the pilot.
In February 2004, TagNet International received its first order through a VAR in
Denmark for 100 TagNet units from Glipstrup Transport A/S, a trucking company in
Denmark. Glipstrup is utilizing TagNet for fleet and logistics planning and
management. In April 2004, Glipstrup increased its order from 100 business
module units (high-end, multi-functional model) to 100 business module units and
200 base module units (basic Tag reading unit).
In June 2004, we submitted a proposal to a train company in South Africa who had
contracted a black economic empowerment technology company to provide a solution
that can track train locations, decrease cargo shrinkage through tracking, and
improve shipping efficiencies. Having failed to deliver a solution after billing
the train company about $15 million, the contractor is under pressure to produce
a solution by September 2004. However, many of its current sub-contractors are
owed about $10 million and are putting pressure on the contractor to get the
money from the train company, who has refused to pay the additional money until
a solution is provided.
16
The proposal, in which we outlined our technology specifications, has been
accepted by the train company. The contractor to whom we would be sub-contracted
has agreed that TagNet is the preferred solution. Engineers in both companies
are agreed that TagNet is a more effective solution and will cost about $25
million less than the other alternative, which has failed to deliver after two
years of trying.
Due to the size of the contract, there are political issues at stake that
management believes have stalled our progress with the contract. We are
currently utilizing every resource available to apply pressure to allow us to
begin the first phase that would involve between five and ten trains all at our
own expense. By so doing, we believe there would be no alternative but for the
contractor to the train company to move forward with TagNet.
At the end of August, the consortium of medical experts with whom we signed a
Memorandum of Understanding (MOU) has scheduled a demonstration with a large
distribution company in South Africa. While separate from the medical
applications they are developing under the MOU, the consortium is actively
working on bringing potential customers to us.
In South Africa, we have submitted proposals for a service delivery solution for
a water meter reading company, a truck monitoring solution for an energy
company, a delivery tracking solution for a cellular company, and a time and
attendance solution for a cleaning service company. In Mexico, we are working on
submitting a proposal for a petroleum transport company in Mexico that is trying
to reduce its loss of petroleum to the black market as a result of shrinkage
from its trucks.
While TagNet has received interest in its products, management wishes to remind
investors that there can be no guarantee that any of these demonstrations or
pilot projects will result in secured contracts or revenues.
To date, we have suffered a setback with TagNet due to a production problem
where Motorola supplied us with GPRS modems that do not function properly. They
initially told us they would be fixed within two weeks. After one week, we began
working on a contingency plan. After five weeks, we had completely redesigned
and retooled our units to be fitted with another modem from another
manufacturer. Motorola has still not corrected the problem. We are considering
taking legal action against Motorola for its failure to provide a workable
solution and for creating a two month bottleneck in production.
As a result, the first 300 units that were to be delivered to Glibstrup
Transport were delayed. We believe we have resolved these problems and
are planning on delivery in August and September. As a result, we believe the
revenue we expected to book from this contract will be realized in the three
months ended September 30, 2004.
This production problem with Motorola caused a delay in the production and
delivery of demonstration units to our operations in South Africa and Mexico,
which are needed in order to demonstrate the technology working "out in the
field." We believe the delay in getting the demonstrator down to South Africa
has caused us to be about two months behind schedule and has resulted in us not
yet having secured a significant order to date. Demonstrators are scheduled to
arrive in South Africa and Mexico at the end of August 2004. While sales can
take place without demonstrators, we believe that having these demonstrators
on-hand will dramatically improve our ability to sell the TagNet solution.
OUR ADVISORY BOARD. We believe that a large part of our recent business
development over the last two months has been a result of the formation of our
Advisory Board. The first director who joined the board was Mpumelelo Tshume,
who is a South African national. Mr. Tshume recently resigned as the CEO of
PetroSA to pursue interests in the commodities trading industry. Petro SA is
South Africa's 5.5 billion (South African Rand) national oil company that
explores for oil and gas in selected basins around the world, supplies
petrochemicals to customers in more than 40 countries, and boasts of having the
largest Gas to Liquids (GTL) plant in the world. Mr. Tshume has committed to
helping us with our business development and political relations in South Africa
and parts of Africa. In particular, he will be working closely with Maximum to
help manage a project between Maximum and Versa International that will focus on
commodities trading and sourcing products from around the world.
17
The second director to join our Advisory Board was Dr. Dingindawo Paulus
Shongwe, who is a South African national. Dr. Shongwe is currently the Senior
Manager of Peoples Bank, which is subsidiary of the Nedcor Group. Peoples Bank
is among the top ten banks in South Africa (by assets) and focuses on offering
affordable and understandable products to the emerging market and small and
medium enterprises. As the Senior Manager, Dr. Shongwe is responsible for the
company's customer education and business development in South Africa. Prior to
the Peoples Bank, Dr. Shongwe worked at Standard Bank as the Senior Manager of
Group Public Affairs and assisted in the Public Sector Banking Department. Dr.
Shongwe has committed to helping us with inroads into and knowledge about the
financial community in South Africa and in the African continent. Dr. Shongwe
was instrumental in getting the M.POS certification process started and
short-tracked. He has taken a keen interest in our village banking initiative
and will be helping open doors and provide guidance throughout the project life.
Equally important, Dr. Shongwe shares our vision to help make a difference in
people's lives and will be helping us to implement our corporate responsibility
strategy in South Africa.
The third director to join our Advisory Board was Sindiswa Mzamo, who is a South
African national with vast experience in various roles in the banking industry
and political arena. Ms. Mzamo has also had management and leadership positions
with blue chip companies in the African continent and internationally. She
serves as a board member of Ukulima Mentoring, Niyethu Consulting, Quest Media
Agency Communication Strategies, Economic Youth Consortium, Hinkweru Consortium,
Brand Baro Matrix, Upright Communications Management Strategies, and Emeatech
Energy Africa (Pty) Ltd. As a consultant to The Presidency on `The Status Of
Women', she brings a wealth of knowledge and resources in the political world.
She has already helped us with her knowledge and experience in the business
climate in South Africa, particularly with M.POS and TagNet.
The fourth director to join our Advisory Board was Andile Mbeki, who is a South
African national and emerging leader in South Africa. He was recently appointed
to serve on the board of the South African Broadcasting Corporation (SABC),
which is South Africa's largest broadcasting company with millions of television
and radio subscribers. Mr. Mbeki has thirteen years of experience in training
and development and has been operating at a national level for the last four
years by being instrumental in the national skills development processes for
South Africa. Mr. Mbeki has worked extensively in building relationships
throughout South Africa and held executive positions in various structures in
the political arena, trade unions, youth organisations, non-governmental
organizations (non-profits) and civic societies. Mr. Mbeki has helped us with
political relations and inroads into the key decision makers of business,
political and social agendas at the national level.
The fifth director to join our Advisory Board was Yvonne Chaka Chaka, who is a
South African national and one of Africa's most prominent singers. She is
commonly referred to as the "Princess of Africa" and has a singing career that
goes back almost 20 years during which she has produced 16 albums and has won
the Ngomo Award for the grand song prize of Zaire (now DRC) as well as the
FNB/SAMA Award for best female singer. Yvonne's passion for singing is also
shared by her commitment to eliminate illiteracy in global society -
demonstrated by her ceaseless work in UNISA. In 2003, Yvonne was made Goodwill
Ambassador for University of South Africa (UNISA) along with Dikgang Moseneke,
Judge of the Constitutional Court of South Africa; Nobel Laureate Bishop Desmond
Tutu; and former 2001 Miss South Africa Vanessa Careirra. She also teaches
literacy part time at UNISA and was recently appointed Goodwill Ambassador for
the university. She sits on several boards of charitable and NGO organizations,
and was recently appointed to the board of the Johannesburg Tourism Company. A
recent big thrill for her was to sing at the 85th birthday party of Nelson
Mandela this year. She attended Maximum's last Advisory Board meeting in July
and participated in the strategy discussion surrounding Maximum's submission of
an extensive proposal to the President of South Africa. She plans to help gather
support from prominent politicians, business leaders and other entertainers.
LIQUIDITY AND CAPITAL RESOURCES. We have cash of $18,705 and accounts receivable
of $72,161, employee advances of $6,154 and inventory of $135,112 as of June 30,
2004. Our total current assets were $232,132 as of June 30, 2004. Our total
assets were $844,030 as of June 30, 2004, of which $170,656 was represented by
property and equipment and accumulated depreciation of ($69,463). We also had
intangible assets of $531,950, accumulated amortization of ($74,669) and other
assets of $53,424. Additionally, our officers are committed to paying our
expenses to enable us to continue operations for at least the next twelve
months. Therefore, we believe that our available cash is sufficient to pay our
day-to-day expenditures.
18
Our total current liabilities were approximately $446,580 as of June 30, 2004.
Accounts payable and accrued liabilities represented $444,799 of our total
current liabilities and $1,781 in other current liabilities. Our accounts
payable consisted of $13,488 in accrued wages for Maximum Dynamics, Inc. SA,
which have been paid, and $241,650 in outsourced research and development costs
for TagNet International. We also had $200,000 in convertible debentures making
our total liabilities $646,580. We also had ($6,263) represented by a minority
interest. We have no other long term commitments or contingencies.
RESULTS OF OPERATIONS.
FOR THE THREE MONTH PERIOD ENDING JUNE 30, 2004, COMPARED TO THE SAME PERIOD
ENDING JUNE 30, 2003.
REVENUES. We have realized revenues of approximately $98,345 from services that
we provided during the three months ended June 30, 2004. This is in comparison
to revenues of $37,599 that we generated during the three month period ended
June 30, 2003. We experienced an increase in revenues because we have increased
our client base and expanded our operations. We were anticipating our revenues
to be higher but due to a production problem with the Motorola modems we use for
our TagNet solution, we were unable to book the revenue from our contract with
Glibstrub Transportation for 300 units of TagNet. Delivery is taking place in
August and September, 2004 and we anticipate those revenues will be booked in
the three months ended September 30, 2004.
OPERATING EXPENSES. For the three months ended June 30, 2004, our total
operating expenses were approximately $898,474. Our cost of generating revenue
was $73,370. Our operating expenses were also represented by stock based
compensation of $475,000, selling, general and administrative expenses of
$302,694, and $47,410 in depreciation and amortization. We experienced a net
operating loss of $800,192 for the three month period ended June 30, 2004. We
attribute most of these expenses to building our infrastructure needed to
support the back-end transaction processing system we now have in place for our
mobile point of sale terminals as well as the costs associated with building the
infrastructure required for TagNet such as logistics solutions and the needed
library of applications.
This is in comparison to the three month period ended June 30, 2003, where we
experienced a net operating loss of $182,887. During the period ended June 30,
2003, our total expenses were $220,486. Of this amount, $2,486 represented cost
of revenue, $24,780 in selling, general and administrative expenses, $60,350 in
contributed services and $132,870 in depreciation and amortization. The increase
as compared to the period ended June 30, 2004 was primarily due to increased
levels of operations, resulting in consulting expenses, depreciation and
amortization that we incurred during that quarter as compared to the same period
ended June 30, 2003.
FOR THE SIX MONTH PERIOD ENDING JUNE 30, 2004, COMPARED TO THE SAME PERIOD
ENDING JUNE 30, 2003.
REVENUES. We have realized revenues of approximately $363,143 from services that
we provided during the six months ended June 30, 2004. This is in comparison to
revenues of $117,973 that we generated during the six month period ended June
30, 2003. We experienced an increase in revenues because we have increased our
client base and expanded our operations.
OPERATING EXPENSES. For the six months ended June 30, 2004, our total operating
expenses were approximately $2,340,742, as compared to $734,549 for the same
period ended 2003. Our cost of generating revenue was $73,370. Our operating
expenses were also represented by stock based compensation of $1,489,000,
selling, general and administrative expenses of $683,206, and $95,166 in
depreciation and amortization. This is in comparison to $38,657 representing
cost of revenue, $127,250 in stock based compensation, $193,342 in selling,
general and administrative expenses and $265,575 in depreciation and
amortization. Therefore, we experienced a net operating loss of $1,977,599 for
the six month period ended June 30, 2004 as compared to $616,576 for the same
period ended in 2003. We attribute most of these expenses to building our
infrastructure needed to support the back-end transaction processing system we
now have in place for our mobile point of sale terminals as well as the costs
associated with building the infrastructure required for TagNet such as
logistics solutions and the needed library of applications.
OUR PLAN OF OPERATIONS FOR THE NEXT TWELVE MONTHS. We have generated $98,345 in
revenues during the quarter ended June 30, 2004, and had $18,705 in cash and
$72,161 in accounts receivable as of that date. We believe that we will be able
to collect those accounts receivable in a timely fashion. We have registered an
equity line of credit with Cornell Capital Partners LLC for $10 million, which
we believe should provide us with access to funding should we require it. We
believe that we should generate revenues over the next two quarters that should
be sufficient to meet our obligations. As such, we believe that that we will
have sufficient financial resources to meet our obligations for the twelve month
period following June 30, 2004. Should we require their assistance, our officers
are committed to paying our expenses at least through that period.
While we have numerous projects we are managing, we are currently focusing the
vast majority of our resources on TagNet, mobile commerce, call center and back
office services, and village banking. We believe that these four main business
units will generate the majority of our forecasted revenues over the next two
quarters.
In addition to the successful demonstrations of TagNet we had and the two
proposals we already had under consideration in the last quarter, we have also
submitted proposals for a service delivery solution for a water meter reading
company, a truck monitoring solution for an energy company, a delivery tracking
solution for a cellular company, and a time and attendance solution for a
cleaning service company. In Mexico, we are working on submitting a proposal for
a petroleum transport company in Mexico that is trying to reduce its loss of
petroleum to the black market as a result of shrinkage from its trucks.
Our biggest challenge right now is servicing enquiries as the resources we were
counting on from Startrack are not available, which means that we do not have
the sales and sales support team needed to keep up with demand. To compensate
for this, we are working diligently to establish more VARs for TagNet and
defining their roles with regard to sales, maintenance and support so that we
can expand our capability to generate and close sales, implement and maintain
these potential contracts.
19
Our management is very excited about the prospects with TagNet and believes that
it will generate significant revenues over the next twelve months. Several of
the contracts we are currently are pursuing are large enough that should we
secure just one of them the contract would provide us with sufficient financial
resources to meet our obligations for the twelve month period following the
start of the contract.
While we are very confident about our technology, we wish to remind investors
that there can be no guarantee that it will result in the successful procurement
of any contract or that sufficient revenues to meet obligations will be
generated should such a contract be procured.
As a project, our management team estimates that our mobile point of sale
project is running behind schedule in terms of revenue generation but ahead of
schedule for being able to offer banking services on the terminals. Starting in
August, we officially moved into product launch phase and are busy working on
securing orders for pre-paid services while we wait for banking to become
available. Based upon our current negotiations with our banking partner, our
management believes that we will secure an agreement that will enable us to
offer banking services on our terminal without having to first certify the
terminal. In so doing, we believe this will open the doors for us to
aggressively market our offering since in our estimation there are few (if any)
solutions currently available that offer both pre-paid and banking on the same
terminal.
Our initial marketing research also indicates that there are thousands of
merchants who are declined by the banks for obtaining banking enabled
terminals.2 However, in approaching them and analyzing the situation, we believe
we have developed a feasible option for merchants to have access to both banking
and pre-paid enabled terminals all while minimizing our risk and the exposure to
the bank. If we are successful in proving this model, current research done by
ourselves and industry experts suggest that the demand could be in excess of
50,000 terminals. With the World Cup coming to South Africa in 2010, we believe
we could be well positioned to participate in much of the merchant
revitalization programs that are planned to take place before then. Management
wishes to remind investors that there can be no assurance that our banking
partner or any other bank will offer us this banking solution or that if it does
we will be able to secure orders for the terminals.
We are also working on a similar solution for the market in Mexico where we have
already met with Inbursa, Banco Azteca and other companies involved in the
banking sector in Mexico. For the time being, we believe that pre-paid solutions
represent a more developed market as a whole in Mexico compared to South Africa.
As such, we are focused on rolling out an end-to-end solution in Mexico for
pre-paid first and then banking. Demand and volumes are higher in general in
Mexico as compared to South Africa. However, the market resembles one controlled
primarily by banking and telecommunications cartels, which can make it more
difficult to penetrate. We have developed strategic partnerships with companies
that are actively involved in this sector and we believe we are now well
positioned in Mexico. Our management estimates that sales of mobile point of
sale terminals in Mexico will lag behind sales in South Africa by a few months
since we only began penetrating the marketing in Mexico in January 2004.
Management believes that there is sufficient demand currently to support its
conservative forecasts of at least 4,000 terminals over the next 12 months.
Assuming these terminals were utilizing our back-end, this number of terminals
would enable us to finance our own terminals and expand our foot print scope to
other regions. Management believes that sales of 750 units would provide us with
sufficient financial resources to meet our obligations for the next twelve month
period. However, there can be no assurance that any sales of point of sale
solutions will occur or that even if sales are generated that it will be
sufficient to cover our obligations.
We are also busy actively implementing our other projects, which to some extent
have moved forward slowly due to the fact that most of our resources to date
have been focused on TagNet and mobile commerce. We have now staffed up and
built the infrastructure and resources required to move forward with almost all
of our projects.
Two projects at the top of our list are our village banking and our call
center/back office services projects. These two projects are not only exciting
business opportunities but they also offer a compelling story. In the context of
South Africa (and any developing economy), bringing banking (and therefore
communications) infrastructure to the marginalized is a story the media are
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1 The primary providers of point of sale terminals capable of handling banking
transactions are distributed by the banks, who screen applicants excessively.
20
extremely interested in telling. We have already been in discussions with
several media groups and are planning a media and public relations campaign
aimed at telling our story. The call center business is booming currently in
South Africa and we are working with Intesol to build that business. Intesol is
also working with us to submit grants for government assistance programs since
the government is providing assistance for call center services. With some of
our unique approaches of conducting skills transfer to those who were previously
disadvantaged, we believe we stand a good chance of obtaining assistance in one
form or another. We believe that these two projects exemplify the uniqueness of
our business model, approach and the exciting opportunities we are experiencing.
We anticipate that our expenditures will vary with the number of customers that
we engage and the level of revenue that those contracts generate. There are four
important milestones over the next twelve months that we believe are very
important for us to achieve. The first milestone is to close three of the seven
TagNet contracts being considered. Because we had received such positive
feedback and been given verbal approval for several large contracts, we focused
much of our efforts on those. While we are waiting for decisions, we are now
also focused on procuring smaller contracts so that we can establish customer
reference sites, which we believe may strengthen our positions with those
considering our proposed solutions.
The second milestone is to sell 1,000 mobile point of sale terminals that are
using our back-end, which would make us profitable within two months of
installation (due to the billing cycles). While our internal goals are much
higher, we are forecasting sales of 30 units in August, 70 in September, 100 in
October, 150 in November and 250 in December. We believe these sales will make
us profitable as soon as they are all processing banking transactions on our
back-end in addition to pre-paid. If we are unsuccessful in obtaining banking
capabilities, we believe we will need about 1,000 terminals selling pre-paid
vouchers through our back-end in order to become profitable.3
The third milestone is to successfully manage the roll-up of the 37 village bank
branches we are targeting and secure an equity stake in that reorganized bank.
With that successfully achieved, we believe we will be able to begin the process
of growing the bank to include an additional 59 branches and transitioning it to
a commercial bank. We have finished developing the software component of the
infrastructure that is required to meet the village banks' requirements. We are
testing the software during the month of August. We are planning to begin
installation in the first three sites in September and will be looking for
investment partners in the reorganized bank to grow the portfolio of the bank at
that time. Even if we are unsuccessful in obtaining an investment partner, we
believe we will be able to gradually do the roll-up of all 96 village bank
branches.
Once the first ten branches are completed, we believe we can then utilize it as
a proof of concept for China where we have received an invitation to manage a
similar process with rural banks there. The investment partner has already been
identified in China although no formal agreement has been signed nor can there
be any assurance that we will successfully launch a pilot project in China.
Once we meet the first two milestones, we believe that we will meet the listing
requirements of either the AMEX or NASDAQ stock exchanges. We believe that
reaching the third and fourth milestones will enable us to create significant
awareness about our company that will result in increased credibility, further
cooperation from government and business entities, and position us with four
core business modules with which to duplicate in developing economies around the
world. We also believe that reaching these milestones and the increased
awareness may lead to more investor awareness about our company. This is
important because it is our goal to move from the Over-The-Counter Bulletin
Board (OTCBB) stock exchange to either AMEX or NASDAQ. We believe that these
exchanges offer us more visibility to the financial markets as well as less
volatility in our trading patterns. We initially believed we would be ready to
start this process by the end of fiscal year 2004. While we could still qualify
if the first two milestones are met within this time frame, we have revised our
internal planning to reflect this delay. As such, we now believe that mid 2005
is a more realistic goal.
If we are unsuccessful in securing customers, we may have to turn to other
sources of financing, which could further dilute the ownership of current
shareholders. While we have begun the process to register these shares securing
a standby equity line of credit with Cornell Capital Partners LLC, we may be
unable to draw down upon this financing successfully. If we are unsuccessful in
obtaining further financing, we could be unable to continue operations. If we do
draw down upon the equity line of credit, it will further dilute the ownership
of current shareholders.
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1 These estimates assume that the terminals are placed in locations that are
close to the industry average in terms of volume of transactions. These
estimates of profitability also include expenses associated with growth and
expansion of the foot print.
21
ITEM 3. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures. We maintain controls and
procedures designed to ensure that information required to be disclosed in the
reports that we file or submit under the Securities Exchange Act of 1934 is
recorded, processed, summarized and reported within the time periods specified
in the rules and forms of the Securities and Exchange Commission. Based upon
their evaluation of those controls and procedures performed as of June 30, 2004,
our chief executive officer and the principal financial officer concluded that
our disclosure controls and procedures were adequate.
(b) Changes in internal controls. There were no significant changes in our
internal controls or in other factors that could significantly affect these
controls subsequent to the date of the evaluation of those controls by the chief
executive officer and principal financial officer.
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
None.
ITEM 2. CHANGES IN SECURITIES.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
31. Rule 13a-14(a)/15d-14(a) Certifications.
32. Section 1350 Certifications.
(b) Reports on Form 8-K
None.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned in the City of Cape Town, South Africa, on August 16, 2004.
Maximum Dynamics, Inc.
By: /s/ Eric R. Majors
--------------------------------------------
Eric R. Majors
Its: Chief Executive Officer
President, Secretary, and a director