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 SEPTEMBER 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 incorporated executive offices) (Zip Code)
Unit 1, College House, Village Square, Parklands, South Africa 7441
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(Address of Global Operations Center) (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 December 1, 2004 there were
92,923,287 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)
September 30, 2004
Assets
Current assets:
Cash..................................................... $ 38,777
Accounts receivable...................................... 141,494
Employee advances........................................ 8,516
Inventory................................................ 99,643
----------------
Total current assets...................... 288,430
Property and equipment....................................... 170,879
Accumulated depreciation..................................... (88,213)
Intangible assets............................................ 531,950
Accumulated amortization..................................... (109,025)
Other assets................................................. 46,004
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Total assets.............................. $ 840,025
================
Liabilities and Shareholders' Deficit
Current liabilities:
Accounts and notes payable............................... $ 612,668
Other current liabilities................................ 6,734
----------------
Total current liabilities................. 619,402
Secured Convertible Debentures (Note 4)...................... 400,000
----------------
Total liabilities......................... 1,019,402
Minority interest ........................................... 4,603
Shareholders' deficit (Note 2 and 6):
Common stock, 90,898,287 shares issued and outstanding... 7,458,093
Additional paid-in capital............................... 579,892
Retained deficit......................................... (8,223,196)
Accumulated other comprehensive income:
Cumulative translation adjustment..................... 1,231
----------------
Total shareholders' deficit............... (183,980)
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$ 840,025
================
See accompanying notes to condensed consolidated financial statements.
2
MAXIMUM DYNAMICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------- -------------------------------
2004 2003 2004 2003
-------------- -------------- -------------- --------------
Service Revenue..................................... $ 214,216 $ 47,100 $ 577,359 $ 155,553
-------------- -------------- -------------- --------------
Operating expenses:
Cost of Revenue................................. 102,012 500 175,382 39,157
Stock based compensation (Note 2 and 6)......... 767,460 20,410 2,256,460 205,860
Selling, general and administrative............. 436,637 15,470 919,843 208,812
Contributed services............................ --- 96,125 --- 205,850
Depreciation and amortization................... 43,569 132,869 138,735 398,444
-------------- -------------- -------------- --------------
Total operating expenses............. 1,349,678 265,374 3,490,420 1,058,123
-------------- -------------- -------------- --------------
Operating loss....................... (1,135,462) (218,274) (2,913,061) (902,570)
Gain on forgiveness of debt..................... --- 50,000 426,900 50,000
Gain on collection of receivables
previously written off........................ --- --- 100,500 ---
Impairment loss (Note 7)........................ 227,986 --- 227,986 ---
Interest Expense................................ 13,329 128,289 23,066 344,250
-------------- -------------- -------------- --------------
Loss before income taxes and
minority interest.................. (1,376,777) (296,563) (2,636,713) (1,196,820)
Minority interest share of net income/(loss)........ (1,660) 539 11,063 539
-------------- -------------- -------------- --------------
Loss before income taxes............ (1,378,437) $ (296,024) $ (2,625,650) $ (1,196,281)
Income tax provision (Note 3)....................... --- --- --- ---
-------------- -------------- -------------- --------------
Net loss............................. $ (1,378,437) $ (296,024) $ (2,625,650) $ (1,196,281)
============== ============== ============== ==============
Basic and diluted loss per share.................... $ (0.02) $ (0.01) $ (0.03) $ (0.04)
============== ============== ============== ==============
Weighted average common shares outstanding.......... 84,823,318 37,526,667 79,972,089 32,213,667
============== ============== ============== ==============
See accompanying notes to condensed consolidated financial statements.
3
MAXIMUM DYNAMICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIT
(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.................... 7,581,146 755,414 6,667 --- --- 762,081
Common stock issued in exchange for
consulting services....................... 6,895,000 689,500 --- --- --- 689,500
Common stock issued in E-Sap
acquisition agreement..................... 2,000,000 200,000 --- --- --- 200,000
Common stock cancelled in E-Sap
acquisition agreement...................... (2,000,000) (200,000) --- --- --- (200,000)
Sale of common stock.......................... 2,500,000 475,000 --- --- --- 475,000
Common stock issued in Unilogic acquisition
agreement (Note 6)........................ 1,000,000 228,000 --- --- --- 228,000
Common stock issued in lieu of compensation
to board members, officers, and
employees (Note 2)........................ 4,090,550 204,528 --- --- --- 204,528
Common stock issued in exchange for
consulting services (Note 6).............. 7,021,904 562,932 --- --- --- 562,932
Comprehensive loss:
Net loss.................................. --- --- --- (2,625,650) --- (2,625,650)
Cumulative translation adjustment......... --- --- --- --- 967 967
------------- ------------ ------------ ------------ ------------ -----------
Balance at
September 30, 2004....................... 90,898,287 $ 7,458,093 $ 579,892 $(8,223,196) $ 1,231 $ (183,980)
============= ============ ============ ============ ============ ===========
See accompanying notes to condensed consolidated financial statements.
4
MAXIMUM DYNAMICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
---------------------------------------
2004 2003
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Net cash (used in) provided by operating activities.................... $ (301,900) $ (140,918)
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Cash flows from investing activities:
Purchases of equipment............................................. (30,304) (2,076)
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Net cash used in investing activities.............................. (30,304) (2,076)
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Cash flows from financing activities:
Working capital advances, net...................................... 6,667 ---
Proceeds from issuance of notes payable ........................... 400,000 165,000
Repayment of notes payable ........................................ (155,634) (20,000)
Payments for offering costs ....................................... (2,700) ---
Proceeds from sale of common stock ................................ 95,000 ---
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Net cash provided by
financing activities.......................... (343,333) 145,000
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Effect of exchange rate on cash........................................ 1,231 ---
Net change in cash............................ 12,360 2,006
Cash, beginning of period.............................................. 26,417 2,813
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Cash, end of period.................................................... $ 38,777 $ 4,819
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Supplemental disclosure of cash flow information:
Income taxes.................................................... $ --- $ ---
================== ==================
Interest........................................................ $ --- $ ---
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Non-cash investing and financing transactions:
Common stock issued as payment of debt and
accrued interest payable .................................... $ 138,614 $ ---
================== ==================
Common stock issued in exchange for
offering costs............................................... $ --- $ 5,000
================== ==================
Common stock issued to acquire Datalus
technology ................................................. $ 200,000 $ ---
================== ==================
Common stock issued to acquire 20 percent
interest in E-SAP ........................................... $ 200,000 $ ---
================== ==================
Common stock issued to acquire 49 percent
interest of Unilogic ........................................ $ 228,000 $ ---
=================== ==================
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.
The accompanying financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. As shown in the accompanying
financial statements, we have incurred net losses of $1,378,437 and $296,024
during the three months ended September 30, 2004 and 2003 and net losses of
$2,625,650 and $1,196,281 during the nine months ended September 30, 2004 and
2003. This factor among others may indicate that we will be unable to continue
as a going concern for a reasonable period of time.
The financial statements do not include any adjustments relating to the
recoverability and classification of liabilities that might be necessary should
we be unable to continue as a going concern. Our continuation as a going concern
is dependent on our ability to generate sufficient cash flow to meet obligations
on a timely basis and ultimately to attain profitability. Our management intends
to seek funding sources to help fund our operation as it expands.
NOTE 2: RELATED PARTY TRANSACTIONS
During the period ended September 30, 2004, we issued 4,090,550 restricted
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 market price on the day of issuance. Stock-based compensation
expense of $204,528 is recognized and included in the accompanying consolidated
financial statements for the period ended September 30, 2004.
During the period ended September 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 $597,325 for the nine months ended September 30, 2004, which are based
on prevailing market rates less 20% for such rentals. The outstanding amount of
$142,818 owned to the related party is carried in the balance sheet at September
30, 2004.
6
Maximum Dynamics, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
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. In June 2004, we filed a registration statement with the Securities and
Exchange Commission to register 12,019,231 shares of our common stock underlying
the convertible debentures.
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
Tagnet components..................................... 70,938
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$ 99,643
================
NOTE 6: COMMON STOCK ISSUANCE
During the quarter ended September 30, 2004, we issued 1,000,000 shares of our
common stock to acquire the remaining 49 percent of Unilogic Solutions (Pty),
Ltd. The shares issued were valued based on market price on the closing date of
the transactions. (See Note 7)
In August 2004, the Company issued 7,021,904 restricted shares of our par value
common stock for services. The shares issued in the transaction were valued
based on market price on the day of issuance. Stock-based compensation expense
of $562,932 is recognized and included in the accompanying consolidated
financial statements for the period ended September 30, 2004.
7
Maximum Dynamics, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
NOTE 7: ACQUISITION AGREEMENT
In February 2004, we acquired the remaining 49 percent of Unilogic outstanding
common stock for 1,000,000 shares of our common stock, which made Unilogic our
wholly-owned subsidiary.
The transaction was accounted for as a purchase in accordance with Statement of
Financial Accounting Standard ("SFAS") No. 141, "Business Combinations". The
aggregate purchase price was $228,000, consisting of 1,000,000 shares of our
common stock with a market value of $.23 per share on the closing date of the
transaction.
Goodwill recognized in the acquisition totaled $227,986. Because both Unilogic
and Maximum have incurred net losses since inception and the fair value of the
net assets obtained in the Unilogic acquisition could not be objectively
verified, management determined that the goodwill recorded as part of the
Unilogic acquisition should be written off and we recorded an asset impairment
charge totaling $227,986.
NOTE 8: SUBSEQUENT EVENT
In November 2004, we signed a letter of intent to acquire up to 70% of Fastmould
Specialists CC, a South African plastics injection molding, tooling and assembly
company. Fastmould was founded in 1994 and specializes in making plastic
injection moulds for various components manufactured in well-known products,
including automobile manufacturers BMW and Rover. Fastmould also provides
tooling and mould making within its injection molding operations using the
latest CAD/CAM and spark eroding technology. By incorporating a production line,
Fastmould can also provide complete or sub-assemblies of products.
8
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
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
consolidated financial statements included in our Quarterly Report on Form
10-QSB for the period ended September 30, 2004.
9
BACKGROUND
Maximum Dynamics, Inc. ("Maximum Dynamics," "we," "MXDY" or the "Company") was
incorporated on August 23, 2000 in Colorado. Today, 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.
MATERIAL EVENTS FOR THE PERIOD ENDING SEPTEMBER 30, 2004
In March 2004, we 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, after deeper investigation beyond our initial due diligence, our
management discovered that the information represented in E-Sap's financial
statements was not accurate. In fact, management has discovered that E-Sap's
Chairman and CEO modified the audited statements and made several material
misstatements, which is a criminal offense in South Africa. Since we had
included the financials in our financial statements that were incorporated into
our quarterly report for the period ended March 31, 2004, we decided to write
off our financial statements for that period in June 2004. We made this decision
since the actual value of E-Sap and our ownership stake in that entity that we
reported for that period is now not correct.
10
In September 2004, we initiated legal action against E-Sap and its principals
for their failure to accurately represent the value of E-Sap to us. We are also
requiring that the 2,000,000 shares of Common Stock that was issued as payment
for the acquisition be cancelled and returned to Maximum's treasury. A legal
firm, who is a strategic partner of ours that specializes in technology law, is
handling the 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 initial
consolidated revenues for Intesol and its joint ventures for the financial year
initially were expected to reveal revenues of about USD$10 million with a net
income estimated to be about USD$2 million. 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.
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 has 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. 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. Our management team is also working with Intesol to
help it restructure the group and to position itself for acquisitions and
mergers with other BEE companies. Two companies in particular have been
identified and Intesol is working to formulate a strategic plan for merging with
those two entities, which would result in consolidated revenues of about two to
three times its current financial position.
We wish to remind investors that there can be no guarantee that we will close
this acquisition or that if it does close that the business combination will be
successful.
In October, we structured an agreement with eDegree to work together on
developing an education business. eDegree has hundreds of online courses that it
offers on-line. Maximum will be providing its premises and infrastructure to
administrate the courses in the Western Cape of South Africa. This revenue
sharing partnership enables Maximum to work towards its goal of utilizing
business as a tool to help people. We are currently working with eDegree on a
marketing campaign aimed at growing its student base in Cape Town.
11
In November, we signed a letter of intent to acquire up to 70% of Fastmould
Specialists CC, a South African plastics injection molding, tooling and assembly
company. Fastmould was founded in 1994 and specializes in making plastic
injection moulds for various components manufactured in well-known products,
including automobile manufacturers BMW and Rover. Fastmould also provides
tooling and mould making within its injection molding operations using the
latest CAD/CAM and spark eroding technology. By incorporating a production line,
Fastmould can also provide complete or sub-assemblies of products. The audited
financials for the year ending February 28, 2004 for Fastmould showed revenues
of US$1.51 million and a net loss US$76,000 (calculated at USD 1 to ZAR 6.4)
with profitable operations for the year prior.
With Tagnet receiving requests for pilot projects and proof of concepts in South
Africa, Mexico and Europe, management is projecting sizeable demand for Tagnet
units. As a result, Maximum has been working on a business strategy wherein
production for Tagnet hardware would be moved in-house (to a subsidiary) because
we would like the ability to control the production and assembly costs of our
Tagnet modules and equipment. The business model is to build a production
company that does plastics, electronic component assembly and other related
production capabilities. One strategy is to utilize South African government
grants for the training of and skills transfer for previously disadvantaged
individuals (PDIs) to cut costs of production in the first couple of years so
that Tagnet can utilize those cost savings to fund its anticipated growth. There
are also certain tax incentives for producing the units in South Africa
(referred to as "Proudly South African"). Management has identified several
production companies that it believes can meet these objectives.
Our management chose Fastmould as its first choice because the company conducts
no marketing and has a record of operating profitably despite operating at about
30% capacity. Fastmould also has an existing training program for PDIs that has
resulted in grants from the government. It has grown organically since inception
and has developed a customer list consisting of well-established companies. We
wish to remind investors however that there can be no assurance that this
acquisition will be completed, that any of the other companies that have been
identified will be acquired, or that if a production company is acquired that it
will result in profitable operations.
We have focused most of our resources from November 2003 through September 2004
on our two flagship projects: Tagnet and Mobile/Virtual Commerce.
OPERATIONS
MOBILE AND VIRTUAL COMMERCE
We consider mobile and virtual 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 range of products and mobile point of
sale ("POS") devices 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.
After nearly a year of development and partnering with other companies, we are
now able to supply a wide range of services to both large corporate enterprises
and budding entrepreneurs alike. Our solutions are aimed at different
environments and can be categorized as follows:
o Virtual voucher distribution and management system (pre-paid services)
o Advanced contact-less card loyalty system
o Integrated into the payment system
o Traditional loyalty system
o Advanced recognition and payment system
o Automated billing and payment
o Logistical management and payment system
12
We can achieve this through the strategic deployment of our range of products
and point of sale (POS) terminals, both mobile and static, which can be operated
as stand alone solutions or integrated into an existing operational system. We
will always attempt to integrate into existing POS-systems (cash registers)
where possible in order to save our clients on capital expenditure.
We make use of both proprietary and non-proprietary systems to ensure the value
added systems, processes and products are cutting edge and enable our clients to
gain competitive advantages in their respective fields, whether they conduct
complex cross border financial transactions from the POS-devices, or simply sell
prepaid vouchers from a sales outlet. We believe the management reporting is of
the highest standards, with reports customized for financial systems and 24 hour
pin access web reporting for traveling executives.
The POS-devices are enabled as virtual shop-fronts and offer numerous value
added services such as:
o Prepaid cellular sales
o Prepaid electricity sales o Prepaid water sales
o Loyalty Systems
o Bank card transactions for all types of bank cards
o Third party payments, such as utility bills
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 system 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 June 2004, we diversified 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.
In so doing, 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, we believe this strategy has
lowered our break-even point from about 10,000 terminals sold to about 1,000
terminals running low volumes of transactions 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.
13
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.
In June 2004, we also began working with the Cooperative Development Agency CC
("CDA") on a village banking initiative involving the roll-up of 96 village
banking branches nationwide. We will provide the funds management, banking
regulatory requirements management systems, financial integration systems, and
the software and infrastructure required to service and operate the village
branches. We believe a mobile terminal can play a significant role in this
project and have built our strategy around a mobile terminal as one key
component. CDA is contributing its project management of 37 South African
community bank branches as well as relationships with 59 other branches
nationwide.
In late August, we completed the software system for the village banking
initiative that we started earlier in the year. The banking infrastructure is
ready to be installed in the first pilot site. However, it was unanimously
decided that nothing further should be done until we receive the due diligence
information that was requested in July from the parties involved. In the
meantime, management is working on a banking infrastructure services plan that
is customized to the unique needs in South Africa. Management is working closely
with members of its advisory board to present the plan to the South African
President's Office to garner support for the plan. We wish to remind investors
that there can be no guarantee that the President will endorse our banking plan
and that even if he does that the plan will be successful.
In August, we experienced several setbacks in the mobile and virtual business
unit that have put our plan of operations behind by about three months. Had we
not secured multiple application capabilities for the one terminal we now have
or developed the advanced recognition and payment solution, management estimates
we would be even further behind.
The first setback was our discovery of two problems with the MPOS terminal,
which after notifying MPOS they failed to correct. The first was a problem with
loading batches of airtime, which we were able to fix ourselves. The other and
more serious problem is that the MPOS2002 unit cannot actually operate multiple
applications at the same time on the terminal. While we have been in the process
of fixing this problem, we have secured the ability to offer two other terminals
that do have multiple application capability. One is programmed for our back-end
already and the other is in the process of being programmed.
Ironically, management believes that this problem has led to a new opportunity.
Due to our discovery, MPOS has renewed its interest in having Maximum work more
closely with it to not only conduct a lot of its programming work but to also
assist it with back-end integration for the market in China. We are currently
working with MPOS to obtain the needed technical specifications from their side
in order to move forward with the development of a back-end system.
The second setback was a breach of contract by Naf-Cell (Pty) Ltd. ("N-Cell"), 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 N-Cell wherein they committed to
purchasing mobile point of sale solutions from us and we would resell their
range of products. N-Cell had committed to a standing order of 500 terminals
from us.
14
Soon after signing the agreement, N-Cell fired its CEO and restructured the
company. The CEO was largely responsible for the establishment of N-Cell's
distribution channels and the relationships with the merchants that represented
that 500 unit order. With this instability, Vodacom required that N-Cell
renegotiate its service agreement and decreased N-Cell's commission levels.
These two occurrences put N-Cell behind on its operations and it was unable to
fulfill its legal obligation to purchase the 500 terminals. We have worked with
N-Cell to assist it in getting sales but the leads N-Cell had for the 500
terminals have proved difficult to close since the departure of N-Cell's CEO. We
considered taking legal action until we discovered N-Cell is trying to raise
money to stay in business.
Despite these setbacks, we have succeeded in putting together our back-end for
banking capabilities. In September, we finalized our network partners for our
mobile commerce and transaction processing project. Through these partnerships,
we now offer a transaction processing back-end that takes payment from the four
major banks in South Africa. In addition to the switching capabilities, we also
now have a loyalty program that can operate on one of the terminals and we are
programming the application to run on other terminals. This enables us to now
run pre-paid voucher services, banking transactions and loyalty transactions all
on one terminal through our own back-end, capturing a percentage of every single
transaction processed on that terminal. By adding loyalty program capabilities,
we further lowered our break-even point to between 600 and 700 terminals
operating in low transaction volume sites.
As a result, we have received requires for pilot projects utilizing the
end-to-end solution from a restaurant chain, a university, a pro golf shop, and
a beverage chain in South Africa. have requested pilots for our back-end system
and loyalty program. There can be no assurance that these pilots will be
successful or that they if they are that they will result in sales.
In October, we began finalizing our network partners for the roll-out of
pre-paid services in Mexico. Management estimates that should it secure adequate
funds for this roll-out that terminals can start hitting the market in January
2005. It has taken a while to solidify our business model and plan in Mexico
because the market is highly controlled and the financing of terminals is
difficult since the banks see it as competition to their own terminal business.
Our team in Mexico has been working hard to penetrate the market there to
establish relationships with partners. There can be no assurance that adequate
funding will be procured and that if it is that the business model will result
in sales of terminals and revenue generated from sales of air-time.
The vast majority of our time from July to September 2004 was spent getting the
banking, pre-paid and loyalty applications all programmed on a range of
terminals and integrated into our back-end system. As a result of our efforts,
we currently have six terminals that either run a pre-paid, banking or loyalty
application on one of the terminals we can source and transact through our
back-end. We have successfully developed the required programming needed to run
all of these applications at the same time on one of the terminals and are
working on getting this done for the other five terminals. We believe we are 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 through our own back-end.
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 secured arrangements with financing
partners so that we can now 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.
In late September and early October, we began marketing to the under-served
market segment, which we define as merchants, small businesses and other related
entrepreneurs that the banks in South Africa have largely ignored. We believe
this market has enormous potential as merchants are eager to accept terms that
are favorable for us due to not currently having any other alternative. However,
after submitting dozens of applications of potential customers to our financing
partners, it became clear that our two partners and almost all finance groups in
South Africa are unwilling to finance these customers, despite indicating this
market is important to them.1 This is extremely disappointing due to the fact
that in many cases there is a demonstrative case that sales of airtime alone
could cover the rental cost plus generate reasonable income. As a result, there
still remains significant demand in South Africa that is not being met.
Our management still remains dedicated to tapping this market. However, it is
clear that we will have to finance those terminals through either raising
financing or through proceeds from the business when the company is generating a
profit. In the meantime, we are in the process of placing twenty terminals in
order to begin slowly building a case to present to our finance partners as to
why they should approve certain heavily screened applications.
15
Since we currently cannot target this market, we have been focusing our
attention on the other market we identified, which is essentially the
`bank-approved' market. To that end, we have been presenting our offering for
either pre-paid, banking or both to a number of retailers, restaurants, hotels,
and other merchants. We currently have about 14 leads, out of which we have had
requests for four pilots and two proof of concepts. We are busy scoping and
preparing for these and hope to begin the pilots in December 2004 and January
2005.
Two of the pilots are focused around what we believe is a unique application
currently not found anywhere else in the world. We have developed a solution
that combines our transaction processing and loyalty offering with Tagnet to
deliver an advanced recognition and payment system for merchants. Management has
been encouraged that every single presentation has been met with very favorable
feedback although we wish to remind investors that this in no way guarantees
sales.
Our management estimates that we need between 300 and 500 terminals (depending
upon transaction volume) processing pre-paid vouchers, banking transactions and
loyalty transactions all on our back-end in order for us to break even. If we
are successful in securing sales from the four pilot projects that we are
currently scoping, we believe we would be able to place approximately 350
terminals over the course of the respective projects. 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
Our Tagnet solution utilizes advanced RFID, GPRS and satellite tracking
technologies in conjunction with sophisticated computer modules to provide real
time solutions by way of networked, administrative workstations. Our solutions
have been customized to suit the mobile logistics, security and fleet management
sectors as well as providing numerous automation solutions for the general
business sector. The various Tagnet solutions enable customers to track
vehicles, cargo and assets and remotely perform all administrative functions in
order to minimize the cost of inventory and invoice management as well as cut
down on inefficiencies due to human error.
A typical solution of the new generation of Tagnet 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
or even be packaged as bar-code labels. Readers are mobile, mini computers that
operate software 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 (RFID) 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.
The next grade up is the Smart Module, 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.
16
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, campuses, etc.
Where the Tagnet product differs, is in its ability to function as a platform on
which to build advanced administrative operations. Tagnet utilizes complex
distributed technology so that a tag reader contains enough intelligence to
process data according to pre-set conditions so that only critical data is sent
to the data center. By adding the functionality of a PC, Tagnet enables a
customer to utilize the system as a remotely networked PC such that
administrative functions like invoicing, pricing, and parts utilization can all
be automated and processed on-site through connection with the corporate center.
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 smart module units. After scoping the requirements and needs, we worked with
our VAR to create a vehicle delivery application customized for Glibstrup. This
system was completed in August and we received a 33% upfront payment in
September. In late October, we secured a banking relationship with Nordea Bank
in Denmark, which provided us with a banking facility to produce the 300 units
for Glibstrup.
We had originally produced the first 100 units for the Glibstrup contract but
were unable to utilize these units for this contract 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 have initiated
the crediting of our account with Motorola.
As a result of this problem, however, we incurred a significant bottle neck
because we were unable to deliver to Glibstrup the 100 units and obtain payment,
which was scheduled to be used to finance the rest of the order. With the
financing from Nordea, we have finally removed that bottle neck and are able to
finance the Glibstrup order as well as a 10 week pilot project for a major
transportation company in South Africa.
Unfortunately, the production problem with Motorola also 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 needed demonstrators down to
South Africa and Mexico has caused us to be about two months behind schedule and
has resulted in us not yet having secured any significant orders to date.
Demonstrators arrived in South Africa in early November and are scheduled to
arrive in Mexico in the first week of December 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.
In June 2004, we submitted a proposal to the contractor for a major
transportation company in South Africa who had contracted a black economic
empowerment technology company to provide a solution that can track the location
if its moving stock and transport vehicles, decrease cargo shrinkage through
tracking, and improve shipping efficiencies. Having tried to deliver a solution
for the last couple of years, the contractor is under pressure to produce a
solution by January 2005.
The proposal, in which we outlined our technology specifications, was accepted
by the contractor who then asked for a technical plan that detailed the Tagnet
concept. After evaluating our technical plan, the contractor requested a
demonstration of the Tagnet solution. On December 1, 2004, we demonstrated our
Tagnet solution to the contractor who evaluated and tested the technology. The
contractor approved the Tagnet solution and has recommended it as the solution
to the transportation company. The contractor has submitted its recommendation
and is scheduling a demonstration to the transportation company.
17
Once the transportation company approves the official demonstration, we will
begin immediately on a four week pilot project that is aimed at proving Tagnet
can meet certain requirements that the contractor and other solution providers
have been unable to overcome. Once those requirements are met in the pilot,
Tagnet will be awarded the subcontractor role conditional upon our successful
customization of the solution to the nationwide deployment of the contract. The
customization process is expected to take between 6 and 8 weeks and is scheduled
to be completed by the end of February 2005. Assuming the customization is
successful, fulfillment on the order would begin in March 2005. The standing
order would be for 3,200 business modules, 3,200 touch screens, 170,000 daisy
chain units. There would also be some data integration programming and other
services provided. We wish to remind investors that there can be no guarantee
that we will secure the subcontracting role or the order and that even if we do
that we will be able to successfully fulfill the order.
We have been working on finding other funding sources in order to finance the
order for Tagnet with Glibstrup, three Tagnet pilots in South Africa and two in
Mexico. We were successful in securing a funding relationship with Tagnet's
bank, Nordea Bank, in Denmark. This credit line will allow Tagnet to finance its
order with Glibstrup for 300 Tagnet modules and the pilot project with the
transportation company in South Africa. Management has also reached terms with a
funding source for a debt instrument that will enable it to finance its other
pilot projects. While management believes it will secure this financing, there
can be no assurance that the needed funds for all pilots will be raised
successfully.
As of the date of this filing, we have submitted proposals in South Africa for a
service delivery solution for a water meter reading company, a truck monitoring
solution for a petroleum transport company, a delivery tracking solution for a
cellular company, a time and attendance solution for a cleaning service company,
a parcel and cargo tracking solution for a freight company, a vehicle monitoring
solution for a transport company, and an asset monitoring solution for a cash in
transit company. Thus far, only the cash in transit company has come back with a
`not interested at this time' which was due to current budget reasons. In
Mexico, we submitted the proposal to the Department of Transportation (DOT) as
well as a proposal for a petroleum transport company to reduce its shrinkage of
petroleum to the black market from its delivery trucks. The petroleum transport
company already has a budget allocated to solve this problem and is waiting for
a demonstration, which we are trying to schedule for the middle of December
2004.
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.
Our Advisory Board. We believe that a large part of our recent business
development over the last nine 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 stepped down as
an advisory board member in order to devote himself full time to a company he is
starting.
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. 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 organizations, 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.
18
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 is helping us by gathering support from prominent
politicians, business leaders and other entertainers. Dr. Shongwe, Ms. Mzamo and
Ms. Chaka Chaka are helping us to present our banking plan to the President's
office in South Africa to garner support for the plan.
The sixth director to join our Advisory Board was Nokwazi Ngonyama, who is a
South African national and a prominent political lobbyist for the African
National Congress (South Africa's current leading political party). She is
working with Ms. Mzamo to help Maximum with some of its proposals that it is
submitting to various departments of the government.
LIQUIDITY AND CAPITAL RESOURCES. We have cash of $38,777 and accounts receivable
of $141,494, employee advances of $8,516 and inventory of $99,643 as of
September 30, 2004. Our total current assets were $288,430 as of September 30,
2004. Our total assets were $840,025 as of September 30, 2004, of which $170,879
was represented by property and equipment and accumulated depreciation of
($88,213). We also had intangible assets of $531,950 as of September 30, 2004.
Our cash available from operations is currently not sufficient to cover
operations and our total liabilities. While our management believes that revenue
generation will continue to increase, we may not have sufficient cash to cover
our operations and our total liabilities. Therefore, we may need to turn to
additional sources of financing. Certain of our officers are committed to paying
our day-to-day expenditures as needed.
Our total current liabilities were approximately $619,402 as of September 30,
2004. Accounts payable and accrued liabilities represented $445,692 of our total
current liabilities. We also had $6,734 in accrued interest. Our accounts
payable consisted of trade payables and accrued expenses of $162,662 and
$283,030 in outsourced research and development costs for Tagnet International.
We also had $400,000 in convertible debentures making our total liabilities
$1,019,402. We also had $4,603 represented by a minority interest. We have no
other long term commitments or contingencies.
RESULTS OF OPERATIONS.
FOR THE THREE MONTH PERIOD ENDING SEPTEMBER 30, 2004, COMPARED TO THE SAME
PERIOD ENDING SEPTEMBER 30, 2003.
REVENUES. We have realized revenues of $214,216 from services that we provided
during the three months ended September 30, 2004. This is in comparison to
revenues of $47,100 that we generated during the three month period ended
September 30, 2003. For the nine months ended September 30, 2004, we have
generated $577,359 in revenues which is an increase of $421,806 over the same
nine month period last year. This increase is attributed to the expansion of our
operations and because we started fulfilling a 300 unit order for Tagnet. 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 the full 300 units
of Tagnet. Delivery is taking place in December, 2004 and January 2005.
19
OPERATING EXPENSES. For the three months ended September 30, 2004, our total
operating expenses were approximately $1,349,678. Our cost of generating revenue
was $102,012. Our operating expenses were also represented by stock based
compensation of $767,460, selling, general and administrative expenses of
$436,637, and $43,569 in depreciation and amortization. We experienced a net
operating loss of $1,135,462 for the three month period ended September 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
servicing our first order and 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 September 30, 2003, where
we experienced a net operating loss of $218,274. During the period ended
September 30, 2003, our total expenses were $265,374. Of this amount, $500
represented cost of revenue, $15,470 in selling, general and administrative
expenses, $96,125 in contributed services and $132,869 in depreciation and
amortization. For the nine months ended September 30, 2004, our net operating
loss was $2,913,061 which is an increase of $2,010,491 over the same nine month
period last year. The increase as compared to the period ended September 30,
2003 was primarily due to increased levels of operations, resulting in
consulting expenses, and cost of good sold that we incurred during that quarter
as compared to the same periods ended September 30, 2003.
OUR PLAN OF OPERATIONS FOR THE NEXT TWELVE MONTHS. We have generated $214,216 in
revenues during the quarter ended September 30, 2004, and had $38,777 in cash
and $141,494 in accounts receivable as of that date. We believe that we will be
able to collect those accounts receivable in a timely fashion. 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 September 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 have had and the pilot
projects already underway, we have also submitted several proposals in South
Africa. These proposal include a service delivery solution for a water meter
reading company, a truck monitoring solution for a petroleum transport company,
a delivery tracking solution for a cellular company, and a time and attendance
solution for a cleaning service company, a parcel and cargo tracking solution
for a freight company, a vehicle monitoring solution for a transport company,
and an asset monitoring solution for a cash in transit company. Thus far, only
the cash in transit company has come back with a `not interested' which was due
to current budget reasons. In Mexico, we submitted the proposal to the DOT as
well as a proposal for a petroleum transport company to reduce its shrinkage of
petroleum to the black market from its delivery trucks. The petroleum transport
company already has a budget allocated to solve this problem and is waiting for
a demonstration, which we are trying to schedule for the middle of December
2004.
Our biggest challenge right now is servicing new enquiries while pushing forward
on current demonstrations, pilots, and proposals given the limited resources we
currently have. We are currently working on establishing a network of VARs so
that we can obtain the sales and sales support team needed to keep up with
demand. However, in learning from our past mistakes we are now much more
diligent as to whom we appoint as a VAR. Given our experience with companies not
fulfilling their contractual obligations, we now require more from our VARs ,
such as the purchase of demonstrator units and a small amount of inventory. This
has reduced the number of interested companies down to those we feel can
demonstrate their ability to move our Tagnet units and solutions.
20
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 and virtual commerce
business unit is running behind schedule in terms of revenue generation but
ahead of schedule for being able to offer banking services on the terminals. We
started trying to secure orders for pre-paid services in August while we waited
for banking services on the terminals to become available. We now have multiple
application abilities on one terminal, which means that pre-paid voucher
services, credit card and ATM card transaction processing, and loyalty program
transactions can all be done on one terminal. We are now working on getting five
other terminals to be able to offer multiple applications. We have also
developed a unique offering which is an advanced payment and recognition
solution that combines Tagnet with our transaction processing and loyalty
back-end system. We have several requests for pilot projects from various
merchants in South Africa that we are now working on delivering. We believe we
are now positioned to penetrate the point of sale market since in our estimation
there are few (if any) solutions currently available that offer pre-paid,
banking and loyalty all 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. The only barrier we now face to being able to tap this market is
finding sources of financing for these merchants to rent or purchase the
terminals. Currently, financing companies in South Africa do not provide
financing to small companies, which represent about 90% of this market.
However, we are in the process of placing twenty terminals in order to begin
slowly building a case to present to our finance partners as to why they should
approve certain pre-screened applications. 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 over the next three years. 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.
For our strategy in Mexico, we believe that pre-paid solutions represents a huge
market in Mexico since the pre-paid market is about to experience the explosion
that occurred in South Africa a couple of years ago. As such, we are focused on
rolling out an end-to-end solution in Mexico for pre-paid services and nearly
have our back-end system completely in place. We believe that we can begin
placing terminals in late December or early January. We are pushing forward with
our efforts in Mexico because we believe we can penetrate the market where
demand and volumes are higher in general as compared to South Africa.
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The downside is that the market resembles one controlled primarily by banking
and telecommunications cartels, which means that offering banking on the
terminals will be a long and difficult process. Furthermore, financing terminals
in Mexico may be even more challenging than in South Africa because the banks
have their own terminal business that they do not want to cannibalize, even
though their terminal business does not really include pre-paid services. We
believe we have a way to move terminals in Mexico despite the lack of
cooperation with the banks. We have developed strategic partnerships with
companies that are actively involved in this sector and we believe we are now
well positioned in Mexico.
Management believes that there is sufficient demand currently to support its
conservative forecasts of at least 4,000 terminals over the next 12 months if we
are able to gain financing mechanisms in place for potential customers. Without
access to financing programs, we believe our forecasts for terminals over the
next 12 months will be closer to 1,500. Assuming these 1,500 terminals were
utilizing our own pre-paid and banking back-end systems, we would be able to
begin financing our own terminals and expand our foot print 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 and virtual commerce. We have now staffed
up and built the infrastructure and resources required to move forward with
certain of our other projects.
Three projects at the top of our list are our village banking, our call
center/back office services and education projects. These 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 that the
media is 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 village banking project has made significant progress over the last few
months. We have completed and tested our software system that we developed
specifically for the management of the bank branches in South Africa. We have
also put together a banking plan that takes into account the challenges of
village banking and repositions the bank branches to be profitable. The plan
also taps into other banking services as well as access to foreign banks and
banking products. We believe our model is sound because we have submitted it to
two of our advisory board members that are senior bankers. They are helping us
to finalize the plan and send it to the Office of the President of South Africa
for endorsement of the plan. We wish to remind investors that there can be no
assurance that the plan will be endorsed or that if it is it will be
successfully implemented.
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.
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The education project has made significant progress through our recent revenue
sharing partnership with eDegree, a large provider of on-line educational
classes, programs and content in Africa. eDegree is partially owned by Johnnic
Pty Ltd, a South African media company with a market capitalization of about
US$300 million. We are in the midst of marketing and sales efforts in conjuction
with eDegree to sign up students for courses to be offered through our site. We
are planning on rolling out our education project plan to under-developed areas
over the next twelve months. We are approaching the government and other
organizations to garner support for the plan and to assist us in the
implementation of this plan.
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 particular
Tagnet pilot projects being considered because these pilots will result in both
significant revenues and also be important new solutions in these three
different industries. We believe these reference sites could be utilized to
promote Tagnet to other companies in these industries around the world. While we
are working on these pilots, we are also focused on procuring smaller contracts
so that we can establish other customer reference sites.
The second milestone is to sell 750 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). We initially forecasted sales of 30 units in August, 70
in September, 100 in October, 150 in November and 250 in December. With the set
backs described earlier, these forecasts have been changed and pushed back three
months. We now believe that we will see sales at the conclusion of the pilot
projects that we are currently scoping. Assuming all four pilot projects
resulted in the quoted order sizes for these potential customers, we would be
working on the placement of about 350 terminals. We believe these terminals are
in high transaction volume sites which may be sufficient for us to break even.
While it has taken us longer than anticipated to turn leads into pilot projects,
our management is pleased about the fact that we now have four pilot projects
being scoped for four national chains in South Africa.
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 and testing the software
component of the infrastructure that is required to meet the village banks'
requirements. We were planning to begin installation in the first three sites in
September but are waiting for due diligence information to be provided to us
that we have requested from the branches and CDA. We have also been looking for
investment partners in the reorganized bank to grow the portfolio of the bank at
that time. We are in the process of setting up meetings with some of these
partners to go over our banking plan. 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.
23
Once we meet the first two milestones, we believe that we will meet the listing
requirements of other 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
as soon as possible. We believe that other 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. Due to the setbacks we have had, we have revised our internal
planning to reflect this delay. As such, we now believe that late 2005 is a more
realistic goal. However, we wish to remind investors that even should we meet
the listing requirements at that time, there can be no assurances that we will
be in a position to move from the OTCBB.
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. If we are unsuccessful in obtaining further financing, we could be
unable to continue operations.
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 September 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.
In June 2004, we filed an SB-2 registration statement with the Securities and
Exchange Commission (SEC) in which we intended to register shares for sale with
Cornell Capital Partners to raise money for the Company. Management was told by
the SEC examiner the Company could it submit a request for acceleration to
become effective on October 1, 2004. On September 30, 2004, however, the SEC
notified the Company that the SEC had decided to initiate a full review of the
SB-2 filing. While no definitive time line was set forth, management estimated
that this process could take as long four to six months.
With the implication of a long delay and no access to the funding as set forth
in the registration statement, management decided to wait four weeks and see if
it seemed as though the process would not take so long. Management decided that
if no action had been taken by the SEC by the end of the fourth week that it
would just request to pull the filing. This decision was reached for three
primary reasons. First, we initially decided to do the filing because we had
forecasted the need for funds required to complete several pilot projects in
October and November 2004. Without access to those funds from the filing during
that time period, management feels that the registration statement is not the
best option for financing. Secondly, the registration statement was costing the
company about $7,500 per month in direct and indirect costs, which we believe
could be better used covering the costs for pilots at this point. Lastly,
management received a very negative reaction in the feedback about the deal with
Cornell when it the filing was first filed. Given the first two reasons,
management felt that pulling the filing would also be in alignment with the
desires of many of the company's shareholders.
Notwithstanding our own reasons for requesting a withdrawal of our registration
statement, it is important for us to disclose that the SEC is continuing to
conduct its own examination of our filings. We have been advised that, on or
about October 7, 2004, the United States Securities and Exchange Commission
("the Commission") commenced a non-public formal investigation in accordance
with an Order Directing Private Investigation and Examination and Designating
Officers to Take Testimony. We understand that the purpose of the investigation
is to determine whether there have been violations of certain provisions of the
federal securities laws, including Sections 5(a), 5(c) and 17(a) of the
Securities Act of 1933 ("Securities Act"), Sections 10(b), 13(a), 13(d) and
16(a) of the Securities Exchange Act of 1934 and Rules 10b-5, 12b-20, 13a-1,
13a-13, 13a-14, 13d-1, 13d-2, 16a-2 and 16a-3 promulgated thereunder. We
understand that the Commission has not yet determined whether any of the persons
or companies mentioned in the formal order have committed any of the acts
described therein, or have in any way violated the law. However, we cannot
determine the outcome of this investigation at this time; in addition, if the
Commission was to institute an administrative action or file a civil injunctive
action against us or our management, it is likely that our business, financial
condition, and operations would be negatively effected.
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Also, concurrent with the issuance of the formal order of investigation, the
Commission issued an order directing that an examination be made to determine
whether a stop order should be issued under Section 8(d) of the Securities Act
with respect to a pending registration statement we had filed on Form SB-2 on or
about June 29, 2004 and three amendments to that registration statement filed
thereafter on or about August 24, 2004, August 25, 2004 and September 1, 2004.
On or about October 22, 2004 and October 25, 2004, we filed an application to
withdraw that pending registration statement and the amendments thereto. On or
about November 5, 2004, the Commission issued an Order denying the withdrawal of
our registration statement and the three related amendments. At this time, we
cannot determine the outcome of the Commission's examination or the likely
impact it will have on our business, financial condition or operations. However,
as indicated above, if the Commission was to institute an administrative action
or file a civil injunctive action against us or our management, it is likely
that our business, financial condition, and operations would be negatively
effected.
We are committed to cooperating with the SEC and its investigation and have
submitted information and documents requested by the SEC. We are working with
the SEC to resolve this confidential inquiry.
We are also taking legal action against E-SAP and its shareholders to cancel and
unwind from our acquisition with them. We are requiring that E-SAP return the
2,000,000 shares of restricted stock issued as payment for the acquisition.
Since the material mis-statement of facts and forgery of audited financials is a
criminal offense in South Africa, we have involved the police and retained legal
counsel to handle the proceedings.
ITEM 2. CHANGES IN SECURITIES.
In August 2004, we issued 8,812,993 shares of restricted common stock as payment
to our employees, full-time contractors and advisory board members as payment
for services to these individuals. We also issued 1,211,000 shares of restricted
common stock to independent contractors as payment for services provided to the
company. We also issued 1,050,000 and 38,461 shares of restricted common stock
respectively to Cornell Capital Partners LLC and Newbridge Securities LLC as
part of our standby equity placement agreement with Cornell. We also recognized
the 1,000,000 shares of restricted common stock that were issued as payment for
the remaining 49% of Unilogic Solutions (pty) Ltd. (now Maximum Dynamics SA
(Pty) Ltd.).
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
On April 22, 2004, Cornell Capital Partners entered into a Securities Purchase
Agreement with Maximum Dynamics under which Cornell Capital Partners agreed to
purchase a total of $500,000 of convertible debentures. Cornell Capital Partners
purchased $200,000 of convertible debentures on April 22, 2004 and purchased
another $200,000 on July 2, 2004. The Agreement also provides for the purchase
of another $100,000 upon the SEC declaring the SB-2 registration statement
effective. The registration statement is currently undergoing a full review by
the SEC The convertible debentures are convertible into shares of common stock
at a price equal to the lower of: (a) an amount equal to one hundred twenty
percent (120%) of the closing bid price of the common stock as of the closing
date or (b) an amount equal to eighty percent (80%) of the lowest closing bid
price of the common stock for the five trading days immediately preceding the
conversion date. As a result, the highest conversion price is $0.27 as a result
of the closing bid price of $.0225 on April 22, 2004. The convertible debentures
are secured by all of Maximum Dynamics' assets. The debentures have a three year
maturity and accrue interest at a rate of 5%.
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ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
In November 2004, certain of our officers and affiliates utilized registered
shares of Rule 144 eligible stock to be sold and/or pledged as collateral in
loans. Eric Majors, our Chief Executive Officer, sold 250,000 shares of stock
and pledged 375,000 shares as collateral in a loan with Nordea Bank in Denmark.
Joshua Wolcott, our Chief Operations Officer and interim Chief Financial
Officer, sold 525,000 shares of stock and pledged 375,000 shares as collateral
in a loan with Nordea Bank in Denmark. Franco Maccioni, our Managing Director of
Maximum Dyamics SA, sold 250,000 shares of stock and pledged 375,000 shares as
collateral in a loan with Nordea Bank in Denmark. Johannes Clausen, our Managing
Director of Tagnet International, sold 250,000 shares of stock and pledged
375,000 shares as collateral in a loan with Nordea Bank in Denmark.
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
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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 December 1, 2004.
Maximum Dynamics, Inc.
By: /s/ Eric R. Majors
--------------------------------------------
Eric R. Majors
Its: Chief Executive Officer
Chairman of the Board and a director