NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE A - ORGANIZATION AND
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of
Presentation
The
accompanying unaudited consolidated financial statements have been prepared in
conformity with Generally Accepted Accounting Principles (“GAAP”) for interim
financial information and with the instructions to SEC Form 10-QSB and Article 8
of Regulation S-K. Accordingly, they do not include all of the information and
footnotes required by GAAP for complete financial statements. In preparing the
financial statements, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the balance sheet and the
reported amounts of revenues and expenses for the period. Actual results could
differ significantly from those estimates. The accompanying unaudited
consolidated financial statements should be read in conjunction with the audited
consolidated financial statements and the notes thereto incorporated by
reference in the Company’s Annual Report on SEC Form 10-KSB for the year ended
September 30, 2007.
In the
opinion of the Company’s management, the accompanying unaudited consolidated
financial statements contain all material adjustments required by GAAP to
present fairly the financial position of UPSNAP, INC. and its subsidiaries as of
March 31, 2008 and the results of their operations for the three and six month
periods ended March 31, 2008 and 2007 and their cash flows for the six months
ended March 31, 2008 and 2007. All such adjustments are of a normal recurring
nature, unless otherwise disclosed in this Form 10-QSB or other referenced
material. Results of operations for interim periods are not necessarily
indicative of results for the full year.
When
required, certain reclassifications are made to the prior period’s consolidated
financial statements to conform to the current presentation.
NOTE B - SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES
These
financial statements have been prepared by management in accordance with GAAP.
The significant accounting principles are as follows:
Principles of
consolidation
The
consolidated financial statements include the accounts of UpSNAP, Inc. since
November 15, 2005 and its wholly-owned subsidiary, UpSNAP USA, Inc., which is
100% consolidated in the financial statements, and the accounts and results from
operations acquired as a result of the XSVoice, Inc. acquisition as of January
6, 2006. All material inter-company accounts and transactions have
been eliminated.
Use of
Estimates
The
preparation of financial statements in conformity with GAAP requires management
to make estimates and assumptions that affect the amounts reported in the
financial statements and the accompanying notes. These estimates and assumptions
are based on management's judgment and available information and, consequently,
actual results could be different from these estimates.
Cash and cash
equivalents
For
purposes of the statement of cash flows, the Company considers all highly liquid
debt instruments purchased with an original maturity of three months or less to
be cash equivalents.
Property and
equipment
Property
and equipment are stated at cost. Major renewals and improvements are
charged to the asset accounts while replacements, maintenance and repairs, which
do not improve or extend the lives of the respective assets, are
expensed. At
the time
property and equipment are retired or otherwise disposed of, the asset and
related accumulated depreciation accounts are relieved of the applicable
amounts. Gains or losses from retirements or sales are credited or
charged to income. Th
e Company
depreciates its property and equipment on the double declining balance method
with a five year life and half year convention.
Disclosure a
bout Fair Value of Financial
Instruments
The
Company estimates that the fair value of all financial instruments at March 31,
2008 and 2007, as defined in FASB 107, does not differ materially from the
aggregate carrying values of its financial instruments recorded in the
accompanying balance sheet. The estimated fair value amounts have been
determined by the Company using available market information and appropriate
valuation methodologies. Considerable judgment is required in interpreting
market data to develop the estimates of fair value, and accordingly, the
estimates are not necessarily indicative of the amounts that the Company could
realize in a current market exchange.
Research and Development
Expenditures
The
Company incurs product development expenses related to the ongoing development
of their search engine technology and connecting new clients to the existing
streaming audio platform. Research and development expenses consist primarily of
wages paid to employees.
The
Company follows the guidelines in Statement of Financial Accounting Standards
No. 2,
Accounting for Research
and Development Costs
. Expenditures, including equipment used in research
and development activities, are expensed as incurred.
Revenue
Recognition
The
Company recognizes revenue under the guidance provided by the SEC Staff
Accounting Bulletin (“SAB”) No. 104, “Revenue Recognition” and the Emerging
Issues Task Force (“EITF”) Abstract No. 99-19 “Reporting Revenue Gross as a
Principal versus Net as an Agent” (“EITF 99-19”).
The
Company receives revenue from the wireless carriers by providing streaming audio
content that the carriers make available to their mobile handset customers.
UpSNAP generates revenues from this line of business in two distinct
ways:
|
|
1.
|
Provider
of Technology Platform: UpSNAP provides technology to brands that have
their own mobile distribution and revenue arrangements with the carriers.
In this case, UpSNAP does not act as the principal in the transaction. The
brands look to UpSNAP to provide the technology platform and service,
while they retain the relationship with the consumer and set the pricing.
In these cases, UpSNAP typically reports net revenues received from the
carrier which are revenues after both carrier charges and content provider
charges.
|
The
Company negotiated a new contract with its largest carrier customer effective
February 12, 2007 in which the carrier is no longer deducting content provider
charges before submitting revenue to the Company. Under this arrangement, the
content provider charges are the responsibility of the Company. The net effect
of this new contract was that revenues and cost of revenues are increased by an
identical amount to reflect the content provider charges. This contract was
terminated during the quarter ended December 31, 2007.
|
|
2.
|
UpSNAP
is Principal Party: UpSNAP acts as the principal party in the content
relationships. Specifically, UpSNAP has the relationship with the
carriers, sets the re-sale price at which consumers buy the product, pays
the content provider for the content, and builds the mobile application or
service. In these relationships, the Company recognizes revenue
based on the gross fees remitted by the carrier to the company. The
Company’s payments to the third party content providers are treated as
cost of sales.
|
The
Company also receives advertising revenues from third parties. These revenues
are resultant from audio ads played on the Company’s SWInG platform, banner ads
on the WAP deck, and pay per call revenues when the consumer proactively
responds to a text message. These advertising revenues are recognized in the
period the transactions are recorded by the third party provider. UpSNAP reports
net advertising revenues received from third parties.
Dividends
The
Company has not yet adopted any policy regarding payment of dividends. No
dividends have been paid or declared since inception.
Long-lived
assets
The
Company reviews the carrying value of property, plant, and equipment for
impairment whenever events and circumstances indicate that the carrying value of
an asset may not be recoverable from the estimated future cash flows expected to
result from its use and eventual disposition. In cases where undiscounted
expected future cash flows are less than the carrying value, an impairment loss
is recognized equal to an amount by which the carrying value exceeds the fair
value of assets. The factors considered by management in performing this
assessment include current operating results, trends and prospects, the manner
in which the property is used, and the effects of obsolescence, demand,
competition, and other economic factors.
Accounting Policy for
Impairment of Intangible Assets
The
Company is required for accounting purposes to measure the value of goodwill
annually or whenever significant events that could be indicators of a change in
value have occurred. In completing our second quarter evaluation, we
considered the impact of the Company’s announced termination of the proposed
merger with Mobile Greetings, Inc., the Company’s recent stock price, and other
industry trends and have determined that impairment to goodwill and other
intangible assets was required. To make this determination, the Company
compared the carrying value of its equity to its fair value and forecasted
future cash flows generated from operations. For purposes of this
evaluation, fair value has been determined based on the recent market value of
Company’s equity. As a result of this evaluation, the Company determined
to write off all of the goodwill, recording a non-cash goodwill impairment
charge of $5.3 million.
Segment
reporting
The
Company follows Statement of Financial Accounting Standards No. 130, Disclosures
About Segments of an Enterprise and Related Information. The Company operates as
a single segment and will evaluate additional segment disclosure requirements as
it expands its operations.
Advertising
costs
The
Company expenses all advertising as incurred. For the six month
periods ended March 31, 2008 and 2007 the Company incurred no advertising
expenses and $3,758 respectively.
Income
Taxes
In
accordance with Statement of Financial Accounting Standards No. 109,
Accounting for Income Taxes
,
the Company uses an asset and liability approach for financial accounting and
reporting for income taxes. The basic principles of accounting for income taxes
are: (a) a current tax liability or asset is recognized for the estimated taxes
payable or refundable on tax returns for the current year; (b) a deferred tax
liability or asset is recognized for the estimated future tax effects
attributable to temporary differences and carryforwards; (c) the measurement of
current and deferred tax liabilities and assets is based on provisions of the
enacted tax law and the effects of future changes in tax laws or rates
are not anticipated; and (d) the measurement of deferred tax assets is
reduced, if necessary, by the amount of any tax benefits that, based on
available evidence, are not expected to be realized.
Loss per common
share
The
Company adopted Statement of Financial Accounting Standards No. 128 that
requires the reporting of both basic and diluted earnings (loss) per share.
Basic loss per share is calculated using the weighted average number of common
shares outstanding in the period. Diluted loss per share includes potentially
dilutive securities such as outstanding options and warrants, using the
"treasury stock" method and convertible securities using the "if-converted"
method. The assumed exercise of options and warrants and assumed
conversion of convertible securities have not been included in the calculation
of diluted loss per share as the affect would be
anti-dilutive.
Recent Accounting
Pronouncements
In
February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities-Including an amendment of FASB
Statement No. 115" ("SFAS 159"). SFAS 159 expands the use of fair value
accounting but does not affect existing standards which require assets or
liabilities to be carried at fair value. Under SFAS 159, a company may elect to
use fair value to measure accounts and loans receivable, available-for-sale and
held-to-maturity securities, equity method investments, accounts payable,
guarantees and issued debt. Other eligible items include firm commitments for
financial instruments that otherwise would not be recognized at inception and
non-cash warranty obligations where a warrantor is permitted to pay a third
party to provide the warranty goods or services. If the use of fair value is
elected, any upfront costs and fees related to the item must be recognized in
earnings and cannot be deferred, e.g., debt issue costs.
The fair
value election is irrevocable and generally made on an instrument-by-instrument
basis, even if a company has similar instruments that it elects not to measure
based on fair value. At the adoption date, unrealized gains and losses on
existing items for which fair value has been elected are reported as a
cumulative adjustment to beginning retained earnings. Subsequent to the adoption
of SFAS 159, changes in fair value are recognized in earnings. SFAS 159 is
effective for fiscal years beginning after November 15, 2007 and is required to
be adopted by the Company in the first quarter of fiscal 2009. The Company is
currently is determining whether fair value accounting is appropriate for any of
its eligible items and cannot estimate the impact, if any, which SFAS 159 will
have on its consolidated results of operations and financial
condition.
In
December 2007, the FASB issued SFAS No. 141(R), Business Combinations, or ("SFAS
141(R)"). SFAS 141(R) establishes principles and requirements for how the
acquirer of a business recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed, and any noncontrolling
interest in the acquiree. SFAS 141(R) also provides guidance for recognizing and
measuring the goodwill acquired in the business combination and determines what
information to disclose to enable users of the financial statements to evaluate
the nature and financial effects of the business combination. The provisions of
SFAS 141(R) are effective for financial statements issued for fiscal years
beginning after December 15, 2008. We are currently assessing the financial
impact of SFAS 141(R) on our consolidated financial statements.
In
December 2007, the FASB issued SFAS 160, Noncontrolling Interests in
Consolidated Financial Statements - An Amendment of ARB No. 51("SFAS 160"). SFAS
160 amends Accounting Research Bulletin No. 51, "Consolidated Financial
Statements," or ARB 51, to establish accounting and reporting standards for the
noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. This statement also amends certain of ARB 51's consolidation
procedures for consistency with the requirements of SFAS 141(R). In addition,
SFAS 160 also includes expanded disclosure requirements regarding the interests
of the parent and its noncontrolling interest. The provisions of SFAS 160 are
effective for fiscal years beginning after December 15, 2008. Earlier adoption
is prohibited. We are currently assessing the financial impact of SFAS 160 on
our consolidated financial statements.
Stock
Plan
On
November 2, 2006 the Board of Directors of UpSNAP, Inc. approved a 2006 Omnibus
Stock and Incentive Plan. The Plan made four million (4,000,000) shares, either
unissued or reacquired by the Company, available for awards of either options,
stock appreciation rights, restricted stocks, other stock grants, or any
combination thereof. Eligible recipients include employees, officers,
consultants, advisors and directors. Options granted generally have a ten-year
term and vest over four years from the date of grant. Certain of the stock
options granted under the Plan have been granted pursuant to various stock
option agreements. Each stock option agreement contains specific terms. The
Board of Directors increased the size of the Plan to seven and one half million
(7,500,000) total shares on August 8, 2007, which was ratified by stockholders
in September 2007.
Stock-Based
Compensation
Under the
fair value recognition provisions of SFAS No. 123(R), stock-based
compensation cost is estimated at the grant date based on the fair value of the
award and is recognized as expense over the requisite service period of the
award. The Company has awarded stock-based compensation both as restricted stock
and stock options.
Compensation
expense for restricted stock is recognized on the date of the grant at the
closing price of the stock on the date of the grant. The Company granted 650,000
and 20,000 restricted shares respectively for the six month periods ended March
31, 2008 and 2007 and recognized stock compensation expense of $104,000 and
$7,900 respectively.
We use
the Black-Scholes option valuation model to value option awards under SFAS
No. 123(R). The Company currently has awards outstanding with only service
conditions and graded-vesting features. We recognize compensation cost on a
straight-line basis over the requisite service period.
Our
statement of operations for the six month periods ended March 31, 2008 and 2007
included stock-based compensation expense for stock options of $29,001 and
$40,234, respectively.
Unrecognized
stock-based compensation expense expected to be recognized over an estimated
weighted-average amortization period of 2.4 years was approximately $151,357 at
March 31, 2008.
Time-Based Stock
Awards
The fair
value of each time-based award is estimated on the date of grant using the
Black-Scholes option valuation model, which uses the assumptions described
below. Our weighted-average assumptions used in the Black-Scholes valuation
model for equity awards with time-based vesting provisions granted during the
quarter ended March 31, 2008 are shown in the following table:
|
Expected
volatility
|
|
70.0%
|
|
Expected
dividends
|
|
0%
|
|
Expected
terms
|
|
6.0
-6.25 years
|
|
Pre-vesting
forfeiture rate
|
|
50%
|
|
Risk-free
interest rate
|
|
4.45% –
4.76%
|
The
expected volatility rate was estimated based on historical volatility of the
Company’s common stock over approximately the seventeen month period since the
reverse merger and comparison to the volatility of similar size companies in the
similar industry. The expected term was estimated based on a simplified method,
as allowed under SEC Staff Accounting Bulletin No. 107, averaging the
vesting term and original contractual term. The risk-free interest rate for
periods within the contractual life of the option is based on U.S. Treasury
securities. The pre-vesting forfeiture rate was based upon plan to date
experience. As required under SFAS No. 123(R), we will adjust the estimated
forfeiture rate to our actual experience. Management will continue to assess the
assumptions and methodologies used to calculate estimated fair value of
share-based compensation. Circumstances may change and additional data may
become available over time, which could result in changes to these assumptions
and methodologies, and thereby materially impact our fair value
determination.
A summary
of the time-based stock awards as of March 31, 2008, and changes during the
quarter ended March 31, 2008, is as follows:
|
|
|
Shares
|
|
|
Weighted
Average
Exercise
Price
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at September 30, 2007
|
|
|
720,000
|
|
|
$
|
0.900
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
150,000
|
|
|
$
|
0.380
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
or expired
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
March 31, 2008
|
|
|
870,000
|
|
|
$
|
0.810
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
at March 31, 2008
|
|
|
255,000
|
|
|
$
|
0.824
|
|
The
following tables summarize information about fixed stock options outstanding and
exercisable at March 31, 2008:
|
|
|
|
Stock
Options Outstanding
|
|
|
Range
of Exercise Prices
|
|
|
Number
of
Shares
Outstanding
|
|
|
Weighted
Average
Contractual
Life
in
Years
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1.130
|
|
|
|
400,000
|
|
|
|
8.83
|
|
|
$
|
0.635
|
|
|
|
300,000
|
|
|
|
8.92
|
|
|
$
|
0.395
|
|
|
|
20,000
|
|
|
|
9.00
|
|
|
$
|
0.380
|
|
|
|
150,000
|
|
|
|
9.92
|
|
|
|
|
|
|
|
870,000
|
|
|
|
9.05
|
|
|
Viant
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
|
Number
of
|
|
|
Exercise
|
|
|
Warrants
|
|
|
Exercise
|
|
|
|
|
Warrants
|
|
|
Price
|
|
|
Exercisable
|
|
|
Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding,
September 30, 2007
|
|
|
560,000
|
|
|
$
|
0.90
|
|
|
|
560,000
|
|
|
$
|
0.90
|
|
|
Granted
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding,
March 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
560,000
|
|
|
$
|
0.90
|
|
|
|
560,000
|
|
|
$
|
0.90
|
|
At March
31, 2008, the range of warrant prices for shares under warrants and the
weighted-average remaining contractual life is as follows:
|
|
|
|
Warrants
Outstanding
|
|
|
Warrants
Exercisable
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
Average
|
|
|
|
|
|
Weighted-
|
|
|
Range
of
|
|
|
Number
of
|
|
|
Average
|
|
|
Remaining
|
|
|
Number
|
|
|
Average
|
|
|
Warrant
|
|
|
Warrants
|
|
|
Exercise
|
|
|
Contractual
|
|
|
Of
|
|
|
Exercise
|
|
|
Exercise
Price
|
|
|
|
|
|
Price
|
|
|
Life
|
|
|
Warrants
|
|
|
Price
|
|
|
$
|
1.10
|
|
|
|
1,800,000
|
|
|
$
|
1.10
|
|
|
|
2.53
|
|
|
|
1,800,000
|
|
|
$
|
1.10
|
|
|
$
|
0.90
|
|
|
|
560,000
|
|
|
$
|
0.90
|
|
|
|
2.62
|
|
|
|
560,000
|
|
|
$
|
0.90
|
|
|
|
|
|
|
|
2,360,000
|
|
|
|
|
|
|
|
|
|
|
|
2,360,000
|
|
|
|
|
|
The
Company may from time to time reduce the exercise price for any of the warrants
either permanently or for a limited period or extend their expiration
date.
NOTE
C
- INCOME
TAXES
For the
twelve month periods ended September 30, 2007 and 2006, the Company incurred net
operation losses and accordingly, no provision for income taxes has been
recorded. In addition, no benefit for income taxes has been recorded
due to the uncertainty of the realization of any tax assets. At
September 30, 2007, the Company had approximately $2,972,040 of accumulated net
operating losses. The net operating loss carryforwards, if not
utilized, will begin to expire in 2022.
The
components of the Company’s deferred tax asset are as follows:
|
|
|
Twelve
Month Period
Ended
September 30
|
|
|
Twelve
Month Period
Ended
September 30
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Federal
and state income tax benefit
|
|
$
|
1,040,214
|
|
|
$
|
864,783
|
|
|
Change
in valuation allowance on deferred tax assets
|
|
|
(1,040,214
|
)
|
|
|
(864,783
|
)
|
|
Net
deferred tax assets
|
|
$
|
-
|
|
|
$
|
-
|
|
A
reconciliation between the amounts of income tax benefit determined by applying
the applicable U.S. and State statutory income tax rate to pre-tax loss is as
follows:
|
|
|
Twelve
Month Period
Ended
September 30
|
|
|
Twelve
Month Period
Ended
September 30
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Federal
and state statutory rate
|
|
$
|
1,040,214
|
|
|
$
|
864,783
|
|
|
Change
in valuation allowance on deferred tax assets
|
|
|
(1,040,214
|
)
|
|
|
(864,783
|
)
|
|
|
|
$
|
-
|
|
|
$
|
-
|
|
NOTE
D
- GOING
CONCERN
As shown
in the accompanying financial statements, the Company has accumulated net losses
from operations from inception through March 31, 2008 totaling $8,986,115 and as
of March 31, 2008, has had limited revenues from operations. These factors raise
substantial uncertainty about the Company’s ability to continue as a going
concern.
The
Company’s financial statements are prepared using the generally accepted
accounting principles applicable to a going concern, which contemplates the
realization of assets and liquidation of liabilities in the normal course of
business. The accompanying financial statements do not include any
adjustments that might be necessary if the Company is unable to continue as a
going concern.
NOTE
E
- CONCENTRATION OF CREDIT
RISK
For the
six month period ended March 31, 2008, our largest customer accounted
for approximately 78% of sales.
NOTE
F
- PROPERTY AND
EQUIPMENT
Property
and equipment consisted of the following:
|
|
|
As
of March 31
|
|
|
As
of March 31
|
|
|
Fixed
Assets
|
|
2008
|
|
|
2007
|
|
|
Computer
and office equipment
|
|
$
|
169,742
|
|
|
$
|
167,565
|
|
|
Office
Equipment
|
|
|
1,000
|
|
|
|
1,000
|
|
|
Office
Furniture
|
|
|
3,000
|
|
|
|
3,000
|
|
|
Accumulated
Depreciation
|
|
|
(107,757
|
)
|
|
|
(67,353
|
)
|
|
Total
Fixed Assets
|
|
$
|
65,985
|
|
|
$
|
104,212
|
|
Depreciation
expense for the quarters ended March 31, 2008 and 2007 was $7,604 and $ 12,708,
respectively. The estimated service lives of property and equipment
are 3 – 7 years.
NOTE
G
–
COMMITMENTS
In March
2008, the Company began a lease for approximately 1,800 square feet of office
space. The lease extends through February 28, 2009 at a rate of $1,500 per
month. Future maturities associated with this commitment are as
follows:
|
Fiscal
Year
|
Amount
|
|
2008
|
$9,000
|
|
2009
|
$7,500
|
The
Company has not determined whether or not to extend the lease beyond the current
term or negotiate a reduction in total square footage.
NOTE
H
–
NOTE
PAYABLE
As part
of the consideration for the purchase of XSVoice, the Company assumed the
principal balance of a November 5, 2004 note that was in default between
XSVoice, Inc. and one of its carrier partners. The principal balance of the note
at the time of the acquisition of XSVoice, Inc. was $113,500 and it carries an
interest rate is 5% above the prime rate and was subject to an additional 2%
after any Event of Default. The Company has been unable to identify
any parties within the carrier that are aware of the note and are thus able to
negotiate terms. The carrier has also made no attempts to collect the note and
the Company determined during the quarter ended December 31, 2007 that the
Note was not going to be collected and wrote off the full amount of the Note to
other income and expense. The Company had carried the note as long-term and was
not accruing interest.
NOTE I – MERGER
AGREEMENT
On March
5, 2008, the Company terminated the Agreement and Plan of Merger, by and among
the Company, Mobile Greetings, Inc., a California corporation, and UpSNAP
Acquisition Corp., a California corporation and a wholly owned subsidiary of
Company dated August 9, 2007 (the “Agreement,” as described on Current Report on
Form 8-K filed with the Securities and Exchange Commission (the “SEC”) on August
9, 2007), as amended on October 16, 2007 by Amendment No. 1 to the Agreement (as
described on Current Report on Form 8-K filed with the SEC on October 16, 2007)
and as further amended on January 14, 2008 by Amendment No. 2 to the Agreement
(as described on 10-KSB for the fiscal year ended September 30, 2007, filed with
the SEC on January 15, 2008). In accordance with Section 7.02(ii) of
the Agreement, as amended, any of the parties to the Agreement, to the extent it
is not in breach of the Agreement, may terminate the Agreement if the
merger is not consummated by February 29, 2008. Due to current
adverse market conditions, the parties were unable to consummate the Agreement
and have decided to terminate the Agreement. Neither party had any
post-termination obligation to the other.
As part
of the termination, the Company wrote off $307,215 in merger related
costs. $238,556 of these costs had been capitalized as of the year ended
September 30, 2007.
NOTE J – OTHER
ASSETS
On
January 6, 2006, the Company completed the purchase of XSVoice, Inc., a
privately held wireless platform and application developer, by acquiring
substantially all of the assets of XSVoice, Inc. for a total purchase price of
$6.3 million. As a result of the acquisition, the Company acquired XSVoice's
proprietary SWInG (Streaming Wireless Internet Gateway) technology, which
enables mobile access to virtually any type of audio content, including
Internet-based streaming audio, radio, television, satellite or other audio
source. The acquisition also allowed the Company to gain access to carrier
distribution channels and premium content provider relationships.
The
aggregate purchase price of $6,393,223 consisted of $198,829 in cash
consideration, the assumption of $130,000 in debt, and common stock valued at
$5,735,000. In addition, the Company paid $80,820 for accounting and legal fees
related to the acquisition and issued common stock valued at $265,074 for
investment banking services.
The value
of the 2,362,830 common shares issued as a result of this acquisition was
determined based on the average market price of the Company’s common shares over
the preceding 15-day period before the closing date of the
acquisition.
The
following table presents the allocation of the acquisition cost, including
professional fees and other related acquisition costs, to the assets acquired
and liabilities assumed, based on their fair values:
|
Allocation
of acquisition cost:
|
|
|
|
|
Accounts
receivable
|
|
$
|
71,621
|
|
|
Property,
plant, and equipment
|
|
|
-
|
|
|
Computer
equipment
|
|
|
28,200
|
|
|
Office
equipment
|
|
|
1,000
|
|
|
Office
furniture
|
|
|
3,000
|
|
|
SWinG
copyright
|
|
|
1,345,000
|
|
|
Customer
relationships
|
|
|
104,000
|
|
|
Employment
contracts
|
|
|
78,000
|
|
|
Supplier
contracts
|
|
|
84,500
|
|
|
Goodwill
|
|
|
4,791,362
|
|
|
Total
assets acquired
|
|
|
6,506,723
|
|
|
Note
payable
|
|
|
(113,500
|
)
|
|
Total
liabilities assumed
|
|
|
(113,500
|
)
|
|
Net
assets acquired
|
|
$
|
6,393,223
|
|
Of the
$6,402,902 of acquired intangible assets, $1,345,040 was assigned to the SWinG
technology platform, $104,000 for customer relationships, $78,000 for employment
contracts, and $84,500 for supplier contracts. These intangible
assets were assigned a life of 45 months. The remaining unallocated intangible
balance of $4,791,362 was assigned to goodwill.
The
Company is required for accounting purposes to measure the value of goodwill
annually or whenever significant events that could be indicators of a change in
value have occurred. In completing our second quarter evaluation, we
considered the impact of the Company’s announced termination of the proposed
merger with Mobile Greetings, Inc. and the resultant drop in the Company’s stock
price and other industry trends and have determined that impairment to goodwill
and other intangible assets was required. To make this determination, the
Company compared the carrying value of its equity to its fair value and
forecasted future cash flows generated from operations. For purposes of
this evaluation, fair value has been determined based on the recent market value
of Company’s equity. As a result of this evaluation, the Company wrote off
the remaining value of the intangible assets as of March 31, 2008 related to the
XSVoice acquisition and recorded a non-cash goodwill impairment charge of $5.3
million.
NOTE K – SUBSEQUENT
EVENTS
On May 14, 2008, the Board
of Directors approved the following with respect to stock options, with the
grants and repricing at an exercise price of $0.10 per share of common stock,
which was the closing price on May 13, 2008:
-Grant to
Tony Philipp, CEO, of options to purchase 100,000 shares of common stock, of
which options for 500,000 shares vested immediately and the balance vesting over
two years, subject to accelerated vesting;
-Reprice
of outstanding options held by existing employees and officers;
-Grant to
each of Mark McDowell and Rick von Gechten, outside directors, in consideration
of their ongoing efforts, of options to purchase 200,000 shares of common stock,
vesting over four years, subject to accelerated vesting;
-Grant of
additional options to Mark McDowell in consideration of his strategic advisory
services, to purchase 300,000 shares of common stock, vesting over four years,
subject to accelerated vesting.
In
addition, the Board of Directors approved an annual salary to Tony Phillipp,
CEO, retroactive to January 1, 2008.
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS
The
following discussion should be read in conjunction with the Financial Statements
and related notes thereto included elsewhere in this report.
TERMINATION
OF AGREEMENT AND PLAN OF MERGER
On March
5, 2008, the Company terminated the Agreement and Plan of Merger, by and among
the Company, Mobile Greetings, Inc., a California corporation, and UpSNAP
Acquisition Corp., a California corporation and a wholly owned subsidiary of
Company dated August 9, 2007 (the “Agreement,” as described on Current Report on
Form 8-K filed with the Securities and Exchange Commission (the “SEC”) on August
9, 2007), as amended on October 16, 2007 by Amendment No. 1 to the Agreement (as
described on Current Report on Form 8-K filed with the SEC on October 16, 2007)
and as further amended on January 14, 2008 by Amendment No. 2 to the Agreement
(as described on 10-KSB for the fiscal year ended September 30, 2007, filed with
the SEC on January 15, 2008). In accordance with Section 7.02(ii) of
the Agreement, as amended, any of the parties to the Agreement, to the extent
they are not in breach of the Agreement, may terminate the Agreement if the
merger is not consummated by February 29, 2008. Due to current
adverse market conditions, the parties were unable to consummate the Agreement
and have decided to terminate the Agreement. Neither party had any
post-termination obligation to the other.
The
Company’s announced termination of the proposed merger with Mobile Greetings,
Inc. resulted in a significant decrease in the Company’s stock price. The
Company’s largest carrier customer, who accounted for 78% of fiscal 2008
revenues, is shifting their wireless data services customers to a technology
that the Company does not currently support. As a result, wireless
data services revenue have fallen approximately 60% since the beginning of the
fiscal year. This customer also has terminated supporting the NASCAR program
which had accounted for approximately 20% of the revenues from this customer
(although the Company’s total gross margins were not impacted by the loss of the
NASCAR program due to a reduction in infrastructure costs). Based on these
factors, the Company determined that impairment to goodwill and other intangible
assets related to the streaming audio platform and XSVoice acquisition was
required during the quarter. To make this determination, the Company
compared the carrying value of its equity to its fair value and forecasted
future cash flows generated from operations. For purposes of this
evaluation, fair value has been determined based on the recent market value of
Company’s equity. As a result of this evaluation, the Company recorded
non-cash goodwill impairment charge of $5.3 million which brought the carrying
value of the intangible assets related to the XSVoice acquisition down to
zero.
As part
of the termination, during the quarter the Company wrote off $307,215 in merger
related costs. $238,556 of these costs had been capitalized as of the year
ended September 30, 2007.
During
the Quarter UpSNAP management continued to wrestle with the decline in revenues
from its largest customer, focused in on reducing cost of operation, and
continued growing distribution with current and new distribution
partners.
In
addition, UpSNAP built out the Mobile Advertising Network Platform.
The
challenges moving forward and the near-term operational goals,
include:
|
|
·
|
Continue
to grow traffic and advertising from current and new distribution
Partners. In April and May 2008, two new/enhanced partnerships were signed
and we expect to launch them in
June.
|
|
|
·
|
Continue
to control costs and increase margins. Currently, we believe we have the
infrastructure and support in place to handle future growth, with minimal
increase in cost.
|
|
|
·
|
Continue
to build out the Mobile Advertising Network Platform. We expect
advertising revenues to grow by adding more advertisers as well as more
distribution partners.
|
INTRODUCTION
UpSNAP,
Inc. and its subsidiaries are collectively referred to as UpSNAP. The following
Management Discussion and Analysis of Financial Condition and Results of
Operations was prepared by management and discusses material changes in UpSNAP’s
financial condition and results of operations and cash flows for the six month
periods and quarters ended March 31, 2008 and 2007. Such discussion and comments
on the liquidity and capital resources should be read in conjunction with the
information contained in the accompanying audited consolidated financial
statements prepared in accordance with U.S. GAAP.
The
discussion and comments contained hereunder include both historical information
and forward-looking information. The forward-looking information, which
generally is information stated to be anticipated, expected, or projected by
management, involves known and unknown risks, uncertainties and other factors
that may cause the actual results and performance to be materially different
from any future results and performance expressed or implied by such
forward-looking information. Potential risks and uncertainties include risks and
uncertainties set forth under the heading “Risk Factors” and elsewhere in this
Form 10-QSB.
OVERVIEW
UpSNAP
provides a mobile search and entertainment platform that enables media companies
to deliver their content to all mobile phones in the United States, and
generates revenue from subscriptions and increasingly from mobile
advertising. UpSNAP has searchable mobile content from over 1,000
content channels and over 150 content partners. Mobile consumers are now buying
more and more powerful phones with Internet features capable of sending email,
running applications and browsing the Internet. According to the Pew Wireless
Internet Access study in February 2007, as many as 25% of Internet users now
have a cell-phone able to access the Internet. In the key youth
demographic of 18-34, consumers are using their cell-phones as their primary
method of communication and entertainment– effectively replacing their
PC.
The
market in general for mobile services is continuing to show very high growth
rates. In the U.S, according to the Cellular Telecommunications &
Internet Association (CTIA), as reported in its Wireless Quick Facts December
2006, wireless subscribers reached 233 million by December 2006, reaching more
than 76% of the total U.S. population.
Now that
the number of subscribers has almost reached saturation point – particularly in
the 18-35 demographic – we believe mobile operators are seeking to increase
their revenues by offering mobile entertainment services. According to the CTIA,
Mobile Entertainment Revenues in the US grew particularly sharply, showing
growth of 82% from $4.8 billion in the first half of 2005, to $8.7 billion for
the latter nine months of 2006.
In the
past, the typical revenue model for mobile entertainment services has been a
paid subscription model. Consumers have proved willing to spend several dollars
on a 20 second ring-tone from a mobile carriers store, even when they can
purchase the whole song on Apple’s iTunes for a mere 0.99 cents on their
computer, an example of the current large discrepancies between the mobile and
Internet content pricing models. As the features of the Internet and PCs
converge into powerful handsets with wireless Internet access, the Company
predicts that these discrepancies cannot last for long.
The
global market for mobile-phone premium content is expected to expand to more
than $43 billion by 2010, rising at a compound annual growth rate of 42.5
percent from $5.2 billion in 2004, according to iSuppli Corp.
UpSNAP
management believes that this paid content subscription model will start to
migrate to a search and advertising driven model over time. Most mass media
business models have started as subscription only, and then migrated with the
increasing reach of consumers into advertising driven services. As John
Templeton said: “History never repeats itself, but it often
rhymes.”
In the
United States, most mobile content is sold from ‘virtual’ shops on the mobile
handsets. However, this trend is set to change. In Europe, the mobile operators
are leaving content choice and selection to media and distribution companies who
sell mobile content. Consumers in the US are now being increasingly exposed to
direct marketing for mobile products.
UpSNAP
has built a search and advertising driven business model, which enables UpSNAP
and its media and carrier partners to make money from advertising, rather than
from the content subscription. UpSNAP believes that it is very well positioned
to take advantage of the enormous consumer demand for mobile content and
entertainment. A 2006 study from Shosteck Group showed that revenues from Mobile
advertising could reach $9.6 billion by 2010. Consumers will also increasing
need quick and convenient ways to search for all the latest content they can
consume on their mobile phone.
UpSNAP
currently has one major distribution arrangement, and in order to increase
sales, UpSNAP must increase its media partnerships that can actively promote
offers direct to consumers, as well as continue to partner with as many of the
mobile operators as possible. The carrier partner behind this major distribution
agreement has seen a large turnover of customers in the last year. As a result,
wireless data services revenue under this distribution arrangement have fallen
approximately 60% since the beginning of the fiscal year. This customer also has
terminated supporting the NASCAR program which had accounted for approximately
20% of the total revenues generated from this arrangement (although the
Company’s total gross margins were not impacted by the loss of the NASCAR
program due to a reduction in infrastructure costs)..
In 2007
UpSNAP signed a contract with Lincoln Financial which enables consumers to
listen and search for popular shows such as the Bob and Sheri Show on demand
from their mobile phones. UpSNAP has also recently signed new distribution
partnerships with Cablevision, Go2 Media, Sports Byline, and Disney
Radio.
In
January 2006 UpSNAP derived 99% of its revenues from subscription revenue from
one major US mobile operator. In our fiscal quarter January – March 2008, our
dependency on this carrier has been reduced to approximately 78% of our
revenues, as we move towards the more lucrative and higher margin search and
advertising related revenues and the revenues from this mobile operator have
fallen approximately 60% since the beginning of the fiscal year.
Media
companies and Advertising Agencies are hopeful that mobile advertising can
obtain the massive reach numbers of a TV campaign, combined with the direct
response and tracking potential of the Internet. However, mobile
marketing is still in its infancy as they struggle with the right forms of
direct marketing, privacy issues, and how to structure mobile advertising deals.
The pace of our deal making activities with the media companies has been much
slower than we would have liked.
UpSNAP is
looking at acquisitions and strategic partners to push this process
quicker. Potential partners would include mobile marketing, loyalty
schemes, advertising, mobile promotions & mobile social
networking.
Principal Products and
Services
UpSNAP
has two principal products and services:
|
|
|
Mobile
Entertainment Services – responsible for 74% of revenues during the
quarter ended March 31, 2008
|
|
|
|
Mobile
Advertising Network Platform – responsible for 26% of revenues during
the quarter ended March 31, 2008
|
MOBILE
ENTERTAINMENT SERVICES
The
UpSNAP SWinG (Streaming Wireless Internet Gateway) platform enables mobile
access to virtually any type of live and on-demand streaming audio content, such
as radio, music, talk shows, and live sports events. The software
translates data from almost any type of common audio format, for example MP3
files, to allow it to be streamed to cell-phones capable of supporting audio
streaming. If the cell-phone does not have any data services, the platform
broadcasts the audio via the voice channel on the cell-phone. The SWinG platform
runs on any mobile phone in the US, regardless of handset, data package or
software. The SWinG platform was built over the course of 2002-2004 and is fully
operational.
Our
catalog of free and premium streaming audio content delivers compelling content
from some of the world’s premier brands including, Disney Radio, Sporting News
Radio, Lincoln Financial’s Bob and Sheri show, Troy Aikman show, Tim Brando
show, Inside Track Show (NASCAR), & Batanga (Hispanic Music). The catalogue
of content includes over 1,000 services, with a wide selection of content
ranging from Radio Stations, music channels, to sports coverage and Podcasts.
UpSNAP also developed a prototype mobile dating service, UpSNAP
Hook-up.
The
Company generates subscription revenues from the SWinG platform by providing the
technology platform to major companies that already have a relationship with the
carriers. In addition, the Company generates revenues acting as the principal in
the relationship with the carriers, providing over 1,000 services.
The
subscription revenues are primarily generated from mobile subscribers to premium
services. Consumers subscribe to a premium service on a monthly basis. For
example, in the case of the Sporting News Radio content, consumers pay $4.99 per
month. The cost of the premium service is added to the consumer’s phone-bill,
and the carriers pay UpSNAP after deducting their margin and associated costs.
In addition, revenues are generated from mobile advertising delivered with the
free content.
UpSNAP
Mobile Advertising Network Platform
Recently,
UpSNAP has combined its search engine suite, entertainment services, call-based
Advertising service, and distribution Network into the UpSNAP Mobile Ad Network
Platform. The Platform combines premier national and local
advertisers with Mobile enabled content and distribution through National
Partners.
Our
advertisers are aggregated from partners with traditional and mobile
advertisers. These ads are then optimized, to generate the highest ROI, for the
appropriate channel or content. The Platform is Multi-Modal, which means it can
reach 230 Million Mobile phones via: IVR, SMS, Mobile Internet, and Data
applications.
The suite
of mobile search products allows consumers to find and access mobile content and
service from any mobile phone in the US. The UpSNAP mobile search engine
platform allows consumers to search via text message, WAP, or through
Interactive Voice Response (IVR) by simply texting a keyword to a “short-code”
or 5 digit telephone number, which in our case is 2SNAP
(27627). Current services include yellow pages directory assistance,
sport shows and content, horoscopes, comedy, and music
channels. Consumers type in search requests e.g. “Leo” for a text
horoscope. The consumer will then be offered a free horoscope, along with an
advertisement to speak with an astrologer direct or hear an extended audio
horoscope. While the service is free, sponsored by advertising, carrier charges
may apply, depending on the consumer's contract.
Similarly,
consumers looking for sports content, for example, will receive a text message
advertising UpSNAP premium sports services. The short-code can also be used for
Premium Text Messaging Services (PSMS) which are subscription based services
directly billed by the carriers, and included on the consumer’s phone bill.
UpSNAP has PSMS services provisioned for billing with most of the major US
carriers including, AT&T, Sprint/Nextel, Verizon, T-Mobile and Alltel. These
short-codes at present will only work on US handsets, limiting the geographic
coverage of the service to those areas in the United States with cell-phone
coverage. Our mobile search engine was launched live to consumers in November
2005.
These
searches are free to use by the consumer – save for any communications cost
incurred by their cellular phone usage according to their carrier
contract.
UpSNAP
generates revenues from advertisers who value the direct response pay-per-click
model of the Internet, and now want the same model to work on mobile
devices.
Once a
consumer makes a search for a specific search category or uses a “key-word’
identified and purchased by an UpSNAP partner as indicative of buying behavior,
the UpSNAP advertising platform inserts a “paid’ advertising listing into the
search reply.
UpSNAP
delivers a variety of call-based advertising services to national advertisers
and advertiser aggregators. Our proprietary, patent-pending solution employs a
rich VoIP technology that allows users and merchants to directly connect from
search results. These services include phone number provisioning, call tracking,
call analytics, click-to-call, and other phone call-based services that enable
aggregators and advertisers to utilize mobile advertising to drive calls into
their businesses and to use call tracking to measure the effectiveness of their
mobile advertising campaigns. Advertisers pay us a fee for each phone call we
place to their call center from call-based ads we distribute on our distribution
network.
Our
Pay-Per-Call advertising platform technology was built in 2005, and our first
pay-per-call-partnership was announced with Ingenio, who provides pay-per-call
advertisers nationwide on May 4, 2006. We rely on third party
operators for our advertising. For example if a national pizza chain
were to only want to target select US cities, our third party partners would
only pass us the advertising for a specific geographical locale. Since then,
UpSNAP has signed up several more advertising partners, including AdValient,
Third Screen Media, and Millennial Media.
Pay-Per-Call
advertising is receiving a much higher margin than pay-per-click on the
Internet. The average price of a pay-per-click on Google according to the Wall
Street Journal was .50 cents. Pay-Per-Call, which directly bridges a consumer
who is looking to buy on his cell-phone with a merchant, starts at $2 dollars a
call, and goes up considerably depending on the nature of the sale. The average
Pay-per-call on the Upsnap Mobile Advertising Network is $10.
DISTRIBUTION
AGREEMENTS
UpSNAP’s
revenues are directly affected by its distribution agreements. The distribution
of our content occurs in one of two ways:
|
|
1.
|
Carrier
or “on deck” promotion – where the carrier actually promotes the service
from the menu’s on the carrier handset, bills the consumer on his mobile
phone bill, and takes its cuts, and then remits the balance to UpSNAP.
UpSNAP has ‘on deck’ agreements with Sprint/Nextel. Recently,
UpSNAP signed an “on deck” distribution agreement with Go2, one of the
largest pure play mobile internet traffic sites in the
USA. go2Media
TM
,
a company focused on the growing user demand for more localized,
personalized mobile content. The goal is to further integrate
the vast UpSNAP audio services into the go2 mobile portal for the benefit
of go2’s base audience of millions of U.S. mobile
consumers. The initial offering utilizes go2’s one-touch
calling feature to provide mobile users with quick access to audio
recordings of current sports stories, scores and news. The
recordings are updated several times a day.
.
|
|
|
2.
|
Off
Deck Promotion – where the consumer signs up for services at
www.upsnap.com
, through media partner
promotions, internet advertising, affiliate marketing relationships, or
other media channels directly. Revenue is generated via mobile advertising
or via premium subscription which is billed via a short-code or Premium
SMS (PSMS) to the consumer’s mobile phone bill. UpSNAP has billing
relationships in place with most major US carriers including, AT&T,
T-Mobile, Sprint/Nextel, Verizon and Alltel. Current Off deck partners
include, Lincoln Financial, Cablevision’ News12, Disney Radio, Interop
Technologies, Sports Byline, Sporting News, as well as hundreds of smaller
radio stations.
Specifically:
Cablevision’s
News 12. The goal is to enable Cablevision customers to receive real time
news, traffic and weather for the seven coverage areas surrounding New
York City via their cell phones.
Disney
Radio. UpSNAP renewed it’s partnership with the Disney Family
and now offers mobile users free access to live Disney
Radio. The service is available for dial-in use and also from
Disney’s WAP site.
UpSNAP
continues to expand their Sports offering with new products and
partners:
Sports
Byline USA. UpSNAP is now providing live sports talk radio feeds to mobile
phone users via an agreement with Sports Byline USA. Users can listen to
Sports Byline USA service on-demand for free. The Sports Byline USA
network is heard on nearly 200 syndicated radio stations.
Sporting
News. UpSNAP has expanded its partnership with Sporting News to offer
mobile users access to two-minute Sporting News Flashes that are updated
throughout the day. Sporting News Radio is a 24-hour sports radio network
broadcasting live on stations from coast to
coast.
|
Revenues
and Margins
The
revenue stream from the consumer is shared across several parties:
The
wireless carrier, who operates the cellular infrastructure and billing interface
to add micro-payments from wireless services onto the customer phone bill. The
carrier will typically demand 30-50% of the gross revenues. UpSNAP reports
revenues net of the carrier gross margin. For example, if UpSNAP sells an
application for $10.00 to the consumer, UpSNAP would only report $5-$7 of net
revenue.
An
aggregator or mobile delivery and clearing house for the receipt and delivery of
mobile messages will take 5-10% of the gross sale value
The
content owner who has the rights to the mobile content.
The
mobile supplier, in this case UpSNAP reports net revenue after the carrier and
aggregator have taken their cut of 30 -60%. In turn, UpSNAP’s average pay-out to
content providers is 30% of the net revenue.
UpSNAP’s
margin improves considerably on advertising related services such as banner ads,
audio ads, and Pay-per-call advertising. For these services, UpSNAP receives net
revenue from an advertising partner. When UpSNAP deals directly with the media
companies, the wireless carriers do not share in this revenue.
SELECTED
FINANCIAL INFORMATION
In
thousands (000’s) except for per share amounts
|
|
|
Quarter Ended March
31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Net
revenue
|
|
$
|
128
|
|
|
$
|
231
|
|
|
Net
income (loss) for the quarter
|
|
$
|
(5,829
|
)
|
|
$
|
(240
|
)
|
|
Net
income (loss) applicable to common shareholders
|
|
$
|
(5,829
|
)
|
|
$
|
(240
|
)
|
|
Basic
and diluted income (loss) per share
|
|
$
|
(0.25
|
)
|
|
$
|
(0.01
|
)
|
|
Total
assets
|
|
$
|
206
|
|
|
$
|
6,111
|
|
|
Shareholders’
equity
|
|
$
|
(61
|
)
|
|
$
|
5,880
|
|
RESULTS
OF OPERATIONS FOR THE QUARTER ENDED MARCH 31, 2008 COMPARED WITH THE QUARTER
ENDED MARCH 31, 2007
In
thousands (000’s)
|
|
|
Quarter Ended March
31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Sales
|
|
$
|
128
|
|
|
$
|
231
|
|
|
Cost
of Sales
|
|
|
48
|
|
|
|
134
|
|
|
Gross
Profit
|
|
|
79
|
|
|
|
97
|
|
|
Product
development
|
|
|
26
|
|
|
|
83
|
|
|
Sales
and marketing expenses
|
|
|
19
|
|
|
|
9
|
|
|
General
and administrative
|
|
|
89
|
|
|
|
137
|
|
|
Merger
costs
|
|
|
307
|
|
|
|
|
|
|
Stock
based compensation
|
|
|
119
|
|
|
|
25
|
|
|
Impairment
of Goodwill
|
|
|
4,678
|
|
|
|
|
|
|
Impairment
of Intangible Asets
|
|
|
588
|
|
|
|
|
|
|
Amortization
expense
|
|
|
84
|
|
|
|
84
|
|
|
Total
Expense
|
|
|
5,910
|
|
|
|
337
|
|
|
Net
operating loss
|
|
|
(5,830
|
)
|
|
|
(240
|
)
|
|
Net
Other Income
|
|
|
1
|
|
|
|
0
|
|
|
NET
LOSS
|
|
$
|
(5,829
|
)
|
|
$
|
(240
|
)
|
Revenue
.
The
composition of revenue in thousands ($000’s), except for units, is as
follows:
|
|
|
Quarter Ended March
31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Wireless
data services
|
|
$
|
95
|
|
|
$
|
226
|
|
|
Advertising
and other
|
|
|
18
|
|
|
|
5
|
|
|
Other
|
|
|
15
|
|
|
|
0
|
|
|
Revenue
|
|
$
|
128
|
|
|
$
|
231
|
|
Net
revenue for the quarter ended March 31, 2008, decreased by $103,000, or 44.6%,
compared with the same period in 2007.
The
Company’s largest carrier customer, who accounted for 78% of fiscal 2008
revenues, is shifting their wireless data services customers to a technology
that the Company does not currently support. As a result, wireless
data services revenue have fallen approximately 60% since the beginning of the
fiscal year. This customer also has terminated supporting the NASCAR program
which had accounted for approximately 20% of the revenues from this customer;
although the Company’s total gross margins were not impacted by the loss of the
NASCAR program due to a reduction in infrastructure costs.
Advertising
revenues increased $13,000 or 260% compared with the same period in 2007 as the
Company continues its efforts to shift its product mix to higher margin
advertising revenues.
Cost of goods
sold
. Cost of revenues for the quarter ended March 31, 2008
were $48,000, resulting in a gross profit of $79,000 (61.7%) compared to cost of
revenues for the quarter ended March 31, 2007 of $134,000 and a gross profit of
$97.000 (42.0%). Costs of revenues were primarily fees paid to the Company’s
content providers; royalty payments for the music content, server farm, and call
connect charges. The increase margin is principally due to the Company’s ability
to reduce infrastructure costs that supported the wireless data services revenue
and a shift in the product mix to higher margin advertising
revenues.
Product
development expenses.
Product development costs consist primarily
of salaries and related expenses for product development personnel as well as
the cost of independent contractors. Product development expenses for the
quarter ended March 31, 2008 decreased by $57,000, or 68.7%, compared with the
same period in 2007. Product development expenses decreased primarily due to the
elimination of product development headcount. Product development
expenses are expected to remain at current levels for the next several
quarters.
Sales and
marketing expenses.
Sales and marketing expenses consist primarily
of salaries and related expenses for marketing personnel as well as the cost of
public relations efforts. Sales and marketing expenses for the quarter ended
March 31, 2008 increased by $10,000 or 111.0%, compared with the same period in
2007. Sales and marketing expenses increased primarily due to the increased
emphasis on marketing headcount and reduced public relations spending. Sales and
marketing expenses are expected to remain at current levels for the next several
quarters.
General and
administrative expenses.
General and administrative expenses in the
table above consist primarily of salaries and related costs for personnel as
well as professional fees for legal, audit, and tax services. General and
administrative expenses for the quarter ended March 31, 2008 decreased by
$48,000, or 35.0%, compared with the same period in 2007. General and
administrative expenses decreased primarily due to the elimination of headcount
and reduced spending for audit fees and travel.
Merger
Costs.
During the quarter ended March 31, 2008 the Company wrote
off $307,215 in costs associated with the Mobile Greetings, Inc. merger that was
terminated during the quarter. $238,556 of these costs had been
capitalized as of the year ended September 30, 2007.
Impairment
Costs.
The
Company is required for accounting purposes to measure the value of goodwill
annually or whenever significant events that could be indicators of a change in
value have occurred. In completing our second quarter evaluation, we
considered the impact of the Company’s announced termination of the proposed
merger with Mobile
Greetings,
Inc., the Company’s recent stock price, and other industry trends and have
determined that impairment to goodwill and other intangible assets was
required. To make this determination, the Company compared the carrying
value of its equity to its fair value and forecasted future cash flows generated
from operations. For purposes of this evaluation, fair value has been
determined based on the recent market value of Company’s equity. As a
result of this evaluation, the Company recorded non-cash goodwill impairment
charge during the quarter ended March 31, 2008 of
$5.3 million.
Stock based
compensation expenses.
Stock based compensation expenses consist of
expenses related to the Company’s granting of stock options and restricted
shares. Stock based compensation for the quarter ended March 31, 2008 included
$96,000 in restricted shares paid to an investor relations firm.
Amortization of
intangibles.
Amortization of intangibles for the quarter
ended March 31, 2008 was $84,000 compared with $84,000 in 2007. Amortization
expense is related to the value assigned to the intangible assets resultant from
the XSVoice acquisition.
RESULTS
OF OPERATIONS FOR THE SIX MONTH PERIOD ENDED MARCH 31, 2008 COMPARED WITH THE
SIX MONTH PERIOD ENDED MARCH 31, 2007
In
thousands (000’s)
|
|
|
Six
Months Ended March 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Sales
|
|
$
|
338
|
|
|
$
|
482
|
|
|
Cost
of Sales
|
|
|
146
|
|
|
|
260
|
|
|
Gross
Profit
|
|
|
192
|
|
|
|
221
|
|
|
Product
development
|
|
|
48
|
|
|
|
169
|
|
|
Sales
and marketing expenses
|
|
|
37
|
|
|
|
38
|
|
|
General
and administrative
|
|
|
256
|
|
|
|
388
|
|
|
Merger
costs
|
|
|
307
|
|
|
|
0
|
|
|
Stock
based compensation
|
|
|
133
|
|
|
|
48
|
|
|
Impairment
of Goodwill
|
|
|
4,678
|
|
|
|
0
|
|
|
Impairment
of Intangible Asets
|
|
|
588
|
|
|
|
0
|
|
|
Amortization
expense
|
|
|
168
|
|
|
|
235
|
|
|
Total
Expense
|
|
|
6,216
|
|
|
|
877
|
|
|
Net
operating loss
|
|
|
(6,024
|
)
|
|
|
(656
|
)
|
|
Net
Other Income
|
|
|
114
|
|
|
|
0
|
|
|
NET
LOSS
|
|
$
|
(5,910
|
)
|
|
$
|
(656
|
)
|
Revenue
.
The
composition of revenue in thousands ($000’s), except for units, is as
follows:
|
|
|
Six
Months Ended March 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Wireless
data services
|
|
$
|
278
|
|
|
$
|
472
|
|
|
Advertising
and other
|
|
|
46
|
|
|
|
8
|
|
|
Other
|
|
|
15
|
|
|
|
1
|
|
|
Revenue
|
|
$
|
338
|
|
|
$
|
481
|
|
Net
revenue for the six month ended March 31, 2008, decreased by $143,000, or 30.3%,
compared with the same period in 2007.
The
Company’s largest carrier customer, who accounted for 78% of fiscal 2008
revenues, is shifting their wireless data services customers to a technology
that the Company does not currently support. As a result, wireless
data services revenue have fallen approximately 60% since the beginning of the
fiscal year. I
Advertising
revenues increased $38,000 or 475% compared with the same period in 2007 as the
Company continues its efforts to shift its product mix to higher margin
advertising revenues.
Cost of goods
sold
. Cost of revenues for the six month ended March 31, 2008
were $146,000, resulting in a gross profit of $192,000 (56.8%) compared to cost
of revenues for the six month ended March 31, 2007 of $260,000 and a gross
profit of $221,000 (45.9%). Costs of revenues were primarily fees paid to the
Company’s content providers; royalty payments for the music content, server
farm, and call connect charges. The increase margin is principally due to the
Company’s ability to reduce infrastructure costs that supported the wireless
data services revenue and shift in the revenue mix to higher margin advertising
sales.
Product
development expenses.
Product development costs consist primarily
of salaries and related expenses for product development personnel as well as
the cost of independent contractors. Product development expenses for the six
month ended March 31, 2008 decreased by $121,000, or 71.6%, compared with the
same period in 2007. Product development expenses decreased primarily due to the
elimination of product development headcount. Product development
expenses are expected to remain at current levels for the next several six
months.
Sales and
marketing expenses.
Sales and marketing expenses consist primarily
of salaries and related expenses for marketing personnel as well as the cost of
public relations efforts. Sales and marketing expenses for the six month ended
March 31, 2008 decreased by $1,000 or 2.6%, compared with the same period in
2007. Sales and marketing expenses are expected to remain at current levels for
the next several six months.
General and
administrative expenses.
General and administrative expenses
consist primarily of salaries and related costs for personnel as well as
professional fees for legal, audit, and tax services. General and administrative
expenses for the six month ended March 31, 2008 decreased by $132,000, or 34.0%,
compared with the same period in 2007. General and administrative expenses
decreased primarily due to the elimination of headcount and reduced spending for
audit fees and travel.
Merger
Costs.
During the six month ended March 31, 2008 the Company wrote
off the costs associated with the Mobile Greetings, Inc. merger that was
terminated during the period. In prior periods, $307,215 of these costs had been
capitalized as pre-merger costs. $238,556 of these costs had been
capitalized as of the year ended September 30, 2007.
Impairment
Costs.
The
Company is required for accounting purposes to measure the value of goodwill
annually or whenever significant events that could be indicators of a change in
value have occurred. In completing our second six month evaluation, we
considered the impact of the Company’s announced termination of the proposed
merger with Mobile Greetings, Inc., the Company’s recent stock price, and other
industry trends and have determined that impairment to goodwill and other
intangible assets was required. To make this determination, the Company
compared the carrying value of its equity to its fair value and forecasted
future cash flows generated from operations. For purposes of this
evaluation, fair value has been determined based on the recent market value of
Company’s equity. As a result of this evaluation, the Company recorded
non-cash goodwill impairment charge during the six month ended March 31, 2008 of
$5.3 million.
Stock based
compensation expenses.
Stock based compensation expenses consist of
expenses related to the Company’s granting of stock options and restricted
shares. Stock based compensation for the six month ended March 31, 2008 included
$96,000 in restricted shares paid to an investor relations firm.
Amortization of
intangibles.
Amortization of intangibles for the six month
ended March 31, 2008 was $168,000 compared with $235,000 in 2007. Amortization
expense is related to the value assigned to the intangible assets resultant from
the XSVoice acquisition. During fiscal 2007 the intangible asset value assigned
to employment agreements, supplier agreements, and customer relationships became
fully amortized.
Other Income and
expense.
For the six month ended March 31, 2008 the Company recognized
$114,000 in income related to the extinguishment of debt.
LIQUIDITY
AND CAPITAL RESOURCES
We have
funded our cash needs from inception through March 31, 2008 with the $2,146,200
in funds acquired as part of the September – October 2005 Private
Placement. In addition, the Company raised $254,750 in February 2007
from the sale of 619,000 Series A warrants and 400,000 Series B warrants at
$0.25 each.
Liquidity.
At March 31, 2008, UpSNAP had cash and cash equivalents of $36,112, compared
with $19,382 at September 30, 2007, an increase of $16,730.
During
the six months ended March 31, 2008, cash provided by operating activities
was $85,390, consisting primarily of the net loss for the period
of $5.9 million offset by non-cash charges related to:
|
|
·
|
amortization and depreciation
charges of $168,000 and $15,000,
respectively;
|
|
|
·
|
extinguishment of debt of
$113,000;
|
|
|
·
|
stock based compensation of
$133,000;
|
|
|
·
|
non-cash charges for impairment
of intangible assets of $5.3 million,
and
|
|
|
·
|
working capital changes increased
cash by $219,000, consisting primarily of a decrease of $201,000 in
accounts receivable.
|
At the
date of this report we are continuing to incur losses but the Company had
positive EBITDA of approximately $6,000 in March 2008. We had cash in the bank
of approximately $34,000 as of May 10, 2008 and a working capital deficit of
approximately $100,000. The Company continues to negotiate payment terms with
its suppliers and believes that it has reached satisfactory arrangements with
them.
The
Company will need to continue to pursue revenue opportunities and closely
monitor operations in order to generate enough cash to sustain operations and
meet the payment terms negotiated with its vendors. The Company may no longer be
able to continue as a going concern.
We are
continuing to explore various financing alternatives, but the Company’s recent
financial performance and current condition of the financial markets makes it
highly improbable that it will be able to raise capital in the public markets.
The Company will also continue to pursue new growth and strategic partnership
opportunities.
CRITICAL
ACCOUNTING ESTIMATES AND POLICIES
UpSNAP’s
management makes certain assumptions and estimates that impact the reported
amounts of assets, liabilities and stockholders’ equity, and revenues and
expenses. These assumptions and estimates are inherently uncertain. Management
judgments that are currently the most critical are related to revenue
recognition, valuation of goodwill and stock based compensation. Below we
describe these policies as well as the estimates involved. For a more detailed
discussion on accounting policies, see the notes to the audited consolidated
financial statements.
Revenue
recognition
The
Company recognizes revenue under the guidance provided by the SEC Staff
Accounting Bulletin (“SAB”) No. 104, “Revenue Recognition” and the Emerging
Issues Task Force (“EITF”) Abstract No. 99-19 “Reporting Revenue Gross as a
Principal versus Net as an Agent” (“EITF 99-19”).
The
Company receives revenue from the wireless carriers by providing streaming audio
content that the carriers make available to their mobile handset customers.
UpSNAP generates revenues from this line of business in two distinct
ways:
Provider
of Technology Platform: UpSNAP provides technology to brands that have their own
mobile distribution and revenue arrangements with the carriers. In this case,
UpSNAP does not act as the principal in the transaction. The brands have their
own relationships with the carriers and look to UpSNAP to provide the technology
platform and service, while they retain the relationship with the consumer and
set the pricing. In these cases, UpSNAP typically reports net revenues received
from the carrier which are revenues after both carrier charges and content
provider charges.
The
Company negotiated a new contract with its largest carrier customer effective
February 12, 2007 in which the carrier is no longer deducting content provider
charges before submitting revenue to the Company. Under this arrangement, the
content provider charges are the responsibility of the Company. The net effect
of this new contract is that revenues and cost of revenues are increased by an
identical amount to reflect the content provider charges.
UpSNAP is
Principal Party: UpSNAP acts as the principal party in the content
relationships. Specifically, UpSNAP has the relationship with the carriers, sets
the re-sale price at which consumers buy the product, pays the content provider
for the content, and builds the mobile application or service. In
these relationships, the Company recognizes revenue based on the gross fees
remitted by the carrier to the company. The Company’s payments to the third
party content providers are treated as cost of sales.
The
Company also receives advertising revenues from third parties. These revenues
are resultant from audio ads played on the Company’s SWInG platform, banner ads
on the WAP deck, and pay per call revenues when the consumer proactively
responds to a text message. These advertising revenues are recognized in the
period the transactions are recorded by the third party provider. UpSNAP reports
net advertising revenues received from third parties.
Valuation
of goodwill
In
accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of
Long-Lived Assets,” UpSNAP reviews the carrying value of long-lived assets
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. Such events or circumstances might include a
significant decline in market share, a significant decline in revenue and/or
profits, changes in technology, significant litigation or other
items.
In
completing our six month evaluation, we considered the impact of the Company’s
announced termination of the proposed merger with Mobile Greetings, Inc., the
Company’s recent stock price, and other industry trends and have determined that
impairment to goodwill and other intangible assets was required. To make
this determination, the Company compared the carrying value of its equity to its
fair value and forecasted future cash flows generated from operations. For
purposes of this evaluation, fair value has been determined based on the recent
market value of Company’s equity. As a result of this evaluation, the
Company recorded non-cash goodwill impairment charge during the six month ended
March 31, 2008 of $5.3 million.
Stock
Based Compensation
The fair
value of each time-based award is estimated on the date of grant using the
Black-Scholes option valuation model, which uses the assumptions described
below. Our weighted-average assumptions used in the Black-Scholes valuation
model for equity awards with time-based vesting provisions granted during the
quarter ended March 31, 2008 are shown in the following table:
|
Expected
volatility
|
|
70.0%
|
|
Expected
dividends
|
|
0%
|
|
Expected
terms
|
|
6.0
-6.25 years
|
|
Pre-vesting
forfeiture rate
|
|
50%
|
|
Risk-free
interest rate
|
|
4.45% –
4.76%
|
The
expected volatility rate was estimated based on historical volatility of the
Company’s common stock over approximately the fourteen month period since the
reverse merger and comparison to the volatility of similar size companies in the
similar industry. The expected term was estimated based on a simplified method,
as allowed under SEC Staff Accounting Bulletin No. 107, averaging the
vesting term and original contractual term. The risk-free interest rate for
periods within the contractual life of the option is based on U.S. Treasury
securities. The pre-vesting forfeiture rate was based upon plan to date
experience. As required under SFAS No. 123(R), we will adjust the estimated
forfeiture rate to our actual experience. Management will continue to assess the
assumptions and methodologies used to calculate estimated fair value of
share-based compensation. Circumstances may change and additional data may
become available over time, which could result in changes to these assumptions
and methodologies, and thereby materially impact our fair value
determination.
OUTSTANDING
SHARE DATA
The
outstanding share data as at March 31, 2008 and 2007 is as follows:
|
|
|
Number of shares
outstanding
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Common
shares
|
|
|
23,370,324
|
|
|
|
22,170,324
|
|
|
Options
to purchase common shares
|
|
|
870,000
|
|
|
|
1,120,000
|
|
|
Warrants
to purchase common shares
|
|
|
2,360,000
|
|
|
|
2,360,000
|
|
|
Debentures
convertible to common shares
|
|
|
-
|
|
|
|
-
|
|
|
Accrued
interest convertible to common shares
|
|
|
-
|
|
|
|
-
|
|
Risk
Factors That May Affect Future Operating Results
You
should carefully consider the risks described below, which constitute the
principal material risks facing us. If any of the following risks
actually occur, our business could be harmed. You should also refer
to the other information about us contained in this report, including our
financial statements and related notes.
Financial
Risks
Our
business has posted net operating losses, faces an uncertain path to
profitability, and we have limited cash resources. For the investor, potential
adverse effects of this include failure of the company to continue as a going
concern. Our auditors have expressed substantial doubt about our ability to
continue as a going concern.
From the
inception of our operating subsidiary, UpSNAP USA, until March 31, 2008, UpSNAP
USA has had accumulated net losses of $8,986,115. Our auditors have raised
substantial doubt about our ability to continue as a going concern due to
recurring losses from operations. The Company incurred $307,215 in costs in
attempting to close on the Merger Agreement with Mobile Greetings. In addition,
the Company’s major carrier customer, which has historically accounted for more
than 90% of revenues, is shifting its customers to a platform not supported by
the Company and terminated the NASCAR program which accounted for approximately
20% of the revenues generated from this carrier (although the Company’s total
gross margins were not impacted by the loss of the NASCAR program due to a
reduction in infrastructure costs). . As a result, revenues from this carrier
have fallen significantly. We expect to continue to have net operating losses
until we can expand our sales channel. These continued net operating losses
together with our limited working capital and the uncertainties of operating in
a new industry make investing in our company a high-risk proposal.
We
have limited cash resources and working capital. The private financing activity
related to the merger with Mobile Greetings, Inc. was not successful, leaving us
with extremely limited resources.
We have
only approximately $34,200 in cash and a working capital deficit of $100,000 as
of May 10, 2008. Since the private financing related to the merger with Mobile
Greetings was not successful, we will need to severely restrict our activities
in order to conserve cash and may need to cease
operations.
Our
business is difficult to evaluate because we have a limited operating history in
a new industry. The adverse effects of a limited operating history include
reduced management visibility into forward sales, marketing costs, customer
acquisition and retention which could lead to missing targets for achievement of
profitability.
UpSNAP is
operating with a technology which is evolving and changing rapidly based around
mobile entertainment services.
We expect
to incur expenses associated with the planned expansion of our sales and
marketing efforts and from promotional arrangements with our strategic partners.
We expect that our future agreements and promotional arrangements with our
strategic partners may require us to pay consideration in various
forms, including the payment of royalties, license fees and other
significant guaranteed amounts based upon revenue sharing agreements and the
issuance of stock in certain cases. In addition, our promotional arrangements
and revenue sharing agreements may require us to incur significant expenses, and
we cannot guarantee that we will generate sufficient revenues to offset these
expenses. To date, we have entered into revenue share relationships with
carriers and content providers at industry standard margins, or enter into
promotional arrangements to include guaranteed minimum payments. Based on
management experience, future contractual arrangements will be based upon
standard revenue share relationships at industry-standard margins. We cannot
guarantee that we will be able to achieve sufficient revenues in relation to our
expenses to become profitable. Even if we do attain profitability, we may not be
able to sustain ourselves as a profitable company in the future.
We
have limited resources to execute our business plan. The risk for investors is
that the share price may suffer as better financed competition takes market
share, or the company is forced to raise additional funds on unfavorable terms
to the existing stockholders.
In
September and October 2005, we raised $2,146,200 in a private placement
transaction. As of the date of this report, we had approximately $34,200 in cash
and cash equivalents. The Company’s current financial models indicate that the
Company’s cash balances have fallen to levels that will make it difficult to
sustain operations, if revenues continue to decline. The Company has no
commitments for additional capital.
Our
closing share price at March 31, 2008 was $0.06 per share, so any potential
additional capital raise will be highly dilutive.
Current
funding limits our operating plan to a conservative one and our auditors have
expressed substantial doubt about our ability to continue as a going concern. We
will need additional funding to ensure that we are able to continue operating
and compete in a dynamic and high growth mobile sector. Our financial resources
are limited and the amount of funding that we will need to develop and
commercialize our products and services is highly uncertain. Adequate funds to
sustain operations and grow the business may not be available when needed or on
terms satisfactory to us. A lack of funds may cause us to cease operations, or
delay, reduce and/or abandon certain or all aspects of our product development
programs. If additional funds are raised through the issuance of equity or
convertible debt securities, your percentage ownership in us will be reduced,
existing stockholders may suffer dilution. The securities that we issue to raise
money may also have rights, preferences and privileges that are senior to those
of our existing stockholders.
We
anticipate that our results of operations may fluctuate significantly from
period to period due to factors that are outside of our control, which may lead
to reduced revenues or increased expenditures.
Our
operating results may fluctuate significantly as a result of a variety of
factors, many of which are outside of our control. Some of the factors that may
affect our quarterly and annual operating results include:
|
·
|
our
ability to establish and strengthen brand
awareness;
|
|
·
|
our
success, and the success of our potential strategic partners, in promoting
our products and services;
|
|
·
|
the
overall market demand for mobile services and applications of the type
offered by us;
|
|
·
|
the
amount and timing of the costs relating to our marketing efforts or other
initiatives;
|
|
·
|
the
timing of contracts with strategic partners and other
parties;
|
|
·
|
fees
that we may pay for distribution and promotional arrangements or other
costs that we may incur as we expand our
operations;
|
As a
result of our limited operating history and the emerging nature of the markets
in which we compete, it is difficult for us to forecast our revenues or earnings
accurately.
Business
Risks
We
are dependent on strategic partners for content and sales distribution to
consumers. If these partnerships were to cease, this could lead to loss of
revenues and customers.
UpSNAP
relies on the US mobile carriers Verizon, Sprint/Nextel, T-Mobile, and AT&T
to sell its products and collect revenues which are then passed onto UpSNAP.
These arrangements may be adversely affected in the future, as it is
management’s experience that carrier contracts are prone to change and
re-negotiation. UpSNAP also relies on the content developers to enter into
commercially reasonable relationship with the company to allow for the
re-selling of the content to consumers. UpSNAP has over 150 content partners and
is not dependent on any one content supplier.
We
are dependent upon our executive officers, managers and other key personnel,
without whose services our prospects would be severely limited leading to loss
of revenue and customer acquisition.
Our
success depends to a significant extent upon efforts and abilities of our key
personnel, in particular our Chief Executive Officer Tony Philipp, who is
currently deferring part of his salary. The loss of Tony Philipp could have a
material adverse effect upon us, resulting in loss of current business
relationships, strategy and planning. Competition for highly qualified personnel
is intense and we may have difficulty replacing such key personnel. UpSNAP
has no key man insurance in place to help alleviate the loss.
The
mobile entertainment services market in which we operate is subject to intense
competition and we may not be able to compete effectively resulting in loss of
revenues or customers.
We
compete in the mobile entertainment services market. This market is becoming
increasingly more competitive. We face competition from the existing mobile
entertainment players, such as Google and Yahoo!, and newcomers to the mobile
entertainment services markets. There are relatively low barriers to entry into
the mobile entertainment services market. Many of our competitors or potential
competitors have longer operating histories, longer customer relationships and
significantly greater financial, managerial, sales and marketing and other
resources than we do. We are particularly vulnerable to efforts by well funded
competitors and will lose market share unless we can attain a critical mass of
consumers, strategic partners, and affiliates, as well as strong brand
identity.
UpSNAP
is largely dependent on one strategic relationship which has diminished by
approximately 60% since the beginning of the fiscal year. We need to
significantly expand our distribution channels. Failure to expand our
distribution channels will result in reduced customer acquisition, and reduced
revenues.
From
inception, substantially all of our revenues were generated from the
Sprint/Nextel Distribution relationship. During this quarter it has become
apparent that cessation of the NASCAR program and the shift from the Nextel
platform, which the Company supports, to the Sprint platform, which the Company
does not support, will result in revenues from this customer falling more than
50% from historic levels (although the Company’s total gross margins were not
impacted by the loss of the NASCAR program due to a reduction in infrastructure
costs). We need to enhance our ability to find new strategic partners in order
to create additional distribution channels for our products and to generate
increased revenues. The Company does not have the resources to invest on an
ongoing basis to expand our partner sales force. The creation of strategic
partnerships requires a sophisticated sales effort targeted at the senior
management of prospective partners. Given our limited budget dedicated to this
effort, we can only focus on a very limited number of distribution
opportunities.
Our
intellectual property and other proprietary rights are valuable, and any
inability to protect them could adversely affect our business and results of
operations; in addition, we may be subject to infringement claims by third
parties which we may be unable to settle.
Our
ability to compete effectively is dependent upon our ability to protect and
preserve the intellectual property and other proprietary rights and materials
owned, licensed or otherwise used by us. We currently have a patent-pending
technology. We cannot assure you that the patent application will result in an
issued patent, and failure to secure rights under the patent
application
may limit our ability to protect the intellectual property rights that the
application was intended to cover. Although we have attempted to protect our
intellectual property and other proprietary rights both in the United States and
in foreign countries through a combination of patent, trademark, copyright and
trade secret protection, these steps may be insufficient to prevent unauthorized
use of our intellectual property and other proprietary rights, particularly in
foreign countries where the protection available for such intellectual property
and other proprietary rights may be limited. To date, we are not currently
engaged in and have not had any material infringement or other claims pertaining
to our intellectual property brought by us or against us in recent years. We
cannot assure you that any of our intellectual property rights will not be
infringed upon or that our trade secrets will not be misappropriated or
otherwise become known to or independently developed by competitors. We may not
have adequate remedies available for any such infringement or other unauthorized
use. We cannot assure you that any infringement claims asserted by us will not
result in our intellectual property being challenged or invalidated, that our
intellectual property will be held to be of adequate scope to protect our
business or that we will be able to deter current and former employees,
contractors or other parties from breaching confidentiality obligations and
misappropriating trade secrets. In addition, we may become subject to claims
against us which could require us to pay damages or limit our ability to
use certain intellectual property and other proprietary rights found to be in
violation of a third party’s rights, and, in the event such litigation is
successful, we may be unable to use such intellectual property and other
proprietary rights at all or on reasonable terms. Regardless of its outcome, any
litigation, whether commenced by us or third parties, could be protracted and
costly and could result in increased litigation related expenses, the loss of
intellectual property rights or payment of money or other damages, which may
result in lost sales and reduced cash flow and decrease our net
income.
In
order to be successful and profitable, we must grow rapidly. We expect that
rapid growth will put a large strain on our management team and our other
resources. We may no longer have sufficient resources to manage this growth
effectively leading to potential loss of customers through poor service and
support.
We
anticipate that a period of significant expansion will be required to address
potential growth in our customer base, market opportunities and personnel. This
expansion will place a significant strain on our management, operational and
financial resources. To manage the expected growth of our operations and
personnel, we will be required to implement new operational and financial
systems, procedures and controls, and to expand, train and manage our growing
employee base. We also will be required to expand our finance, administrative
and operations staff. Further, we anticipate that we will be entering into
relationships with various strategic partners and third parties necessary to our
business. Our current and planned personnel, systems, procedures and controls
may not be adequate to support our future operations. Management may not able to
hire, train, retain, motivate and manage required personnel for our planned
operations.
Our
business is subject to frequent technology changes, multiple standards, rapid
roll-out of new mobile handsets, and changes in the method of Internet
broadcasting delivery, that could lead to us being unable to provide our
services to some our existing and new users, leading to loss of revenues, poor
performance or both.
We are
presently able to sell and deliver information to our product carriers
throughout the world, but any changes in the method of delivery of Internet
broadcasting or mobile communications standards, could result in our not being
able to deliver our services to some or all of our customers. We will continue
to develop our technology to address emerging mobile platforms and standards to
avoid this problem, but no assurance can be given that this will be accomplished
in a timely manner. The Company is constrained by current resources and thus has
limited funds to develop any new technology.
Some
of our existing stockholders can exert control over us and may not make
decisions that are in the best interests of all stockholders which could lead to
a reduced stock price.
As of the
date of this quarterly report, officers, directors, and stockholders holding
more than 5% of our outstanding shares collectively controlled approximately
55.8% of our outstanding common stock. As a result, these stockholders, if they
act together, would be able to exert a significant degree of influence over our
management and affairs and over matters requiring stockholder approval,
including the election of directors and approval of significant corporate
transactions. Accordingly, this concentration of ownership may harm the market
price of our common stock by delaying or preventing a change in control of us,
even if a change is in the best interests of our other
stockholders.
In
addition, the interests of this concentration of ownership may not always
coincide with the interests of other stockholders, and accordingly, they could
cause us to enter into transactions or agreements that we would not otherwise
consider. No officers or directors of UpSNAP are currently or have
ever been affiliated with any of the other greater than 5% beneficial
owners.
Market
Risks
A
limited public market exists for the trading of our securities, which may result
in shareholders being unable to sell their shares, or forced to sell them at a
loss.
Our
common stock is quoted on the NASD Over-the-Counter Bulletin Board. Our common
stock is thinly traded and has little to no liquidity. The stock has a limited
number of market makers, and a limited number of round lot holders. As a result,
investors may find it difficult to dispose of our securities. This lack of
liquidity of our common stock will likely have an adverse effect on the market
price of our common stock and on our ability to raise additional
capital.
If an
active trading market does develop, the market price of our common stock is
likely to be highly volatile due to, among other things, the low revenue nature
of our business and because we are a new public company with a relatively
limited operating history. Further, even if a public market develops, the volume
of trading in our common stock will presumably be limited and likely be
dominated by a few individual stockholders. The limited volume, if any, will
make the price of our common stock subject to manipulation by one or more
stockholders and will significantly limit the number of shares that one can
purchase or sell in a short period of time.
The
equity markets have, on occasion, experienced significant price and volume
fluctuations that have affected the market prices for many companies’ securities
that have often been unrelated to the operating performance of these companies.
Any such fluctuations may adversely affect the market price of our common stock,
regardless of our actual operating performance. As a result, stockholders
may be unable to sell their shares, or may be forced to sell them at a
loss.
We
do not intend to pay dividends to our stockholders, so you will not receive any
return on your investment in our company prior to selling your interest in
us.
We have
never paid any dividends to our stockholders. We currently intend to retain any
future earnings for funding growth and, therefore, do not expect to pay any
dividends in the foreseeable future. If we determine that we will pay dividends
to the holders of our common stock, we cannot assure that such dividends will be
paid on a timely basis. As a result, you will not receive any return on your
investment prior to selling your shares in our company and, for the other
reasons discussed in this “Risk Factors” section, you may not receive any return
on your investment even when you sell your shares in our company and your shares
may become worthless.
A
significant number of our shares will be eligible for sale and their sale or
potential sale may depress the market price of our common stock.
Sales of
a significant number of shares of our common stock in the public market could
harm the market price of our common stock. We have authorized 97,500,000 shares
of common stock. As of March 31, 2008, we had outstanding 23,370,324 shares of
common stock. Accordingly, we have 74,129,676 shares of common stock available
for future sale subject to outstanding options and warrants.
Under our
2006 Omnibus Stock and Incentive Plan, (the “Plan”) up to 7,500,000 shares of
Company Common Stock, either unissued or reacquired by the Company, are
available for awards of options, stock appreciation rights, restricted stocks,
other stock grants, or any combination thereof. Eligible recipients include
employees, officers, consultants, advisors and directors.
As
additional shares of our common stock become available for resale in the public
market, the supply of our common stock will increase, which could decrease its
price. Some or all of the shares of common stock may be offered from time to
time in the open market under Rule 144, and these sales may have a depressive
effect on the market for our shares of common stock. In general, a person who
has held restricted shares for a period of six months may sell into the market
common stock under Rule 144.
Because
our stock is considered a penny stock, any investment in our stock is considered
to be a high-risk investment and is subject to restrictions on
marketability.
Our
common stock is a “penny stock” within the meaning of Rule 15g-9 to the
Securities Exchange Act of 1934, which is generally an equity security with a
price of less than $5.00. Our common stock is subject to rules that impose sales
practice and disclosure requirements on certain broker-dealers who engage in
certain transactions involving a penny stock. Under the penny stock regulations,
a broker-dealer selling penny stock to anyone other than an established customer
or “accredited investor” must make a special suitability determination for the
purchaser and must receive the purchaser’s written consent to the
transaction prior to the sale, unless the broker-dealer is otherwise exempt.
Generally, an individual with a net worth in excess of $1,000,000 or annual
income exceeding $200,000 individually or $300,000 together with his or her
spouse is considered an accredited investor.
In
addition, the penny stock regulations require the broker-dealer to:
· deliver,
prior to any transaction involving a penny stock, a disclosure schedule prepared
by the Securities and Exchange Commission relating to the penny stock market,
unless the broker-dealer or the transaction is otherwise exempt;
· disclose
commissions payable to the broker-dealer and the Registered Representative and
current bid and offer quotations for the securities; and
· send
monthly statements disclosing recent price information with respect to the penny
stock held in a customer’s account, the account’s value and information
regarding the limited market in penny stocks.
Because
of these regulations, broker-dealers may encounter difficulties in their attempt
to sell shares of our common stock, which may affect the ability of selling
stockholders or other holders to sell their shares in the secondary market and
have the effect of reducing the level of trading activity in the secondary
market. These additional sales practice and disclosure requirements could impede
the sale of our securities. In addition, the liquidity of our securities may be
decreased, with a corresponding decrease in the price of our securities.
Our common stock in all probability will be subject to such penny stock rules
and our stockholders will, in all likelihood, find it difficult to sell their
securities.
ITEM
3A(T). CONTROLS AND PROCEDURES
Quarterly Evaluation of
Controls
. As of the end of the period covered by this
quarterly report on Form 10-QSB, we evaluated the effectiveness of the design
and operation of our disclosure controls and procedures ("Disclosure Controls"),
as defined in Rules 13a -15(e) and 15d – 15(e) under the Exchange
Act. This evaluation (“Evaluation”) was performed by our Chairman and Chief
Executive Officer, Tony Philipp, and our Chief Financial Officer, Paul C.
Schmidt (“CFO”). In addition, we have discussed these matters with
our board. In this section, we present the conclusions of our CEO and
CFO as of the date of the Evaluation with respect to the effectiveness of our
Disclosure Controls.
CEO and CFO
Certifications
. Attached to this quarterly report, as Exhibits
31.1 and 31.2, are certain certifications of the CEO and CFO, which are required
in accordance with the Exchange Act and the Commission's rules implementing such
section (the "Rule 13a-14(a)/15d–14(a) Certifications"). This section of the
quarterly report contains the information concerning the Evaluation referred to
in the Rule 13a-14(a)/15d–14(a) Certifications. This information should be read
in conjunction with the Rule 13a-14(a)/15d–14(a) Certifications for a more
complete understanding of the topic presented.
Disclosure Controls
.
Disclosure Controls are procedures designed with the objective of ensuring that
information required to be disclosed in our reports filed with the Commission
under the Exchange Act, such as this quarterly report, is recorded, processed,
summarized and reported within the time period specified in the Commission's
rules and forms. Disclosure Controls are also designed with the objective of
ensuring that material information relating to us is made known to the CEO and
the CFO by others, particularly during the period in which the applicable report
is being prepared.
Scope of the Evaluation
. The
CEO and CFO's evaluation of our Disclosure Controls included a review of the
controls' (i) objectives, (ii) design, (iii) implementation, and (iv) the effect
of the controls on the information generated for use in this quarterly report.
This type of evaluation is done on a quarterly basis so that the conclusions
concerning the effectiveness of our controls can be reported in our quarterly
reports on Form 10-QSB and annual reports on Form 10-KSB. The overall goals of
these various evaluation activities are to monitor our Disclosure Controls, and
to make modifications if and as necessary. Our intent in this regard
is that the Disclosure Controls will be maintained as dynamic systems that
change (including improvements and corrections) as conditions
warrant.
Conclusions.
Based
upon the Evaluation, our Disclosure Controls and procedures are designed to
provide reasonable assurance of achieving our objectives. Our CEO and CFO have
concluded that our Disclosure Controls and procedures are effective at that
reasonable assurance level to ensure that material information relating to the
Company is made known to management, including the CEO and CFO, particularly
during the period when our periodic reports are being prepared. Additionally,
there has been no change in our internal controls, (as defined in Rules 13a
-15(f) and 15d – 15(f) under the Exchange Act), over financial reporting that
occurred during our most recent fiscal quarter that has materially affected, or
is reasonably likely to affect, our internal controls over financial
reporting.
PART
II – OTHER INFORMATION
ITEM
2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS
During
the quarter the Company issued 600,000 restricted stock grants to an investor
relations firm and 50,000 restricted stock grants to its CFO. These grants were
exempted from registration by reason of Section 4(2) of the Securities Act of
1933 and Regulation D thereunder.
The
exhibits to this form are listed in the attached Exhibit Index.
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
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|
UPSNAP,
INC.
(Registrant)
|
|
Date: May
15, 2008
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Tony
Philipp
Chairman
of the Board and
Chief
Executive Officer
(Principal
Executive Officer)
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|
|
|
|
|
|
Date: May
15, 2008
|
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Paul
C. Schmidt
Chief
Financial Officer
(Principal
Financial Officer)
|
INDEX
TO EXHIBITS
|
Exhibit
No.
|
Description
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31.1
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31.2
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32
|
|
* filed
herein
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