<PAGE>
================================================================================
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(MARK ONE)
X Quarterly report pursuant to Section 13 or 15(d) of the Securities
- --- Exchange Act of 1934
For the period ended: MARCH 31, 2000
OR
___ Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission File Number: 000-29417
I CRYSTAL, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 62-1581902
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
3237 KING GEORGE HWY., SUITE 101-B
SURREY, BC V4P 1B7, CANADA
(Address of principal executive offices)
TELEPHONE NUMBER: (604) 542-5021
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days:
YES NO X
--- ---
At April 3, 2000, the Company had outstanding 14,682,800 shares of common stock,
$.01 par value per share (the "Common Stock") and had committed to issue an
additional 1,000,000 shares.
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
The March 31, 2000 condensed consolidated financial statements included in
this filing on Form 10-QSB have been reviewed by Moss Adams LLP, independent
certified public accountants, in accordance with established professional
standards and procedures for such review. The report of Moss Adams LLP
commenting upon their review accompanies the condensed financial statements
is included in Item 1 of Part I.
<PAGE>
I CRYSTAL, INC. AND SUBSIDIARY
INDEPENDENT ACCOUNTANT'S REPORT
AND
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
QUARTER ENDED MARCH 31, 2000 AND
YEAR ENDED DECEMBER 31, 1999
<PAGE>
I CRYSTAL INC.
TABLE OF CONTENTS
QUARTER ENDED MARCH 31, 2000 AND YEAR ENDED DECEMBER 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAGE
<S> <C>
INDEPENDENT ACCOUNTANT'S REPORT............................................1
FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheet..................................2
Condensed Consolidated Statement of Operations........................3
Condensed Consolidated Statement of Cash Flows........................4
Notes to Condensed Consolidated Financial Statements ................4-10
</TABLE>
<PAGE>
[LETTERHEAD]
- --------------------------------------------------------------------------------
CERTIFIED PUBLIC ACCOUNTANTS
INDEPENDENT ACCOUNTANT'S REPORT
To the Board of Directors and Stockholders
I crystal, Inc.
We have reviewed the accompanying condensed consolidated balance sheet of I
crystal Inc. as of March 31, 2000, and the related condensed consolidated
statements of operations and cash flows for the three months ended March 31,
2000. These financial statements are the responsibility of I crystal Inc.'s
management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures
to financial data and making inquiries of persons responsible for financial
and accounting matters. It is substantially less in scope than an audit
conducted in accordance with generally accepted auditing standards, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the condensed financial statements referred to above for
them to be in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has incurred losses since its inception and
has a net stockholders' deficit. These conditions raise substantial doubt
about its ability to continue as a going concern. Management's plans
regarding those matters also are described in Note 1. The financial
statements do not include any adjustments that might result from the outcome
of this uncertainty.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of I crystal Inc. as of December
31, 1999, and the consolidated related statements of operations,
stockholders' equity and cash flows for the year then ended (not presented
herein); and in our report dated March 31, 2000, which included an
explanatory paragraph describing conditions that raised substantial doubt
about the Company's ability to continue as a going concern, we expressed an
unqualified opinion on those financial statements. In our opinion, the
information set forth in the accompanying condensed consolidated balance
sheet as of December 31, 1999, is fairly presented, in all material respects,
in relation to the balance sheet from which it has been derived.
/s/ MOSS ADAMS LLP
Bellingham, Washington
May 18, 2000
1
<PAGE>
I CRYSTAL, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEET
QUARTER ENDED MARCH 31, 2000 AND YEAR ENDED DECEMBER 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS
March 31, December 31,
2000 1999
--------------- ----------------
<S> <C> <C>
CURRENT ASSETS
Cash $ 86,700 $ 23,800
Accounts receivable -- Master Licensee 98,700 75,700
Prepaid expenses 24,800 900
--------------- ----------------
Total current assets 210,200 100,400
PROPERTY AND EQUIPMENT, net 19,200 17,900
--------------- ----------------
TOTAL ASSETS $ 229,400 $ 118,300
=============== ================
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable $ 54,400 $ 72,100
Advances from related party 102,100 98,700
Deferred revenue -- Master Licensee 134,000 67,000
Convertible debt 78,200 78,200
--------------- ----------------
Total current liabilities 368,700 316,000
ADVANCES FROM STOCKHOLDERS 19,000 19,000
--------------- ----------------
Total liabilities 387,700 335,000
--------------- ----------------
STOCKHOLDERS' DEFICIT
Common stock, $0.01 par value, 30 million shares authorized;
15,182,800 and 14,682,800 shares issued and outstanding, respectively 151,900 146,900
Additional paid-in capital 5,678,800 5,471,300
Deferred compensation (40,600) (59,300)
Accumulated deficit (5,948,400) (5,775,600)
--------------- ----------------
Total stockholders' deficit (158,300) (216,700)
--------------- ----------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 229,400 $ 118,300
=============== ================
</TABLE>
SEE ACCOMPANYING NOTES TO THESE CONSOLIDATED FINANCIAL STATEMENTS 2
- --------------------------------------------------------------------------------
<PAGE>
ICRYSTAL, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
QUARTER ENDED MARCH 31, 2000 AND 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
March 31, March 31,
2000 1999
--------------- ----------------
<S> <C> <C>
REVENUE
Software royalties $ 105,500 $ -
--------------- ----------------
OPERATING EXPENSES
General and administrative 209,000 2,444,900
Research and development 61,600 8,000
Sales and marketing 7,500 2,300
--------------- ----------------
Total operating expenses 278,100 2,455,200
--------------- ----------------
LOSS FROM OPERATIONS (172,600) (2,455,200)
--------------- ----------------
OTHER EXPENSE
Interest 200 100
--------------- ----------------
Total other expense 200 100
--------------- ----------------
NET LOSS BEFORE PROVISION FOR INCOME TAXES (172,800) (2,455,300)
PROVISION FOR INCOME TAXES - -
--------------- ----------------
NET LOSS $ (172,800) $ (2,455,300)
=============== ================
EARNINGS (LOSS) PER SHARE
Basic and diluted $(0.01) $(0.32)
====== ======
Weighted average common shares
outstanding (basic and diluted) 14,693,700 7,787,500
=============== ================
</TABLE>
SEE ACCOMPANYING NOTES TO THESE CONSOLIDATED FINANCIAL STATEMENTS. 3
- --------------------------------------------------------------------------------
<PAGE>
ICRYSTAL, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
QUARTER ENDED MARCH 31, 2000 AND 1999
- --------------------------------------------------------------------------------
Increase (Decrease) in Cash
<TABLE>
<CAPTION>
March 31, March 31,
2000 1999
---------------- -----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (172,800) $ (2,455,300)
ADJUSTMENTS TO RECONCILE NET LOSS TO
NET CASH FROM OPERATING ACTIVITIES
Amortization of deferred compensation 18,700 15,000
Depreciation 1,000 -
Noncash general and administrative expenses
incurred in exchange for stock 112,500 2,272,900
CHANGES IN OPERATING ASSETS AND LIABILITIES
Accounts receivable (23,000) -
Prepaid expense (23,900) -
Accounts receivable - lawyer trust account - (577,000)
Accounts payable (17,700) -
Deferred revenue 67,000 -
--------------- ----------------
Net cash from operating activities (38,200) (744,400)
--------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (2,300) (500)
--------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceed from stock issuances 100,000 800,300
Advances from (to) related parties, net 3,400 (100,400)
Collection of stock subscription receivables - 45,000
--------------- ----------------
Net cash from financing activities 103,400 744,900
--------------- ----------------
NET CHANGE IN CASH 62,900 -
CASH, beginning of period 23,800 -
--------------- ----------------
CASH, end of period $ 86,700 $ -
=============== ================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid $ - $ -
=============== ================
Income taxes paid $ - $ -
=============== ================
NONCASH TRANSACTIONS
Stock issued for future services $ - $ 40,000
=============== ================
</TABLE>
SEE ACCOMPANYING NOTES TO THESE CONSOLIDATED FINANCIAL STATEMENTS. 4
- --------------------------------------------------------------------------------
<PAGE>
ICRYSTAL, INC. AND SUBSIDIARY
NOTE 1 - ORGANIZATION AND CESSATION OF DEVELOPMENT STAGE OPERATIONS
ORGANIZATION
I crystal, Inc. (the Company or I crystal) was incorporated October 5,
1994 in the state of Delaware as Cable Group South, Inc. In November
1998, the Company changed its name to Softnet Industries, Inc.; and, in
June 1999, to avoid a conflict with another company with a similar name,
the name was changed again to I crystal, Inc.
In July 1998, after giving affect to the reverse stock split discussed
below, the Company president received 375,000 shares of common stock in
exchange for services. Effective October 19, 1998, stockholders approved
an eight to one reverse stock split, reducing the number of outstanding
shares from 6,130,000 to 766,300. All references in the accompanying
financial statements to number of shares and per share amounts have been
restated to reflect the reduced number of shares outstanding.
On December 1, 1998, the Company entered into a memorandum of agreement
with Diversified Cosmetics International, Inc. (Diversified), a related
party (Note 5), to license the rights to certain internet-based gaming
software that was in the process of being developed by Diversified.
Under terms of the agreement, Diversified had the option to require the
Company to purchase the rights, including all source code and technical
specifications, graphics, domain names and trademarks, in exchange for
2.5 million shares of common stock. Diversified exercised its option on
December 10, 1998. Consideration also included a $65,000 note payable
given for the additional amount of development undertaken by Diversified
subsequent to entering into the agreement. The note was paid in full
during 1999.
Concurrent with the acquisition of the software rights, the Company
issued two million shares to certain owners of Diversified. The shares
were issued in exchange for stock subscriptions receivable and for
future services to be provided in their capacity as corporate officers
of I crystal. Another 2.5 million shares were issued to certain
individuals in exchange for stock subscriptions receivable and for
services provided in connection with facilitating the transfer of the
software from Diversified to the Company.
CESSATION OF DEVELOPMENT STAGE OPERATIONS AND GOING CONCERN
For the period October 5, 1994 through June 30, 1999, the Company's
efforts were devoted to corporate structuring, financial and business
planning, recruiting directors and advisors, raising additional
financing, establishing the technological feasibility of the gaming
software acquired from Diversified, and negotiating a master license
agreement. Accordingly, through June 30, 1999, the Company was
characterized as a development stage company. Development stage
operations were financed primarily through the issuance of shares of
common stock for services and, in March 1999, the issuance of 1,914,000
shares of common stock for net proceeds of $800,300. Prior to the March
1999 issuance, the Company had no material amount of assets or
liabilities.
In September 1999, the Company established offices in Surrey, British
Columbia, where it engages in developing and licensing software related
to the internet gaming industry. Products include various theme-oriented
blackjack and poker games, slot machines, and bingo games. The Company
does not conduct any gaming activities itself but has entered into a
nonexclusive master license agreement with DCI, Inc. (Master Licensee),
a related party (Note 5), for use of the Company's gaming technology. In
the third quarter of 1999, the Company began realizing revenues from
this agreement and development stage operations ceased.
On August 17, 1999, I crystal Software Inc. (I crystal Software) was
incorporated in the province of British Columbia, Canada. Upon
incorporation, all founding shares were issued to the officers of I
crystal. Effective December 13, 1999, the officers contributed all
shares to the Company, at which time I crystal Software became a
wholly-owned subsidiary of I crystal. I crystal Software has
subsequently carried out essentially all of the Company's software
development activity.
SEE ACCOMPANYING NOTES TO THESE CONSOLIDATED FINANCIAL STATEMENTS. 5
- --------------------------------------------------------------------------------
<PAGE>
ICRYSTAL, INC. AND SUBSIDIARY
SEE ACCOMPANYING NOTES TO THESE CONSOLIDATED FINANCIAL STATEMENTS. 6
- --------------------------------------------------------------------------------
<PAGE>
ICRYSTAL, INC. AND SUBSIDIARY
NOTE 1-ORGANIZATION AND CESSATION OF DEVELOPMENT STAGE OPERATIONS (Continued)
The Company has incurred net losses since inception; and, at March 31,
2000, it had a working capital deficiency of $158,500 and a
stockholders' deficit of $158,300. The Company has not yet generated
revenues sufficient to fund its operations. Accordingly, the Company's
ability to accomplish its business strategy and to ultimately achieve
profitable operations is dependent on its capacity to obtain additional
financing and execute its business plan.
Although cash flows from licensing revenues have been increasing as
games and websites are developed and licensed, management does not
anticipate that cash revenues will be adequate to fund its cash expenses
until the third quarter of 2000. The high level of non-cash expenses
incurred during 1999 in exchange for stock is not expected to be
repeated in 2000 and future periods. Management also believes that it
may be able to negotiate favorable terms of repayment for the $102,100
of advances from Diversified, a related party (Note 5).
During the quarter ended March 31, 2000, the Company raised $100,000 in
a private placement of common stock. Subsequent to March 31, 2000, it
raised an additional $100,000. During the remainder of 2000, the Company
plans to raise another $1.5 million in private equity financing.
Proceeds will be used to fund its software development projects. Success
in raising this additional financing is dependent on the Company's
ability to demonstrate that it can fulfill its business strategy to
license its games and websites and generate significant royalty
revenues. Management believes these plans will allow the Company to
generate sufficient cash to support its operations through March 31,
2001.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INTERIM FINANCIAL INFORMATION
The financial information included herein is unaudited; however, the
information reflects all adjustments (consisting solely of normal
recurring adjustments) that are in the opinion of management, necessary
to a fair presentation of the financial position, results of operations,
and cash flows for the interim periods.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements of I crystal, Inc. and Subsidiary
include the accounts of its wholly-owned subsidiary, I crystal Software,
Inc. All material intercompany accounts and transactions have been
eliminated in consolidation.
REVENUE RECOGNITION
The Company recognizes revenue when earned, in accordance with American
Institute of Certified Public Accountants Statement of Position (SOP)
97-2, SOFTWARE REVENUE RECOGNITION, and SOP 98-9, MODIFICATION OF SOP
97-2 WITH RESPECT TO CERTAIN TRANSACTIONS. Royalties based upon
licensees' net gaming revenues are recognized as licensees' revenues are
earned. In the event that licensee's revenue recognition criteria are
not met, revenue is recognized when received. Revenue from packaged
product sales to and through distributors and resellers is recorded when
related products are shipped. Revenue attributable to significant
undelivered elements, including maintenance and technical support, is
recognized over the contract period as elements are delivered.
SEE ACCOMPANYING NOTES TO THESE CONSOLIDATED FINANCIAL STATEMENTS. 7
- --------------------------------------------------------------------------------
<PAGE>
ICRYSTAL, INC. AND SUBSIDIARY
NOTE 2-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
NEW ACCOUNTING STANDARD
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. Among
other provisions, SFAS No. 133 requires that entities recognize all
derivatives as either assets or liabilities in the balance sheet and
measure those financial instruments at fair value. Accounting for
changes in fair value is dependent on the use of the derivatives and
whether such use qualifies as hedging activity. The new standard, as
amended, becomes effective for the Company in fiscal 2001, and
management is currently assessing the impact, if any, it may have on
financial position and results of operations.
NOTE 3 - CONVERTIBLE DEBT
In August 1999, the Company received a $78,200 loan advance from West
Peak Ventures of Canada, Inc. (West Peak). Under the terms of the loan,
the advance is unsecured and bears interest at 2% above the prime
banking lending rate. The loan is due in full on November 30, 1999,
unless converted into 200,000 common shares of I crystal, which the
Company agrees to register for resale at the request of West Peak.
On December 23, 1999 the Company issued 200,000 common shares to West
Peak. West Peak did not accept the shares tendered based on its position
that the shares were to be registered upon delivery. On February 15,
2000, after negotiations to resolve the issue failed, West Peak filed a
claim against the Company in the Supreme Court of British Columbia,
Canada, claiming breach of the loan agreement. West Peak is seeking
$78,200 plus interest, costs and such other relief as the Court may deem
necessary. As of May 18, 2000, management believes that the Company has
not yet been properly served in the action. Due to the uncertainties
surrounding this matter, the Company continues to report an obligation
for the $78,200 loan rather than present the 200,000 common shares as
being issued and outstanding.
NOTE 4 - CAPITAL STOCK AND STOCK-BASED COMPENSATION
The Company has a single class of $0.01 par value common stock. Thirty
million shares are authorized and 15,182,800 shares are issued (or
committed to be issued) and outstanding at March 31, 2000. During the
first quarter of 2000, the Company committed to be issued 500,000 shares
for $100,000 of cash proceeds and consulting services. Subsequent to
March 31, 2000, the Company received another $100,000 for an additional
500,000 shares.
NOTE 5 - RELATED PARTY TRANSACTIONS
The Company is affiliated with the following entities:
DIVERSIFIED COSMETICS INTERNATIONAL, INC. (DIVERSIFIED)
The Company is affiliated with Diversified through common ownership.
Diversified is an Alberta corporation that was previously listed on the
Alberta Stock Exchange. As described in Note 1, in December 1998, the
Company acquired certain software rights from Diversified. Subsequent to
the transfer of the technology to the Company, Diversified has had no
significant business operations; and, as of May 18, 2000, it was in the
process of winding down its affairs.
Prior to the Company establishing its own bank account, all cash
transactions were deposited in and disbursed from Diversified's bank
account. Diversified has also paid various expenses on the Company's
behalf. The net effect of these circumstances has resulted in the
Company owing Diversified $102,100 at March 31, 2000. Diversified has
stipulated no terms of repayment.
SEE ACCOMPANYING NOTES TO THESE CONSOLIDATED FINANCIAL STATEMENTS. 8
- --------------------------------------------------------------------------------
<PAGE>
ICRYSTAL, INC. AND SUBSIDIARY
NOTE 5-RELATED PARTY TRANSACTIONS (Continued)
DCI, INC. (THE MASTER LICENSEE)
Effective April 8, 1999, the Company entered into a ten-year
nonexclusive master license agreement with the Master Licensee for use
of the Company's technology. Essentially all of the Company's revenue
has been realized under this agreement. Leonard Slamko, a consultant
retained by the Master Licensee, is a stockholder of the Company and a
relative of officers and directors of the Company. The Master Licensee
is incorporated in the Commonwealth of Dominica, where it is licensed to
conduct international wagering, lotteries and games of chance by way of
telecommunications.
During the quarter ended March 31, 2000, the Company received $67,000 of
a $100,000 upfront fee from the Master Licensee. The remaining $33,000
is due when the Company has completed development of a specified
software package. Recognition of the $67,000 fee received in 2000 and
another $67,000 received under similar terms in 1999 has been deferred.
Once the final amounts are received, the total balance will be
recognized over the remainder of the ten-year term of the Master
Licensee agreement, as ongoing maintenance, support and upgrades are
delivered.
SLAMKO VISSER, CHARTERED ACCOUNTANTS (SLAMKO VISSER)
The Company is affiliated with the Canadian chartered accounting firm
Slamko Visser through common ownership. During the first quarter of 2000
and 1999, the Company paid $14,000 and $-0-, respectively, to Slamko
Visser for consulting and accounting fees and related costs.
NOTE 6 - SEGMENT AND GEOGRAPHIC INFORMATION AND MAJOR CUSTOMERS
SEGMENT INFORMATION
The Company's primary operations consist of the development and
licensing of internet-based gaming technology. Management assesses the
performance of its operations as a single segment. Through June 30,
1999, the Company's efforts were focused primarily on development stage
operations, and no material activities occurred within this segment
prior to that date. The following tables and schedules summarize certain
information about this segment.
<TABLE>
<CAPTION>
Internet Gaming
Software Development
--------------------------------
March 31, March 31,
2000 1999
--------------- ---------------
<S> <C> <C>
External revenues $ 105,500 $ 90,900
Intersegment revenues - -
Segment income (loss) before tax 33,200 (11,500)
Segment assets 170,400 36,000
Total income (loss) before tax for reportable segments $ 33,200 $ (11,500)
Corporate headquarters expense (206,000) (2,443,800)
--------------- ---------------
Consolidated total $ (172,800) $ (2,455,300)
=============== ===============
</TABLE>
SEE ACCOMPANYING NOTES TO THESE CONSOLIDATED FINANCIAL STATEMENTS. 9
- --------------------------------------------------------------------------------
<PAGE>
ICRYSTAL, INC. AND SUBSIDIARY
NOTE 7 - SUBSEQUENT EVENTS
2000 INCENTIVE PLAN
Subject to stockholder approval, effective April 4, 2000, the Company
adopted the 2000 Incentive Plan (the "Plan"). Under the Plan, the
Company may make awards to employees, non-employees, directors,
consultants, and independent contractors of shares of common stock or
derivative securities such as incentive and nonqualified stock options,
stock purchase warrants, securities convertible into common stock, stock
appreciation rights, phantom stock, or any other form of derivative,
without limitation. The term of the Plan is ten years, and 3 million
shares are reserved for awards made under the Plan. The Plan stipulates
no terms or conditions for the awards to be granted. Subsequent to
adoption of the Plan, the Board of Directors granted 1,350,000 stock
options to employees, directors, and consultants, all of which have a
one-year vesting period and an exercise price of $0.20.
CORPORATE NAME CHANGE
Subject to stockholder approval, the Company has proposed a name change
from the I crystal, Inc. to iCrystal, Inc. The board believes the name
change better reflects the Company's business, given the popular usage
of the letter "i" to characterize Internet related businesses.
SEE ACCOMPANYING NOTES TO THESE CONSOLIDATED FINANCIAL STATEMENTS. 10
- --------------------------------------------------------------------------------
<PAGE>
ITEM 2. MANAGEMENT DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND MARCH 31,
1999
Revenues - Revenues for the periods ending March 31, 2000 and March 31, 1999
were $105,500 and $0, respectively. The increase of $105,500 reflects the
cessation of the Company's development stage operations in the third quarter
of 1999, when it began collecting revenues from its license agreement (the
"Master License") with DCI, Inc. (the "Master Licensee") and continued
marketing strategies for revenue growth.
Operating Expenses - Operating expenses are primarily comprised of research
and development and general and administrative costs. Operating expenses were
$278,100 and $2,455,200 for the three months ended March 2000 and 1999,
respectively. The decrease of $2,177,100 was largely attributable to the
Company recognizing $2,287,900 of non-cash services received during the first
quarter of 1999 in exchange for issuance of stock. Similar non-cash services
received in exchange for stock during the first quarter of 2000 were
$131,200. Exclusive of these items, operating expenses in total were
comparable between periods.
Research and Development - The Company's research and development costs
consist primarily of costs associated with the continued development of its
Internet based casino software. Research and development costs were $61,600
and $8,000 for the three months ended March 31, 2000 and 1999, respectively.
The $53,600 increase reflects the Company's ongoing development costs to
develop, expand and maintain licensed Internet based gaming software.
General and Administrative - The Company's general and administrative costs
consist of salaries and wages, consulting fees, professional fees, investor
relation services, and office expenses. General and administrative costs
were $209,000 and $2,444,900 for the three months ended March 31, 2000 and
1999, respectively. The $2,235,900 reflects the Company recognizing
$2,287,900 of non-cash investor relation and consulting services received
during the first quarter of 1999 in exchange for issuance of stock. Non-cash
services received in exchange for stock during the first quarter of 2000 were
$131,200. Other factors affecting the decrease relate to the Company's
having incurred more consulting and investor relation services during the
first quarter of 1999, beyond though received in exchange for stock. These
costs were associated with the Company's financing efforts and corporate
restructuring, which followed the acquisition of certain technology from
Diversified Cosmetics International, Inc. and a change in the Company's
management in December 1998.
<PAGE>
Net Loss - The Company incurred a net loss of $(172,800) and $(2,455,300) for
the three months ended March 31, 2000 and 1999, respectively. The March 31,
1999 loss was the result of the expenses incurred by the Company during its
development stage, which ceased in the third quarter of 1999, when it began
to realize revenues from licensing its Internet based casino software. The
March 31, 2000 operating loss resulted because the research and development,
administrative costs, and sales and marketing costs of $278,100 exceeded the
$105,500 in licensing royalties and up-front fees recorded during that period.
FLUCTUATIONS IN ANNUAL AND QUARTERLY RESULTS
The Company's annual and quarterly operating results may fluctuate
significantly in the future as a result of numerous factors, including:
1. the amount and timing of expenditures required to develop the
Company's casino and bingo software and its licensing and
strategic relationships to enhance sales and marketing;
2. changes in the growth rate of Internet usage and the interest
of consumers in using Internet based casino and bingo websites
for recreation; and
3. the emergence of new services and technologies in the market
in which the Company now competes.
The Company also faces foreign currency exchange risk as a majority of its
revenue is denominated in U.S. currency and a majority of its operating costs
are incurred in Canadian currency. Significant fluctuations in the foreign
exchange rate between U.S. and Canadian currency will result in fluctuations
in the Company's annual and quarterly results.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Effective April 8, 1999, the Company entered into the Master License with the
Master Licensee for use of the Company's technology. Under the terms of the
Master License, the Company is obligated to provide a minimum of six new
theme-oriented software packages and websites per year, along with updates
and technical support, and development of specified electronic payment and
accounting technology. During the first year of the Master License the
Company provided the six packages required, however, the Master Licensee has
requested special upgrades to the graphics and the games in two of the
packages. The special modifications are expected to be completed by June
2000. The Company is also obligated to provide a monthly advertising rebate
equal to the lesser of 10% of monthly net gaming revenue derived from the
Master Licensee's use of its software or the amount expended by the Master
Licensee on advertising. The Company, in return, is to receive 40% of
monthly net gaming revenue derived from use of the software by the Master
Licensee and 50% of upfront fees charged by the Master Licensee to any
sub-licensee. In the event the Company produces certain of its games on
CD-ROM and enters into a reseller agreement with the Master Licensee, the
Company will receive 10% of gross revenue derived from the Master Licensee's
sales of the software. The Master Licensee is also obligated to spend $10,000
per month on advertising for each software package and website licensed from
the Company. Under terms of an amendment to the Master License dated May 1,
1999, the Company had the option to spend up to a specified amount on
promotion of the Master Licensee's website in exchange for an additional 10%
share of net gaming revenue, not to exceed the total amount spent by the
Company on promotion. The term of the amendment, but not the underlying
master License, has expired and no amount was spent by the Company in
furtherance of that amendment during its term.
The Company began realizing revenues from its licensing activities in June of
1999, and such revenues amounted to $90,900 through December 31, 1999 and
$105,500 for the March 31, 2000 quarter. The Company anticipates sales
revenue for the remaining fiscal period ending December 31, 2000 to grow at
$5,830 per month. Although cash outflows from licensing revenues have been
increasing as games and websites are developed and licensed, management does
not anticipate that cash revenues will equal cash expenses until sometime
during this third quarter of 2000. The Company's liquidity over the next 12
months is contingent on its ability to raise money through debt or equity
financings to meet its short term needs.
In October 1999, the Company entered into a second ten-year agreement with
the Master Licensee related to licensing three specific theme-oriented
Internet casino websites. Under this agreement, once all three sites are
ready for operation, the Company is to receive a $100,000 upfront fee. It
will then receive 40% of the first $100,000 of monthly net gaming revenue
derived from the sites and 30% of monthly net gaming revenue in excess of
$100,000. In January 2000, the Company received $67,000 of the upfront fee.
The balance of $33,000 is due once the third casino website is delivered. The
Company's disclosure of the terms of the Master License may impact the
Company's ongoing relationships with future licensees who now have full
access to the information. Disclosure of such terms may also negatively
affect the Company's ability to negotiate more favorable licenses with other
licensees since they will be able to refer to the terms of the Master
License.
In March 2000, the Company launched a free gaming website where people can
play the game Keno for free prizes. In the month of March, 2000 the site
received approximately 4,000,000 "hits". This site is structured to generate
banner-advertising revenue for the Company. Given the recent launch of this
site, no revenues have yet been recorded and management has not determined
whether the current traffic is indicative of future traffic or potential
traffic growth and whether future revenues to the Company from this or
similar free sites will be significant.
As of March 31, 2000, current monthly cash flows from licensing royalties are
approximately $45,000 per month. Currently, average monthly operating cash
needs are approximately $70,000. Although cash flows from licensing revenues
have been increasing as games and websites are developed and licensed,
management does not anticipate that cash revenues will equal cash expenses
until sometime during the third quarter of 2000. However, the high level of
non-cash expenses incurred by the Company during 1999 and 1998 in exchange
for stock issued is expected to be reduced in 2000 and future periods as the
Company matures.
The Company's budgeted capital expenditures for the fiscal year ending
December 31, 2000 are approximately $25,000, of which $2,300 had been spent
as of March 31, 2000.
During 1999, the Company raised $915,300 of net cash proceeds (including
funding of subscription receivables) from exempt offerings or the private
placements of Common Stock. Another $78,200 of cash was raised in connection
with a convertible loan agreement. The loan obligation remains outstanding,
although the Company tendered the specified Common Stock. (See Legal
Proceedings). Financing was also provided in 1999 in the form of advances
from Diversified, a related party. The $98,700 in advances outstanding at
December 31, 1999 represent various expenses paid by Diversified on the
Company's behalf, prior to the Company establishing its own bank account.
Though the advances bear no interest, during 1999, the Company paid
Diversified $6,700 of management fees for handling its cash receipts and
disbursements. Diversified has stipulated no terms for repayments of the
advances. Because the liability is due to a related party, management
believes it can negotiate repayment terms that are flexible and favorable to
the Company's financial circumstances. At March 31, 2000 the balance of the
advances was $102,057.
In January 2000 the Company commenced negotiations to raise an additional
$200,000 of equity financing, which was completed by the end of April 2000.
This financing raised an aggregate of $200,000 in cash in exchange for
1,000,000 shares of Common Stock of the Company, to be issued to
approximately 6 investors. During the remainder of 2000, the Company hopes to
raise another $1.5 million in private equity financing principally to fund
its software development projects. Management is pursuing numerous potential
financing sources for the $1.5 million, including existing equity holders and
new sources, but no commitments have been received. Management believes that
the Company's success in raising this additional financing will depend on the
Company's ability to demonstrate that it can fulfill its business strategy to
license its games and websites and generate significant royalty revenues.
Management also believes that stockholders will continue to support the
financing efforts of the Company as long as it continues to demonstrate that
it can fulfill that business strategy. Although cash operating expenses have
stabilized at approximately $70,000 per month, management estimates that
monthly cash from licensing royalties and other revenues will not be
sufficient to cover these expenses until sometime during the third quarter of
2000. Subsequent to that time, management believes that cash from operations,
coupled with the $1.5 million of private equity financing discussed above
will allow the Company to generate sufficient cash to support its operations
for the next twelve months. However, there can be no certainty that the
Company will be able to meet its financing goals or raise sufficient
financing to fund such future business plans. In the event that the Company
is unsuccessful in its efforts to raise the capital expected to be required
over the next twelve months, the Company will need to modify its business
strategy accordingly, to adjust its operating requirements to meet its
available liquidity and may need to consider reductions in operations until
capital resources or operating cash flows are sufficient to meet operating
needs.
IMPACT OF INFLATION
The Company believes that inflation has not had a material effect on its past
business.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On February 15, 2000 West Peak Ventures of Canada, Inc. ("West
Peak") filed a claim against the Company in the Supreme Court of British
Columbia, Canada claiming breach of a loan agreement by the Company. West
Peak has asked for a judgment in the amount of $78,196.20, plus interest,
costs and such other relief as the court may deem necessary. As of May 2000,
the Company does not believe that it has been properly served in this matter
and has made no formal response.
ITEM 2. CHANGES IN SECURITIES
In the first quarter of 2000 the Company agreed to issue 500,000
shares and in April 2000 the Company agreed to issue an additional 500,000
shares of its common stock to approximately 6 non-U.S. resident investors for
an aggregate of $200,000 in cash. To the extent U.S. securities laws were
applicable to the issuance, the issuance was made in reliance of Rule 506
under Regulation D and in any event under Section 4(2) as a private
transaction, not involving a public offering.
<PAGE>
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of the security holders of
the Company either through solicitation of proxies or otherwise in the first
quarter of the fiscal year ending December 31, 2000. The Company does plan to
submit for a vote of it stockholders at its Annual Meeting, currently
scheduled to be held on June 5, 2000, the following matters: (1) stockholders
ratification of past actions of the Board of Directors changing the name of
the Company to "Softnet Industries, Inc." and subsequently to "I crystal,
Inc."; (2) stockholders approval of an amendment of the Company's Certificate
of Incorporation to change the Company's name to "iCrystal, Inc."; (3)
stockholder approval of Amended and Restated Bylaws for the Company; (4) the
election Larry J. Hrabi, Derek Bodnarchuk and H. Rex Hollett as directors of
the Company; and (5) stockholder approval of the Company's 2000 Incentive
Plan which would allow the Company to issue options and stock based awards
entitling the holders to exercise the awards to acquire up to 3,000,000
shares of the Company's common stock, par value $.01 per share.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8K
(a) Exhibits:
27.1 Financial Data Schedule.
(b) Reports on Form 8-K:
The Company filed no reports on Form 8K during the period covered by
this report.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Dated: May 22, 2000
I CRYSTAL, INC.
(REGISTRANT)
By: /S/ LARRY HRABI
----------------------------------------------
LARRY HRABI
CHAIRMAN OF THE BOARD, CHIEF EXECUTIVE OFFICER
By: /S/ GERALD P. SLAMKO
----------------------------------------------
GERALD P. SLAMKO
CHIEF FINANCIAL OFFICER
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ICRYSTAL
INC.'S UNAUDITED CONDENSED FINANCIAL STATEMENTS AS OF MARCH 31, 2000 AND FOR THE
AUDITED FINANCIAL STATEMENTS AS OF DECEMBER 31, 1999 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 86,700
<SECURITIES> 0
<RECEIVABLES> 98,700
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 210,200
<PP&E> 21,700
<DEPRECIATION> 2,500
<TOTAL-ASSETS> 229,400
<CURRENT-LIABILITIES> 368,700
<BONDS> 0
0
0
<COMMON> 5,830,700
<OTHER-SE> (5,989,000)
<TOTAL-LIABILITY-AND-EQUITY> 229,400
<SALES> 0
<TOTAL-REVENUES> 105,500
<CGS> 0
<TOTAL-COSTS> 278,100
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 200
<INCOME-PRETAX> (172,800)
<INCOME-TAX> 0
<INCOME-CONTINUING> (172,800)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (172,800)
<EPS-BASIC> (0.01)
<EPS-DILUTED> (0.01)
</TABLE>
