<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: JUNE 30, 2000
OR
__ Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission File Number: 000-29417
iCRYSTAL, 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 X NO
--- ---
At August 7, 2000, the Company had outstanding 15,682,800 shares of
common stock, $.01 par value per share (the "Common Stock").
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
The June 30, 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>
[LETTERHEAD OF MOSS-ADAMS LLP]
--------------------------------------------------------------------------------
INDEPENDENT ACCOUNTANT'S REPORT
To the Board of Directors and Stockholders
iCrystal, Inc.
We have reviewed the accompanying condensed consolidated balance sheet of
iCrystal, Inc. and Subsidiary as of June 30, 2000, and the related condensed
consolidated statements of operations and cash flows for the three and six
months then ended. These financial statements are the responsibility of
iCrystal 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 iCrystal, Inc. and Subsidiary 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 consolidated balance sheet from which it has been derived.
/s/ MOSS ADAMS LLP
Bellingham, Washington
August 7, 2000
F-1
<PAGE>
ICRYSTAL, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
JUNE 30, 2000 AND DECEMBER 31, 1999
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<TABLE>
<CAPTION>
ASSETS
June 30, December 31,
2000 1999
--------- ---------
<S> <C> <C>
CURRENT ASSETS
Cash $ 8,200 $ 23,800
Accounts receivable - Master Licensee 78,800 75,700
Prepaid expenses -- 900
----------- -----------
Total current assets 87,000 100,400
PROPERTY AND EQUIPMENT, net 45,300 17,900
----------- -----------
TOTAL ASSETS $ 132,300 $ 118,300
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 132,400 $ 72,100
Advances from related party 102,100 98,700
Current portion of deferred revenue - Master Licensee 13,400 --
Convertible debt 78,200 78,200
----------- -----------
Total current liabilities 326,100 249,000
----------- -----------
LONG-TERM LIABILITIES
Deferred revenue - Master Licensee 139,300 67,000
Advances from stockholders 19,000 19,000
----------- -----------
Total liabilities 484,400 335,000
----------- -----------
STOCKHOLDERS' DEFICIT
Common stock, $0.01 par value, 30,000,000
shares authorized; 15,682,800, and 14,682,800
shares issued and outstanding 156,900 146,900
Additional paid-in capital 5,843,800 5,471,300
Deferred compensation (29,400) (59,300)
Accumulated deficit (6,323,400) (5,775,600)
----------- -----------
Total stockholders' deficit (352,100) (216,700)
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS DEFICIT $ 132,300 $ 118,300
=========== ===========
</TABLE>
SEE ACCOMPANYING NOTES TO THESE CONSOLIDATED FINANCIAL STATEMENTS.
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F-2
<PAGE>
ICRYSTAL, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
QUARTER AND SIX MONTHS ENDED JUNE 30, 2000 AND 1999
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<TABLE>
<CAPTION>
Quarter Quarter Six Months Six Months
Ended Ended Ended Ended
June 30, June 30, June 30, June 30,
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
REVENUE
Software royalties $ 54,200 $ -- $ 159,700 $ --
------------ ------------ ------------ ------------
OPERATING EXPENSES
General and administrative 315,900 1,813,400 524,900 4,258,300
Research and development 100,100 198,100 161,700 206,100
Sales and marketing 13,100 34,400 20,600 36,700
------------ ------------ ------------ ------------
Total operating expenses 429,100 2,045,900 707,200 4,501,100
------------ ------------ ------------ ------------
LOSS FROM OPERATIONS (374,900) (2,045,900) (547,500) (4,501,100)
OTHER EXPENSE
Interest 100 200 300 300
------------ ------------ ------------ ------------
Total other expense 100 200 300 300
------------ ------------ ------------ ------------
NET LOSS BEFORE PROVISION (375,000) (2,046,100) (547,800) (4,501,400)
FOR INCOME TAXES
PROVISION FOR INCOME TAXES -- -- -- --
------------ ------------ ------------ ------------
NET LOSS $ (375,000) $ (2,406,100) $ (547,800) $ (4,501,400)
============ ============ ============ ============
EARNINGS (LOSS) PER SHARE
Basic and diluted $ (0.02) $ (0.23) $ (0.04) $ (0.49)
============ ============ ============ ============
Weighted average common shares
outstanding (basic and diluted) 15,583,900 10,558,100 15,136,100 9,175,600
============ ============ ============ ============
</TABLE>
SEE ACCOMPANYING NOTES TO THESE CONSOLIDATED FINANCIAL STATEMENTS.
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F-3
<PAGE>
ICRYSTAL, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2000 AND 1999
-------------------------------------------------------------------------------
Increase (Decrease) in Cash
<TABLE>
<CAPTION>
June 30, June 30,
2000 1999
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (547,800) $(4,501,400)
ADJUSTMENTS TO RECONCILE NET LOSS TO
NET CASH USED IN OPERATING ACTIVITIES
Amortization of deferred compensation 29,900 30,000
Depreciation 2,100 400
Noncash expenses incurred in exchange for stock 182,500 3,743,100
CHANGES IN OPERATING ASSETS AND LIABILITIES
Accounts receivable (3,100) (800)
Prepaid expenses 900 (900)
Accounts receivable - lawyer trust account -- (121,000)
Accounts payable 60,300 --
Deferred revenue 85,700 --
----------- -----------
Net cash from operating activities (189,500) (850,600)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (29,500) (4,900)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from stock issuances 200,000 800,300
Advances from (to) related parties, net 3,400 (8,800)
Advances from stockholders -- 19,000
Collection of stock subscription receivables -- 45,000
----------- -----------
Net cash from financing activities 203,400 855,500
----------- -----------
NET CHANGE IN CASH (15,600) --
CASH, beginning of period 23,800 --
----------- -----------
CASH, end of period $ 8,200 $ --
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid $ 300 $ 300
=========== ===========
Income taxes paid $ -- $ --
=========== ===========
</TABLE>
SEE ACCOMPANYING NOTES TO THESE CONSOLIDATED FINANCIAL STATEMENTS.
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F-4
<PAGE>
ICRYSTAL, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2000 AND 1999
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NOTE 1 - ORGANIZATION AND CESSATION OF DEVELOPMENT STAGE OPERATIONS
ORGANIZATION
iCrystal, Inc. (the Company or iCrystal) 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 June 2000, the name
was changed again to iCrystal, Inc. The board believes the most recent
name change better reflects the Company's business, given the popular
usage of the letter "i" to characterize Internet related businesses.
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 iCrystal. 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
iCrystal. Effective December 13, 1999, the officers contributed all shares
to the Company, at which time I crystal Software became a wholly-owned
subsidiary of iCrystal. I crystal Software has subsequently carried out
essentially all of the Company's software development activity.
F-5
<PAGE>
ICRYSTAL, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2000 AND 1999
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NOTE 1 - ORGANIZATION AND CESSATION OF DEVELOPMENT STAGE OPERATIONS (Continued)
The Company has incurred net losses since inception, and, at June 30, 2000,
it had a working capital deficiency of $239,100 and a stockholders' deficit
of $352,100. 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 or fourth 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 six months ended June 30, 2000, the Company raised $200,000 in
private placements of common stock. 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 June 30, 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 iCrystal, 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.
F-6
<PAGE>
ICRYSTAL, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 2000 AND 1999
-------------------------------------------------------------------------------
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 iCrystal, 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. 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 15,682,800 shares are issued (or
committed to be issued) and outstanding at June 30, 2000. During the first
six months of 2000, the Company committed to be issued 1,000,000 shares for
$200,000 of cash proceeds and consulting services.
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 August 7, 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 June 30, 2000. Diversified has stipulated no
terms of repayment.
F-7
<PAGE>
ICRYSTAL, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 2000 AND 1999
-------------------------------------------------------------------------------
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.
Through June 30, 2000, the Company has received $156,000 of upfront fees
from the Master Licensee for development of specified software packages.
Recognition of the fees received is deferred until such time as the
software packages have been fully developed. Once development is complete,
the fees are recognized over a five-year term, the estimated period over
which the Company expects to provide ongoing maintenance, support and
upgrades.
SLAMKO VISSER, CHARTERED ACCOUNTANTS (SLAMKO VISSER)
The Company is affiliated with the Canadian chartered accounting firm
Slamko Visser through common ownership. During the six months ended June
30, 2000 and 1999, the Company paid $20,200 and $11,100, 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>
Software Development
-----------------------------------------------------------
Quarter Quarter Six Months Six Months
Ended Ended Ended Ended
June 30, June 30, June 30, June 30,
2000 1999 2000 1999
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
External revenues $ 54,200 $ - $ 159,700 $ -
Intersegment revenues - - - -
Segment income (loss) before tax (63,800) (234,900) (30,600) (246,400)
Segment assets 119,100 4,500 119,100 4,500
Total income (loss) before tax
for reportable segments $ (63,800) $ (234,900) $ (30,600) $ (246,400)
Corporate headquarters expense (311,200) (1,811,200) (517,200) (4,255,000)
----------- ----------- ----------- ------------
Consolidated total $ (375,000) $(2,046,100) $ (547,800) $(4,501,400)
=========== =========== =========== ============
</TABLE>
F-8
<PAGE>
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 June 30, 2000, the Board of Directors
plans to grant 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.
F-9
<PAGE>
ITEM 2. MANAGEMENT DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION.
RESULTS OF OPERATIONS FOR THE QUARTERS AND SIX MONTHS ENDED JUNE 30, 2000 AND
JUNE 30, 1999
QUARTERS ENDED JUNE 30, 2000 AND 1999
Revenues - Revenues for the quarters ending June 30, 2000 and June 30, 1999 were
$54,200 and $0, respectively. The increase of $54,200 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. During the 2000 quarter the Company's Master Licensee had a large
portion of time where the websites were being revised which resulted in lower
than expected revenues.
Operating Expenses - Operating expenses are primarily comprised of research and
development and general and administrative costs. Operating expenses were
$429,100 and $2,045,900 for the quarters ended June 30, 2000 and 1999,
respectively. The decrease of $1,616,800 was largely attributable to the Company
recognizing $1,485,300 of non-cash services received during the second quarter
of 1999 in exchange for issuance of stock. Similar non-cash services received in
exchange for stock during the second quarter of 2000 were $79,600. The
balance of the decrease relates primarily to the avoidance of various costs
incurred in 1999 in connection with development stage operations.
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 $100,100
and $198,000 for the quarters ended June 30, 2000 and 1999, respectively. The
$97,900 decrease reflects the avoidance of various costs incurred during 1999
when the Company was in the development stage. The Company is continuing 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
$315,900 and $1,813,400 for the quarters ended June 30, 2000 and 1999,
respectively. The decrease of $1,497,500 consists mainly of the Company
recognizing $1,485,300 of non-cash consulting services received during the
second quarter of 1999 in exchange for issuance of stock. Non-cash services
received in exchange for stock during the second quarter of 2000 were
$79,600. Other decreases relate to the avoidance of certain costs incurred in
connection with development stage operations during the first part of 1999.
Net Loss - The Company incurred a net loss of $(375,000) and $(2,046,100) for
the quarters ended June 30, 2000 and 1999, respectively. The June 30, 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 June 30, 2000
operating loss resulted because the research and development, administrative
costs, and sales and marketing costs of $429,100 exceeded the $54,200 in
licensing royalties and up-front fees recorded during that period.
<PAGE>
SIX MONTHS ENDED JUNE 30, 2000 AND 1999
Revenues - Revenues for the six months ending June 30, 2000 and June 30, 1999
were $159,700 and $0, respectively. The increase of $159,700 reflects the
cessation of the Company's development stage operations in the third quarter of
1999, when it began collecting revenues from the Master License with 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
$707,200 and $4,501,100 for the six months ended June 30, 2000 and 1999,
respectively. The decrease of $3,793,900 was largely attributable to the
Company recognizing $3,773,100 of non-cash services received during the first
six months of 1999 in exchange for issuance of stock. Similar non-cash
services received in exchange for stock during the first six months of 2000
were $212,400. The balance of the decrease relates primarily to the avoidance
of various costs incurred in 1999 in connection with development stage
operations.
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 $161,700
and $206,100 for the six months ended June 30, 2000 and 1999, respectively.
The $44,400 decrease reflects the avoidance of various costs incurred during
1999 when the Company was in the development stage. The Company is continuing
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
$524,900 and $4,258,200 for the six months ended June 30, 2000 and 1999,
respectively. The $4,258,200 reflects the Company recognizing $3,773,100 of
non-cash investor relation and consulting services received during the first six
months of 1999 in exchange for issuance of stock. Non-cash services received in
exchange for stock during the first six months of 2000 were $212,400. Other
decreases relate to the avoidance of certain costs incurred in connection
with development stage operations during the first part of 1999.
Net Loss - The Company incurred a net loss of $(547,800) and $(4,501,400) for
the six months ended June 30, 2000 and 1999, respectively. The June 30, 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 June 30,
2000 operating loss resulted because the research and development,
administrative costs, and sales and marketing costs of $707,200 exceeded the
$159,700 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;
<PAGE>
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.
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 were completed by June 30, 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
July of 1999, and such revenues amounted to $90,900 through December 31, 1999,
$54,200 for the June 30, 2000 quarter and $159,700 for the six months ended June
30, 2000. 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 the fourth 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.
<PAGE>
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. This site is structured to
generate banner-advertising revenue for the Company. Given the recent launch
of this site, no significant 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.
In April 2000, the Company entered into a third ten-year agreement with
the Master Licensee related to licensing four specific theme-oriented Internet
casino websites. Under this agreement the Company is to receive $80,000 per
casino staged over 3 payments. It will then receive 20% of the monthly net
gaming revenue derived from the sites. In April 2000, the Company received
$22,000 as a deposit on this software.
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 fourth
quarter of 2000. However, the high level of non-cash expenses incurred by the
Company during 1999 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 $50,000, of which $29,500 had been spent as
of June 30, 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 $102,100 in advances
outstanding at June 30, 2000 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,
<PAGE>
management believes it can negotiate repayment terms that are flexible and
favorable to the Company's financial circumstances.
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, 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
$80,000 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 fourth 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.
<PAGE>
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 (the "Court") claiming breach of a loan agreement (the
"Loan") by the Company. West Peak had asked for a judgment in the amount of
$78,196.20, plus interest, costs and such other relief as the court may deem
necessary. On March 1, 2000 the Company filed an appearance in the Court. On
March 9, 2000 the Company filed its Statement of Defense and on March 14,
2000 filed an Amended Statement of Defense on March 14, 2000 generally
denying the claims made by West Peak. The proceeding has been scheduled for a
hearing on August 24, 2000, at which time a trial date will likely be set.
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. All 1,000,000 shares were issued on July 6, 2000. To the
extent U.S. securities laws were applicable to the issuances, the issuances were
made in reliance of Rule 506 under Regulation D and in any event under Section
4(2) as private transactions, not involving a public offering.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On June 15, 2000, the Company submitted for a vote of it stockholders
at its Annual Meeting 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." (the
"Ratification Vote"); (2) stockholders approval of an amendment of the Company's
Certificate of Incorporation to change the Company's name to "iCrystal, Inc."
(the "Name Change"); (3) stockholder approval of Amended and Restated Bylaws for
the Company (the "Amended Bylaws"); (4) the election of 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 (the "Incentive Plan").
The Ratification Vote was approved by the vote of 9,250,826 shares of
the Company with 0 shares voting against, 0 shares abstaining and 0 broker
non-votes.
<PAGE>
The Name Change was approved by the vote of 9,250,826 shares of the
Company with 0 shares voting against, 0 shares abstaining and 0 broker
non-votes.
The Amended Bylaws were approved by the vote of 9,250,826 shares of the
Company with 0 shares voting against, 0 shares abstaining and 0 broker
non-votes.
All nominated directors were unopposed and elected at the Annual
Meeting, with Mr. Larry Hrabi receiving 9,250,826 votes in favor, with 0 shares
voting against and 0 shares abstaining, while authority was withheld on 0
shares, Mr. Derek Bodnarchuk receiving 9,250,826 votes in favor, with 0 shares
voting against and 0 shares abstaining, while authority was withheld on 0
shares, and with Mr. H. Rex Hollett receiving 9,250,826 votes in favor, with 0
shares voting against and 0 shares abstaining, while authority was withheld on 0
shares. The Incentive Plan was approved by the vote of 9,250,826 shares of the
Company with 0 shares voting against, 0 shares abstaining and 0 broker
non-votes.
ITEM 5. OTHER INFORMATION
On June 15, 2000 the stockholders of the Company approved an amendment
to the Company's Certificate of Incorporation changing the name of the Company
to "iCrystal, Inc." and subsequently, June 29, 2000, the Company filed its
Certificate of Amendment to the Certificate of Incorporation of I crystal, Inc.
submitted herewith as Exhibit 3.1. The Company also adopted Amended and Restated
Bylaws as of June 15, 2000 submitted herewith as Exhibit 3.2.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8K
(a) Exhibits:
3.1 Amendment to the Certificate of Incorporation of I
crystal, Inc. filed June 29, 2000.
3.2 Amended and Restated Bylaws of iCrystal, Inc. adopted
June 15, 2000.
10.1 Agreement dated April 25, 2000 by and among the
Company, the Master Licensee, Stefan Schoenung
and Kurt Neuer.
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.
<PAGE>
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: August 18, 2000
iCRYSTAL, 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
