SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
COMMISSION FILE NUMBER: 0-29417
ICRYSTAL, INC.
----------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 62-1581902
---------------------- -----------------------------------
(STATE OF ORGANIZATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
3237 KING GEORGE HWY., STE. 101-B
SURREY, BRITISH COLUMBIA, V5P 1B7 CANADA
----------------------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(604)542-5021
--------------------------------------------------
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE
CHECK WHETHER THE ISSUER (1) FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION
13 OR 15(d) OF THE EXCHANGE ACT DURING THE PAST 12 MONTHS AND (2) HAS BEEN
SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES _X__ NO ____
THERE ARE xx SHARES OF COMMON STOCK OUTSTANDING AS OF OCTOBER 31,
2000.
<PAGE>
ICRYSTAL, INC. AND SUBSIDIARY
TABLE OF CONTENTS
SEPTEMBER 30, 2000 AND DECEMBER 31, 1999
PAGE
PART I FINANCIAL INFORMATION
INDEPENDENT ACCOUNTANT'S REPORT.....................................1
ITEM 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..............5-10
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS..............................11-16
SIGNATURES....................................................................17
PART II OTHER INFORMATION
ITEM 6 EXHIBITS ..........................................................E-1
<PAGE>
INDEPENDENT ACCOUNTANT'S REPORT
To the Board of Directors and Stockholders
iCrystal, Inc. and Subsidiary
We have reviewed the accompanying condensed consolidated balance sheet of
iCrystal, Inc. and Subsidiary (the "Company") as of September 30, 2000, and the
related condensed consolidated statements of operations and cash flows for the
three and nine 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
November 10, 2000
1
<PAGE>
<TABLE>
<CAPTION>
ICRYSTAL, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEET (Unaudited)
SEPTEMBER 30, 2000 AND DECEMBER 31, 1999
ASSETS
September 30, December 31,
2000 1999
------------- ------------
<S> <C> <C>
CURRENT ASSETS
Cash $ 18,200 $ 23,800
Accounts receivable - Master Licensee 104,500 75,700
Prepaid expenses - 900
----------- -----------
Total current assets 122,700 100,400
PROPERTY AND EQUIPMENT, net 49,600 17,900
----------- -----------
TOTAL ASSETS $ 172,300 $ 118,300
=========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable and accrued liabilities $ 150,300 $ 72,100
Advances from related party - 98,700
Current portion of deferred revenue - Master Licensee 13,400 -
Convertible debt 78,200 78,200
----------- -----------
Total current liabilities 241,900 249,000
LONG-TERM LIABILITIES
Deferred revenue - Master Licensee 143,900 67,000
Advances from stockholders 4,400 19,000
----------- -----------
Total liabilities 390,200 335,000
----------- -----------
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 5,973,600 5,471,300
Deferred compensation (19,800) (59,300)
Accumulated deficit (6,328,600) (5,775,600)
----------- -----------
Total stockholders' deficit (217,900) (216,700)
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 172,300 $ 118,300
=========== ===========
</TABLE>
See Accompanying notes to these consolidated financial statements.
2
<PAGE>
<TABLE>
<CAPTION>
ICRYSTAL, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (Unaudited)
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
September 30, September 30, September 30, September 30,
2000 1999 2000 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
REVENUE
Software royalties $ 374,800 $ 21,100 $ 534,500 $ 21,100
------------- ------------- ------------- -------------
OPERATING EXPENSES
General and administrative 142,100 94,300 670,100 4,352,600
Research and development 100,800 380,000 261,100 586,000
Sales and marketing 12,100 46,200 31,300 82,900
Stock-based compensation -
stock options 117,800 - 117,800 -
------------- ------------- ------------- -------------
Total operating expenses 372,800 520,500 1,080,300 5,021,500
------------- ------------- ------------- -------------
INCOME (LOSS) FROM OPERATIONS 2,000 (499,400) (545,800) (5,000,400)
OTHER EXPENSE
Interest and finance costs 7,200 12,800 7,200 13,200
------------- ------------- ------------- -------------
NET LOSS BEFORE
PROVISION FOR INCOME TAXES (5,200) (512,200) (553,000) (5,013,600)
PROVISION FOR INCOME TAXES - - - -
------------- ------------- ------------- -------------
NET LOSS $ (5,200) $ (512,200) $ (553,000) $ (5,013,600)
============= ============= ============= =============
EARNINGS (LOSS) PER SHARE
Basic and diluted $ - $ (0.05) $ (0.04) $ (0.51)
============= ============= ============= =============
Weighted average common shares
outstanding (basic and diluted) 15,682,800 11,356,600 15,319,700 9,871,400
============= ============= ============= =============
</TABLE>
See Accompanying notes to these consolidated financial statements.
3
<PAGE>
<TABLE>
<CAPTION>
ICRYSTAL, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
September 30, September 30,
2000 1999
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (553,000) $ (5,013,600)
ADJUSTMENTS TO RECONCILE NET LOSS TO
NET CASH USED IN OPERATING ACTIVITIES
Amortization of deferred compensation 39,500 72,300
Depreciation 6,100 2,100
Stock-based compensation - stock options 117,800 -
Stock-based compensation - common stock 194,500 4,022,300
CHANGES IN OPERATING ASSETS AND LIABILITIES
Accounts receivable (95,800) (21,900)
Prepaid expenses 900 -
Accounts payable and accrued liabilities 78,200 28,000
Deferred revenue 90,300 7,000
---------- ------------
Net cash from operating activities (121,500) (903,800)
---------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (37,800) (16,800)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from stock issuances 200,000 800,400
Repayment of advances from related party, net (46,300) (3,700)
Proceeds from issuance of convertible debt - 78,900
Collection of stock subscriptions receivable - 45,000
---------- ------------
Net cash from financing activities 153,700 920,600
---------- ------------
NET CHANGE IN CASH (5,600) -
CASH, beginning of period 23,800 -
---------- ------------
CASH, end of period $ 18,200 $ -
========== ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid $ 300 $ 1,200
========== ============
Income taxes paid $ - $ -
========== ============
NON-CASH TRANSACTIONS
Stock issued for future services $ - $ 63,700
========== ============
Assignment of accounts receivable for settlement of advances
from related party and stockholders $ 67,000 $ -
========== ============
Liabilities assumed by stockholder $ 12,000 $ -
========== ============
</TABLE>
See Accompanying notes to these consolidated financial statements.
4
<PAGE>
ICRYSTAL, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
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 7), 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 7), 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.
5
<PAGE>
ICRYSTAL, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
NOTE 1 - ORGANIZATION AND CESSATION OF DEVELOPMENT STAGE OPERATIONS (Continued)
The Company has incurred net losses since inception, and, at September
30, 2000, it had a working capital deficiency of $119,200 and a
stockholders' deficit of $217,900. 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 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.
During the nine months ended September 30, 2000, the Company raised
$200,000 in private placements of common stock. During the fourth
quarter of 2000 or the first quarter of 2001, the Company plans to raise
another $2 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 September 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.
These consolidated financial statements should be read in conjunction
with the consolidated financial statements for the year ended December
31, 1999 and notes thereto included in Form 10SB as filed with the
Securities and Exchange Commission on May 30, 2000.
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 licensees' 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.
6
<PAGE>
ICRYSTAL, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
NINE MONTHS ENDED SEPTEMBER 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 - RESTATEMENT OF 1999 INTERIM FINANCIAL INFORMATION
During the current period, management determined that the net loss and
loss per share for the three months ended September 30, 1999 were
incorrectly reported in the Company's Form 10-SB filed on February 10,
2000. The misstatement was due to certain expenses incurred during the
first six months of the year being reported in the third quarter.
Results of operations and loss per share have been restated to report
these expenses in the proper period. As a result of the restatement, net
loss decreased by $1,169,900, from $(1,682,100) as previously reported
to $(512,200). Loss per share decreased $0.10, from $(0.15) as
previously reported to $(0.05).
Certain balances in the statements of operations and cash flows for the
nine months ended September 30, 1999 have been reclassified to conform
with the 2000 presentation. The reclassifications had no effect on net
loss or loss per share for this period.
NOTE 4 - 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 was 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. On September 7, 2000, the
Court ordered the Company to pay West Peak the balance of the note plus
interest and other costs for a total obligation of $85,100. As of
November 10, 2000, the Company had not repaid the loan, or paid the
interest and other costs.
NOTE 5 - CAPITAL STOCK
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 and
outstanding at September 30, 2000. During the first nine months of 2000,
the Company issued 1,000,000 shares for $200,000 of cash proceeds and
consulting services. Certain stockholders also assumed $12,000 of
liabilities during the period, which was recorded as a capital
contribution.
7
<PAGE>
ICRYSTAL, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
NOTE 6 - STOCK-BASED COMPENSATON
On June 15, 2000, stockholders approved adoption of 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 three million shares are reserved for
awards made under the Plan. The Plan stipulates no terms or conditions
for the awards to be granted.
A summary of the status of the Plan at September 30, 2000 is as follows:
<TABLE>
<CAPTION>
Weighted-
Number Average
of Options Exercise Price
---------- --------------
<S> <C> <C>
Options outstanding at December 31, 1999
Granted 1,350,000 $ 0.20
Exercised - -
Forfeited - -
---------- --------------
Options outstanding at September 30, 2000 1,350,000 $ 0.20
========== ==============
Options exercisable at September 30, 2000 1,350,000 $ 0.20
========== ==============
</TABLE>
A summary of stock options outstanding at September 30, 2000 is as
follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------------------------------------------------- ---------------------------
Weighted-
Average Weighted- Weighted-
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life Price Exercisable Price
---------- ----------- ----------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$ 0.20 1,350,000 0.75 years $ 0.20 1,350,000 $ 0.20
</TABLE>
The Company applies the provision of APB Opinion No. 25, ACCOUNTING FOR
STOCK ISSUED TO EMPLOYEES, and related interpretations to account for
stock-based awards granted to employees and non-employee directors
holding positions that are filled by stockholder election. Accordingly,
costs for employee and non-employee director stock options is measured
as the excess, if any, of the value of the Company's common stock at the
measurement date over the amount the employee must pay to acquire the
stock. No compensation expense was recognized at the date of grant for
awards made to employees and non-employee directors under the Plan.
The Company applies the provision of SFAS No. 123, ACCOUNTING FOR
STOCK-BASED COMPENSATION, and related interpretations to account for
stock-based awards granted to non-employees, other than non-employee
directors. SFAS No. 123 requires that the costs for non-employee stock
options be measured based on the fair value of the options granted at
the date the services were performed. The Company uses the Black-Scholes
option-pricing model to compute estimated fair value. Stock-based
compensation expense recognized on the date of grant for options issued
to non-employees during the three and nine months ended September 30,
2000 totaled $38,500, based on the following assumptions:
8
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ICRYSTAL, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
NOTE 6 - STOCK-BASED COMPENSATON (Continued)
Risk-free interest rate 6.0%
Dividend yield rate 0.0%
Price volatility 100.0%
Weighted average expected life of options .75 years
The Plan includes a cashless exercise feature that allows holders to
exercise their options without presenting cash or other consideration.
When this feature is utilized, the Company withholds from shares that
would otherwise be issued the number of shares having a fair market
value equal to the option exercise price. Consequently, the number of
shares issuable upon exercise varies with changes in the Company's stock
price. Because the number of shares to be issued is not fixed, the
Company re-measures the compensation cost of outstanding options at each
balance sheet date. As a result of the re-measurement, during the three
months ended September 30, 2000, the Company recognized an additional
$52,500 of compensation expense for options granted to employees and
non-employee directors, and another $26,800 of compensation expense for
options granted to non-employees, other than non-employee directors.
SFAS No. 123 requires disclosure of the pro forma effect of applying the
fair value method of accounting for stock options granted to employees
and non-employee directors. For disclosure purposes, the Company uses
the Black-Scholes option-pricing model to compute estimated fair value,
based on the assumptions presented above. Pro forma net loss and
earnings (loss) per share amounts for the three and nine months ended
September 30, 2000 are as follows. There are no similar pro forma
results to report for the 1999 comparative periods.
<TABLE>
<CAPTION>
2000
---------------------------------
Three Nine
Months Months
-------------- --------------
<S> <C> <C>
Pro forma net loss $ (33,200) $ (581,000)
Pro forma basic earnings (loss) per share $ 0.00 $ (0.04)
Pro forma diluted earnings (loss) per share $ 0.00 $ (0.04)
</TABLE>
NOTE 7 - 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 November 10, 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. As a result of these circumstances, as of June 30, 2000, the
Company owed Diversified $102,100. During the three months ended
September 30, 2000, the Company repaid $49,700 of this amount, and
Diversified agreed to settle the remaining $52,400 obligation by
accepting the assignment of a receivable from the Company's Master
Licensee.
9
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ICRYSTAL, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
NOTE 7 - 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 September 30, 2000, the Company has received $164,000 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 nine months ended
September 30, 2000 and 1999, respectively, the Company incurred $31,200
and $11,100 of expense to Slamko Visser for consulting and accounting
fees and related costs.
ADVANCES FROM STOCKHOLDERS
As of June 30, 2000, the Company owed certain stockholders $19,000 for
advances made to the Company during 1999, when it was in its development
stage. During the three months ended September 30, 2000, the
stockholders agreed to settle $14,600 of the obligation by accepting the
assignment of a receivable from the Company's Master Licensee.
NOTE 8 - 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
-------------------------------------------------------------
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
September 30, September 30, September 30, September 30,
2000 1999 2000 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
External revenues $ 374,800 $ 21,100 $ 534,500 $ 21,100
Intersegment revenues - - - -
Segment loss before tax 250,600 (408,800) (223,500) (655,400)
Segment assets 153,200 33,700 153,200 33,700
Total income (loss) before tax $ 250,600 $ (408,800) $ 223,500 $ (655,300)
for reportable segments
Corporate headquarters expense (255,800) (103,400) (776,500) (4,358,300)
--------- ---------- --------- -----------
Consolidated total $ (5,200) $ (512,200) $(553,000) $(5,013,600)
========= ========== ========= ===========
</TABLE>
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ITEM 2. MANAGEMENT DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION.
RESULTS OF OPERATIONS FOR THE QUARTERS AND NINE MONTHS ENDED SEPTEMBER 30, 2000
AND SEPTEMBER 30, 1999
QUARTERS ENDED SEPTEMBER 30, 2000 AND 1999
Revenues - Revenues for the quarters ending September 30, 2000 and September 30,
1999 were $374,800 and $21,100, respectively. The increase of $353,700 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 sites which were in full operation which resulted in stronger
revenue than previous quarters.
Operating Expenses - Operating expenses are primarily comprised of research and
development and general and administrative costs. Operating expenses were
$372,800 and $520,500 for the quarters ended September 30, 2000 and 1999,
respectively. The decrease of $147,700 was largely attributable to the Company's
reduced research and development expenditures during the third quarter of 2000
as compared to 1999. The 1999 expense was particularly high due to the Company's
acquiring certain Internet-based software under development known as METROBINGO.
The software was acquired in exchange for 1,450,000 shares of common stock
valued at $0.19 per share for a total cost of $275,500. In the 2000 quarter the
company formalized its stock option plan and as a result recorded $117,800 of
stock-based compensation expense related to stock options awarded during the
quarter. The amount recorded in the 1999 quarter was $0 since the plan was not
in place during this quarter. .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 $100,800 and $380,000
for the quarters ended September 30, 2000 and 1999, respectively. The $279,200
decrease reflects the Company's acquiring the METROBINGO software mentioned
above. 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
$142,100 and $94,300 for the quarters ended September 30, 2000 and 1999,
respectively. The increase of $47,800 consists mainly of the Company expanding
its facilities and personnel in third quarter of 2000. Other factors affecting
the difference relates to the Company having incurred more legal and
professional costs in the third quarter of 2000 compared to the third quarter of
1999. The additional costs relate primarily to the Company's regulatory
reporting requirements now that it is a fully reporting company.
Net Loss - The Company incurred a net loss of $(5,200) and $(512,200) for the
quarters ended September 30, 2000 and 1999, respectively. The September 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
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realize revenues from licensing its Internet based casino software. The
September 30, 2000 loss resulted mainly because of the $117,800 expense
associated with the stock-based compensation on the stock options. The options
were for past services and vested immediately, requiring immediate recognition
of the related expense.
During the third quarter of 2000 management determined that the net loss and the
net loss per share for the three months ended September 30, 1999 were
incorrectly reported in the Company 10SB filed on February 10, 2000. The
misstatement was due to certain expenses incurred in the first six months of the
year being reported in the third quarter. Results of operations and loss per
share have been restated to report these expenses in the proper period. As a
result of the restatement, net loss decreased by $1,169,900 from $(1,682,100) as
previously reported to $(512,200). Loss per share decreased $0.10, from $(0.15)
as previously reported to $(0.05).
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
Revenues - Revenues for the nine months ending September 30, 2000 and September
30, 1999 were $534,500 and $21,100, respectively. The increase of $513,400
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
$1,080,300 and $5,021,500 for the nine months ended September 30, 2000 and 1999,
respectively. The decrease of $3,941,200 was largely attributable to the Company
recognizing $4,022,300 of non-cash services received during the first nine
months of 1999 in exchange for issuance of stock. Similar non-cash services
received in exchange for stock during the first nine months of 2000 were
$194,500. As well, in 2000 the company formalized its stock option plan and as a
result recorded $117,800 of stock-based compensation expense related to stock
options awarded during the quarter. The amount recorded in 1999 was $0 since the
plan was not in place during this period. 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 $261,100 and $586,000
for the nine months ended September 30, 2000 and 1999, respectively. The
$324,900 decrease is largely attributable to the Company's acquiring in 1999
certain Internet-based software under development known as METROBINGO. The
software was acquired in exchange for 1,450,000 shares of common stock valued at
$0.19 per share for a total cost of $275,550. 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
$670,100 and $4,352,600 for the nine months ended September 30, 2000 and 1999,
respectively. The $4,352,600 reflects the Company recognizing $4,022,300 of
non-cash investor relation and consulting services received during the first
nine months of 1999 in exchange for issuance of stock. Non-cash services
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<PAGE>
received in exchange for stock during the first nine months of 2000 were
$194,500. . Other factors affecting the difference relates to the Company having
incurred more legal and professional costs in the second quarter of 2000
compared to the second quarter of 1999 when it was not yet a fully reporting
company.
Net Loss - The Company incurred a net loss of $(553,000) and $(5,013,600) for
the nine months ended September 30, 2000 and 1999, respectively. The September
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
September 30, 2000 operating loss resulted because the research and development,
administrative costs, sales and marketing costs, stock-based compensation for
stock options and interest and finance costs of $1,087,500 exceeded the $534,500
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.
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
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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, $374,800
for the September 30, 2000 quarter and $534,500 for the nine months ended
September 30, 2000. The Company anticipates sales revenue for the remaining
fiscal period ending December 31, 2000 to grow at $10,000 per month. Although
cash outflows from licensing revenues have been increasing as games and websites
are developed and licensed, management had anticipated that cash revenues would
equal cash expenses sometime during the third quarter of 2000. Excluding the
non-cash charge for stock-based compensation for stock options the company had
reached the level where the cash revenues had exceeded the cash expenses during
this quarter. However, due to the Company's software development plans over the
next year 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. 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.
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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 and August 2000, the
Company received $22,000 and $7,900 respectively, as a deposit on this software.
As of September 30, 2000, current monthly cash flows from licensing royalties
are approximately $120,000 per month. Currently, average monthly operating cash
needs are approximately $120,000. Cash flows from licensing revenues have been
increasing as games and websites are developed and licensed. 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. The company has spent $37,800 as of
September 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 $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. At September 30, 2000 the
balance had been settled in full.
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 next six months, the Company hopes to raise another $2.0 million in
equity financing principally to fund its software development projects.
Management is pursuing numerous potential financing sources for the $2.0
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.
Management estimates that monthly cash from licensing royalties and other
revenues is presently sufficient to cover operating expenses. Management
believes that cash from operations, coupled with the $2.0 million of 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
15
<PAGE>
available liquidity and may need to consider reductions in software development
projects until capital resources or operating cash flows are sufficient to meet
the new development needs.
IMPACT OF INFLATION
The Company believes that inflation has not had a material effect on its past
business.
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SIGNATURES
Purusant to the requirements of Section 13 of the Securities Exchange Act of
1934, the Registrant has duly caused this registration statement to be signed on
its behalf by the undersigned, thereunto duly authorized.
Dated this 21st day of November, 2000
ICRYSTAL, INC.
By:/s/LARRY J. HRABI
-----------------
Larry J. Hrabi, CEO
November 21, 2000
17
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EXHIBITS
Exhibit
Number Description
------- -----------------------
27 Financial Data Schedule
E-1
