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 1934For the three months ended MARCH 31, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the transition period from January 1, 2000 to
March 31, 2000
Commission file number: 000-20786
LEAPFROG SMART PRODUCTS, INC.
(Name of small business issuer in its charter)
COLORADO 84-1076959
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1011 Maitland Center Commons, Maitland, Florida 32751
(Address of Principal Executive Offices) (Zip Code)
Issuer's telephone number (407) 838-0400
Securities registered pursuant to Section 12(b) of the Securities Exchange
Act:
NONE
Securities registered pursuant to section 12(g) of the Securities Exchange
Act:
COMMON STOCK, NO PAR VALUE PER SHARE
(Title of class)
Check whether the issuer (1) filed all reports required to be filed by
Section13 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 [ ]
State issuer's revenues for its most recent fiscal year: December 31, 1999
($121,533)
As of March 31, 2000, 6,146,066 shares of the issuer's Common Stock were
outstanding.
<PAGE> 1
ITEM 1. FINANCIAL STATEMENTS
FINANCIAL STATEMENTS
The unaudited financial statements of Leapfrog Smart Products, Inc. for the
three months ended March 31, 2000 and 1999 follow. The financial statements
reflect all adjustments which are, in the opinion of management, necessary
to a fair statement of the results for the interim period represented.
It is suggested that these financial statements be read in conjunction with
the financial statements and notes thereto included in the annual report on
Form 10-KSB for the year ended December 31, 1999.
INDEX TO FINANCIAL STATEMENTS
________
Page
Number
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets - March 31, 2000 (Unaudited) and
December 31, 1999 (Audited) 3
Consolidated Statements of Operations (Unaudited) - Quarters ended
March 31, 2000 and March 31, 1999 and for the Period April 11, 1996
(Date of Inception) Through March 31, 2000 4
Consolidated Statements of Changes in Stockholders' Equity (Deficit)
(Unaudited) - Quarters ended March 31, 2000 and March 31, 1999 5
Consolidated Statements of Cash Flows (Unaudited) - Quarters ended
March 31, 2000 and March 31, 1999 and for the Period April 11, 1996
(Date of Inception)Through March 31, 2000 7
Notes to Consolidated Financial Statements 8
<PAGE> 2
LEAPFROG SMART PRODUCTS, INC. AND SUBSIDIARIES
(A Development Stage Company)
CONSOLIDATED BALANCE SHEETS
ASSETS
March 31, December 31
2000 1999
(Unaudited) (Audited)
CURRENT ASSETS
Cash $ 391,209 $ 18,529
Accounts receivable 4,710 6,554
Inventory 80,264 52,639
Prepaid expenses 164,583 219,740
Notes receivable - related party 40,047 26,600
Other receivables 2,353 9,226
TOTAL CURRENT ASSETS 683,166 333,288
PROPERTY AND EQUIPMENT, NET 283,135 267,073
OTHER ASSETS
Related-party advances 89,284 43,116
Notes receivable - related party - 5,000
Deposits 8,350 8,600
Capitalized software costs, net of accumulated
Amortization of $11,400 and $7,600 64,600 68,400
Costs in excess of fair market value of assets
acquired, net of accumulated amortization of $3,250
and $2,500 26,750 27,500
$1,155,285 $752,977
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Notes payable $2,045,595 $1,859,049
Notes payable - related party 115,258 75,258
Deferred Income 5,975 -
Accounts payable 103,485 223,474
Accrued expenses 188,430 99,816
TOTAL CURRENT LIABILITIES 2,458,743 2,257,597
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock - no par value; 30,000,000
shares authorized; 6,146,066 and 5,189,769
shares issued and outstanding 4,996,150 4,006,025
Convertible preferred stock - no par value per
share;
10,000,000 shares authorized;
Series A; 125,000 and 0 shares issued and
outstanding 480,000 -
Series F; 195 and 0 shares issued and outstanding 14,625 -
Deficit accumulated during development stage (6,794,233) (5,510,645)
(1,303,458) (1,504,620)
$ 1,155,285 $ 752,977
<PAGE> 3
LEAPFROG SMART PRODUCTS, INC. AND SUBSIDIARIES
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Cumulative
from
April 11,
1996
Quarter Quarter (Inception)
Ended Ended Through
March 31, March 31, March 21,
2000 2000 2000
REVENUES $ 22,343 $ 33,162 $ 903,133
COST OF SALES 29,349 32,075 619,778
GROSS PROFIT (LOSS) (7,006) 1,087 283,355
OPERATING EXPENSES
Personnel and related expenses 636,617 176,468 3,193,366
Consulting fees 71,248 45,001 525,713
General and administrative 452,586 116,221 2,641,438
Depreciation and amortization 22,499 13,265 153,698
TOTAL OPERATING EXPENSES 1,182,950 350,955 6,514,215
OTHER INCOME (EXPENSE)
Other income, net 38,895 854 60,817
Interest expense (130,637) (30,226) (622,300)
(91,742) (29,372) (561,483)
NET LOSS $(1,281,698) $(379,240) $(6,792,343)
Dividends on preferred stock (1,890) -
Net loss attributable to common
shareholders $(1,283,588) $(379,240)
BASIC AND DILUTED NET LOSS PER
COMMON SHARE $ (0.23) $ (0.10)
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 5,598,332 3,948,129
<PAGE> 4
LEAPFROG SMART PRODUCTS, INC. AND SUBSIDIARIES
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS' EQUITY (DEFICIT) (UNAUDITED)
<TABLE>
<CAPTION>
Deficit
Accumulated Total
Common Stock Preferred Stok During Stockholders'
No Par Value No Par Value Development Equity
Shares Amount Shares Amount Stage (Deficit)
<S> <C> <C> <C> <C> <C> <C>
BALANCE -
DECEMBER 31, 1999 5,189,769 $4,006,025 - - $(5,510,645) $(1,504,620)
MERGER
TRANSACTION WITH
ALBARA CORPORATION 616,797 (14,625) 195 $ 14,625 - -
ISSUANCE OF COMMON
AND PREFERRED STOCK
FOR CASH 211,000 838,500 125,000 480,000 - 1,318,500
ISSUANCE OF COMMON
STOCK FOR SERVICES 51,000 103,500 - - - 103,500
ISSUANCE OF COMMON
STOCK FOR PAYMENT OF
DEBT 2,500 6,500 - - - 6,500
ISSUANCE OF COMMON
STOCK RELATED TO DEBT
FINANCING 75,000 56,250 - - - 56,250
ACCRUED DIVIDENDS ON
PREFERRED STOCK (1,890) (1,890)
NET LOSS - - - - (1,281,698) (1,281,698)
BALANCE -
MARCH 31, 2000 6,146,066 $4,996,150 125,195 $ 494,625 $(6,794,233) ($1,303,458)
</TABLE>
<PAGE> 5
LEAPFROG SMART PRODUCTS, INC. AND SUBSIDIARIES
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS' EQUITY (DEFICIT) (Continued)
<TABLE>
<CAPTION>
Deficit
Accumulated Total
Common Stock Preferred Stock During Stockholders'
No Par Value No Par Value Development Equity
Shares Amount Shares Amount Stage (Deficit)
<S> <C> <C> <C> <C> <C> <C>
BALANCE -
DECEMBER 31, 1998 3,767,219 $1,778,411 - - $(2,413,005) $ (634,594)
ISSUANCE OF COMMON
STOCK FOR CASH 164,118 290,409 - - - 290,409
ISSUANCE OF COMMON
STOCK ON EXERCISE
OF STOCK OPTIONS 64,075 16,019 - - - 16,019
ISSUANCE OF COMMON
STOCK FOR SERVICES 43,720 21,261 - - - 21,261
ISSUANCE OF COMMON
STOCK FOR PAYMENT OF
DEBT 25,000 25,000 - - - 25,000
ISSUANCE OF COMMON
STOCK FOR ACQUISITION
OF MINORITY INTEREST
POSITION IN SUBSIDIARY 40,000 30,000 - - - 30,000
ISSUANCE OF COMMON
STOCK RELATED TO DEBT
FINANCING 18,667 14,500 - - - 14,500
NET LOSS - - - - (379,240) (379,240)
BALANCE -
MARCH 31, 1999 4,122,799 $2,175,600 - - $(2,792,245) $ (616,645)
</TABLE>
<PAGE> 6
LEAPFROG SMART PRODUCTS, INC. AND SUBSIDIARIES
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
Cumulative
From
April 11, 1996
Quarter Quarter (Inception)
Ended Ended Through
March 31, March 31, March 32
2000 1999 2000
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (1,281,698) $ (379,240) $ (6,792,343)
Reconciliation of net loss to net
cash used in operating activities
Depreciation 17,949 13,015 143,637
Depreciation and amortization charged
to cost of sales 11,080 18,738 37,418
Amortization 4,550 250 7,050
Loss on disposal of assets, net - 2,667 10,127
Loss on write-off of related party note
receivable - 17,870 17,870
Common stock issued for services and
interest 166,250 35,762 1,173,844
Cash provided by (used in) change in:
Accounts receivable 1,844 (2,250) (4,710)
Related party advances (46,168) (1,694) (89,284)
Other receivables 6,873 (854) (2,353)
Inventory (27,625) 21,865 (80,264)
Prepaid expenses and other assets 56,626 (29,510) (171,714)
Accounts payable (121,162) (153,133) 119,979
Accrued expenses 86,724 (25,665) 186,540
Deferred income 5,975 (11,500) 5,975
Minority interest - 11,018 -
NET CASH USED IN OPERATING ACTIVITIES (1,118,782) (482,661) (5,438,228)
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of property, plant and
equipment (45,091) (76,695) (475,190)
Net increase in notes receivable - related
party (8,447) (14,000) (57,917)
Capitalization of software costs - (62,000 (76,000)
Proceeds from sale of vehicles - - 8,473
NET CASH USED IN INVESTING ACTIVITIES (53,538) (152,695) (600,634)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of notes payable 550,000 300,000 2,965,866
Payments on notes payable (363,500) (8,450 (687,984)
Proceeds from exercise of common stock
options - 16,019 448,620
Proceeds from sale of common stock 838,500 290,4 3,108,311
Proceeds from sale of preferred stock 480,000 - 480,000
Proceeds from related-party borrowings 40,000 - 122,658
Repayments of related-party borrowings - - (7,400)
NET CASH PROVIDED BY FINANCINGACTIVITIES 1,545,000 597,978 6,430,071
NET INCREASE (DECREASE) IN CASH 372,680 (37,378) 391,209
CASH AT BEGINNING OF PERIOD 18,529 40,872 -
CASH AT END OF PERIOD $ 391,209 $ 3,494 $ 391,209
</TABLE>
<PAGE> 7
LEAPFROG SMART PRODUCTS, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Quarters Ended March 31, 2000 and 1999
NOTE 1 ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
Leapfrog Smart Products, Inc. and Subsidiaries (the "Company") operations
include the design, development, and licensing of Smart card applications
and related hardware and database management systems and services. The
Smart card is a wallet-sized plastic card with an embedded computer chip
carrying accessible data that is retrievable on demand and is capable of
integrating various functions with security features.
Leapfrog Smart Products, Inc. ("Leapfrog") was incorporated under the laws
of the State of Florida in 1996 originally under the name Telephones!
Telephones!, Inc. Leapfrog owns 100% of the outstanding common stock of
Leapfrog Global IC Products, Inc. and approximately 96% of the
outstanding common stock of Conduit Healthcare Solutions, Inc.
("Conduit"). Conduit was originally incorporated in 1997 under the name
Leapfrog Healthcare Products, Inc.
Effective February 18, 2000, Albara Corporation ("Albara") acquired,through
its wholly owned subsidiary Leapfrog Merger, Inc., 100% of the outstanding
common stock of the Company in exchange for 5,350,049 shares of Albara
common stock. Additionally, the outstanding stock options of the
Company were converted, on a pro rata basis, into 2,434,950 Albara stock
options. Prior to the merger, Albara was considered to be a publicly
held shell company with no revenues and insignificant expenses, assets
and liabilities, accordingly, proforma information has not been presented.
Upon completion of the merger, the original shareholders of Albara held
616,796 shares of its common stock and 195 shares of preferred stock. As
a result of the exchange, the former stockholders of the Company gained
control of Albara. For accounting purposes, the acquisition has been
accounted for as a recapitalization of the Company with the Company being
treated as the acquiring entity (reverse acquisition) with no goodwill
recorded. Accordingly, the historical financial statements prior to
February 18, 2000 are those of Leapfrog Smart Products, Inc. and
Subsidiaries with the related stockholders' equity section being
retroactively restated to reflect the equivalent number of Albara shares
received in the merger after giving effect to the differences in par value.
No significant assets or liabilities were obtained from Albara in the
closing of the transaction. In connection with the merger, Albara changed
its name to Leapfrog Smart Products, Inc. In January 2000 Albara increased
its authorized shares of no par value common stock to 30,000,000 and
increased its authorized shares of no par value preferred stock to
10,000,000.
<PAGE> 8
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Basis of Presentation
The accompanying unaudited consolidated financial statements include the
accounts of Leapfrog Smart Products, Inc., Conduit Healthcare Solutions,
Inc., and Leapfrog Global IC Products, Inc. (collectively, the Company).
All significant intercompany transactions and balances have been
eliminated in the consolidated financial statements. These statements
have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions
to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not
include all of the information and foonotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring adjustments)
considered necessary for a fair presentation of the results of operations
for the periods presented have been included. Operating results for the
three month period ended March 31, 2000 are not necessarily indicative of
the results that may be expected for the full year.
Development Stage Company
Since its inception, the Company's planned principal operations have not
yet begun to produce significant revenue; accordingly, the Company is
considered to be a development stage enterprise.
Net Loss Per Share of Common Stock
The basic and diluted net loss per common share in the accompanying
consolidated statements of operations are based upon the net loss after the
deduction of preferred dividends divided by the weighted average number of
common shares outstanding during the periods presented. Diluted net
loss per common share is the same as basic net loss per common share
since the inclusion of all potentially dilutive common shares that would
be issuable upon the exercise of outstanding stock options and the
convertible preferred stock and promissory notes would be anti-dilutive.
Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
<PAGE> 9
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Continued Operations
The accompanying consolidated financial statements have been prepared on a
going concern basis, which contemplates the realization of assets and
satisfaction of liabilities in the normal course of business. As shown in
the accompanying financial statements during the three month periods ended
March 31, 2000 and 1999, the Company incurred losses of approximately
$1.3 million and $379,000, respectively, and had a deficiency in working
capital of approximately $1.8 million at March 31, 2000. These factors,
among others, may indicate the Company will be unable to continue as a
going concern for a reasonable period of time. The accompanying
consolidated financial statements do not include any adjustments relating
to the outcome of this uncertainty.
Liquidity and Plan of Operations
At March 31, 2000, the Company had cash of approximately $391,000 and a
deficiency in working capital of $1.8 million.
The Company has a limited operating history and its prospects are subject
to the risks expenses and uncertainties frequently encountered by
companies in new and rapidly6 evolving markets such as Smart card products
and services. These risks include the failure to develolp and extend the
Company to maintain and increase its customer base, as well as other risks
uncertainties. In the event that the Company does not successfully
implement its business plan, certain assets may not be recoverable.
The Company's continuation as a going concern is dependent upon its
ability to generate sufficient cash flow to meet its obligations on a
timely basis. The Company's primary source of liquidity has been through
private placement of equity and debt securites. The Company is presently
exploring possibilities with respect to raising working capital through
additional equity and/or debt financings in the near future. The Company
is in the process of closing a private placement of up to 600,000 shares
of the Company's common stock for $2.4 million spread over a period
from March 2000 through September 2000. As of May 9, 2000 the Company
had received $860,000 of which $180,000 was used to fund Smart Products
International. However, there can be no assurance that the Company will
be successful in achieving profitable operations or acquiring additional
capital or that such capital, if available, will be on terms and
conditions favorable to the Company. Based upon its current business
plan, the Company believes that it will generate sufficient cash flow
through operations and external sources of capital to continue to meet
its obligations in a timely manner. If anticipated financing
transactions and operating results are not achieved, management has the
intent and believes that it has the ability to delay or reduce
expenditures so as not to require additional financial resources, if
such resources were not available on terms acceptable to the Company.
<PAGE> 10
NOTE 2- NOTES PAYABLE
In the first quarter of 2000, the Company issued an aggregate of $550,000
of 10% debenture notes. The Company also issued an aggregate of 75,000
shares of its common stock to some of the debenture holders as incentive to
enter into the agreements. For accounting purposes, these shares of common
stock were valued at $56,250 and that value was included in interest
expense. During the first quarter of 2000, the Company repaid $350,000 in
bank notes with the proceeds of the above debentures and issuances of
stock.
Cash paid for interest during the first quarter of 2000 and 1999 was
$19,439 and $7,747 respectively.
All notes payable are past due except for $300,000 of the debentures issued
in March of 2000 and due August of 2000 and several related party notes
that are not due until December of 2000 totalling $50,258 and one other
related party note that is due in June of 2000.
NOTE 3- STOCKHOLDERS' EQUITY
Issuances of Common or Preferred Stock
Subsequent to the merger, the Company issued 125,000 shares of Series A
Convertible Preferred Stock and received net proceeds of $480,000. The
holders of the Series A Preferred Shares are entitled to cumulative
dividends at the rate of 6% per annum. Each share of Series A convertible
Preferred Stock is convertible into one share of common stock at the
election of the holder thereof. The Company may require mandatory
conversion of all, but not less than all, of the Series A Preferred shares
on or after the first anniversary of the initial sale if certain stock
trading prices are attained or if there is a reorganization of the Company
involving an exchange of its common stock for shares of a United States
domiciled corporation the shares of which are traded on a national exchange
or an the NASDAQ national market system. Additional issuances of the
preferred stock,under substantially identical terms and conditions of the
aforementioned shares, may be sold until Series A Convertible Preferred
Stock having an aggregate purchase price of $6,000,000 have been sold,
provided that all such sales are held prior to May 2, 2000. For as long as
at least 50% of the Series A Convertible Preferred shares are outstanding,
the holders thereof may elect one board member to the Company's Board of
Directors.
During the first quarter of 2000, the Company issued an aggregate of 211,000
shares of its common stock for cash and received proceeds of $838,500.
The shares issued to Albara shareholders consisted of 616,797 shares of
common stock and 195 shares of preferred stock. The preferred stock is
Series F and is entitled to receive dividends on a pro rata basis with
holders of common stock. These holders are entitled to a $100 per share
preference on any liquidation of the Company and shall share pro rata with
the common stockholders in any remaining amounts distributed. Each share is
convertible into 15 shares of common stock after August 31, 1993.
<PAGE> 11
NOTE 3 - STOCKHOLDERS' EQUITY (CONTINUED)
Authorized Shares
In January 2000, prior to the merger, the authorized shares of no par value
common stock were increased to 30,000,000 and the authorized shares of no par
value preferred stock were increased to 10,000,000.
Warrant
On January 31, 2000 a warrant was issued to the former majority shareholder
of Albara for the right to purchase 500,000 shares of common stock at $3.50
per share on or after April 30, 2000. The warrant expires on January 31,
2010. The exercise price of $3.50 shall be adjusted to $.035 in the event
the Company has not closed an equity offering raising an aggregate of at
least $2,500,000 by June 29, 2000.
NOTE 4 - SUBSEQUENT EVENTS
The Company is in the process of closing a private placement of up to 600,000
shares of the Company's common stock for $2.4 million spread over a period
from March 2000 through September 2000. As of May 9, 2000 the Company had
received $860,000 of which $180,000 was invested into a newly formed
Singapore subsidiary, Smart Products International, for a 60% ownership.
This subsidiary was formed to market, sell and distribute the Company's
software and hardware products throughout the Asia-Pacific region (excluding the
People's Republic of China), and also to market and sell those products
elsewhere as agreed.
(THE REMAINDER OF THIS PAGE HAS BEEN INTENTIONALLY LEFT BLANK)
<PAGE> 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS OR
PLAN OF OPERATION
The following discussion should be read in conjunction with the Financial
Statements and notes thereto.
PLAN OF OPERATION
LEAPFROG did not have any external sources of working capital since inception
except for the sale of stock to individuals and the issuance of short-term
notes payable while it was a private company. On February 18, 2000, LEAPFROG
merged with Albara Corporation through a reverse acquisition in which Albara
acquired LEAPFROG and the existing shareholders of LEAPFROG obtained control
of Albara. Even with the completion of this business combination transaction,
there can be no assurance that the combined comps to undertake any significant
development, marketing and manufacturing activities. Accordingly, the Company
is being required to seek additional debt or equity financing or funding from
third parties, in exchange for which the Company might be required to issue a
substantial equity position.
From the period January 1, 2000 through March 31, 2000, additional debt of
$550,000 was issued to third parties and 211,000 shares of restricted common
stock were issued for $838,500 and 125,000 shares of convertible preferred stock
were issued for net proceeds of $480,000.
There is no assurance that the Company will be able to obtain additional
financing on terms acceptable to the Company. If Management is successful in
obtaining additional funding, these funds will be used primarily to provide
working capital needed for repayment of outstanding notes payable, software
development, sales and marketing expense, to finance research, development and
advancement of intellectual property concerns and for general administration.
The Company is in the process of closing a private placement of up to 600,000
shares of the Company's common stock for $2.4 million spread over a period from
March 2000 to September 2000. As of May 9, 2000 the Company had received
$860,000 of which $180,000 was used to invest in its newly formed Singapore
subsidiary, Smart Products International (SPI), for a 60% ownership. SPI has
been formed to market, sell and distribute the Company's products throughout the
Asia-Pacific region (excluding Peoples Republic of China) and also to market and
sell those products elsewhere as agreed.
Management has committed to a $225,000 investment into its China subsidiary for
funding a joint venture to produce and market biometric readers internationally.
<PAGE> 13
RESULTS OF OPERATIONS
Revenues and Gross Profits:
LEAPFROG is a development stage company with virtually no revenues. Revenues
for the quarter ended March 31, 2000 decreased $11,000, from $33,000 to $22,000,
a 33% decrease compared to the quarter ended March 31, 1999. Revenues were
associated with the sale of predominantly hardware related items such as Smart
card readers/writers utilized in pilot evaluation programs, software testing
programs and specialized software solutions by potential future users of
LEAPFROG's software products. Gross loss margin for the quarter ended
March 31, 2000 was $7,000 due to a loss taken on a specialized software solution
and the related hardward with the intention of using this as an investment in
future projects. During the first quarters of 2000 and 1999, LEAPFROG initiated
pilot programs by providing software and hardware at cost or near cost. These
gross margins are not indicative of margins expected in future years.
Total Operating Expenses:
Total operating expenses for the quarter ended March 31, 2000 increased $832,000
from $351,000 to $1.2 million, a 237% increase compared to the same period in
1999. This increase is net of $62,000 in software development expenditures that
were capitalized during the quarter ended March 31, 1999. This increase is
primarily associated with expense incurred in hiring additional marketing and
sales personnel to prepare for an intended roll-out of products in 2000 as well
as administrative staff. Significant legal and professional expenses were
incurred related to the closing of the merger in first quarter 2000.
Personnel and related expenses increased $460,000 or 261% to $637,000 for the
quarter ended March 31, 2000 compared to the $176,000 for the same period in
1999. This increase was primarily due to the doubling of the staff, including
senior marketing and sales personnel to prepare for an intended rollout of
products in 2000 and other administrative staff in preparation for expected
growth and the reporting responsibilities of a public company.
Consulting fees increased by $26,000 from the $45,000 incurred for the quarter
ended March 31, 1999 to $71,000 for the quarter ended March 31, 2000. The
expenses in 2000 and 1999 related primarily to fees paid to individuals and
companies that assisted the Company in identifying potential contract
opportunities and recruiting distributors and value added resellers who may
participate in the intended product rollout in 2000.
General and administrative expenses increased to $453,000 for the quarter ended
March 31, 2000 from $116,000 for the same period in 1999. This $336,000 or 289%
increase was due largely to increased legal and other professional costs related
to the merger. General and administrative expenses increased in several areas
with the hiring of new personnel requiring more space and general overhead.
International travel increased significantly in the first quarter of 2000
related to the Singapore and China joint ventures.
<PAGE> 14
Depreciation and amortization expenses increased $9,000 or 70% to $22,000 for
the quarter ended March 31, 2000 compared to $13,000 for the same period in
1999. The increase was due to the purchase of additional assets as well as the
amortization of capitalized software costs and the addition attributable to
costs of assets acquired in excess of fair market value.
Other income and expense:
Interest expense for the quarter ended March 31, 2000 increased $100,000 from
$30,000 to $131,000 when compared to the same period in 1999. In March through
July 1999, LEAPFROG completed a short-term debt offering to a select group of
accredited investors providing net proceeds of $1,402,000. These amounts and
other notes issued in the first quarter of 2000 were not outstanding in the
first quarter of 1999 and therefore, no interest expense was incurred on them.
In January 2000, the Company issued an aggregate of $550,000 of 10% debenture
notes. The Company also issued an aggregate of 75,000 shares of it common stock
to some of the debenture holders as incentive to enter into the agreements. For
accounting purposes, these shares of common stock were valued at $56,250 and
that value was included in interest expense. Substantially all of the interest
expense in 1999 is directly associated with the $350,000 in bank notes and other
short-term notes payable to one individual totaling $250,000.
Net loss:
The net loss for the quarter ended March 31, 2000 increased $902,000 from
$379,000 to $1.3 million, a 238% increase compared to the quarter ended
March 31, 1999. This increase is net of $62,000 in software development
expenditures that were capitalized during the quarter ended March 31, 1999.
This increase is primarily associated with expense incurred in hiring additional
marketing and sales personnel to prepare for an intended roll-out of products in
2000 as well as administrative staff. Significant legal and professional
expenses were related to the closing of the merger in first quarter 2000. Net
loss per share of common stock increased from $.10 per share in 1999 to $.23 in
2000. This increase is primarily due to the increase in losses realized offset
by an increase in the weighted average number of common shares outstanding from
3,948,129 for the quarter ended March 31, 1999 to 5,598,332 for the quarter
ended March 31, 2000.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used by operating activities increased $636,000 from $483,000 for the
quarter ended March 31, 1999 to $1.1 million for the quarter ended
March 31, 2000. The increase is primarily due to the higher net loss offset
slightly by the common stock issued for services.
Net cash used for investing activities decreased $99,000 from $153,000 in the
first quarter of 1999 compared to $54,000 in the same period of 2000. The
decrease was primarily due to $32,000 less being spent on fixed assets
acquisitions and no capitalization of software costs in the first quarter of
2000.
<PAGE> 15
Net cash provided by financing activities increased $947,000 from $598,000 for
the quarter ended March 31, 1999 to $1.5 million for the quarter ended
March 31, 2000. Financing activities during 2000 included the issuance of
common stock providing $838,500 in the aggregate and the issuance of notes
payable which provided $550,000 offset by an $363,500 repayment of existing
notes payable. Financing activities during 1999 included the issuance of common
stock providing $306,000 in the aggregate and the issuance of notes payable that
provided a net of $292,000 after repayment of principal in the amount of $8,000.
Like many early stage technology companies, the majority of LEAPFROG's assets
are intangible assets such as copyrights, trademarks, and research and
development costs which by their very nature are not reflected in the Company's
balance sheet as ssets.
In the past, LEAPFROG'S Management has been successful in attracting accredited
investors who have purchased newly issued common stock. However, there can be
no assurance that the Company will be able to obtain additional equity financing
on similar terms in the future. Over the past two years all of LEAPFROG'S debt
financing has been short-term notes payable. These notes can only be repaid if
the Company successfully raises additional equity or debt financing. In
addition tot he cash requirement assiciated with repaying these notes, LEAPFROG
will not be able to mount an effective national marketing campaign for its
products without an additional infusion of capital. The Company does not have
any commitments to provide additional capital funding. Accordingly, there can
be no assurance that any additional funds will be available to the Company to
allow it to repay its outstanding debt and to cover the expenses associated with
executing its sales and marketing plan.
Y2K COMPLIANCE
LEAPFROG concluded its efforts concerning its exposure relative to year 2000
issues for both information and non-information technology systems. Management
actively monitors the status of the readiness program of the Company.
LEAPFROG`s out of pocket cost associated with becoming Year 2000 compliant were
not significant. These cost were expensed as incurred, and the Company does not
anticipate any additional material expenditure as a result of Year 2000 issues.
Based on operations since January 1, 2000, including the leap year date of
February 29, 2000, the Company has not experienced any significant disruption or
change, and does not expect any significant impact to its ongoing business a
result of the Year 2000 issue. Additionally, the Company is not aware of any
significant Year 2000 issues or problems that have arisen for its significant
customers, vendors or service providers. As there can be no assurance that the
Company's efforts to achieve Year 2000 readiness have been completely successful
or that customers, vendors and service providers will not experience Year 2000
related failures in the future, the Company will continue to monitor its
exposure to Year 2000 issues and will leave its contingency plans in place
in the event that any significant Year 2000 related issues arise.
<PAGE> 16
FORWARD LOOKING STATEMENT
This Management's Discussion and Analysis of Financial Condition and Results of
Operations includes a number of forward-looking statements that reflect
Management's current views with respect to future events and financial
performance. Those statements include statements regarding the intent, belief
or current expectations of LEAPFROG and members of its management team as well
as the assumptions on which such statements are based. Prospective investors
are cautioned that any such forward-looking statements are not guarantees of
future performance and involve risk and uncertainties, and that actual results
may differ materially from those contemplated by such forward-looking
statements. Readers are urged to carefully review and consider the various
disclosures made by the Company in this report and in the Company's other
reports filed with the Securities Exchange Commission. Important factors
currently known to Management could cause actual results to differ materially
from those in forward-looking statements. The Company undertakes no obligation
to update or revise forward-looking statements to reflect changed assumptions,
the occurrence of unanticipated events or changes in the future operating
results over time. The company believes that its assumptions are based upon
reasonable data derived from and known about its business and operations and the
business and operations of LEAPFROG. No assurances are made that actual results
of operations or the results of the Company's future activities will not differ
materially from its assumptions.
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
<PAGE> 17
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
The following documents are filed herewith or have been included as exhibits to
previous filings with the Commission and are incorporated herein by this
reference:
Exhibit No. Exhibit
### 2.1 Agreement and Plan of Merger
## 3(a) Articles of Incorporation
## 3(b) Bylaws
# 4(a) Agreements Defining Certain Rights of Shareholders
# 4(b) Specimen Stock Certificate
# 10(a) Pre-incorporation Consultation and Subscription Agreement
## 10.1 Consultation Services Agreement
## 10.2 Legal Services Engagement Agreement
### 10.3 Bleed-Out Agreement
### 10.4 Consulting Agreement
### 10.5 Warrant Agreement
### 10.6 Registration Rights Agreement
x 11 Statement re Computation of Earnings per Share
####16 Letter on Change in Certifying Accountant
x 21 Subsidiaries of the Registrant
x 27 Financial Data Schedule
# 99.1 Safe Harbor Compliance Statement
____________________________
<PAGE> 18
x filed herewith
# previously filed with the Company's Definitive Information Statement on
Schedule 14C on January 18, 2000.
## previously filed with the Company's Registration Statement on Form S-8 on
February 29, 2000
### previously filed with the Company's Form 8-K dated March 8, 2000
#### previously filed with the Company's Form 8-K dated March 17, 2000
(b) REPORTS ON FORM 8-K
The Company filed the following reports on Form 8-K during the last quarter of
the 1999 fiscal year:
Current Report on Form 8-K dated March 8, 2000
Current Report on Form 8-K dated March 17, 2000
<PAGE> 19
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934,
the registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
LEAPFROG SMART PRODUCTS, INC.
By: /s/ Randolph Tucker
RANDOLPH TUCKER, CEO
Date: May 15, 2000
In accordance with the Exchange Act, this report has been signed below by the
following persons in the capacities and on the dates indicated.
Signature Title Date
/s/ Randolph Tucker CEO & DIRECTOR May 15, 2000
RANDOLPH TUCKER
/s/ James K. Gornto CFO May 15, 2000
JAMES K. GORNTO
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