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 six months ended JUNE 30, 2001
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission file number: 000-20786
LEAPFROG SMART PRODUCTS, INC.
formerly Albara Corporation
(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, 32751
MAITLAND, FLORIDA
(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, 2000--$972,724
As of August 20, 2001:
9,766,845 shares of the issuer's Common Stock were outstanding.
1
ITEM 1. FINANCIAL STATEMENTS
FINANCIAL STATEMENTS
The unaudited condensed financial statements of Leapfrog Smart Products,
Inc. for the six months ended June 30, 2001 and 2000 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, 2000.
INDEX TO FINANCIAL STATEMENTS
________
Page
Number
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Condensed Balance Sheets - June 30, 2001 and
December 31, 2000 3
Consolidated Condensed Statements of Operations - Quarters
ended June 30, 2001 and 2000, the Six Months ended
June 30, 2001 and 2000, and for the Period April 11, 1996
(Date of Inception) Through June 30, 2001 4
Consolidated Condensed Statement of Changes in Stockholders'
Equity (Deficit) - Six Months ended June 30, 2001 5
Consolidated Condensed Statements of Cash Flows - Six Months
ended June 30, 2001 and 2000 and for the Period
April 11, 1996 (Date of Inception)Through June 30, 2001 6
Notes to Consolidated Financial Statements 7
LEAPFROG SMART PRODUCTS, INC. AND SUBSIDIARIES
(A Development Stage Company)
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
June 30, December 31,
2001 2000
-------- ------------
CURRENT ASSETS
Cash $ 41,846 $ 107,413
Accounts receivable 75,110 113,092
Inventory 107,882 122,382
Prepaid expenses 111,915 172,060
Notes receivable - related party 3,400 15,900
Other receivables 540 1,980
-------- ------------
TOTAL CURRENT ASSETS 340,693 532,827
PROPERTY AND EQUIPMENT, NET 229,834 238,457
OTHER ASSETS
Related-party advances 100,929 107,009
Deposits 37,638 38,136
Capitalized software costs, net of accumulated
amortization of $32,485 and $24,884 182,394 169,137
Costs in excess of fair market value of assets
acquired, net of accumulated amortization of
$6,251 and $5,500 23,749 24,500
--------- ----------
$ 915,237 $1,110,066
========= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Notes payable - current portion $ 1,245,504 $1,452,956
Notes payable - related party 436,274 355,258
Deferred Income 10,000 -
Accounts payable 1,153,358 1,043,453
Accrued expenses 468,393 212,255
----------- ---------
TOTAL CURRENT LIABILITIES 3,313,529 3,063,922
CONVERTIBLE LONG-TERM NOTES PAYABLE, NET
OF DISCOUNT 1,890,742 -
----------- ---------
TOTAL LIABILITIES 5,204,271 3,063,922
REDEEMABLE PREFERRED STOCK
7% Series B Convertible - 50,000 and 0
shares issued and outstanding (redemption
value - $62,500 on June 15, 2002
and $100,000 on June 15, 2003) 50,000 -
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock - no par value; 30,000,000
shares authorized; 9,297,495 and 8,977,845
shares issued and outstanding 10,876,422 10,488,907
Convertible preferred stock - no par value
per share; 10,000,000 shares authorized;
6% Series A - 125,000 shares issued 480,000 480,000
and outstanding Series F- (aggregate
liquidation preference of $19,500),
195 shares issued and outstanding 14,625 14,625
Deficit accumulated during development stage (15,710,081) (12,937,389)
---------- ----------
(4,339,034) (1,953,856)
---------- ----------
$ 915,237 $ 1,110,066
========== ==========
LEAPFROG SMART PRODUCTS, INC. AND SUBSIDIARIES
(A Development Stage Company)
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Cumulative
From
April 11,
Six Six 1996
Months Months Quarter Quarter (Inception)
Ended Ended Ended Ended Through
June 30, June 30, June 30, June 30, June 30,
2001 2000 2001 2000 2001
REVENUES $ 579,886 $ 167,740 $ 286,148 $ 145,397 $ 2,433,400
COST OF SALES 505,509 158,429 226,137 129,080 2,001,743
--------------------------------------------------------------
GROSS PROFIT 74,377 9,311 60,011 16,317 431,657
OPERATING EXPENSES
Personnel and related
expenses 1,617,710 1,230,187 843,274 593,570 8,232,181
Consulting fees 157,750 222,908 40,620 151,660 2,232,864
General and administrative 857,470 1,021,445 497,470 568,859 4,262,324
Depreciation and
amortization 42,736 46,869 20,998 24,370 265,745
--------------------------------------------------------------
TOTAL OPERATING EXPENSES 2,675,666 2,521,409 1,402,362 1,338,459 14,993,114
OTHER INCOME (EXPENSE)
Other income, net 15,682 40,091 (5,408) 1,196 78,116
Loss on disposal ofassets - - - - (30,389)
Equity interest in loss
of subsidiary - - - - (150,000)
Interest expense (187,085) (251,616) (116,430) (120,979) (1,046,351)
---------------------------------------------------------------
(171,403) (211,525) (121,838) (119,783) (1,148,624)
NET LOSS $(2,772,692) (2,723,623) (1,464,189)(1,441,925) (15,710,081)
---------------------------------------------------------------
BASIC AND DILUTED NET LOSS
PER COMMON SHARE $ (0.31) (0.46) (0.16) (0.23)
---------------------------------------------------------------
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 9,000,946 5,944,854 9,018,123 6,291,375
LEAPFROG SMART PRODUCTS, INC. AND SUBSIDIARIES
(A Development Stage Company)
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN
STOCKHOLDERS' EQUITY (DEFICIT)
SIX MONTHS ENDED JUNE 30, 2001
Deficit
Accumulated Total
Common Stock Preferred Stock During Stockholders'
No Par Value No Par Value Development Equity
Shares Amount Shares Amount Stage (Deficit)
BALANCE -
DECEMBER 31, 2000 8,977,845 $10,488,908 125,195 $494,625 $(12,937,389) $(1,953,856)
ISSUANCE OF
COMMON STOCK
AND OPTIONS
FOR SERVICES
AND INTEREST 30,000 186,559 - - - 186,559
ISSUANCE OF COMMON
STOCK ON EXERCISE
OF OPTIONS 4,000 1,000 - - - 1,000
ISSUANCE OF
COMMON STOCK FOR
CASH 285,650 199,955 - - - 199,955
NET LOSS - - - - (2,772,692) (2,772,692)
-------------------------------------------------------------------------------
BALANCE - JUNE
30, 2001 9,297,495 $10,876,422 125,195 $494,625 $(15,710,081) $(4,339,034)
==============================================================================
LEAPFROG SMART PRODUCTS, INC. AND SUBSIDIARIES
(A Development Stage Company)
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Cumulative
From
April 11,
Six Six 1996
Months Months (Inception)
Ended Ended Through
June 30, June 30, June 30,
2001 2000 2001
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (2,772,692) $ (2,723,623) $ (15,710,081)
Reconciliation
of net loss to net
cash used in
operating
activities
Depreciation 34,384 37,770 232,640
Depreciation and amortization - 11,795 38,460
charged to cost of sales
Amortization 8,351 9,100 30,093
Assets expensed to research and
development - 18,158 28,968
Loss on disposal of assets, net - - 33,639
Loss on write-off of related party
note receivable - - 17,870
Gain on write-off of notes payable (20,000) - (20,000)
Employee compensation for options
issued below market - - 1,167,580
Common stock and options issued for
services and interest 156,559 456,718 2,159,039
Discount on issuance of debt (147,633) - (147,633)
Amortization of discount on debt 27,633 - 27,633
Cash provided by (used in) change in:
Accounts receivable 37,982 (143,757) (75,110)
Related party advances 6,080 (134,771) (100,929)
Other receivables 1,440 6,499 (540)
Inventory 14,500 (39,638) (107,882)
Prepaid expenses and other assets 60,642 (144,698) (149,554)
Accounts payable 152,405 415,279 1,244,098
Accrued expenses 358,532 182,495 638,749
Deferred income 10,000 - 10,000
-----------------------------------------
NET CASH USED IN OPERATING
ACTIVITIES (2,071,817) (2,048,673) (10,682,960)
CASH FLOWS FROM INVESTING
ACTIVITIES
Acquisition of property, plant and
equipment (25,760) (101,768) (563,371)
Net increase in notes receivable-
related party - (14,809) (63,124)
Capitalization of software costs (20,858) (21,435) (214,879)
Proceeds from sale of vehicles - - 8,473
-----------------------------------------
NET CASH USED IN INVESTING
ACTIVITIES (46,618) (138,012) (832,901)
CASH FLOWS FROM FINANCING
ACTIVITIES
Proceeds from issuance of notes payable 2,000,000 701,902 5,217,768
Payments on notes payable (287,249) (399,313) (1,114,224)
Proceeds from exercise of common stock
options 1,000 2,750 470,870
Proceeds from sale of common stock 199,955 1,251,000 6,008,873
Proceeds from sale of preferred stock 50,000 480,000 530,000
Proceeds from related-party borrowings 100,000 140,000 462,658
Repayments of related-party borrowings (10,838) - (18,238)
----------------------------------------
NET CASH PROVIDED BY FINANCING
ACTIVITIES 2,052,868 2,176,339 11,557,707
----------------------------------------
NET INCREASE (DECREASE) IN CASH (65,567) (10,346) 41,846
CASH AT BEGINNING OF PERIOD 107,413 18,529 -
----------------------------------------
CASH AT END OF PERIOD $ 41,846 $ 8,183 $ 41,846
=========================================
LEAPFROG SMART PRODUCTS, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Six Months Ended June 30, 2001 and 2000
NOTE 1 -ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
Leapfrog Smart Products, Inc. and Subsidiaries' operations include
the design, development, and licensing of Smart card applications
and related 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.
Effective February 18, 2000, Albara Corporation ("Albara"), a
Colorado corporation, acquired, through its wholly owned
subsidiary Leapfrog Merger, Inc., a Florida corporation, 100% of
the outstanding common stock of Leapfrog 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 a publicly held shell company with little revenues and
insignificant expenses, assets and liabilities. Upon completion of
the merger, the original shareholders of Albara held 616,796
shares of its common stock and 195 shares of its Series F
Preferred Stock. As a result of the exchange, the former
shareholders of Leapfrog gained control of Albara. For accounting
purposes, the acquisition has been accounted for as a re-
capitalization of Leapfrog with Leapfrog 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. In connection with the merger, Albara
changed its name to Leapfrog Smart Products, Inc. Leapfrog
recorded a charge to general and administrative expenses of
$64,000 for direct and other merger related costs pertaining to
the merger transaction. Merger transaction costs consisted
primarily of fees for legal, investment banking and other related
charges.
NOTE 1 -ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Leapfrog owns approximately 95% of the outstanding common stock of
Leapfrog Global IC Products, Inc. ("LGIC") and approximately 100%
of the outstanding common stock of Conduit Healthcare Solutions,
Inc. ("Conduit"). By licensing agreement, LGIC has the rights to
all of Leapfrog's technology and distribution rights of its
product line outside of North America, except for the territories
subsequently granted to Smart Products, International Pte., Ltd.
("SPI") The LGIC agreement expires in 2009, calls for revenue
sharing, and may be terminated if certain performance measures are
not met. Certain employees and consultants of Leapfrog hold stock
options to purchase an aggregate of 10% of LGIC at an exercise
price of $11,500. These individuals also have the right to
receive additional options to purchase up to an additional 48 % of
LGIC for $48,000 if certain performance measures are met. In
2000, LGIC created Leapfrog China, Inc., as a wholly owned
subsidiary, for the purpose of pursuing opportunities in China.
The SPI license agreement has performance standards and may be
terminated by the Company if these standards are not met. Conduit
was originally incorporated in 1997 under the name Leapfrog
Healthcare Products, Inc. On April 2, 2001, the Company entered
into an agreement for the sale of approximately 82% of Conduit.
The Company and the purchaser mutually terminated the agreement in
June 2001.
The consolidated financial statements include the accounts of
Leapfrog Smart Products, Inc., Colorado, Leapfrog Smart Products,
Inc. Florida, Conduit Healthcare Solutions, Inc., Leapfrog Global
IC Products, Inc. and Leapfrog China, Inc. (collectively, the
"Company"). In the first quarter of 2001, Leapfrog Merger, Inc.
changed its name to Leapfrog Smart Products, Inc. The Company's
50% ownership interest in Smart Products International Pte., Ltd.
is accounted for on the equity method. All significant
intercompany transactions and balances have been eliminated in the
consolidated financial statements.
These unaudited statements have been prepared in accordance with
generally accepted accounting principles for interim financial
information and with the instructions to Form 10-QSB and of item
310 (b) of Regulation S-B. Accordingly, they do not include all
of the information and footnotes necessary for a fair presentation
of financial condition, results of operations and cash flows in
conformity with generally accepted accounting principles. 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. These unaudited statements should
be read in conjunction with the Company's Annual Report on Form
10-KSB, which contains audited financial statements and notes
thereto, together with Management's Discussion and Analysis, for
the years ended December 31, 2000 and 1999. Operating results for
the six-month and three-month periods ended June 30, 2001 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.
NOTE 1 -ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Revenue and Expense Recognition
Revenues are generally recognized when the service has been
performed and related costs and expenses are recognized when
incurred. Contracts for the development of software and
installation of the related hardware that extend over more then
one reporting period are accounted for using the percentage-of-
completion method of accounting. Revenue recognized at the
financial statement date under these contracts is that portion of
the total contract price that costs expended to date bears to the
total anticipated final cost, based on current estimates of cost
to complete. Revisions in total costs and earnings estimated
during the course of the contract are reflected in the accounting
period in which the circumstances necessitating the revision
become known. At the time a loss on a contract becomes known the
entire amount of the estimated loss is recognized in the financial
statements. Costs attributable to contract disputes are carried
in the accompanying balance sheet only when realization is
probable. Amounts received on contracts in progress in excess of
the revenue earned, based upon the percentage of completion
method, are recorded as deferred revenue and the related costs and
expense incurred are recorded as deferred costs.
In 2000, the Company entered into a contract with the U.S. General
Services Administration (GSA) to supply GSA with hardware and
software products related to Smart card technologies and
applications. Significant portions of these contracts may be
fulfilled by independent dealers (the Dealers) authorized by the
Company and GSA. Revenues earned under the GSA contract are
recorded by the Company at the gross amount billed to GSA and the
corresponding cost of sales are recorded at the amount serviced by
the Dealers. Revenues recognized under the GSA contract during
the six month periods ended June 30, 2001 and 2000 approximated
$451,000 and $ 4,500, respectively. Cost of sales recognized
under the GSA contract during the six month periods ended June 30,
2001 and 2000 approximated $433,000 and $4,300, respectively.
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.
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 June 30, 2001 and
2000, the Company incurred losses of approximately $1.46 million
and $1.44 million, respectively, and had a deficiency in working
capital of approximately $2.97 million at June 30, 2001. The
Company incurred losses of $2.77 million and $2.72 million for the
six months ended June 30, 2001 and June 30, 2000, respectively.
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 June 30, 2001, the Company had cash of approximately $42,000
and a deficiency in working capital of $2.97 million.
The Company has a limited operating history and its prospects are
subject to the risks, expenses and uncertainties frequently
encountered in new and rapidly evolving markets such as Smart card
products and services. These risks include the failure to develop
and extend the Company's products and services, the rejection of
such services by Smart card customers, vendors and/or advertisers,
the inability of the Company to maintain and increase its customer
base, as well as other risks and 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 the private placement of equity and
debt securities. The Company has continued its effort to explore
possibilities with respect to raising working capital through
additional equity and/or debt financings in the near future.
Subsequent to June 30, 2001 through August 20, 2001, the Company
sold 469,350 additional shares of common stock for approximately
$271,000 in net proceeds. During this same period, the Company
received $14,250 in net proceeds from the exercise of employee
stock options for 57,000 shares.
NOTE 1 -ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
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. 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.
Reclassifications
Certain amounts in the 2000 financial statements have been
reclassified to conform with the 2001 presentation.
NOTE 2 - NOTES PAYABLE
In the first quarter of 2001, the Company issued a note to a
shareholder and noteholder for $2 million to be funded in various
installments from January 25, 2001 through May 15, 2001. As of
June 30, 2001, $2 million had been received. The note is
collateralized by the assets of the Company. Interest accrues at
12% and is due and payable quarterly beginning July 1, 2001. The
note matures on July 1, 2002. The note or any portion thereof, is
convertible into shares of the Company's stock at the rate of
$1.00 per share. As part of this financing agreement, the
noteholder received an option to purchase up to 1,000,000 shares
of the Company's common stock at $1.00 per share through June 30,
2002. These options were valued at $157,000. The value is
recorded as a discount on the issuance of debt and will be
amortized to interest expense through the due date of the note.
The interest expense recognized in the six months ended June 30,
2001 and the quarter ended June 30, 2001 was $37,000 and $9,000,
respectively. Proceeds from the note were used to repay the
$200,000 remaining balance on a note that was collateralized by
the assets of the Company that was due in January 2000. The
holder of this note and a second note in the amount of $100,000
has agreed to accept $1 million in cash with the remaining
principal and accrued interest converted into common stock at the
rate of $1.00 per share upon the Company's receipt of funds from a
private placement transaction. There can be no assurance that the
Company will be successful in raising these funds from a private
placement transaction.
During the quarter ended June 30, 2001, the Company paid off part
of the principal and interest of the $100,000 note with the bank
through a series of installments. The note has been extended to
October 1, 2002. The Company also issued a $100,000 note to a
related party during the quarter. The interest rate is 8% per
annum and the note matures on December 31, 2001.
Cash paid for interest during the three months ended June 30, 2001
and 2000 was $3,481 and $22,312, respectively. Cash paid for
interest during the six months ended June 30, 2001 and 2000 was
$29,518 and $41,790, respectively.
Except for the notes discussed above, the other notes payable
remain past due at June 30, 2001. The Company is attempting to
work with noteholders to extend the due dates or change the terms.
NOTE 3 -STOCKHOLDERS' EQUITY
Issuances of Common or Preferred Stock
After 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 second quarter of 2001, the Company issued an aggregate
of 285,650 shares of its common stock and received proceeds of
$199,955. The Company also issued an aggregate of 50,000 shares of
its Series B Convertible Preferred stock for cash and received
proceeds of $50,000. The holders of Series B Convertible Preferred
Stock are entitled to cumulative dividends at the rate of 7% per
annum. Each share is convertible to one share of freely tradable
common stock at any time after one year. Holders of the Series B
Convertible Preferred Stock have the right to "put" all preferred
shares back to the Company on the first anniversary date at $1.25
per share or at $2.00 per share on the second anniversary date.
The excess of liquidation value over the carrying value of the
Series B convertible redeemable preferred stock is being amortized
over the two-year term of the redeemable option. The Series B
Convertible Preferred Stock is offered at $50,000 per unit to
accredited investors. Each unit subscribed provides for 16,667
options for common stock exercisable at any time for three years at
the exercise price of $1.00 per share.
The shares issued to Albara shareholders in the merger 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.
Warrant
On January 31, 2000 a warrant was issued to the former majority
shareholder of Albara for the right to purchase, after performing
certain consultation services, 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. The Company is in litigation contesting the
consideration for the warrant.
NOTE 4 -LEGAL PROCEEDINGS
The Company is party to various legal proceedings. However,
management does not believe the ultimate outcomes to any of these
actions will have a material impact to the Company's financial
position and there have been no material changes since the end of
last quarter in the status of the proceedings.
NOTE 5 -EMPLOYMENT CONTRACTS
On January 16, 2001, the Board of Directors approved employment
contracts with three key employees. The terms of the contracts
extend to dates ranging from January 24, 2002 to September 30,
2003. The agreements call for aggregate salaries of $390,000 with
annual 4% increases. These agreements call for the issuance of an
aggregate of 1,150,000 stock options to purchase common stock of
the Company. The options all have an exercise price of $1.00 each
with various vesting dates through January 1, 2002 and expiration
dates ranging from January 16, 2004 through December 1, 2005. A
provision of one of the contracts involves the payment of a cash
bonus equal to 1% of the Company's net profits, defined as net
earnings before insurance, taxes and amortization. Another contract
requires the payment of a cash bonus equal to 4% of the Company's
income from U.S. operations, defined as net income before taxes,
minority interests, extraordinary items, amortization of intangible
assets, interest on long-term debt and any incentive compensation
to employees.
NOTE 6 -SUBSEQUENT EVENTS
The Company is in the process of attempting to finalize a private
placement with accredited investors. Proceeds of the private
placement will be used for working capital, debt reduction and to
expand sales and marketing in the healthcare and security
industries. The Company is also exploring other possibilities with
respect to raising working capital through additional equity and/or
debt financings in the near future.
In July 2001, upon the recommendation of its board of directors,
the Company decided to focus on the healthcare and access control
sectors of the Smart card industry. The Company will also continue
to develop the government and international markets, but is scaling
down its college campus solutions initiatives.
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 significant 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
companies will have sufficient funds 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.
During the quarter ended June 30, 2001, the Company received the remaining
proceeds of $700,000 from the note issued in the first quarter of the year
to a shareholder and noteholder for $2 million to be funded in various
installments from January 25, 2001 through May 15, 2001. The note is
secured by the assets of the Company. Interest accrues at 12% and is due
and payable quarterly beginning July 1, 2001. The note matures on July 1,
2002. The note or any portion thereof, is convertible into shares of the
Company's stock at the rate of $1.00 per share. As part of this financing
agreement, the noteholder received an option to purchase up to 1,000,000
shares of the Company's common stock at $1.00 per share through June 30,
2002.
During the quarter ended June 30, 2001, the Company paid off part of the
principal and interest of the $100,000 note with the bank through a series
of installments. The note has been extended to October 1, 2002.
The Company also issued a note to a related party for $100,000 for working
capital during the quarter ended June 30, 2001. The interest rate is 8% per
annum. The note matures on December 31, 2001.
Except for the notes discussed above, the other notes payable remain past
due at June 30, 2001. The Company is attempting to work with noteholders
to extend the due dates or change the terms.
The Company is in the process of attempting to finalize a private placement
with accredited investors. Proceeds of the private placement will be used
for working capital, debt reduction and to expand sales and marketing in
the healthcare and security industries.
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.
In July 2000, the Company received approval from the Securities and
Exchange Commission ("SEC") for an SB-1 authorizing a total of 2,909,635
registered shares. This was amended to 3,433,923 shares on September 7,
2000. This increased the Company's ability to obtain equity financing.
In May 2001, the Company entered into an agreement with Electronic Data
Systems Corporation. Under the agreement, the Company is given the status
of a first position supplier for all works within the Company's core
competencies. The first year of the agreement is an evaluation period that
either party may cancel with ninety calendar days written notification to
the other party. Upon the first year anniversary date, the agreement will
be automatically extended for an additional four years. After that time,
the term may be extended upon mutual written agreement of the parties.
RESULTS OF OPERATIONS
REVENUES AND GROSS PROFITS:
LEAPFROG is a development stage company with revenues just beginning to be
recognized. Revenues for the quarter ended June 30, 2001 increased
$141,000, from $145,000 to $286,000 compared to the quarter ended June 30,
2000. Revenues in the second quarter of 2001 increased $203,000 from
purchases by the U.S. Government made through the Company's GSA contract.
In addition to these GSA contract revenues, the increase in revenues during
2001 was due to the recognition of revenue from the sale of the Company's
healthcare software products to hospitals. Gross margin for the three
months ended June 30, 2001 was 21% of revenue. This margin can be broken
down into the margin on the GSA revenues, which was 4%, and the margin on
all other revenues, which was 66%. Gross margin for the six months ended
June 30, 2001 was 13%. This margin can be broken down into the margin on
GSA revenues, which was 4%, and the margin on all other revenues, which was
44%. The margins on the GSA contract revenues are lower since the sales
are currently being made through the contract using an agent company so the
net to the Company is usually 4%. The margins on other revenues have
improved as economies of scale have begun to be realized on additional
installations of the Company's software solutions.
TOTAL OPERATING EXPENSES:
Total operating expenses for the quarter ended June 30, 2001 increased
$64,000 from $1.34 million to $1.4 million, a 4.8% increase compared to the
same period in 2000. This increase is primarily associated with increased
personnel expenses. This increase was partially offset by the decrease in
consulting fees and general and administrative expenses.
Total operating expenses for the six months ended June 30, 2001 increased
$154,000 from $2.52 million to $2.676 million, a 6.1% increase compared to
the same period in 2000. This increase is primarily associated with
increased personnel expenses. This increase was partially offset by the
decrease in consulting fees and general and administrative expenses.
Personnel and related expenses increased $249,000 or 42% to $843,000 for
the quarter ended June 30, 2001 compared to $593,570 for the same period in
2000. This net increase was primarily due to pay increases, as the average
number of staff compared to the same quarter of 2000 is approximately the
same. This 42% increase is partially offset by the direct cost savings
realized from processing payroll and benefits in-house versus through an
outside vendor starting at beginning of the year.
Personnel and related expenses increased $388,000 or 32% to $1.62 million
for the six months ended June 30, 2001 compared to $1.23 million for the
same period in 2000. This net increase was primarily due to pay increases,
as the average number of staff compared to the same period of 2000 is
approximately the same. This 32% increase is partially offset by the
direct cost savings realized from processing payroll and benefits in-house
versus through an outside vendor starting at beginning of the year.
Consulting fees decreased by $111,000 from the $152,000 incurred for the
quarter ended June 30, 2000 to $41,000 for the quarter ended June 30, 2001.
The expenses in 2001 and 2000 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 rollouts. Additionally, the consulting
fees also consisted of amounts paid for services in maintaining a public
market presence.
Consulting fees decreased by $65,000 from the $223,000 incurred for the six
months ended June 30, 2000 to $158,000 for the six months ended June 30,
2001. The expenses in 2001 and 2000 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 rollouts.
Additionally, the consulting fees also consisted of amounts paid for
services in maintaining a public market presence.
General and administrative expenses decreased to $497,000 for the quarter
ended June 30, 2001 from $569,000 for the same period in 2000. This
$71,000 or 12.5% decrease was due in part to decreased legal and other
professional costs.
General and administrative expenses decreased to $857,000 for the six
months ended June 30, 2001 from $1,021,000 for the same period in 2000.
This $164,000 or 16% decrease was due in part to decreased legal and other
professional costs.
Depreciation and amortization expenses decreased by $3,000 or 14% to
$21,000 for the quarter ended June 30, 2001 compared to $24,000 for the
same period in 2000. Assets purchases have been close to the amount of
assets disposed of and becoming fully depreciated accounting for the stable
depreciation expense.
Depreciation and amortization expenses decreased by $4,000 or 9% to $43,000
for the six months ended June 30, 2001 compared to $47,000 for the same
period in 2000. Assets purchases have been close to the amount of assets
disposed of and becoming fully depreciated accounting for the stable
depreciation expense.
OTHER INCOME AND EXPENSE:
Interest expense for the quarter ended June 30, 2001 decreased $5,000 from
$121,000 to $116,000 when compared to the same period in 2000. Interest
expense for the six months ended June 30, 2001 decreased $65,000 from
$252,000 to $187,000 when compared to the same period in 2000. These
decreases are due primarily to lower interest rates on some of the
Company's notes payable resulting from the renegotiation of the terms of
these notes near the end of the first quarter of 2001.
NET LOSS:
The net loss for the quarter ended June 30, 2001 increased slightly by
$22,000 from $1.44 million to $1.46 million, a 1.5% increase compared to
the quarter ended June 30, 2000. Net loss per share of common stock
decreased from $.23 per share in 2000 to $.16 in 2001. This decrease is
due to the increase in the weighted average number of common shares
outstanding from 6,291,375 for the quarter ended June 30, 2000 to 9,018,123
for the quarter ended June 30, 2001.
The net loss for the six months ended June 30, 2001 increased by $49,000
from $2.72 million to $2.77 million, a 1.8% increase compared to the six
months ended June 30, 2000. Net loss per share of common stock decreased
from $.46 per share in 2000 to $.31 in 2001. This decrease is due to the
increase in the weighted average number of common shares outstanding from
5,944,854 for the six months ended June 30, 2000 to 9,000,946 for the six
months ended June 30, 2001.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used by operating activities increased slightly by $23,000 from
$2.05 million for the six months ended June 30, 2000 to $2.07 million for
the six months ended June 30, 2001.
Net cash used for investing activities decreased from $138,000 in the first
six months of 2000 compared to $47,000 in the same period of 2001. The
decrease was primarily due to less fixed assets acquisitions.
Net cash provided by financing activities decreased $123,000 from $2.18
million for the six months ended June 30, 2000 to $2.05 million for the six
months ended June 30, 2001. Financing activities during the first six
months of 2001 consisted primarily of the issuance of notes payable of
approximately $2.1 million that was partially used to pay down debt by
$298,000. The Company also received proceeds from issuing common and
preferred stock. Financing activities during the first six months of 2000
included the issuance of common and preferred stock providing $1.73 million
in the aggregate and the issuance of notes payable, which provided $842,000
offset by $399,000 in repayments of existing notes payable.
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 assets.
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 much 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 to the cash requirement
associated 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. 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.
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
and 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
Leapfrog and its subsidiary, Leapfrog Global IC Products, Inc. ("LGIC")
were named in an action (Valenti vs. Leapfrog Smart Products, Inc. ("LSP")
et al) alleging that the companies failed to disclose certain corporate
records as required by Florida Law. LSP's special Florida litigation
counsel has advised the company that the remedies asked for in the
complaint against LSP are not available because LSP is a Colorado
corporation. In any event, the plaintiff is seeking primarily equitable
relief, and not monetary damages except attorney's fees, against both LSP
and LGIC. As such, even if the suit was successful, it would not
materially impact the financial condition of either LSP or LGIC.
The Company filed a lawsuit styled LEAPFROG SMART PRODUCTS, INC. V. REAL
PROVENCHER , in the U.S. District Court of the Middle District of Florida,
Orlando Division with the following claims: 1) breach of contract under a
Consulting Agreement; 2) breach of contract under the terms of a Bleed Out
Agreement; 3) violation of Rule 16 of the Securities Act of 1934; 4)
fraudulent misrepresentation and common law fraud; and 5) violation of Rule
144 of the Securities Act of 1934. The Company alleged compensatory
damages, costs, and further relief, as the court finds appropriate. The
Florida Court has transferred venue to the U.S. District Court for the
Southern District of Texas, Houston Division and the two cases have been
consolidated.
REAL PROVENCHER V. LEAPFROG SMART PRODUCTS, INC., F/K/A ALBARA
CORPORATION,
AND AMERICAN SECURITIES TRANSFER INCORPORATED was filed, after the
Company's suit, in the U.S. District Court for the Southern District of
Texas, Houston Division. Plaintiff, a shareholder of Albara, now Leapfrog,
has filed the following claims against the Company: 1) the Company breached
its statutory duty to register and transfer Plaintiff's shares in the
Company; 2) the Company violated his statutory right under Rule 144(k) of
the Securities Act of 1934 to terminate restrictions to sell his shares; 3)
the Company committed common law and statutory fraud; 4) breach of contract
under a Bleed Out Agreement; 5) and tortuous interference with Plaintiff's
contract to sell 77,300 shares of stock. Plaintiff has alleged actual
damages of $2,576,000 plus attorney's fees, and pre-and post-judgment
interest.
As part of a consulting agreement with Provencher, a warrant with an
effective date of February 18, 2000 was issued 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 was to be adjusted to $0.035 in the event the Company did not close
an equity offering raising an aggregate of at least $2.5 million by July
16, 2000. Although, Provencher has not attempted to exercise the warrants,
as part of the lawsuit the Company is attempting to have the warrants
declared null and void due to the alleged non-performance under the
Consulting Agreement.
Discovery is underway in the case. We are unable to determine the
likelihood of an unfavorable outcome in this case nor are we able to
estimate the potential loss to the Corporation at this time. Accordingly,
the financial statements include no provision or liability related to the
ultimate outcome of this matter.
The Company was party to a lawsuit brought by Publicard, Inc. regarding the
repayment of $100,000 in notes due to them from the Company. It was the
Company's position that although these notes were recorded with interest
accruing, the notes should be offset with certain costs incurred by the
Company. This lawsuit was settled on February 2, 2001, requiring that the
Company repay $90,000 in nine $10,000 monthly installments beginning
February 2001. At June 30, 2001, the Company's remaining obligation was
$60,000.
The lessor of a portion of the Company's former office space has sued the
Company for breach of contract alleging the Company's failure to pay rent.
Damages requested are $270,400, plus attorney's fees and costs. The
Company brought a counter suit against the lessor for a declaratory action,
breach of lease, tortuous interference with an advantageous business
relationship, and breach of good faith and fair dealings regarding
reletting the property. The Company has accrued an insignificant portion
of the lessor's claims in an amount equal to the unpaid lease payments that
would have been due under the lease through December 31, 2000. No other
amounts have been recorded in the accompanying financial statements for
this uncertainty, as management cannot reasonably estimate the ultimate
outcome.
The Company is party to a lawsuit brought by Ocala Interventional
Cardiology in the Circuit Court of the Ninth Judicial Circuit in Florida
regarding the repayment of $50,000 in notes due to them from the Company.
Service of process on the Company was made on April 25, 2001. The Company
is defending on the basis of usury.
The Company is party to a lawsuit brought by Andre David Blaquier in the
Circuit Court of the Fifth Judicial Circuit in Florida regarding repayment
of $30,000 in notes due to him from the Company. Service of process on the
Company was made on April 30, 2001. Because of a clerical error, the
Company failed to answer and a final judgment was issued by the court. The
Company filed a motion for rehearing, relief from judgment and to set aside
the final judgment. The motion for rehearing is scheduled for September
26, 2001.
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.
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
[required unless the computation can be clearly
determined from financials]
#### 16 Letter on Change in Certifying Accountant
x 21 Subsidiaries of the Registrant
x 27 Financial Data Schedule
# 99.1 Safe Harbor Compliance Statement
____________________________
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
Current Report on Form 8-K dated August 16, 2001
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/ RANDALL SCHRADER
Randall Schrader, CEO
Date: August 20, 2001
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/ Randall Schrader Chief Executive Officer August 20, 2001
RANDALL SCHRADER