UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Amendment No. 1
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the nine months ended SEPTEMBER 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.
(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 December 4, 2001:
10,030,845 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 nine and three months periods ended September 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
Condensed Consolidated Balance Sheets - September 30, 2001 and
December 31, 2000 3
Condensed Consolidated Statements of Operations - Nine Months
ended September 30, 2001 and 2000, Quarters ended
September 30, 2001 and 2000, and for the Period April 11, 1996
(Date of Inception) Through September 30, 2001 4
Condensed Consolidated Statement of Changes in Stockholders'
Equity (Deficit) - Nine Months ended September 30, 2001 5
Condensed Consolidated Statements of Cash Flows - Nine Months
ended September 30, 2001 and 2000 and for the Period
April 11, 1996 (Date of Inception)Through September 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
September 30, December 31,
2001 2000
-------- ------------
CURRENT ASSETS
Cash $ 7,810 $ 107,413
Accounts receivable 53,624 113,092
Inventory 107,749 122,382
Prepaid expenses 103,087 172,060
Notes receivable - related party 3,400 15,900
Other receivables 642 1,980
-------- ------------
TOTAL CURRENT ASSETS 276,312 532,827
PROPERTY AND EQUIPMENT, NET 215,140 238,457
OTHER ASSETS
Related-party advances 101,964 107,009
Deposits 37,638 38,136
Capitalized software costs, net of accumulated
amortization of $36,286 and $24,884 178,593 169,137
Costs in excess of fair market value of assets
acquired, net of accumulated amortization of
$7,750 and $5,500 22,250 24,500
--------- ----------
$ 831,897 $1,110,066
========= ==========
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND
STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Notes payable - current portion $ 3,057,435 $1,452,956
Notes payable - related party 537,162 355,258
Deferred Income 10,000 -
Accounts payable 1,251,475 1,043,453
Accrued expenses 877,179 212,255
----------- ---------
TOTAL CURRENT LIABILITIES 5,733,251 3,063,922
LONG-TERM NOTES PAYABLE 84,310 -
----------- ---------
TOTAL LIABILITIES 5,817,561 3,063,922
REDEEMABLE CONVERTIBLE 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) 53,646 -
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock - no par value; 30,000,000
shares authorized; 10,018,845 and 8,977,845
shares issued and outstanding 11,200,203 10,488,908
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 (16,734,138) (12,937,389)
---------- ----------
(5,039,310) (1,953,856)
---------- ----------
$ 831,897 $ 1,110,066
========== ==========
SEE ACCOMPANYING NOTES
LEAPFROG SMART PRODUCTS, INC. AND SUBSIDIARIES
(A Development Stage Company)
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Cumulative
From
April 11,
Nine Nine 1996
Months Months Quarter Quarter (Inception)
Ended Ended Ended Ended Through
Sept. 30, Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2001 2000 2001 2000 2001
REVENUES $ 716,291 $ 802,345 $ 136,405 $ 634,605 $ 2,569,805
COST OF SALES 635,520 735,644 130,011 577,215 2,131,754
--------------------------------------------------------------
GROSS PROFIT 80,771 66,701 6,394 57,390 438,051
OPERATING EXPENSES
Personnel and related
expenses 2,212,091 1,981,589 594,381 751,402 8,826,562
Consulting fees 208,465 634,929 50,715 412,021 2,283,579
General and administrative 1,081,922 1,571,111 224,452 549,666 4,486,776
Depreciation and
amortization 72,571 69,029 29,836 22,160 295,580
--------------------------------------------------------------
TOTAL OPERATING EXPENSES 3,575,049 4,256,658 899,384 1,735,249 15,892,497
OTHER INCOME (EXPENSE)
Other income, net 12,567 40,966 (3,115) 875 75,001
Loss on disposal of assets - - - - (30,389)
Equity interest in loss
of subsidiary - - - - (150,000)
Interest expense (315,038) (312,080) (127,953) (60,464) (1,174,304)
---------------------------------------------------------------
(302,471) (271,114) (131,068) (59,589) (1,279,692)
NET LOSS $(3,796,749) (4,461,071) (1,024,058)(1,737,448) (16,734,138)
---------------------------------------------------------------
BASIC AND DILUTED NET LOSS
PER COMMON SHARE $ (0.41) (0.70) (0.11) (0.24)
---------------------------------------------------------------
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 9,259,191 6,388,171 9,767,261 7,265,169
SEE ACCOMPANYING NOTES
LEAPFROG SMART PRODUCTS, INC. AND SUBSIDIARIES
(A Development Stage Company)
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN
STOCKHOLDERS' EQUITY (DEFICIT)
NINE MONTHS ENDED SEPTEMBER 30, 2001
Deficit
Convertible 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 61,000 15,250 - - - 15,250
ISSUANCE OF
COMMON STOCK FOR
CASH 950,000 513,132 - - - 513,132
ACCRETION OF
REDEMPTION VALUE
OF REDEEMABLE
PREFERRED STOCK (3,646) (3,646)
NET LOSS - - - - (3,796,749) (3,796,749)
-------------------------------------------------------------------------------
BALANCE - SEPTEMBER
30, 2001 10,018,845 $11,200,203 125,195 $494,625 $(16,734,138) $(5,039,310)
==============================================================================
SEE ACCOMPANYING NOTES
LEAPFROG SMART PRODUCTS, INC. AND SUBSIDIARIES
(A Development Stage Company)
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Cumulative
From
April 11,
Nine Nine 1996
Months Months (Inception)
Ended Ended Through
Sept. 30, Sept. 30, Sept. 30,
2001 2000 2001
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (3,796,749) $ (4,461,071) $ (16,734,138)
Reconciliation
of net loss to net
cash used in
operating
activities
Depreciation 58,919 55,380 257,175
Depreciation and amortization
charged to cost of sales - 12,122 38,460
Amortization 13,652 13,650 35,394
Assets expensed to research and
development - 28,970 28,968
Loss on disposal of assets, net - 14,775 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 156,559 981,211 2,159,039
Discount on issuance of debt (147,633) - (147,633)
Amortization of discount on debt 57,879 - 57,879
Cash provided by (used in) change in:
Accounts receivable 59,468 (230,704) (53,624)
Related party advances 5,045 (276,046) (101,964)
Other receivables 1,338 6,708 (642)
Inventory 14,633 (16,172) (107,749)
Prepaid expenses and other assets 69,471 (133,693) (140,725)
Accounts payable 250,522 540,873 1,342,214
Accrued expenses 767,317 136,473 1,047,535
Deferred income 10,000 - 10,000
-----------------------------------------
NET CASH USED IN OPERATING
ACTIVITIES (2,499,579) (3,327,524) (11,110,722)
CASH FLOWS FROM INVESTING
ACTIVITIES
Acquisition of property, plant and
equipment (35,600) (107,118) (573,211)
Net increase in notes receivable-
related party - (13,654) (63,124)
Capitalization of software costs (20,858) (75,861) (214,879)
Proceeds from sale of vehicles - - 8,473
-----------------------------------------
NET CASH USED IN INVESTING
ACTIVITIES (56,458) (196,633) (842,741)
CASH FLOWS FROM FINANCING
ACTIVITIES
Proceeds from issuance of notes payable 2,000,000 701,902 5,217,768
Payments on notes payable (301,952) (474,910) (1,128,927)
Proceeds from exercise of common stock
options 15,250 21,250 485,120
Proceeds from sale of common stock 513,131 2,650,588 6,322,049
Proceeds from sale of preferred stock 50,000 480,000 530,000
Proceeds from related-party borrowings 190,843 140,000 553,501
Repayments of related-party borrowings (10,838) - (18,238)
----------------------------------------
NET CASH PROVIDED BY FINANCING
ACTIVITIES 2,456,434 3,518,830 11,961,273
----------------------------------------
NET INCREASE (DECREASE) IN CASH (99,603) (5,327) 7,810
CASH AT BEGINNING OF PERIOD 107,413 18,529 -
----------------------------------------
CASH AT END OF PERIOD $ 7,810 $ 13,202 $ 7,810
=========================================
SEE ACCOMPANYING NOTES
LEAPFROG SMART PRODUCTS, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Nine Months Ended September 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 Leapfrog 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 96% 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. Leapfrog's Board of Directors has declared the license in
default. 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 nine-month and
three-month periods ended September 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. The Company has elected to expense
rather than capitalize most of its development costs.
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 than 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 nine- month periods ended September 30, 2001
and 2000 approximated $586,000 and $449,000, respectively. Cost of sales
recognized under the GSA contract during the nine-month periods ended
September 30, 2001 and 2000 approximated $563,000 and $436,000, 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 and the accretion of the redemption value of
redeemable preferred stock 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
September 30, 2001 and 2000, the Company incurred losses of approximately
$1.02 million and $1.74 million, respectively, and had a deficiency in working
capital of approximately $5.46 million at September 30, 2001. The Company
incurred losses of $3.8 million and $4.5 million for the nine months ended
September 30, 2001 and September 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 September 30, 2001, the Company had cash of approximately $8,000 and a
deficiency in working capital of $5.46 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
September 30, 2001 through December 4, 2001, the Company received proceeds of
approximately $295,000 from the issuance of notes payable. During the same
period, the Company received $3,000 in net proceeds from the exercise of
employee stock options for 12,000 shares.
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.
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
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 nine months ended September 30, 2001 and the quarter ended September 30,
2001 was $67,000 and $30,000, 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 September 30, 2001, the Company paid off part of the
principal and interest of a $100,000 note with a bank through a series of
installments. The note matures on October 1, 2002. The Company also received
proceeds of approximately $84,000 from the issuance of a note during the
quarter. The interest rate is 8% per annum. Principal and interest are due
on the maturity date of the note which is December 31, 2002.
Cash paid for interest during the three months ended September 30, 2001 and
2000 was $1,615 and $17,447, respectively. Cash paid for interest during the
nine months ended September 30, 2001 and 2000 was $91,750 and $59,237,
respectively.
All notes payable remain past due at September 30, 2001 except for the
$100,000 note with a bank, a $100,000 note to a related party which matures on
December 31, 2001, and the approximate $84,000 note which was issued during
the quarter ended September 30, 2001. The Company is attempting to work with
noteholders to extend the due dates or change the terms.
NOTE 3 - REDEEMABLE CONVERTIBLE PREFERRED STOCK
During the second quarter of 2001, the Company 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. As of September
30, 2001, dividends in arrears total approximately $1,000. 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 cumulative amount of accretion as of
September 30, 2001 is approximately $3,600. 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.
NOTE 4 - 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. As of September 30, 2001, dividends in arrears total
approximately $46,000. 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. 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 nine months ended September 30, 2001, the Company issued an
aggregate of 1,011,000 shares of its common stock including shares issued upon
the exercise of stock options and received net proceeds of approximately
$528,000. During the three months ended September 30, 2001, the Company
issued an aggregate of 721,350 shares of its common stock including shares
issued upon the exercise of stock options and received net proceeds of
approximately $327,000.
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.
NOTE 4 - STOCKHOLDERS' EQUITY
(CONTINUED)
Warrant
On January 31, 2000 the Company entered into a consulting agreement with the
former majority shareholder of Albara. As part of the agreement, this
shareholder would receive, after performing certain consultation services, the
right to a warrant for 500,000 shares of common stock at $3.50 per share. If
the warrant had been issued, it would expire on January 31, 2010. The
exercise price of $3.50 is 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 failure to
provide consideration for the warrant.
NOTE 5 - LEGAL PROCEEDINGS
The Company is party to several 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 6 - SUBSEQUENT EVENTS
The Company is in the process of finalizing a private placement with
accredited investors. Proceeds of the private placement, if successful, 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.
14
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 six months ended June 30, 2001, the Company received $2 million
in proceeds from the note issued in the first quarter of the year to a
shareholder and noteholder. This note was 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 September 30, 2002.
During the quarter ended September 30, 2001, the Company paid off part of the
principal and interest of a $100,000 note with a bank through a series of
installments. The note matures on October 1, 2002. The Company also received
proceeds of approximately $84,000 from the issuance of a note during the
quarter. The interest rate is 8% per annum. Principal and interest are due
on the maturity date of the note which is December 31, 2002.
All notes payable remain past due at September 30, 2001 except for the
$100,000 note with a bank, the $100,000 note to a related party which matures
on December 31, 2001, and the approximate $84,000 note which was issued during
the quarter ended September 30, 2001. The Company is attempting to work with
noteholders to extend the due dates or change the terms.
For the three months ended September 30, 2001, the Company issued an aggregate
of 721,350 shares of its common stock including shares issued upon the
exercise of stock options and received net proceeds of approximately $327,000.
For the three months ended September 30, 2000, shares of common stock totaling
1,129,619 were issued for cash of approximately $1.4 million for both the
exercise of stock options and the private placements of stock with
individuals.
15
For the period of January 1, 2001 through September 30, 2001, total additional
debt of approximately $2.2 million was issued to third parties, 1,011,000
shares of common stock were issued for cash and on the exercise of stock
options for approximately $528,000 in net proceeds and 50,000 shares of Series
B Convertible Redeemable Preferred Stock were issued for net proceeds of
$50,000.
For the period of January 1, 2000 through September 30, 2000, total additional
debt of $750,000 was issued to third parties and 1,595,119 shares of
restricted common stock were issued for approximately $2.7 million and 125,000
shares of convertible preferred stock were issued for net proceeds of
$480,000.
The Company is in the process of finalizing a private placement with
accredited investors. Proceeds of the private placement, if successful, 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.
RESULTS OF OPERATIONS
Revenues and Gross Profits:
LEAPFROG is a development stage company with revenues just beginning to be
recognized. The Company has elected to expense rather than capitalize most of
its development costs. Revenues for the nine months ended September 30, 2001
decreased $86,000 to $716,000 from the $802,000 reported for the nine months
ended September 30, 2000. Revenues for the three months ended September 30,
2001 decreased $499,000, from $635,000 to $136,000 compared to the quarter
ended September 30, 2000. The decrease in revenues in the third quarter of
2001 was attributable primarily to a decrease in purchases by the U.S.
Government made through the Company's GSA contract. Gross margin for the
three months ended September 30, 2001 was $6,400 or 4.7% 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 84%. Gross margin for the
nine months ended September 30, 2001 was $81,000 or 11.3% of revenue. This
margin can be broken down into the margin on GSA revenues, which was 4%, and
the margin on all other revenues, which was 36%. 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.
16
Total Operating Expenses:
Total operating expenses for the quarter ended September 30, 2001 decreased
$836,000 from $1.735 million to $899,000, a 48% decrease compared to the same
period in 2000. This decrease is associated with decreases in personnel and
related expenses, consulting fees and general and administrative expenses.
Total operating expenses for the nine months ended September 30, 2001
decreased $680,000 from $4.26 million to $3.58 million, a 16% decrease
compared to the same period in 2000. This decrease is associated with
decreases in consulting fees and general and administrative expenses. This
decrease was partially offset by the increase in personnel and related
expenses for the nine-month period.
Personnel and related expenses decreased $157,000 or 21% to $594,000 for the
quarter ended September 30, 2001 compared to $751,000 for the same period in
2000. This net decrease was primarily due to a reduction in staff in the
third quarter of 2001.
Personnel and related expenses increased $230,000 or 11.6% to $2.21 million
for the nine months ended September 30, 2001 compared to $1.98 million for the
same period in 2000. This net increase was due to a higher average number of
staff, increased salaries and compensation expense recognized from the
exercise of stock options compared to the same period of 2000.
Consulting fees decreased by $361,000 from the $412,000 incurred for the
quarter ended September 30, 2000 to $51,000 for the quarter ended September
30, 2001. Consulting fees decreased by $427,000 from the $635,000 incurred
for the nine months ended September 30, 2000 to $208,000 for the nine months
ended September 30, 2001. The expenses in 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. Additionally, the consulting fees also consisted of amounts paid
for services in maintaining a public market presence. In 2001, the Company
outsourced less of these services to consultants.
General and administrative expenses decreased to $224,000 for the quarter
ended September 30, 2001 from $550,000 for the same period in 2000. This
$326,000 or 59% decrease was due in part to decreased legal and other
professional costs, trade show expenses and travel expenses.
General and administrative expenses decreased to $1.08 million for the nine
months ended September 30, 2001 from $1.57 million for the same period in
2000. This $490,000 or 31% decrease was due in part to decreased legal and
other professional costs and travel expenses.
Depreciation and amortization expenses increased by $8,000 or 36% to $30,000
for the quarter ended September 30, 2001 compared to $22,000 for the same
period in 2000. Depreciation and amortization expenses increased by $4,000 or
5.8% to $73,000 for the nine months ended September 30, 2001 compared to
$69,000 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.
17
Other income and expense:
Interest expense for the quarter ended September 30, 2001 increased $68,000
from $60,000 to $128,000 when compared to the same period in 2000. This
increase was due primarily to the increase in notes payable balances.
Interest expense for the nine months ended September 30, 2001 increased $3,000
from $312,000 to $315,000 when compared to the same period in 2000.
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
through May 15, 2001. 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 maturity date of the note
which is July 1, 2002. The interest expense recognized in the nine months
ended September 30, 2001 and the quarter ended September 30, 2001 was $67,000
and $30,000, respectively.
In January of 2000, $550,000 in debentures were issued with 75,000 shares of
common stock issued as an incentive to enter into these agreements. These
shares resulted in $56,250 in interest expense being recorded. Also, included
in interest expense was $55,000 attributable to the value of the stock options
issued with the $100,000 related party note on April 28, 2000.
Net loss:
The net loss for the quarter ended September 30, 2001 decreased by $720,000
from $1.74 million to $1.02 million, a 41% decrease compared to the quarter
ended September 30, 2000. Net loss per share of common stock decreased from
$.24 per share in 2000 to $.11 in 2001. This decrease is due to the decrease
in losses realized and to the increase in the weighted average number of
common shares outstanding from 7,265,169 for the quarter ended September 30,
2000 to 9,767,261 for the quarter ended September 30, 2001.
The net loss for the nine months ended September 30, 2001 decreased by
$660,000 from $4.46 million to $3.8 million, a 15% decrease compared to the
nine months ended September 30, 2000. Net loss per share of common stock
decreased from $.70 per share in the first nine months of 2000 to $.41 in the
same period for 2001. This decrease is due to the decrease in losses realized
and to the increase in the weighted average number of common shares outstanding
from 6,388,171 for the nine months ended September 30, 2000 to 9,259,191 for
the nine months ended September 30, 2001.
18
LIQUIDITY AND CAPITAL RESOURCES
Net cash used by operating activities decreased $800,000 from $3.3 million for
the nine months ended September 30, 2000 to $2.5 million for the nine months
ended September 30, 2001. The decrease is primarily due to lower net loss,
lower receivables and lower prepaid expenses offset by the common stock and
stock options issued for services and interest and the increase in accounts
payable and accrued expenses.
Net cash used for investing activities decreased from $197,000 in the first
nine months of 2000 compared to $56,000 in the same period of 2001. The
decrease was primarily due to less fixed assets acquisitions.
Net cash provided by financing activities decreased $1.06 million from $3.52
million for the nine months ended September 30, 2000 to $2.46 million for the
nine months ended September 30, 2001. Financing activities during the first
nine months of 2001 consisted primarily of the issuance of notes payable of
approximately $2.2 million that was partially used to pay down debt by
$313,000. The Company also received proceeds of $578,000 from issuing common
and preferred stock. Financing activities during the first nine months of
2000 included the issuance of common and preferred stock providing $3.2
million in the aggregate and the issuance of notes payable and related-party
borrowings, which provided $842,000 offset by $475,000 in repayments of
existing notes payable.
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 three years
much of LEAPFROG's debt financing has been short-term notes payable. These
notes can only be repaid if the Company successfully generates significant
revenues or 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 costs associated with becoming Year 2000
compliant were not significant. These costs 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
19
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
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.
20
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.
As part of the Consulting Agreement with Provencher, after services are
rendered, a warrant would be issued for the right to purchase 500,000 shares
of common stock at $3.50 per share on or after April 30, 2000. If the warrant
had been issued, it would expire on January 31, 2010. The exercise price of
$3.50 is adjusted to $0.035 in the event the Company has not closed an equity
offering raising an aggregate of at least $2.5 million by July 16, 2000.
Although Provencher has not attempted to exercise the warrant, as part of the
lawsuit the Company is attempting to have the warrant 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 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 approximately $70,000 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 Andre David Blaquier in the
Circuit Court of the Fifth Judicial Circuit in Florida regarding repayment of
$30,000 in notes plus interest due to him from the Company.
21
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
22
### 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 third quarter
of the 2001 fiscal year:
Current Report on Form 8-K dated August 16, 2001
23
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, Chairman
Date: December 4, 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/ Randolph Tucker Chairman December 4, 2001
Randolph Tucker