UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-KSB
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[ X]
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ANNUAL
REPORT UNDER TO SECTION 13 OR 15(d)
OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR
THE FISCAL YEAR ENDED DECEMBER 31, 2007
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[ ]
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE
SECURITIES EXCHANGE ACT OF 1934. FOR
THE
TRANSITION PERIOD FROM _________ To _________ .
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Commission
File Number 000-12817
SONA
MOBILE HOLDINGS CORP.
(Name of
small business issuer in its charter)
Delaware
95-3087593
(State or
other
jurisdiction (I.R.S.
Employer
of
incorporation or
organization) Identification
No.)
245 Park Avenue, New York,
New York 10167
(Address
of principal executive office)
(212)
486-8887
(Issuer’s
telephone number, including area code)
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Securities
registered under Section 12(b) of the Exchange
Act:
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None
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None
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(Title
of Each Class)
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(Name
of each Exchange on Which
Registered)
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Securities
registered under Section 12(g) of the Exchange Act:
Common Stock,
par value $.01
per share
(Title of
Class)
Check
whether the issuer is not required to file reports pursuant to section 13 or
15(d) of the Exchange Act. [ ]
Check
whether the issuer: (1) filed all reports required to be filed by Section 13 or
15(d) of the Exchange Act during the past 12 months (or for such shorter period
that the issuer was required to file such reports), and (2) has been subject to
such filing
requirements
for the past 90
days. Yes [X] No
[ ]
Check if
there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this Form, and no disclosure will be contained, to
the best of issuer’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [X]
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes [ ] No[X
]
Issuer’s
revenues for its most recent fiscal year: $980,649.
As of
February 29, 2008, the aggregate market value of the voting stock held by
non-affiliates of the Issuer was approximately $19.3 million. The
market value of the Issuer’s voting stock was computed by reference to the
average of the closing bid and asked prices of the Issuer’s Common Stock on such
date.
As of
February 29, 2008, there were 57,832,857 shares of the Issuer’s Common
Stock outstanding.
Transitional
Small Business Disclosure Format. Yes [ ] No[X
]
SONA
MOBILE HOLDINGS CORP
YEAR
ENDED DECEMBER 31, 2007
FORM
10-KSB
ANNUAL
REPORT
TABLE
OF CONTENTS
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Page
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Forward-Looking
Statements
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3
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Part
I.
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Item
1.
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Description
of Business
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4
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Item
2.
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Description
of Property
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22
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Item
3.
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Legal
Proceedings
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22
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Item
4.
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Submission
of Matters to a Vote of Security Holders
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22
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Part
II.
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Item
5.
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Market
for Common Equity, Related Stockholders Matters and Small Business Issuer
Purchases of Equity Securities
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23
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Item
6.
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Management's
Discussion and Analysis or Plan of Operation
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24
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Item
7.
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Financial
Statements
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35
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Item
8.
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Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
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55
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Item
8A(T).
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Controls
and Procedures
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55
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Item
8B.
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Other
Information
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55
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Part
II.
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Item
9.
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Directors,
Executive Officers, Promoters and Control Persons and Corporate
Governance; Compliance with Section 16(a) of the Exchange
Act
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56
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Item
10.
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Executive
Compensation
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58
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Item
11.
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Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
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60
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Item
12.
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Certain
Relationships and Related Transactions and Director
Independence
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62
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Item
13.
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Exhibits
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63
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Item
14.
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Principal
Accountant Fees and Services
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65
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Signatures
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FORWARD-LOOKING
STATEMENTS
Certain
statements made in this Annual Report on Form 10-KSB are “forward-looking
statements” regarding the plans and objectives of management for future
operations and market trends and expectations. The words “expect,”
“believe,” “plan,” “intend,” “estimate,” “anticipate,” “propose,” “seek” and
similar words and variations thereof, when used, are intended to specifically
identify forward-looking statements. Such statements involve known
and unknown risks, uncertainties and other factors that may cause our actual
results, performance or achievements to be materially different from any future
results, performance or achievements expressed or implied by such
forward-looking statements. The forward-looking statements included
herein are based on current expectations that involve numerous risks and
uncertainties, including but not limited to those set forth in this Annual
Report on Form 10-KSB beginning on page 15. Our plans and objectives
are based, in part, on assumptions involving the continued expansion of our
business. Assumptions relating to the foregoing involve judgments with respect
to, among other things, future economic, competitive and market conditions and
future business decisions, all of which are difficult or impossible to predict
accurately and many of which are beyond our control. Although we
believe that our assumptions underlying the forward-looking statements are
reasonable, any of the assumptions could prove inaccurate and, therefore, we
cannot assure you that the forward-looking statements included in this report
will prove to be accurate. In light of the significant uncertainties
inherent in the forward-looking statements included herein, the inclusion of
such information should not be regarded as a representation by us or any other
person that our objectives and plans will be achieved. Readers are
cautioned not to place undue reliance on these forward-looking statements, which
reflect management’s analysis only as of the date hereof. We do not
undertake any obligation to publicly revise these forward-looking statements to
reflect events or circumstances that arise after the date hereof.
The
terms the “Company”, “Sona”, “we”, “our”, “us”, and derivatives thereof, as used
herein refer to Sona Mobile Holdings Corp., a Delaware corporation, and its
predecessor, Sona Mobile, Inc., a Washington Corporation and the
Company’s subsidiaries Sona Mobile, Inc., a Delaware corporation and Sona
Innovations, Inc., a Canadian company.
Part
I
Item
1. Description
of Business
Introduction
We are a
software and service provider that specializes in value-added applications to
data-intensive vertical and horizontal market segments including the gaming
industry. Through our subsidiaries, we develop, market and sell data application
software for gaming and mobile devices which enables secure execution of real
time transactions on a flexible platform over wired, cellular or Wi-Fi networks.
Our target customer base includes casinos, horse racing tracks and operators,
cruise ship operators and casino game manufacturers and suppliers on the gaming
side, and corporations that require secure transmissions of large amounts of
data in the enterprise and financial services verticals. Our revenues consist of
project, licensing and support fees generated by our Sona Gaming System™ (“SGS”)
and wireless application software products. We operate as one business segment
focused on the development, sale and marketing of client-server application
software which can be deployed on wired, wireless or cellular networks or a
combination thereof.
We are a
Delaware corporation. Our predecessor, Sona Mobile, Inc., commenced
operations in November 2003. On April 19, 2005, which we refer to as the
‘‘Merger Date,’’ pursuant to an Agreement and Plan of Merger dated as of March
7, 2005, Sona Mobile, Inc. merged with and into PerfectData Acquisition
Corporation, a Delaware corporation (‘‘PerfectData’’) and a wholly-owned merger
subsidiary of PerfectData Corporation, a then inactive publicly held Delaware
corporation. In connection with the merger with PerfectData, on the Merger
Date,
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all
but one of PerfectData’s directors and officers resigned and Sona’s
nominees were elected to our Board of Directors; and officers designated
by Sona were elected by our Board;
and
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the
former shareholders of Sona received shares of our Series A Convertible
Preferred Stock representing approximately 76% of the then issued and
outstanding common stock on a fully diluted basis. These
preferred shares were automatically converted into shares of our common
stock on November 17, 2005, upon approval by our shareholders of an
increase in total authorized
shares.
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As a
result, the merger has been accounted for as a reverse merger, with Sona Mobile,
Inc. deemed to be the accounting acquirer. In connection with the merger, the
merger subsidiary changed its name to Sona Mobile, Inc. and, on November 17,
2005, we changed our corporate name from PerfectData to Sona Mobile Holdings
Corp.
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We
market our software principally to two large vertical
markets:
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Gaming and
entertainment. We propose to
(i) deliver casino games via our SGS, both wired and wirelessly in
designated areas on casino properties; (ii) offer real-time, multiplayer
games that accommodate an unlimited number of players; (iii) deliver games
on a play-for-free or wagering basis (where permitted by law) on mobile
telephone handsets over any carrier network; and (iv) deliver horse and
sports wagering applications, where legal, for race and sports books, as
well as on-track and off-track wagering, including live streaming video of
horse races and other sports events. We also propose to deliver
content via channel partners and content partners, including live
streaming television, digital radio, specific theme downloads for mobile
phones, media downloads and gaming
applications.
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Financial services and
enterprise software. Our products and services extend enterprise
applications to the wireless arena, such as customer relationship
management systems, sales force automation systems, information technology
(IT) service desk and business continuity protocols. One of our primary
focuses in this sales vertical is to develop software for the
data-intensive investment banking community and client-facing applications
for the retail banking
industry.
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We have
sales offices in New York, New York and Toronto, Canada and research and
development operations in Boulder, Colorado and Toronto, Canada. Our
principal executive office is located at 245 Park Avenue, 39th Floor, New York,
New York 10167. Our Web address is www.sonamobile.com.
Mission
Statement
Sona
seeks to enrich the gaming and entertainment industries through the use of our
innovative technology. Our goal is to be the leading provider of
server based gaming software and embedded wireless software. We seek
to offer gaming venues the ability to drive incremental revenue, reduce costs,
improve player tracking and improve the customer’s overall experience through
the implementation of our server based gaming and entertainment
applications.
Our
vision for growth includes developing and marketing best-of-breed gaming and
entertainment applications that provide operators with additional revenue
sources and distribution channels, forming strategic partnerships
with eading gaming and racing operators, and partnering with leading
content and distribution providers to enable the world-wide delivery of our
advanced technology.
Growth
Strategy
We
believe that the two essential components for long-term success in the highly
competitive client-server application software market are focus and expertise.
Our strategy is to leverage our distinct expertise in secure, real-time
software gaming systems and to develop embedded software applications aimed
at increasing the productivity, efficiency and revenue generating potential of
our customers. Our growth strategy includes the following key
components:
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To
take advantage of the growth and the latest trends in the gaming and
entertainment market by leveraging our expertise in client-server software
applications. Table games, sports books, lotteries, horse racing, and
other types of gaming can all be made portable and are expected to be
increasingly offered in wireless format and other embedded client
formats. We believe this technology will modernize the gaming
floor, reduce equipment, implementation and maintenance costs and improve
operator efficiencies, thereby adding direct value to our
customers.
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To
develop and market best-of-breed embedded software gaming and
entertainment applications that provide additional revenue sources and
content distribution channels to casino operators, horse race track
operators and other businesses in the gaming and entertainment
sector.
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To
partner with leading content providers in the gaming and entertainment
space, enabling delivery of comprehensive solutions combining advanced
embedded software technology with popular content to our
customers.
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To
form strong and lasting business relationships, directly and through our
strategic partners, with the leading casino operators in the world and
work closely with them in aligning our gaming solutions to the needs of
their end-users.
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To
leverage our technology across a wide range of end-markets. While our
primary focus will remain on gaming and entertainment markets, we will
continue pursuing select applications in the enterprise space capitalizing
on the increasingly mobile nature of the modern work force and the
necessity to expand PC-based corporate applications to a mobile
device.
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Gaming and Entertainment
We
believe that Sona is the first company in the world to achieve the GLI–26
standard for wireless gaming from Gaming Laboratories International, an
independent and internationally accredited gaming software certification
company. This certification was awarded in March 2007 to our the
wireless version of our SGS, at which time the system also received
certifications GLI–21 for server based game systems, as well as GLI–11 and
GLI-12 certification for gaming devices and progressive gaming devices in
casinos, GLI–13 certification for online monitoring and control and GLI–16
certification for cashless systems. At the time of the March 2007
certification, the SGS was certified for use with Shuffle Master’s Three Card
Poker™. These certifications permit Sona to deploy and operate the
certified system in certain domestic and international jurisdictions where
additional licensing is not required. In November 2007, three
additional non-proprietary games, roulette, blackjack and baccarat, were
certified for use with the SGS. Our intention is to pursue additional
certifications for other games and in jurisdictions where we plan to do
business.
In
January 2006, we entered into a strategic alliance distribution and licensing
agreement with Shuffle Master, Inc. (‘‘Shuffle Master’’), a leading provider of
table gaming content. Shuffle Master beneficially owns 8.2% of our common stock.
The licensing agreement was amended and restated in its entirety, as was a
related master services agreement, effective February 28, 2007. Under the terms
of the agreements, we have agreed to develop a Shuffle Master-branded wireless
gaming platform powered by Sona’s SWP for in-casino use, which would feature
handheld versions of Shuffle Master's proprietary table game content as well as
other popular public domain casino games. Though many of these products are
currently still in either the development or product certification and licensing
stages, a few have been commercially available since the fourth quarter of
2007.
In
addition, both the Company and Shuffle Master are permitted to distribute,
market and sell the version of the SGS to gaming venues worldwide. Additionally,
our Company has been granted a non-exclusive worldwide license to offer Shuffle
Master's proprietary table game content on the platform, and the Company has
granted Shuffle Master a non-exclusive worldwide license to certain
Sona-developed wireless platform software and enhancements that support the
integration and mobilization of casino gaming applications into in-casino
wireless gaming delivery systems.
In 2006,
in conjunction with our strategic alliance with Shuffle Master and because of
the perceived opportunities for wireless server-based applications in the gaming
industry, we switched our primary sales and development focus towards the gaming
industry. During 2007, we perceived that there was a potentially far
greater opportunity to develop and sell server-based gaming applications that
could be operated in both wired and wireless network environments or a
combination thereof and rather than focusing on just wireless gaming
applications, developed our products to run in multiple network
environments.
The
Sona Gaming System™
The
Company provides secure software solutions for server based gaming and
entertainment applications. We believe our technology delivers a rich
client experience without compromising performance or
security. Sona’s key differentiator is the Sona Gaming System™ (SGS),
an architecture which allows us to offer in-casino, internet and mobile systems
in conjunction with each other or separately. The mobile application is an
extension of the web and casino applications, integrating the same look, feel
and navigation that customers expect from our products. We believe
that our system is significantly less expensive for our customers on a per unit
basis, than a stand-alone slot or other electronic table game and adds
significant flexibility since many games can be played on a single
machine.
The SGS
is a standards-based development platform that makes it easier for corporations
to bring new or existing mission-critical data to mobile devices. The SGS
consists of distinct client and server-side software development kits (SDKs) and
a runtime server. They work together to produce compelling, intelligent client
applications that are at the same time scalable and robust.
The
SGS:
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Facilitates
seamless integration and customization, including fully branded
interfaces.
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Allows
rapid presentation design with its powerful user interface tools that are
highly optimized for resource-constrained
devices.
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Exists
as fully modular and decoupled components, making it both flexible and
easy to engage in incremental
deployment.
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Supports
Elliptic Curve Cryptography (“ECC”) and 128-bit Security Sockets Layer for
true end-to-end secure encryption; never compromising sensitive data
through gateway decryption.
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Is
device and cellular carrier agnostic: solutions can be deployed across all
prevalent PDA operating platforms, including Palm, Windows Mobile (Pocket
PC and Smartphone) and BlackBerry®, as well as Java™-enabled smart phones
through the use of Java™ 2 Micro Edition
(J2ME™).
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Readily
incorporates partner technology to extend features, functions, and
performance.
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Drastically
reduces development, testing, and deployment
time.
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Offers
server-side scalability, redundancy, and failover
support.
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The SGS
is a server based gaming software application which delivers slots, table games,
video poker, horseracing and sportsbook wagering virtually anywhere gaming is
permitted. Sona offers a secure central server and provides a
detailed account of all player activity, which gives casinos real-time player
tracking on a play-by-play basis. The SGS consists of server and
device software that runs on wireless personal digital assistants (PDA), a
wireless tablet or a fixed kiosk (wired or wireless). The SGS can be configured
for several games, including Blackjack, Roulette, Baccarat, Bingo, Keno, Video
Slots, and several varieties of Video Poker as well as Race and Sports Wagering.
The architecture also supports communal versions of these games for peer-to-peer
or multiplayer Poker (e.g., Texas Hold’em and Omaha).
The SGS
allows a multitude of games on almost any size device with centralized
controls. For example, a property might want to replace a video only
terminal in a race and sports book with the SGS. This will allow patrons
to sit within the designated sports book area and make race and sports wagers,
or play Roulette, Video Poker, Slots, or other table games between races or at
halftime. This can allow properties to extend their casino floor to
ancillary areas and, in our view, allows them to differentiate themselves from
other casinos by using this technology. The SGS kiosk screen can be
customized with property logos, advertisements, or current specials and offers.
The SGS brings gaming, entertainment and hospitality together to offer an
opportunity to casinos, cruise ships, racinos, bingo halls, and other gaming
venues to generate additional revenues.
The SGS
product architecture consists of and includes the following
features:
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A
secure central server, referred to as the back-of-house server, runs the
random number generator. It also contains all gaming logic, runs the
gaming engine, provides content and determines the outcome of
games.
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Play
is on a thin client device; the client will instantly download all content
which has the same look and feel as being at the
tables.
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Accounting
server provides real-time monitoring and accounting for all games
including buy-in, coin-in and coin-out by type of wager, total hands by
table, as well as play details, P&L, gross and payout
percentage.
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Accounting
server uses standard slot machine style interfaces for casino accounting
systems.
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Sona
Gaming System™ mobilizes wagering of any casino game to any wired or
wireless enabled casino location.
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The
Company offers customers and potential customers the opportunity to
benefit from our strategic partnerships with major content and hardware
providers such as the New York Racing Association, the Daily Racing Form, Del
Mar Thoroughbred Club, Equibase, Shuffle Master and Station
Casinos. In our view, these strong partnerships enable us to provide
the ultimate in content, distribution, marketing and
advertising. Our goal is to provide the best possible solution
to customers, allowing gaming venues to drive incremental revenue and reduce
operating costs by bringing modern and flexible technology to the casino
floor.
mWager™
and mWager SportsBook™
mWager™
is a wagering system for horse racing that allows users to place wagers by
offering a similar gaming interface whether the user is in the
casino, at the track, on a home computer or on a mobile device.
The
mWager™ application can be ported to a wired or wireless kiosk and almost any
mobile phone, PDA, or tablet device. Users can conduct pre-race
research for current day races; select the desired race, track, and date; place
wagers utilizing amount, pool and runner(s) selections; review, submit or cancel
wagering information; receive instant wager confirmation with a unique
transaction number; review wager history; view live odds; receive updated race
information automatically; view horse name and program numbers; watch secure,
streaming video of live races in real time at kiosks or on wireless devices;
receive race alerts regarding information such as runners and scratches; receive
instant access to results and post-race information; deposit funds and request
withdraws, display account balance and access important account
information. The software also has wagering and account management
built in and the server-console provides real-time monitoring and cash
management. mWager™, which is part of the SGS, uses encryption and
security at both the application and network levels to provide a completely
secure transaction environment.
mWager
SportsBook™ is a wagering system for sports that allows users to place
wagers by offering a similar gaming interface whether you are in the
sportsbook, on your home computer or on your mobile device. mWager
SportsBook ™ offers users the same security and accounting features provided by
the mWager™ system.
Sona
Media Platform™
The Sona
Media Platform consists of the Sona Media Player application for Blackberry® and
Windows Mobile® devices, Sona's mobile media encoding system, and the Sona Media
Management Server. This platform provides for full management of media content
delivery and program scheduling, as well as advanced user provisioning
capabilities. Sona's platform enables push delivery of media content from
the server, rather than users having to request a download of media to mobile
devices, and we believe it is the only system that provides media management and
delivery for Blackberry® devices and have filed a provisional patent application
for these features. The entire platform is designed to integrate with mobile
carrier systems, enterprise media applications, or third party content
management systems. An easy to use browser based management console
provides full control of the platform, and application program interfaces
(“API’s”) enable custom integration with any external system. Using our
patent-pending mobile media player technology for mobile devices, we have made
it possible for users to access and view multi-media content on BlackBerry® and
other handheld devices. The media player is a brandable mobile
application that can be customized for a variety of media delivery applications
and services.
In addition, we have combined the fully configurable Media Manager Server with a
new version of the Sona Media Player™. This new platform introduces
the concept of ‘push media’, which distributes content to wireless devices
invisibly and notifies users when multi-media content has been delivered to the
device and is available for playback. This eliminates the need for
subscribers to manually download video clips over wireless networks, and
provides subscribers with immediate access to content such as breaking news or
daily highlights. Video content can also be played via the Sona Media
Player on the latest generation of Blackberry® devices.
Our entertainment software products also give content providers a new platform
to sell, market and distribute their broadcast content to customers in a mobile
format. We believe that the key differentiator of our video products is the
ability to integrate them with our existing data applications, such as our horse
racing and financial markets products. We believe that particular types of
information will be purchased by retail customers, including headline news
clips, sports clips, full length sporting events, entertainment news and music
videos. In addition, we believe that there is significant demand in the
financial services sector for wireless access to analyst calls, morning market
calls, and other time-sensitive financial markets news. By partnering with
content providers, we plan to offer the ability to view streamed video in
real-time on most wireless devices including JAVA phones, PDA's and
SmartPhones.
Financial
Services and Enterprise Software
Financial
markets are open 24 hours a day, five days a week, and are prone to volatility.
Financial institutions and professionals are demanding market related
information 24 hours a day, seven days a week, as well as cost effective mobile
solutions, in order to increase information visibility, service availability,
productivity, risk management, and ultimately, profitability. For these
enterprises, we have developed application software products that deliver in
real-time information that may be required by professionals in the finance
sector, including traders, risk managers, investment bankers and stock brokers.
Such information takes the form of live market data and news, proprietary data
and risk systems, research, internal Web casts, as well as trade execution and
regulatory compliance. With the convergence of technologies, devices,
connectivity, availability and pricing, there is now an opportunity to deliver
financial and business data services in a wireless format, which meets the needs
of the end users in both the professional and retail space.
Our
wireless enterprise software products allow mobile workers to access all their
critical applications from handheld devices and interact with enterprise data
systems from anywhere. Whether involving replication of corporate help desk
software, capturing inspection data or transmitting any proprietary programs and
information, we believe that our wireless enterprise application software
products make working outside the office simple and efficient.
In the
wireless data market place, there are many technology companies providing
solutions. However, we believe most of these providers lack an accurate
understanding of their customers’ requirements, resulting in the following
flaws:
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Technology
driven. Many technology companies provide their clients with complex
technology products rather than solutions that meet their unique
requirements – ease-of-use, timely data and
reliability.
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Single
technology delivery. Most technology companies offer only one common
technology to deliver such data, whereas varying types of data requires
different modes of delivery.
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Narrow
products. Competitors offer narrow products rather than robust and
customer-driven products. These narrow products are designed to meet only
specific requirements, leaving the customer to cobble together an array of
products on varying platforms to replicate the workplace
environment.
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The emergence
of a new generation of mobile computers has compelled enterprises to deploy
mobile applications software in many areas. Mobile employees can access
enterprise data and applications and transact with them while in the field,
providing increased efficiency, productivity, employee satisfaction, and
responsiveness.
We
believe that our software products can be seamlessly integrated with existing
infrastructure and create efficiency gains by allowing employees in the field to
spend less time on administrative tasks as follows:
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User
interface features such as pre-populated fields, check-boxes and
selectable menus reduce time
requirements;
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Data
is captured once and transmitted to a central repository immediately via a
wireless data connection or through an end-of-day
synchronization;
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Client
history or site information may be pre-loaded for reference for faster
response; and
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Custom
features are easily incorporated into any application, including
scheduling, route planning and employee
visibility.
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We offer
financial services and enterprise companies the following products and
services:
Sona
Mobile Markets
Sona
Mobile Markets is a suite of application software programs that provides
real-time market data, quotes, graphs, portfolios, watch lists, news and trading
transactions for the financial marketplace. Sona Mobile Markets is an
‘‘out-of-the-box’’ product enabling mobile access to business-critical
information previously only available to financial market professionals on the
trading floor. This product serves as an access point for a full array of
financial services comprised of carefully selected technologies, including
real-time streaming of prices, up-to-the-second news, market analysis, research
and more, all combined into one device and benefiting from complete synergy with
a user’s workplace systems. While Sona Mobile Markets currently targets the
financial services market, we believe that it can rapidly be modified to deliver
content to different markets.
ServiceDesk
Pro
Developed
based on its parent product Sona Service Desk, the ServiceDesk Pro is a
field force automation product for field technicians and service personnel that
provides wireless delivery of work orders and wireless gathering of status and
completion information on ruggedized field-ready windows laptops and wireless
PDA’s. The product is designed to be able to rapidly replicate a
“like for like” user interface and to use our advanced secure mobile delivery
technology and back office integration tools to replace some of the
legacy products currently in use at large corporations.
We
believe that ServiceDesk Pro can dramatically reduce support and
maintenance cost, requires little or no additional training for the field force,
and provides significant extensibility and flexibility for the
future.
We
believe that Sona Service Desk Pro provides the mobile foundation for an
integrated, ‘‘end-to-end’’ approach to information technology service
management. This product wirelessly enables a mobile work force to submit,
monitor, and manage help desk cases, change tasks, and asset and inventory
records. Service Desk Pro also indicates which business services are
impacted by a given incident or problem by sending trouble tickets to your
wireless device of choice. Sona Service Desk Pro allows the user to determine
priorities based on business needs and respond within seconds to address those
priorities.
We
believe that the benefits that Service Desk Pro can offer include the
following:
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Increases
the adoption of Help Desk features for better trouble
shooting;
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Improves
productivity and effectiveness of field service
representatives;
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Improves
the product data quality for forecasting, ordering, performance evaluation
and customer service requests; and
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Is
scalable and adaptable to customer
requirements.
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Sona
Service Desk Pro takes the capabilities of the enterprise’s ‘‘help desk’’
software and builds a tailored interface for the wireless handheld device of
choice. This product seamlessly delivers the applications of an enterprise to
wireless devices in a personalized fashion. We believe that this product
minimizes downtime and maximizes productivity. With Sona Service Desk Pro,
information technology staff can wirelessly access the same help desk they know
and use in their office from wherever they may be located. By using our
multi-threading technology, users can run this product in the background while
accessing other key information and applications on their wireless devices, such
as short messaging text services, e-mail and voice services.
Sales
and Marketing
We market
our products to some of the leading casino, race track and cruise ship
operators, as well as mid and large size enterprises in data intensive
verticals, including the financial services and insurance industries. We use a
comprehensive distribution channel strategy in order to penetrate our target
markets as rapidly as possible and to reach a significantly high number of
users, while seeking to keep resource consumption low. Our channel partners
represent an essential component of our sales and marketing strategy. We pursue
sales alliances and reseller arrangements within the following categories of
businesses:
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Providers
of gaming hardware and content;
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Cellular
telephone operators, who could take our products to their client bases,
satisfying both the needs of their enterprise clients in this vertical
space and their own need to increase revenues and usage of data
services;
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IT
systems integration and hosting companies – firms that can add our
products to their integration services in their geographic
regions;
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Wireless
device marketing and distribution
companies;
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Hardware
and operating systems software
vendors;
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Resellers
and distributors which have significant client bases and brands in the
financial services vertical space;
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We cannot
assure you that our marketing and sales efforts will result in definitive
business arrangements with any of these companies or if we do enter into any
such arrangements, that such arrangements will be advantageous or profitable for
us.
During
the fiscal year ended December 31, 2007, two customers collectively comprised
62% of our revenue (47% and 15%, respectively). During 2006, three customers
collectively comprised approximately 60% of our revenue (24%, 22% and 14%,
respectively). Since revenues are derived in large part from single projects, we
bear some credit risk due to a high concentration of revenues from individual
customers. The customer revenue concentrations referenced above in both 2007 and
2006 are primarily single project revenues in the respective years, although
there will be some smaller amounts of recurring revenues from the 2007 customers
referenced in subsequent fiscal years due to maintenance and support fees
spelled out in the respective contracts. The 2007 percentages above
derived from financial services and enterprise products and gaming products
respectively, while all the 2006 percentages derived from financial services and
enterprise products.
Product
Development Strategy
We
develop our products to meet the stringent requirements of GLI, as well as the
testing laboratories of other jurisdictions, including Nevada, in which we seek
to do business, for providing secure execution of real time transactions over
wireless and wired server-based and cellular delivery systems. The
manufacturing and distribution
of gaming
products and the conduct of gaming operations are subject to extensive
regulation by various domestic and foreign gaming authorities. Our gaming
devices and related software are subject to independent testing prior to
approval for each jurisdiction in which we plan to do business. On
March 1, 2007, we received GLI certification of the wireless version of the SGS
for use with Shuffle Master’s Three Card Poker® game under the GLI-26 ‘‘Wireless
Gaming Systems Standards.’’ We believe that we are the first company in the
world to receive GLI certification for a wireless gaming system based on random
number generation technology, a key component in many casino products including
automatic card shufflers, slot machines and multi-player table games. The
certification covers use of our system with Shuffle Master's Three Card Poker®
game. Additional regulatory approval in some jurisdictions may be
required. In addition, the Company has received certifications GLI–21 for
(server based game systems), GLI–11 and 12 (gaming devices and progressive
gaming devices in casinos), GLI–13 (online monitoring and control) and GLI–16
(cashless systems). These noteworthy certifications permit Sona to
deploy and operate the SGS in certain domestic and international jurisdictions
where additional licensing and product certification is not required, including
cruise ships when they are not in port, although most North American and many
international jurisdictions have their own approval processes. In
November 2007, three additional non-proprietary games, roulette, baccarat and
blackjack were also approved by GLI for use with the SGS. The Company
plans to submit additional games to be GLI certified for use with the
system, including Shuffle Master's proprietary Ultimate Texas Hold'em™, Dragon
Bonus® Baccarat, Let It Ride Bonus® and other Shuffle Master titles, as well as
other public domain and non-proprietary games.
We are
committed to deploying software products that surpass not only industry
standards for performance and resilience, but also meet the expectations of our
partners, customers and end users through independent testing and verification.
We believe that this distinguishes us from many competing software
providers.
Competition
We
compete in the highly competitive businesses of casino gaming software
applications, wireless enterprise application software, mobile and wireless
telecommunications, systems integration and professional services. The
competition is from a broad range of both large and small domestic and
international corporations. Most of our competitors have far greater financial,
technical and marketing resources than we do.
In the
mobile gaming and entertainment industry, our competition includes but is not
limited to, Cantor Gaming, Diamond I, FortuNet, International Game Technology,
Gametech International, and Phantom Fiber Corporation. In the enterprise and
financial services sector, our competitors include @Hand Corp, Dexterra, Sybase,
Infowave Systems and Novarra, as well as companies such as Bloomberg and Reuters
who are increasingly offering mobile versions of their desktop
software.
We
believe that our principal competitive advantage in the gaming industry is the
fact that we are one of the first companies with a server-based gaming system
which can be deployed in both wired and wireless environments. We are focused on
server-based applications based on our broad understanding of client-server
technology in both of these wired and wireless environments and how best to
leverage such technology to create new revenue streams for our customers and
increase their productivity and efficiency. The competitive factors important to
us are our technology, development and engineering expertise, subject matter
expertise, customer support, distribution channel and customer relationships, as
well as the ability to be licensed as a company and get our products licensed
and certified in the various jurisdictions in which we seek to do
business. Industry competitive factors include, but are not limited
to, technology, engineering capability, customer support, breadth and depth of
strategic relationships, financial condition, and marketing initiatives. We seek
to leverage the quality of our development team, the depth and breadth of our
customer relationships, and our ability to respond quickly to change and
respond, in order to be competitive and successful.
Research
and Development
We
maintain our research and development operations in Toronto, Canada and Boulder,
Colorado. At February 29, 2008 we employed 24 persons in research and
development and engineering. We find it advantageous to have the majority of our
research and development activities in Toronto due to the abundance of
available, affordable and talented software engineers. Total costs incurred in
research and development amounted to $2,547,858 for the fiscal year ended
December 31, 2007, and $2,002,121 for the year ended December 31,
2006.
Regulatory
& Legal Environment
General
The
manufacture, sale and distribution of gaming devices, equipment and related
gaming software is subject to federal, state, tribal and local regulations in
the United States and foreign jurisdictions. While the regulatory requirements
vary from jurisdiction to jurisdiction, the majority of these jurisdictions
require licenses, registrations, permits, findings of suitability, documentation
of qualification including evidence of financial stability and/or other required
approvals for companies who manufacture and distribute gaming equipment, as well
as the individual suitability or licensing of officers, directors, major
shareholders and key employees. Laws of the various gaming regulatory
agencies generally serve to protect the public and ensure that gaming related
activity is conducted honestly, competitively, and free of
corruption.
We and
our key personnel have obtained gaming licenses in the state of Nevada as a
Manufacturer (Manufacturer of Gaming Devices or Equipment), Distributor
(Distributor of Gaming Devices or Equipment) and Mobile Operator (Operator of a
Mobile Gaming System). We have never been denied a gaming related license, nor
have any licenses been suspended or revoked. We are not yet licensed as a
company in other jurisdictions, however we are in the process of applying or
will be applying for licenses in jurisdictions where we plan to do business and
licensing is required. Our gaming equipment system is not yet licensed in any
specific gaming jurisdictions, however we received Gaming Labs International
‘‘GLI’’ certification in 2007 for our Wireless and Server-based Gaming System
for use with Shuffle Master’s Three Card Poker® game under the GLI-26 ‘‘Wireless
Gaming Systems Standards’’, as well as GLI-13 approval for on-line monitoring
and control systems, GLI-16 approval for cashless systems in casinos, GLI-21
approval for its server-based gaming platform. In November 2007, three
additional games, Baccarat, Blackjack and Roulette were also approved by GLI for
use with our system. Thiscertification allows us to market and distribute our
products in jurisdictions, as well as to cruise ship lines, where additional
regulatory licensing may not be required.
Nevada
Regulation
The
manufacture, sale and distribution of gaming devices in Nevada or for use
outside Nevada are subject to the Nevada Gaming Control Act and the regulations
of the Nevada Gaming Commission (‘‘NV Commission’’), and the State Gaming
Control Board (GCB), and the local laws, regulations and ordinances of various
county and municipal regulatory authorities (collectively referred to as the
Nevada gaming authorities). These laws, regulations and ordinances
primarily concern the responsibility, financial stability and character of
gaming device manufacturers, distributors and operators, as well as persons
financially interested or involved in gaming operations. The manufacture,
distribution and operation of gaming devices require separate licenses. The
laws, regulations and supervisory procedures of the Nevada gaming authorities
seek to (i) prevent unsavory or unsuitable persons from having a direct or
indirect involvement with gaming at any time or in any capacity; (ii) establish
and maintain responsible accounting practices and procedures; (iii) maintain
effective control over the financial practices of licensees, including
establishing minimum procedures for internal fiscal affairs and the safeguarding
of assets and revenues, providing reliable record keeping and requiring the
filing of periodic reports with the Nevada gaming authorities; (iv) prevent
cheating and fraudulent practices; and (v) provide a source of state and local
revenues through taxation and licensing fees. Changes in these laws,
regulations, procedures, and judicial or regulatory interpretations could have
an adverse effect on our gaming operations.
Our
licenses require the periodic payment of fees and taxes and are not
transferable. Each type of machine we sell in Nevada must first be approved by
the NV Commission and may require subsequent machine modification.
We are
registered with the NV Commission as a publicly traded corporation and are
required periodically to submit detailed financial and operating reports to the
NV Commission and to furnish any other information that the NV Commission may
require. Our officers, directors and key employees who are actively engaged in
the administration or supervision of gaming and/or directly involved in gaming
activities of our licensed gaming subsidiaries may be required to file
applications with the Nevada gaming authorities and may be required to be
licensed or found suitable by them. Officers, directors and certain key
employees of our licensed gaming subsidiaries must file applications with the
Nevada gaming authorities and may be required by them to be licensed or found
suitable. It is our policy to pay all costs of the GCB investigations that are
related to our officers, directors or employees.
The
Nevada gaming authorities may investigate any individual who has a material
relationship or involvement with us, or any of our licensed gaming subsidiaries
in order to determine whether such individual is suitable or should be licensed
as a business associate of a gaming licensee. The Nevada gaming authorities may
deny an application for licensure or finding of suitability for any cause deemed
reasonable. A finding of suitability is comparable to licensing and both require
submission of detailed personal and financial information followed by a thorough
background investigation. The applicant for licensing or a finding of
suitability must pay all costs of the investigation. We must report changes in
licensed positions to the Nevada gaming authorities. The Nevada gaming
authorities may disapprove any change in position by one of our officers,
directors or key employees, or require us to suspend or dismiss officers,
directors or other key employees and sever all relationships with such persons,
including those who refuse to file appropriate applications or whom the Nevada
gaming authorities find unsuitable to act in such capacities. Determinations of
suitability or of questions pertaining to licensing are not subject to judicial
review in Nevada.
We are
required to submit detailed financial and operating reports to the NV
Commission. If it were determined that any Nevada gaming laws were violated by
us or any of our licensed gaming subsidiaries, our gaming licenses could be
limited, conditioned, suspended or revoked, subject to compliance with certain
statutory and regulatory procedures. In addition, we, our licensed gaming
subsidiaries and any persons involved may be subject to substantial fines for
each separate violation of the Nevada gaming laws at the discretion of the NV
Commission. The NV
Commission
also has the power to appoint a supervisor to operate our gaming properties and,
under certain circumstances, earnings generated during the supervisor’s
appointment could be forfeited to the State of Nevada. The limitation,
conditioning or suspension of our gaming licenses or the appointment of a
supervisor could (and revocation of our gaming licenses would) materially and
adversely affect our gaming operations.
The NV
Commission may require any beneficial holder of our voting securities,
regardless of the number of shares owned, to file an application, be
investigated, and be found suitable, in which case the applicant would be
required to pay all of the costs and fees of the GCB investigation. If the
beneficial holder of voting securities who must be found suitable is a
corporation, partnership, or trust, it must submit detailed business and
financial information including a list of beneficial owners. Any person who
acquires more than 5% of our voting securities must report this to the NV
Commission. Any person who becomes a beneficial owner of more than 10% of our
voting securities must apply for a finding of suitability within 30 days after
the chairman of the GCB mails the written notice requiring this
filing.
Under
certain circumstances, an Institutional Investor, as this term is defined in the
NV Commission regulations, which acquires more than 10%, but not more than 15%,
of our voting securities may apply to the NV Commission for a waiver of these
finding of suitability requirements, provided the institutional investor holds
the voting securities for investment purposes only. An institutional investor
will not be deemed to hold voting securities for investment purposes unless the
voting securities were acquired and are held in the ordinary course of its
business and not for the purpose of causing, directly or indirectly (i) the
election of a majority of our board of directors; (ii) any change in our
corporate charter, bylaws, management, policies or operations; or (iii) any
other action which the NV Commission finds to be inconsistent with holding
our voting securities for investment purposes only. The NV Commission considers
voting on all matters voted on by shareholders and the making of financial and
other informational inquiries of the type normally made by securities
analysts, and such other activities as the NV Commission may determine, to be
consistent with holding voting securities for investment purposes only. If the
beneficial holder of voting securities who must be found suitable is a
corporation, partnership, limited partnership, limited liability company or
trust, it must submit detailed business and financial information including a
list of beneficial owners. The applicant is required to pay all costs of the GCB
investigation.
Any
person who fails or refuses to apply for a finding of suitability or a license
within 30 days after being ordered to do so by the NV Commission or the chairman
of the GCB may be found unsuitable. The same restrictions apply to a record
owner who fails to identify the beneficial owner, if requested to do so. Any
stockholder found unsuitable and who holds, directly or indirectly, any
beneficial ownership of our voting securities beyond that period of time as may
be prescribed by the NV Commission may be guilty of a criminal offense. We are
subject to disciplinary action, and possible loss of our approvals, if, after we
receive notice that a person is unsuitable to be a stockholder or to have any
other relationship with us or any of our licensed gaming subsidiaries, we (i)
pay that person any dividend or interest upon our voting securities, (ii) allow
that person to exercise, directly or indirectly, any voting right conferred
through securities held by that person, (iii) give remuneration in any form to
that person, for services rendered or otherwise, or (iv) fail to pursue all
lawful efforts to require the unsuitable person to relinquish his voting
securities for cash at fair market value. Additionally, the Clark County
authorities have taken the position that they have the authority to approve all
persons owning or controlling the stock of any corporation controlling a gaming
licensee
The NV
Commission may, in its discretion, require the holder of any of our debt
securities to file an application, be investigated and be found suitable to own
any of our debt securities. If the NV Commission determines that a person is
unsuitable to own any of these securities, then pursuant to the Nevada gaming
laws, we can be sanctioned, including the loss of our approvals, if without
prior NV Commission approval, we: (i) pay to the unsuitable person any dividend,
interest, or any distribution whatsoever; (ii) recognize any voting right by the
unsuitable person in connection with these securities; (iii) pay the unsuitable
person remuneration in any form; or (iv) make any payment to the unsuitable
person by way of principal, redemption, conversion, exchange, liquidation, or
similar transaction.
We are
required to maintain a current stock ledger in Nevada which may be examined by
the Nevada gaming authorities at any time. If any of our securities are held in
trust by an agent or by a nominee, the record holder may be required to disclose
the identity of the beneficial owner to the Nevada gaming authorities. A failure
to make this disclosure may be grounds for finding the record holder unsuitable.
We are also required to render maximum assistance in determining the identity of
the beneficial owner. The NV Commission has the power at any time to require our
stock certificates to bear a legend indicating that the securities are subject
to the Nevada gaming laws and the regulations of the NV Commission. To date, the
NV Commission has not imposed this requirement on us.
We may
not make a public offering of our securities without the prior approval of the
NV Commission if the securities or their proceeds are intended to be used to
construct, acquire or finance gaming facilities in Nevada, or retire or extend
obligations incurred for such purposes. Such approval, if given, does not
constitute a finding, recommendation, or approval by the NV Commission or the
GCB as to the accuracy or adequacy of the prospectus or the investment merits of
the securities. Any representation to the contrary is unlawful.
Changes
in control through merger, consolidation, acquisition of assets or stock,
management or consulting agreements or any act or conduct by a person whereby he
obtains control, may not occur without the prior investigation of the GCB and
approval of the NV Commission. Entities seeking to acquire control of us must
satisfy the GCB and the NV Commission in a variety of stringent standards prior
to assuming control. The NV Commission may also require controlling
shareholders, officers, directors and other persons having a material
relationship or involvement with the entity proposing to acquire control, to be
investigated and licensed as part of the approval process relating to the
transaction.
The
Nevada legislature has declared that some corporate acquisitions opposed by
management, repurchases of voting securities and other corporate defense tactics
that affect Nevada gaming licensees, and publicly-traded corporations that are
affiliated with those operations, may be injurious to stable and productive
corporate gaming. The NV Commission has established a regulatory scheme to
ameliorate the potentially adverse effects of these business practices upon
Nevada’s gaming industry and to further Nevada’s policy to (i) assure the
financial stability of corporate gaming operators and their affiliates; (ii)
preserve the beneficial aspects of conducting business in the corporate
form; and (iii) promote a neutral environment for the orderly governance of
corporate affairs. Approvals are, in certain circumstances, required from the NV
Commission before we can make exceptional repurchases of voting securities above
their current market price and before a corporate acquisition opposed by
management can be consummated. Nevada’s gaming laws and regulations also require
prior approval by the NV Commission if we were to adopt a plan of
recapitalization proposed by our board of directors in opposition to a tender
offer made directly to our shareholders for the purpose of acquiring control of
us.
License
fees and taxes, computed in various ways depending on the type of gaming or
activity involved, are payable to the State of Nevada and to the cities and
counties where our subsidiaries conduct operations. Depending on the
particular fee or tax involved, these fees and taxes are payable either monthly,
quarterly or annually. Annual fees are payable to the State of Nevada to renew
our licenses as a manufacturer, distributor, and operator of a slot machine
route. Nevada gaming law also requires persons providing gaming devices in
Nevada to casino customers on a revenue participation basis to pay their
proportionate share of the taxes imposed on gaming revenues generated by the
participation gaming devices.
Any
person who is licensed, required to be licensed, registered, required to be
registered, or is under common control with such persons (collectively referred
to as licensees), and who proposes to participate in the conduct of gaming
operations outside of Nevada is required to deposit with the GCB, and thereafter
maintain, a revolving fund in the amount of $10,000 to pay the expenses of
investigation by the GCB of the licensee’s participation in foreign gaming. This
revolving fund is subject to increase or decrease at the discretion of the NV
Commission. As a licensee, we are required to comply with certain reporting
requirements imposed by the Nevada gaming laws. We are also subject to
disciplinary action by the NV Commission if we knowingly violate any laws of the
foreign jurisdiction pertaining to our foreign gaming operation, fail to conduct
our foreign gaming operations in accordance with the standards of honesty and
integrity required of Nevada gaming operations engage in any activity or enter
into any association that is unsuitable because it poses an unreasonable threat
to the control of gaming in Nevada, reflects or tends to reflect discredit or
disrepute upon the State of Nevada or gaming in Nevada, or is contrary to the
gaming policies of Nevada, engage in any activity or enter into any association
that interferes with the ability of the State of Nevada to collect gaming taxes
and fees, or employ, contract with or associate with any person in the foreign
gaming operation who has been denied a license or a finding of suitability in
Nevada on the ground of personal unsuitability, or who has been found guilty of
cheating at gambling.
Other
Jurisdictions
Each of
the other jurisdictions in which we do business requires various licenses,
permits and approvals in connection with the manufacture and/or distribution of
gaming devices typically involving restrictions similar in many respects to
those of Nevada.
Federal
United States Registration
The
Federal Gambling Devices Act of 1962 (the Act) makes it unlawful for a person to
manufacture, transport, or receive gaming machines, gaming devices or components
across interstate lines unless that person has first registered with the
Attorney General of the US Department of Justice. We are so registered and must
renew our registration annually. In addition, gambling device identification and
record keeping requirements are imposed by the Act. Violation of the Act may
result in seizure and forfeiture of the equipment, as well as other penalties.
We have complied with the registration requirements of the Act.
Native
American Gaming Regulation
Gaming on
Native American lands is governed by federal law, tribal-state compacts, and
tribal gaming regulations. The Indian Gaming Regulatory Act of 1988 (IGRA)
provides the framework for federal and state control over all gaming on Native
American lands and is administered by the National Indian Gaming Commission (the
NIGC) and the Secretary of the US Department of the Interior. IGRA requires that
the tribe and the state enter into a written agreement, a tribal-state compact,
which governs the terms of the gaming activities. Tribal-state compacts vary
from state-to-state and in many cases require equipment manufacturers and/or
distributors to meet ongoing registration and licensing requirements. In
addition, tribal gaming commissions have been established by many Native
American tribes to regulate gaming related activity on Indian
lands.
International
Regulation
Certain
foreign countries permit the importation, sale and operation of gaming equipment
in casino and non-casino environments. Some countries prohibit or restrict the
payout feature of the traditional slot machine or limit the operation and the
number of slot machines to a controlled number of casinos or casino-like
locations. Each gaming machine must comply with the individual country’s
regulations. Certain jurisdictions require the licensing of gaming machine
operators and manufacturers.
Intellectual
Property
We
believe that our intellectual property rights are significant assets that
provide us with a competitive advantage and are critical to our future
profitability and growth. We seek to protect our investment in research
and development by seeking patent and trademark protection for our
technologies. We also acquire and license patents and other intellectual
property from third parties.
Patents: We have patent
applications pending for certain of our existing products and methods, including
for the Sona MediaPlayer™ for Blackberry® and several patent applications
relating to our SGS, future products that have not yet been introduced,
potential product modifications and improvements and to products we do not
currently sell. A majority of these technologies are internally developed. Some
of our technology has been purchased and is licensed. No
assurance can be given that any such patent applications will be issued or that
the patents we have licensed or any new patents that we acquire will be or
remain valid or will provide any competitive protection for our
products.
Trademarks: We own
several common law trademarks and have several trademark applications pending in
the U.S. and in some foreign countries. We market most of our
products under trademarks that we believe provide product recognition and
promote widespread acceptance. We also license trademarks from
others. We seek protection for our trademarks in the U.S. and various
foreign countries, where applicable.
Other Intellectual
Property: In addition to patents and trademarks, we also own
intellectual property in the form of copyrights (unregistered) and trade
secrets. No assurance can be given that we will be successful in maintaining the
confidentiality of our trade secrets and other proprietary information. Costs
associated with defending and pursuing infringement claims can be substantial.
In the absence of valid and enforceable patent, copyright, trademark or trade
secret protection, we would be vulnerable to competitors who could lawfully copy
our products and technology.
Product-Related
Agreements: We are party to certain cross-licensing agreements.
Under these agreements, we have certain rights to third party intellectual
property. There are no royalty obligations with respect to any of these
agreements that are material to our results of operations. Further, none of the
royalties that we receive from these agreements are currently material to our
results of operations.
Infringement and
Litigation: We do not believe that any of our products, methods or
technologies infringes the valid and enforceable patents and other valid and
enforceable intellectual property rights of others. We have not been
and are not currently subject to litigation claiming that we have infringed the
rights of others. From time to time, we have received, and may
receive in the future, notice of claims of infringement of others’ proprietary
rights.
Employees
At
February 29, 2008, we had 32 full-time employees. Approximately 3 of our
employees are engaged in sales and marketing, 5 are engaged in executive
management, finance and administration, and 24 in engineering and
development. No employees are covered by a collective bargaining
agreement. We believe that we have a good relationship with all of our
employees.
RISK
FACTORS
In
addition to the other information in this report, the following risk factors
should be considered carefully in evaluating our business and us.
Risks
Related to Our Business
We
will need additional financing to continue our operations past May 2008, which
financing may not be available on acceptable terms or at all and, if available,
may result in significant additional dilution to our current
stockholders.
At
December 31, 2007, we had total cash and cash equivalents of $2.4 million held
in current and short-term deposit accounts. We believe that based on our
current level of spending, this cash will only be sufficient to fund our
operations until May 2008. Based on our current business plans, we will be
obligated to seek additional financing before that time. Such financing
may not be available to us on favorable terms, or at all. If adequate funds are
not available when required or on acceptable terms, we may be unable to continue
our operations as planned, or at all. In addition, financing transactions,
if successful, are likely to result in significant additional dilution to the
voting and economic rights of our existing stockholders. Financings may
also result in the issuance of securities with rights, preferences and other
characteristics superior to those of our common stock and, in the case of debt
or preferred stock financings, may subject the company to covenants that
restrict its ability to freely operate its business.
Our
8% senior unsecured convertible debentures due 2010 contain
various negative covenants that limit, among other things, our ability to incur
debt and create liens on our properties or assets, except with the consent of
holders of at least 51% of the principal amount of the debentures then
outstanding, or if there are less than $500,000 principal amount of
debentures then outstanding. As a result, these negative covenants may
impair our ability to obtain future debt financing.
We
have a history of losses, our auditors have stated that these losses raise
substantial doubt about our ability to continue as a going concern and we expect
to continue to operate at a loss and to have negative cash flow from operations
for the foreseeable future.
We have a
history of continuing losses and negative cash flow from operations. From
our inception in November 2003 through December 31, 2007, we had cumulative net
losses of approximately $21.6 million and we had negative cash flow from
operations in the year ended December 31, 2007, of approximately $5.4 million.
We expect that our expenses will increase substantially as we continue to
develop our products and services. In addition, since we became a public company
our general and administrative expenses have increased significantly. As a
result, we expect to continue to incur losses for the foreseeable
future.
Because of
our history of continuing losses, our auditors, in their report on our audited
financial statements included elsewhere in this report, have stated that these
losses raise substantial doubt about our ability to continue as a going concern.
The going concern qualification from our auditors could have a negative
impact on our future sales to customers, inhibit our ability to obtain financing
terms from vendors and may adversely impact our ability to raise additional
financing. Accordingly, we cannot assure you that we will ever be
profitable. Whether we ever become profitable will depend on many factors, but
principally on our ability to raise additional capital and to successfully
market our products and services. See ‘‘Management’s Discussion and
Analysis or Plan of Operations-Liquidity and Capital Resources’’.
Our
limited operating history makes evaluation of our business and prospects
difficult.
Our
limited operating history makes it difficult to evaluate our business and
prospects. We have encountered, and expect to continue to encounter, many of the
difficulties and uncertainties often faced by early stage companies. You should
consider our business and prospects in light of the risks, uncertainties and
difficulties frequently encountered by early stage companies, including limited
capital, delays in product development, marketing and sales obstacles and
delays, inability to gain customer acceptance of our products and services,
inability to attract and retain high-quality and talented executives and other
personnel and significant competition. We cannot be certain that we will
successfully address these risks. If we are unable to address these risks, our
business may not grow, our stock price may suffer and/or we may be unable to
stay in business.
We
are an early stage software development company and our business focus is
primarily on product development of unproven products.
Our business
is primarily focused on research and development of wireless and
server-based gaming applications which have not yet proven themselves or been
widely accepted in the industries in which we are targeting our products. These
products have not generated sufficient levels of revenue to date to sustain our
current level of expenditures. There can be no assurance that our wireless
applications will be developed into marketable products from which we will
generate significant revenue. Our future revenues and success will depend upon
our successful development efforts and the sales and marketing of our wireless
gaming solution and other products, which are largely unproven at this time. Our
ability to successfully introduce our products into the market may be affected
by a number of factors, such as consumer acceptance, unforeseen costs and
expenses, regulatory approvals, technological changes, economic downturns,
competitive factors or other events beyond our control.
Our
future success depends on broad market acceptance of wired and wireless
server-based software applications in the gaming industry, which may not
happen.
The
market for server-based gaming software application products and services in the
gaming industry has begun to develop only recently and is characterized by rapid
technological change, evolving industry and regulatory standards and unknown
customer demand for new products, applications and services. As is typical of a
new and rapidly evolving industry, the demand for and market acceptance of
wireless data application products and services are highly uncertain. We cannot
assure you that the use of wired and wireless server-based data application
products and services will become widespread in the gaming industry. The
commercial acceptance of server-based data application products and services in
the gaming industry may be affected by a number of factors
including:
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quality
of infrastructure;
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equipment,
software or other technology
failures;
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inconsistent
quality of service; and
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lack
of availability of cost-effective, high-speed network
capacity.
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If the market
for client-server data application products and services in the gaming industry
fails to develop, develops more slowly than we anticipate, or if wireless data
application products and services products and services fail to achieve market
acceptance, our business could be adversely affected.
Our
business depends on the level of capital spending by enterprises for technology
products and services.
As a
supplier of technology products and services for enterprises including race
tracks and casinos, our business depends on the level of capital spending for
technology products and services by enterprises in our target markets. We
believe that an enterprise's investment in computer network and communications
systems and related products and services depends largely on general economic
conditions that can vary significantly as a result of changing conditions in the
economy as a whole. The market for technology and communications products
and services may continue to grow at a modest rate, or may not grow at
all. If the level of spending by our customers on technology and
communications systems and related products and services decreases, our revenue
and operating results may be adversely affected.
If
we fail to keep up with changes in our industry, we will become less
competitive, which will adversely affect our financial performance.
In order
to remain competitive and serve our customers effectively, we must respond on a
timely and cost-efficient basis to technological changes as well as changes in
industry standards and procedures and customer preferences. In some cases these
changes may be significant and their cost may be substantial. We cannot assure
you that we will be able to adapt to any changes in the future or that we will
have the financial resources to keep up with changes in the marketplace. The
cost of adapting our products and services may have a material and adverse
effect on our operating results.
Our
competitive position may depend upon our strategic alliance agreements with
Shuffle Master.
Pursuant
to our strategic alliance agreements with Shuffle Master, we have agreed to
develop a wireless gaming solution for marketing and distribution by Shuffle
Master in exchange for a percentage of revenues received from sales. If we
are unable to develop the contemplated products, or if we experience delays in
development, we may not recoup our investment. Moreover, Shuffle
Master is not obligated to market and distribute our products under the
agreements and we may not receive any revenues under the agreements. These
agreements are non-exclusive and, if Shuffle Master decides to license its
proprietary content to third parties, our products may face additional
competition. In addition, if we breach the agreements with Shuffle Master, or
those agreements are terminated, our competitive position may suffer and our
business could be adversely affected. Without revenues from
the
agreements
with Shuffle Master, we will have to either license alternative proprietary
content or develop non-proprietary content for inclusion in our products in
order to generate revenues. If such content is not available on favorable terms,
or at all, our revenues and business could be adversely affected. In addition,
we may need to hire additional sales people to market our products in the
absence of the Shuffle Master alliance.
We
have many competitors and expect new competitors to enter our target markets,
which could increase price competition and may affect the amount of business
available to us and the prices that we can charge for our products and
services.
The
markets for our products and services are extremely competitive and may change
rapidly. Substantial growth in demand for wireless technology products and
services has been predicted and we expect competition to increase as existing
competitors enhance and expand their products and services and as new
participants enter the wireless data application market. There are relatively
few barriers to entry for companies with computer and network experience. A
rapid increase in competition could negatively affect the amount of business
that we get and the prices that we can charge.
Additionally,
many of our competitors and potential competitors have substantially greater
financial resources, customer support, technical and marketing resources, larger
customer bases, longer operating histories, greater name recognition and more
established relationships than we do. We cannot be sure that we will have the
resources or expertise to compete successfully. Compared to us, our competitors
may be able to:
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develop
and expand their products and services more
quickly;
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adapt
faster to new or emerging technologies and changing customer
needs;
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take
advantage of acquisitions and other opportunities more
readily;
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• negotiate more favorable
agreements with vendors;
• devote greater resources
to marketing and selling their products; and
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address
customer service issues more
effectively.
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Some of
our competitors may also be able to increase their market share by providing
customers with additional benefits or by reducing their prices. We cannot be
sure that we will be able to match price reductions by our competitors. If we do not become licensed in various
gaming jurisdictions, it could limit our ability to generate
revenues.
We are in
the process of obtaining the necessary gaming regulatory licenses and approvals
in various jurisdictions deemed necessary for the development, marketing and
distribution of the SGS and plan to continue to obtain licensing in additional
jurisdictions where significant gaming business opportunities are perceived to
exist. If we do not obtain the appropriate gaming licenses, we will not be able
to do business or may be limited in the type of business we can do within the
particular jurisdiction and as such our revenue growth could be limited or
slowed.
In
addition, pursuant to our distribution and licensing agreement with Shuffle
Master, revenues generated in various jurisdictions will be shared with Shuffle
Master. In the event we are unable to obtain the appropriate license in a
particular jurisdiction, Shuffle Master will set aside our portion of the
revenues earned for the first 180 days while Sona Mobile is acquiring the
appropriate licenses to enable it to share revenues in that jurisdiction. In the
event we fail to obtain the license within 24 months, the revenues will revert
back to Shuffle Master and we will forfeit those revenues. The loss of these
revenues could have an adverse effect on our results of operations.
Our
business may suffer from lack of diversification.
Our
business is centered primarily on providing wired and wireless server-based data
application software products and services to the gaming industry. The risks
associated with primarily focusing on a limited product line, primarily within a
single industry, are substantial. If consumers do not accept our products
and services or if there is a general decline in market demand for, or any
significant decrease in, the perceived need for our products and services, we
are not financially or operationally capable of introducing alternative products
and services within a short time frame. As a result, lack of acceptance of
our products and services or a significant decline in the demand for our
products and services could cause us to cease operations.
Our
future performance depends on our ability to retain key personnel.
Our
future success depends on retaining our existing key employees. Losing any
of our key employees could limit our ability to execute our growth strategy,
resulting in lost sales and a slower rate of growth.
We depend
on the continued efforts of our senior management team, including Shawn Kreloff,
Stephen Fellows and Lance Yu. If for any reason our senior executives do not
continue to be active in our business, our business, financial condition or
results of operations could be adversely affected. Also, we do not carry, nor do
we anticipate obtaining, ‘‘key man’’ insurance on these executives. It would be
difficult for us to replace any of these individuals. We cannot assure you
that we will be able to continue to retain our senior executives or other
personnel necessary for the development of our business.
We
may not be able to hire and retain highly skilled technical employees, which
would affect our ability to compete effectively and could adversely affect our
operating results.
We depend
on highly skilled technical personnel for research and development and to market
and service our products. To succeed, we must hire and retain employees who are
highly skilled in rapidly changing wireless technologies. In particular, as we
implement our strategy of focusing on wireless data applications, we will need
to:
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hire
more employees with experience developing and providing advanced
communications products and
services;
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train
our current personnel to sell wireless data applications products and
services; and
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train
personnel to service our products.
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Because
the competition for qualified employees in our industry is intense, hiring and
retaining qualified employees is both time-consuming and expensive. We may not
be able to hire enough qualified personnel to meet our needs as our business
grows or to retain the employees we currently have. Our inability to hire and
retain the individuals we need could hinder our ability to sell our existing
products, systems, software or services or to develop and sell new ones. If we
are not able to attract and retain qualified employees, we will not be able to
successfully implement our business plan and our business will be
harmed.
Our
operating results may fluctuate dramatically, particularly from quarter to
quarter.
We
anticipate that our quarterly and annual operating results will fluctuate
dramatically over the near terms as a result of a number of factors, including
the following:
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volume
and timing of orders received;
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the
availability and cost of products and components from our
suppliers;
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the
mix of products and services sold;
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patterns
of capital spending by enterprises for technology products and
services;
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the
timing of new product announcements and
releases;
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general
economic conditions.
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As a
result of these and other factors, we have historically experienced, and may
continue to experience, fluctuations in revenues and operating results. In
addition, it is possible that in the future our operating results may fall below
the expectations of analysts and investors, and as a result, the price of our
securities may fall.
We
may not be able to manage our growth effectively, which could adversely affect
our operations and financial performance.
The
ability to manage and operate our business as we execute our growth strategy
will require effective planning. Significant rapid growth could strain our
internal resources, leading to a lower quality of customer service, reporting
problems and delays in meeting important deadlines resulting in loss of market
share and other problems that could adversely affect our financial performance.
Our efforts to grow have placed, and we expect will continue to place, a
significant strain on our personnel, management systems, infrastructure and
other resources. Ifwe do not manage our growth effectively, our operations could
be adversely affected, resulting in slower growth and a failure to achieve or
sustain profitability.
If
we are unable to protect our intellectual property rights, our business may be
harmed.
Although
we attempt to protect our intellectual property through patent applications,
trademarks, trade secrets, copyrights, confidentiality and non-disclosure
agreements and other measures, intellectual property is difficult to protect and
these measures may not provide adequate protection. Patent filings by third
parties, whether made before or after the date of our patent filings, could
render our intellectual property less valuable. Competitors may misappropriate
our intellectual property, disputes as to ownership of intellectual property may
arise and our intellectual property may otherwise become known or independently
developed by competitors. The failure to protect our intellectual property could
seriously harm our business because we believe that developing new products and
technologies that are unique to us is important to our success. If we do not
obtain sufficient international protection for our intellectual property, our
competitiveness in international markets could be significantly impaired, which
would limit our growth and future revenue.
We
may be found to infringe third-party intellectual property rights.
Third
parties may in the future assert claims or initiate litigation related to their
patent, copyright, trademark and other intellectual property rights in
technology that is important to us. The asserted claims and/or litigation could
include claims against us or our suppliers alleging infringement of intellectual
property rights with respect to our products or components of those products.
Regardless of the merit of the claims, they could be time consuming, result in
costly litigation and diversion of technical and management personnel, or
require us to develop a non-infringing technology or enter into license
agreements. We cannot assure you that licenses will be available on acceptable
terms, if at all. Furthermore, because of the potential for significant damage
awards, which are not necessarily predictable, it is not unusual to find
unmeritorious claims resulting in large settlements. If any infringement or
other intellectual property claim made against us by any third party is
successful, or if we fail to develop non-infringing technology or license the
proprietary rights on commercially reasonable terms and conditions, our
business, operating results and financial condition could be materially
adversely affected.
If
we do not accurately predict demand for our products when deciding to invest in
new products, we will likely incur substantial capital expenditures that will
not benefit our business.
Research
and development takes a significant amount of time and requires significant
investment in skilled engineering and scientific personnel. We have made these
investments, and intend to continue to make such investments based on internal
projections of the potential market for our products and services and of our
potential profit margins on sales of these products and services. If those
projections are inaccurate, we may not be able to obtain an acceptable return on
our investment in the development of these products and services. If our
projections of the prospects of new products are inaccurate, we may make
investments in the development, testing and approval of those products and
services that may result in unsatisfactory returns.
General
Company Related Risks
Upon
the occurrence of an event of default under their notes, holders of at least 20%
of the principal amount of our 8% senior unsecured convertible notes
due 2010 then outstanding could accelerate payment of all principal and
interest and other amounts then owing at a specified default
rate.
On
November 28, 2007, we issued $3.0 million in aggregate principal amount of the
notes. Upon an event of default under the notes that remains uncured, the
holders of at least 20% of the aggregate principal amount of notes outstanding
could accelerate all payment of principal and interest owing under their notes
at a specified default rate. Events of default under the notes include,
without limitation:
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Effectiveness
of the registration statement covering resale of shares underlying the
notes lapses, or a selling stockholder may not make sales thereunder, for
more than 20 consecutive trading days or 40 non-consecutive trading days
during any 12-month period (subject to certain
exceptions);
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A
material default or event of default occurs under the notes (eg. Failure
to pay interest amounts when due) or the related registration rights
agreement; or
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A
material default or event of default occurs under any other material
agreement to which we are
obligated.
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If an
event of default is declared, we may not have sufficient cash to pay the
accelerated amounts due. Even if we do have sufficient cash, such
payments could have a material adverse effect on our financial
condition.
We
do not intend to pay dividends and, consequently, the only opportunity for
investors to achieve a return on their investment is if a trading market
develops and investors are able to sell their shares for a profit or if our
business is sold at a price that enables investors to recognize a
profit.
We will
need all of our cash resources to fund our operations, including the development
of future products and services. Accordingly, we do not expect to pay cash
dividends on our common stock in the foreseeable future. We cannot assure
investors any return on their investment, other than in connection with a sale
of their shares or a sale of our business. At the present time there is a
limited trading market for our shares. Therefore, holders of our securities may
be unable to sell them. We cannot assure investors that an active trading market
will develop or that any third party would offer to purchase our business on
acceptable terms and at a price that would enable our investors to recognize a
profit.
Our
internal control over financial reporting may not be effective in future
periods, which could have a significant and adverse effect on our
business.
Section
404 of the Sarbanes-Oxley Act of 2002 (“Section 404”) and the rules and
regulations of the Securities and Exchange Commission require us to evaluate our
internal control over financial reporting to allow management to report on those
internal controls as of the end of each year beginning in fiscal
2007. Section 404 will also require our independent registered public
accounting firm to attest to the effectiveness of our internal controls over
financial reporting in future periods beginning with the fiscal year ended
December 31, 2009, as currently proposed. The
proposal
if not passed will require auditor attestation for the fiscal year ended
December 31, 2008. Effective internal controls are necessary for us
to produce reliable financial reports and are important in our effort to prevent
financial fraud. In the course of our Section 404 evaluations, we may
identify conditions that may result in significant deficiencies or material
weaknesses and we may conclude that enhancements, modifications or changes to
our internal controls are necessary or desirable. Implementing any
such matters could divert the attention of our management, could involve
significant costs, and may negatively impact our results of
operations.
We note
that there are inherent limitations on the effectiveness of internal controls,
as they cannot prevent collusion, management override or failure of human
judgment. If we fail to maintain an effective system of internal
controls or if management or our independent registered public accounting firm
were to discover material weaknesses in our internal controls, we may be unable
to produce reliable financial reports or prevent fraud, and it could harm our
financial condition and results of operations, result in a loss of investor
confidence and negatively impact our share price.
We
may experience additional expense in the future in complying with Sarbanes-Oxley
Section 404.
We are
required to evaluate our internal control over financial reporting under
Section 404 beginning with the current fiscal year being reported at
December 31, 2007. Section 404 also requires that our independent
registered public accounting firm report on management’s evaluation of our
system of internal controls. We will be required to comply with the auditor
attestation of internal controls requirements of Section 404 for each fiscal
year ending on or after December 31, 2009, as currently proposed. The
proposal if not passed will require auditor attestation for the fiscal year
ended December 31, 2008. Such auditor attestation regarding our
internal controls will likely lead to a significant increase in our annual audit
expenses. Furthermore, any failure to implement required new or
improved controls, or difficulties encountered in the implementation of adequate
controls over our financial processes and reporting in the future, could harm
our operating results or cause us to fail to meet our reporting
obligations.
The
public market for our common stock is limited, and stockholders may not be able
to resell their shares at or above the purchase price paid by such stockholder,
or at all.
There is
currently only a limited public market for our common stock. We cannot assure
you that an active public market for our common stock will develop or be
sustained in the future. The market price of our common stock may fluctuate
significantly in response to factors, some of which are beyond our control, such
as: the announcement of new products or product enhancements by us or our
competitors; developments concerning intellectual property rights and regulatory
approvals; quarterly variations in our competitors’ results of operations;
changes in earnings estimates or recommendations by securities analysts;
developments in our industry; and general market conditions and other factors,
including factors unrelated to our own operating performance. The stock market
in general has recently experienced extreme price and volume fluctuations.
Continued market fluctuations could result in extreme volatility in the price of
our common stock, which could cause a decline in the value of our common stock.
Prospective investors should also be aware that price volatility might be worse
if the trading volume of our common stock is low.
We
may not be able to attract the attention of major brokerage firms, which could
have a material adverse impact on the market value of our common
stock.
Security
analysts of major brokerage firms may not provide coverage of our common stock
since there is no incentive to brokerage firms to recommend the purchase of our
common stock. The absence of such coverage limits the likelihood that an active
market will develop for our common stock. It will also likely make it more
difficult to attract new investors at times when we require additional
capital.
We
may be unable to list our common stock on any securities exchange.
Although
we may apply to list our common stock on the Nasdaq Stock Market or the American
Stock Exchange in the future, we cannot assure you that we will be able to meet
the initial listing standards, including the minimum per share price and minimum
capitalization requirements, or that we will be able to maintain a listing of
our common stock on either of those or any other trading venue. Until such
time as we qualify for listing on Nasdaq, the American Stock Exchange or another
trading venue, our common stock will continue to trade on the OTC Bulletin Board
or another over-the-counter quotation system, or on the ‘‘pink sheets,’’ where
an investor may find it more difficult to dispose of shares or obtain accurate
quotations as to the market value of our common stock. In addition, rules
promulgated by the Commission impose various practice requirements on
broker-dealers who sell securities that fail to meet certain criteria set forth
in those rules to persons other than established customers and accredited
investors. Consequently, these rules may deter broker-dealers from recommending
or selling our common stock, which may further affect the liquidity of our
common stock. It would also make it more difficult for us to raise additional
capital.
Our
common stock may be considered a ‘‘penny stock’’ and may be difficult to
sell.
The
Commission has adopted regulations which generally define a ‘‘penny stock’’ to
be an equity security that has a market price of less than $5.00 per share or an
exercise price of less than $5.00 per share, subject to specific exemptions. The
market price of our common stock, if an active trading market develops, may be
less than $5.00 per share and, therefore, it may be designated as a ‘‘penny
stock’’ according to the Commission’s rules. This designation requires any
broker or dealer selling these securities to disclose certain information
concerning the transaction, obtain a written agreement from the purchaser and
determine that the purchaser is reasonably suited to purchase the securities.
These rules may restrict the ability of brokers or dealers to sell our common
stock and may affect the ability of investors to sell their shares.
We may be required to pay liquidated
damages to certain of our investors in the event of a breach of our registration
rights agreements with them.
In
connection with the private placements of our securities in July 2006 and
November 2007, we entered into registration rights agreements with the
purchasers of such securities. These registration rights agreements require us
to pay liquidated damages under certain circumstances if we do not satisfy our
obligations under such registration rights agreements, including our obligations
to file, obtain or maintain the effectiveness of any registration statements
covering the securities purchased by such investors. If we are unable to satisfy
our obligations under these registration rights agreements and are obligated to
pay liquidated damages, it may adversely impact our financial
condition.
A significant number of shares of our
common stock have been registered for resale or will be released from lock-ups
in 2008, and such sales could depress the market price of our
stock.
Sales of
a substantial number of shares of our common stock in the public markets, or the
perception that these sales may occur, could cause the market price of our
common stock to decline and could materially impair our ability to raise capital
through the sale of additional equity securities. As of February 29, 2008, we
had 57,832,857 shares of common stock issued and outstanding. Virtually
all of these shares are either registered for resale under the Securities Act or
eligible for resale under Rule 144(k) under the Securities Act. We have filed a
registration statement covering an additional 12,133,333 shares for resale upon
conversion and exercise of our outstanding 8% senior unsecured convertible notes
due 2010 and related warrants. In addition, we have registered under a
Form S-8 registration statement approximately 9.2 million shares of our common
stock reserved for issuance collectively under our Amended and Restated Stock
Option Plan of 2000 and 2006 Incentive Plan. Certain former management and
directors of the Company signed share lockup agreements as part of our private
placement financing in July 2006. The lockup periods begin to expire in May
2008 through July 2008, at which time the underlying shares are eligible or
partially eligible for sale. All selling restrictions under such agreements
expire by July 2008.
A
limited number of stockholders have significant voting power, which will limit
your ability to influence the outcome of key decisions.
Our
executive officers and directors beneficially own, in the aggregate, shares of
our capital stock representing approximately 10.5%. Shuffle Master and
John Bush each beneficially own approximately 8.2% and 9.7%, respectively of the
voting power of the issued and outstanding shares of our capital stock that are
entitled to vote. As a result, these stockholders may have the ability to
exercise a degree of influence over our affairs and corporate actions
requiring stockholder approval, including electing and removing directors,
selling all or substantially all of our assets, merging with another entity or
amending our articles of incorporation. This could be disadvantageous to our
other stockholders with interests that differ from those of the aforementioned
stockholders. For example, they could delay, deter or prevent a change in
control even if a transaction of that sort would benefit the other stockholders.
In addition, concentration of ownership could adversely affect the price that
investors might be willing to pay in the future for our securities.
Delaware
corporate law and our certificate of incorporation and bylaws contain provisions
that could delay, defer or prevent a change in control of our company or our
management.
These
provisions could discourage proxy contests and make it more difficult for you
and other shareholders to elect directors and take other corporate actions. As a
result, these provisions could limit the price that investors are willing to pay
in the future for shares of our common stock. For example:
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Without
prior shareholder approval, the board of directors has the authority to
issue one or more classes of preferred stock with rights senior to those
of common stock and to determine the rights, privileges and inference of
that preferred stock.
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There
is no cumulative voting in the election of directors, which would
otherwise allow less than a majority of shareholders to elect director
candidates.
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Additional
Information
We
electronically file annual, quarterly and current reports and amendments to such
reports, proxy statements and other information with the Commission. You
may read and copy any report or other document that we file at the Commission's
Public Reference Room located at 100 F Street, N.E., Washington, D.C. 20549.
Please call the Commission at 1-800-SEC-0330 for further information as to
the operation of the Public Reference Room. The Commission also maintains
an Internet site at www.sec.gov that contains reports, proxy and information
statements and other information regarding issuers, including us, that
electronically file documents with the Commission. Our web address is
www.sonamobile.com.
Item
2. Description
of Property
Properties
We lease
a total of approximately 8,000 square feet of office space for sales, support,
research and development, accounting and administrative functions. Of this
total, we lease
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approximately
3,100 square feet in Toronto, Canada for sales, research and development,
administrative and accounting functions under a lease expiring in February
2012, at an annual rental of approximately $115,000, subject to escalation
for our pro rata share of realty taxes and operating expenses of the
building. Under the lease agreement there is a gross free rent period for
the first 6 months of the lease;
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approximately
4,800 square feet of office space in Boulder, Colorado for research and
development under a lease expiring in September 2010, at annual rental of
approximately $120,000, subject to escalation for our pro rata share of
real estate taxes and operating expenses of the building;
and
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approximately
500 square feet in New York, New York, for our corporate headquarters and
sales and support functions which we are currently leasing on a short-term
basis under a renewable lease which runs to June 2008, at a monthly rent
of approximately $10,000. The Company intends to renew its lease on
substantially the same terms on a short-term basis when the current lease
agreement expires. In addition, in 2007 we leased approximately 1,000
square feet in Las Vegas, Nevada, for our corporate apartment which was
leased on an annual basis until February 2008, at a monthly rent of
approximately $2,300. Our frequent trips to Las Vegas made this lease a
cost effective way to house our employees during business trips
for meetings with our partner Shuffle Master and in connection with
GLI certification of our wireless gaming solution. This lease
was not renewed when it expired at the end of February
2008.
|
Item
3. Legal
Proceedings
None.
Item
4. Submission
of Matters to a vote of Security Holders
None.
Part
II
|
Item
5.
|
Market
for Common Equity, Related Stockholder Matters and Small Business Issuer
Purchases of Equity Securities
|
Our
common stock is not listed on any stock exchange, but is quoted on the
Over-the-Counter Bulletin Board (the ‘‘OTC Bulletin Board’’) under the symbol
‘‘SNMB.’’ The following table sets forth the high and low bid information
for our common stock for the periods indicated, as reported by the OTC Bulletin
Board. The quotations reflect inter-dealer prices, without retail mark-up,
mark-down or commission, and may not represent actual transactions.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
March
31, 2006
|
|
|
2.99 |
|
|
|
1.75 |
|
|
|
|
June
30, 2006
|
|
|
2.00 |
|
|
|
0.68 |
|
|
|
|
September
30, 2006
|
|
|
0.80 |
|
|
|
0.45 |
|
|
|
|
December
31, 2006
|
|
|
0.70 |
|
|
|
0.24 |
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March
31, 2007
|
|
|
0.59 |
|
|
|
0.33 |
|
|
|
|
June
30, 2007
|
|
|
0.61 |
|
|
|
0.23 |
|
|
|
|
September
30, 2007
|
|
|
0.49 |
|
|
|
0.34 |
|
|
|
|
December
31, 2007
|
|
|
0.58 |
|
|
|
0.32 |
|
The
approximate number of stockholders of record at February 29, 2008 was
190. The number of stockholders of record does not include beneficial
owners of common stock whose shares are held in the names of various dealers,
clearing agencies, banks, brokers and other fiduciaries.
We have
not declared any cash dividends on our common stock during the past two years
and do not expect to do so in the near future.
Equity
Compensation Plan Information
The
following table summarizes information about our equity compensation plans as of
December 31, 2007. All outstanding awards relate to our common stock. For
additional information about our equity compensation plans, see Note 14 to our
financial statements in Item 7.
|
Equity
Compensation Plan Information
|
|
|
Plan
category
|
|
Number
of securities to be issued upon exercise of outstanding options, warrants
and rights
(a)
|
|
|
Weighted-average
exercise price of outstanding options, warrants and rights
(b)
|
|
|
Number
of securities remaining available for future issuance under equity
compensation plans (excluding securities reflected in column
(a))
(c)
|
|
|
Equity
compensation plans approved by security holders
|
|
|
6,997,000
|
(1) |
|
$
|
0.706 |
|
|
|
1,997,500 |
(2) |
|
Equity
compensation plans not approved by security holders (3)
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
Total
|
|
|
6,997,000
|
|
|
$
|
0.706 |
|
|
|
1,997,500 |
|
(1) Represents
shares of common stock issued or issuable under the Amended and Restated Stock
Option Plan of 2000 and the
2006 Incentive Plan.
(2) Represents
shares of common stock available under the 2006 Incentive Plan.
|
(3)
|
On
July 19, 2005, our Board of Directors (“Board”) adopted a compensation
plan for directors, which was amended on August 3, 2006 and again on
September 29, 2006. Under the plan, each non-employee director,
immediately upon his or her election or appointment to the Board, receives
40,000 shares of common stock, of which 20,000 shares will vest
immediately and 20,000 will vest on the first anniversary of his or her
election to the Board. If the director leaves the Board for any
reason, voluntarily or involuntarily, before the first anniversary of his
or her election to the Board, he or she will forfeit any unvested shares.
In addition, any Chairman of the Audit Committee who is also
designated as an Audit Committee "financial expert" will receive an
additional 60,000 restricted shares upon his or her appointment as such,
30,000 of which will vest immediately and 30,000 of which will vest on the
first anniversary of his or her appointment. Further, each non-employee
director receives an annual option to purchase such number of shares of
common stock having a value equal to approximately $40,000, with the
number of shares determined based upon the trading price of the Company's
common stock on the date of grant, which option will vest in equal
quarterly installments.
|
Item
6. Management’s
Discussion and Analysis or Plan of Operation
The
following discussion of our financial condition and results of operations should
be read in conjunction with the consolidated financial statements and related
notes included elsewhere in this report. Certain statements in
this discussion and elsewhere in this report constitute forward-looking
statements within the meaning of Section 21E of the Securities and Exchange Act
of 1934, as amended. See “Forward Looking Statements” on page 3
of this report. Because this discussion involves risk and
uncertainties, our actual results may differ materially from those anticipated
in these forward-looking statements. Such risks and uncertainties
include, but are not limited to, those described under “Risk Factors” beginning
on page 15 of this report.
Our
consolidated financial statements included elsewhere in this report have been
prepared assuming that we will continue as a going concern. Since our
inception in November 2003, we have generated minimal revenue, have incurred net
losses and have not generated positive cash flow from operations. We
have relied primarily on the sale of shares of equity and convertible debt to
fund our operations. In addition, our cash reserves are only
sufficient to fund our current level of operating expenses to May
2008. Based on our current business plans, we will be obligated to
seek additional financing before that time. Such financing may not be
available to us on favorable terms, or at all. If adequate funds are not
available when required or on acceptable terms, we may be unable to continue our
operations as planned, or at all. In view of our continuing losses, our auditors
in their report on our December 31, 2007 consolidated financial statements
(included in this report) have
stated that these continuing losses raise substantial doubt about our ability to
continue as a going concern.
Business
Overview
We are a
software and service provider that specializes in value-added applications to
data-intensive vertical and horizontal market segments including the gaming
industry. Through our subsidiaries, we develop, market and sell data application
software for gaming and mobile devices which enables secure execution of real
time transactions on a flexible platform over wired, cellular or Wi-Fi networks.
Our target customer base includes casinos, horse racing tracks and operators,
cruise ship operators and casino game manufacturers and suppliers on the gaming
side, and corporations that require secure transmissions of large amounts of
data in the enterprise and financial services verticals. Our revenues consist of
project, licensing and support fees generated by our flagship products the Sona
Gaming System™ (“SGS”) and the Sona Wireless Platform™
(‘‘SWP’’) and related vertical gaming and wireless application software
products. We operate as one business segment focused on the development, sale
and marketing of client-server application software. We market our
software principally to two large vertical markets:
|
|
•
|
Gaming and
entertainment. We propose to (i) deliver casino games via our SGS,
both wired and wirelessly in designated areas on casino properties; (ii)
offer real-time, multiplayer games that accommodate an unlimited number of
players; (iii) deliver games on a play-for-free or wagering basis (where
permitted by law) on mobile telephone handsets over any carrier network;
and (iv) deliver horse and sports wagering applications, where legal, for
race and sports books, as well as on-track and off-track wagering,
including live streaming video of horse races and other sports
events. We also propose to deliver content via channel partners and
content partners, including live streaming television, digital radio,
specific theme downloads for mobile phones, media downloads and gaming
applications.
|
|
|
•
|
Financial services and
enterprise software. Our products and services extend enterprise
applications to the wireless arena, such as customer relationship
management systems, sales force automation systems, information
technology (IT) service desk and business continuity protocols. One of our
primary focuses in this sales vertical is to develop software for the
data-intensive investment banking community and client-facing applications
for the retail banking industry.
|
Since
December 2003, we have focused on two areas: (1) further developing and
enhancing our software platforms and developing an array of products for the
gaming, entertainment, financial services, and general corporate market that
leverage the functionality of our software platforms and (2) developing a sales
strategy that would develop relationships with software manufacturers,
multi-service operators, wireless carriers and direct customers.
In 2006,
in conjunction with our strategic alliance with Shuffle Master and because of
the perceived opportunities for wireless server-based applications in the gaming
industry, we switched our primary sales and development focus towards the gaming
industry. During 2007, we perceived that there was a potentially far
greater opportunity to develop and sell server-based gaming applications that
could be operated in both wired and wireless network environments or a
combination thereof. We continue to focus on the financial services
and enterprise market sectors for products, customers and verticals where we
have previously experienced success or where we perceive significant
opportunities to exist.
Business
Trends
We
believe that there will be a trend in the gaming industry away from single,
standalone electronic games on the casino floor towards server based gaming
consoles, touch screens and kiosks which can play multiple games and can
primarily be centrally serviced by a network or IT manager, as the cost of such
multi-game client devices is a fraction of the cost of most of the currently
available single, standalone electronic games currently in existence on the
casino floor. In the financial and enterprise space, the market
demand for mobile and wireless solutions, both at the enterprise and consumer
levels, continues to grow rapidly. We believe that we are
well-positioned to exploit this opportunity with various focused initiatives,
ranging from direct and channel sales to the enterprise market, combined with
partnership and joint venture agreements with content providers to satisfy the
significant growth in demand from the consumer market for these types of
services.
Approximately
88% of our revenue for the fiscal year ended December 31, 2007 resulted from
development fees for project work and approximately 12% from continuing license
subscriptions. During the comparative fiscal year ended December 31,
2006, 60% of revenue resulted from project work and 40% from continuing
subscriptions. Much of our project work is attributable to new
engagements for which we received development fees. We believe that
the ratio will move toward continuing license subscription revenue, as we
transition from focusing on custom projects in the financial services and
enterprise segment and move towards longer term licensing contracts in the
gaming industry and from perceived opportunities in the horse race and sports
wagering industry. In the fiscal year ended December 31, 2007,
approximately 80% of our revenue was derived from the sale of our financial
services and enterprise products, while the remaining revenue was derived from
our gaming and horse racing products. In the prior fiscal year, all
our revenue was derived from the financial services and enterprise
products. Now that our products are commercially available and as new
leads are generated, we anticipate that significant business opportunities will
emerge within the gaming and horse racing industry. However, we
cannot assure you that any such business opportunities will emerge, or if they
do, that any such opportunity will result in a definitive arrangement with any
enterprises in the gaming industry, or that any such definitive arrangement will
be profitable.
Significant
Transactions
In
January 2006, we entered into a strategic alliance distribution and licensing
agreement with Shuffle Master, a leading provider of table gaming content, to
license, develop, distribute and market “in casino” wireless handheld gaming
content and delivery systems to gaming venues throughout the
world. Under
the terms of the agreement, we agreed to develop a Shuffle Master-branded
wireless gaming platform powered by our SWP for in-casino use, which would
feature handheld versions of Shuffle Master’s proprietary table game content, as
well as other proprietary gaming content and public domain casino
games. In conjunction with this strategic alliance, Shuffle Master
invested $3 million in the Company, in exchange for common stock and warrants to
purchase common stock in our Company pursuant to the Licensing and Distribution
Agreement, dated January 12, 2006 between the Company and Shuffle Master, ( the
“Licensing and Distribution Agreement”). This Licensing and
Distribution Agreement was amended and restated in February
2007. Under the terms of the amended Licensing and Distribution
Agreement, both the Company and Shuffle Master are permitted to distribute,
market and sell the wireless version of the SGS to gaming venues
worldwide. Additionally, we have been granted a non-exclusive
worldwide license to offer Shuffle
On April 28,
2006, we purchased certain intellectual property assets from Digital Wasabi LLC,
a Colorado limited liability company (“Digital Wasabi”). The purchase
price was 800,000 shares of our common stock. The assets consist of
intellectual property in the form of software under development related to
communications and gaming. The principals and employees of Digital
Wasabi became our employees and are based in our Boulder, Colorado
office. While we believe this purchased technology will have
significant future value, the software does not meet the criteria for
capitalization as prescribed by SFAS No. 86, “Accounting for the Costs of
Computer Software to Be Sold, Leased, or Otherwise Marketed” (“SFAS 86”) and as such
was written off in the quarter of acquisition.
On July
7, 2006, we closed a private placement to accredited investors whereby we sold
16,943,323 shares of common stock and warrants to purchase 8,471,657 shares of
common stock for gross proceeds of approximately $10.1 million before payment of
commissions and expenses. The warrants had an exercise price of $0.83 per
share, subject to downward adjustment if the Company does not meet specified
annual revenue targets, and are exercisable at any time during the period
commencing July 7, 2006, and ending July 7, 2011. The funds from the
financing will primarily be used for general working capital
purposes. As a result of the Company not meeting the specified
revenue targets for fiscal 2006 and fiscal 2007, the exercise price of the
warrants was adjusted downwards to an exercise price of $0.70 per share at the
end of fiscal 2006 and was readjusted to an exercise price of $0.40 per share at
the end of fiscal 2007. We used $300,000 of the funds raised to
repurchase 650,000 shares of common stock from our former chief executive
officer, John Bush.
On
November 28, 2007, the Company completed a private placement of 8.0% convertible
notes (the “2007 Notes”) with 3,333,333 accompanying warrants (the “2007
Warrants”) for gross proceeds of $3 million. The 2007 Notes have a
face value of $3 million, are due on November 28, 2010 and are convertible into
6,666,667 shares of common stock (assuming interest is paid in cash) at a
conversion price of $0.45 per share. The 2007 Warrants are common
stock purchase warrants to purchase 3,333,333 shares of common
stock. The 2007 Warrants have an exercise price of $0.50 per share
and expire five years from the issue date. The 2007 Notes bear
interest at a rate of 8.0% per annum, payable quarterly on the first of January,
April, July, and October with such interest payable in cash, shares of common
stock or a combination thereof. Payment of interest in shares of
common stock is subject to certain conditions being met including the existence
of a registration statement which has been declared effective by the SEC and
which covers the required number of interest shares.
Corporate
History
Sona
Mobile, Inc. (“Sona Mobile”) was formed under the laws of the State of
Washington in November 2003, for the purpose of acquiring Sona Innovations, Inc.
(“Innovations”), which it did in December 2003. On April 19, 2005,
Sona Mobile merged (the "Merger") with and into PerfectData Acquisition
Corporation, a Delaware corporation (“PAC”) and a wholly-owned subsidiary of
PerfectData Corporation, also a Delaware corporation
(“PerfectData”). Under the terms of that certain Agreement and Plan
of Merger dated as of March 7, 2005, (i) PAC was the surviving company but
changed its name to Sona Mobile, Inc.; (ii) the pre-merger shareholders of Sona
Mobile received stock in PerfectData representing 80% of the voting power in PAC
post-merger; (iii) all of PerfectData’s officers resigned and Sona Mobile’s
pre-merger officers were appointed as the new officers of PerfectData; and (iv)
four of the five persons serving as directors of PerfectData resigned and the
remaining director appointed the three pre-merger directors of Sona Mobile to
the PerfectData Board of Directors. In November 2005, PerfectData
changed its name to “Sona Mobile Holdings Corp.”
At the
time of the Merger, PerfectData was essentially a shell company that was not
engaged in an active business. Upon completion of the Merger,
PerfectData’s only business was the historical business of Sona Mobile and the
pre-merger shareholders of Sona Mobile controlled
PerfectData. Accordingly, the Merger was accounted for as a reverse
acquisition of a public shell and a recapitalization of Sona
Mobile. No goodwill was recorded in connection with the Merger and
the costs were accounted for as a reduction of additional
paid-in-capital. The pre-merger financial statements of Sona Mobile
are treated as the historical financial statements of the combined
companies. The historical financial statements of PerfectData prior
to the Merger are not presented. Furthermore, because Sona Mobile is
deemed the accounting acquirer, its historical stockholders’ equity has been
adjusted to reflect the new capital structure.
Critical
Accounting Policies
We
prepare our financial statements in accordance with accounting principally
generally accepted in the United States of America (“GAAP”). These
accounting principles require management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, and the disclosure of
contingent assets and liabilities at the date of its financial
statements. Management is also required to make certain judgments
that affect the reported amounts of revenues and expenses during each reporting
period. Management periodically evaluates these estimates and
assumptions including those relating to revenue recognition, impairment of
goodwill and intangible assets, the allowance for doubtful accounts, capitalized
software, income taxes, stock-based compensation and contingencies and
litigation. Management bases its estimates on historical experience
and various other assumptions that it believes to be reasonable based on
specific circumstances. Management reviews the development,
selection, and disclosure of these estimates with the Audit Committee of our
Board of Directors. These estimates and assumptions form the basis
for judgments about the carrying value of certain assets and liabilities that
are not readily apparent from other sources. Actual results could
differ from these estimates. Further, changes in accounting and legal
standards could adversely affect our future operating results. Our
critical accounting policies include: revenue recognition, allowance for
doubtful accounts, capitalized software, income taxes, stock-based compensation,
and derivatives, each of which are discussed below.
Revenue
Recognition
We follow
specific and detailed guidance in measuring revenue, although certain judgments
affect the application of our revenue recognition policy. These
judgments include, for example, the determination of a customer’s
creditworthiness, whether two separate transactions with a customer should be
accounted for as a single transaction, or whether included services are
essential to the functionality of a product thereby requiring percentage of
completion accounting rather than software accounting.
We
recognize revenue in accordance with Statement of Position (“SOP”) 97-2,
“Software Revenue Recognition,” as amended by SOP 98-4 and SOP 98-9, and in
certain instances in accordance with SOP 81-1, “Accounting for Performance of
Construction-Type and Certain Production-Type Contracts.” We license
software under non-cancelable license agreements. License fee
revenues are recognized when (a) a non-cancelable license agreement is in force,
(b) the product has been delivered, (c) the license fee is fixed or determinable
and (d) collection is reasonably assured. If the fee is not fixed or
determinable, revenue is recognized as payments become due from the
customer.
Residual
Method Accounting. In software arrangements that include
multiple elements (e.g., license rights and technical support services), we
allocate the total fees among each of the elements using the “residual” method
of accounting. Under this method, revenue allocated to undelivered
elements is based on vendor-specific objective evidence of fair value of such
undelivered elements, and the residual revenue is allocated to the delivered
elements. Vendor specific objective evidence of fair value for such
undelivered elements is based upon the price we charge for such product or
service when it is sold separately. We may modify our pricing
practices in the future, which would result in changes to our vendor specific
objective evidence. As a result, future revenue associated with
multiple element arrangements could differ significantly from our historical
results.
Percentage
of Completion Accounting. Fees from licenses sold together
with consulting services are generally recognized upon shipment of the licenses,
provided (i) the criteria described in subparagraphs (a) through (d) in the
second paragraph under “Revenue Recognition” above are met; (ii) payment of the
license fee is not dependent upon performance of the consulting services; and
(iii) the consulting services are not essential to the functionality of the
licensed software. If the services are essential to the functionality
of the software, or performance of services is a condition to payment of license
fees, both the software license and consulting fees are recognized under the
“percentage of completion” method of contract accounting. Under this
method, we are required to estimate the number of total hours needed to complete
a project, and revenues and profits are recognized based on the percentage of
total contract hours as they are completed. Due to the complexity
involved in the estimating process, revenues and profits recognized under the
percentage of completion method of accounting are subject to revision as
contract phases are actually completed. Historically, these revisions
have not been material.
Sublicense
Revenues. We recognize
sublicense fees as reported by our licensees. License fees for
certain application development and data access tools are recognized upon direct
shipment by us to the end user or upon direct shipment to the reseller for
resale to the end user. If collection is not reasonably assured in
advance, revenue is recognized only when sublicense fees are actually
collected.
Service
Revenues. Technical support revenues are recognized ratably
over the term of the related support agreement, which in most cases is one
year. Revenues from consulting services subjected to time and
materials contracts, including training, are recognized as services are
performed. Revenues from other contract services are generally
recognized based on the proportional performance of the project, with
performance measured based on hours of work performed.
Allowance
for Doubtful Accounts
Whenever
relevant, we maintain an allowance for doubtful accounts to reflect the expected
non-collection of accounts receivable based on past collection history and
specific risks identified in our portfolio of receivables. Additional
allowances might be required if deteriorating economic conditions or other
factors affect our customers’ ability to make timely payments.
Capitalized
Software Development Costs
We
capitalize certain software development costs after a product becomes
technologically feasible and before its general release to
customers. Significant judgment is required in determining when a
product becomes “technologically feasible.” Capitalized development
costs are then amortized over the product’s estimated life beginning upon
general release of the product. Periodically, we compare a product’s
unamortized capitalized cost to the product’s net realizable
value. To the extent unamortized capitalized cost exceeds net
realizable value based on the product’s estimated future gross revenues (reduced
by the estimated future costs of completing and selling the product) the excess
is written off. This analysis requires us to estimate future gross
revenues associated with certain products and the future costs of completing and
selling certain products. Changes in these estimates could result in
write-offs of capitalized software costs. As of December 31, 2007,
certain development costs of the Company met the criteria of SFAS 86 for the
capitalization of software development costs. Accordingly, $471,988
of software development costs related to the development of our server based
casino gaming products, the Sona Gaming System, are capitalized as of December
31, 2007. Commercial feasibility was determined to be established on
August 31, 2007, with our first field trial in Lima, Peru at which point we
ceased capitalization of any additional costs related to the development of this
product. Three additional games were certified for use with the SGS
in November 2007 and shortly thereafter, we made the determination that the
software was available for general release to customers. We
intend to commence amortization of these capitalized costs on a straight-line
basis as of January 1, 2008 over an estimated useful life of three years. We
believe that there are significant revenue opportunities for our server based
casino gaming product and as such, we have determined that there are no
impairment charges required as of December 31, 2007 to the value of the
capitalized development costs.
Income
Taxes
We use
the asset and liability approach to account for income taxes. This
methodology recognizes deferred tax assets and liabilities for the expected
future tax consequences of temporary differences between the carrying amounts
and the tax bases of assets and liabilities. We then record a
valuation allowance to reduce deferred tax assets to an amount that likely will
be realized. We consider future taxable income and ongoing prudent
and feasible tax planning strategies in assessing the need for the valuation
allowance. If we determine during any period that we could realize a
larger net deferred tax asset than the recorded amount, we would adjust the
deferred tax asset and record a corresponding reduction to its income tax
expense for the period. Conversely, if management determines that we
would be unable to realize a portion of our recorded deferred tax asset, it
would adjust the deferred tax asset and record a charge to income tax expense
for the period. Significant judgment is required in assessing the
future tax consequences of events that have been recognized in our financial
statements or tax returns. Fluctuations in the actual outcome of
these future tax consequences (e.g., the income we earn within the United
States) could materially impact our financial position or results of
operations.
We
adopted the provisions of FASB Interpretation 48, “Accounting for
Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109,”
(“FIN 48”) on January 1, 2007. As of December 31, 2007, exist a
valuation allowance against the full amount of its net deferred tax asset, the
adoption of FIN 48 did not have an impact on the financial statements for the
fiscal year ended December 31, 2007. It is our policy to
recognize interest and penalties accrued on any unrecognized tax benefits as a
component of income tax expense. As of the date of adoption of FIN
48, there was no accrued interest or penalty associated with any unrecognized
tax benefits, nor was any interest expense or penalty recognized during fiscal
year ended December 31, 2007.
We file
our income tax returns in the U.S. federal jurisdiction and various state and
foreign jurisdictions. Tax regulations within each jurisdiction are
subject to the interpretation of the related taxes laws and regulations and
require significant judgment to apply. The Company is no longer
subject to U.S. federal and state examinations for years before 2004, and
Canadian federal and provincial tax examination for years before
2004. Management does not believe there will be any material changes
in the Company’s unrecognized tax position over the next 12 months.
We have
applied for Scientific Research and Development Tax credits, as part of our
annual Canadian federal and provincial income tax filings. The federal tax
credits are non-refundable and as we have a full provision against any future
benefits from our historical tax losses, a tax receivable amount for federal
research tax credits is not recognized on the balance sheet. Ontario
provincial tax credits for valid research and development expenditures are
refundable to the Company. As the amount of tax credit that will be
awarded to us upon assessment of the returns by this tax jurisdiction is not
always certain at the time the tax returns are filed, it is our policy to book a
receivable for these amounts on the balance sheet only when we receive the final
tax assessment after the filing of such returns. As of December 31, 2007
and 2006, the balances for tax credits receivable on our balance sheet were
$51,220 and $43,568, respectively.
Stock-based
Compensation
As of
January 1, 2006, we adopted the provisions of, and accounts for stock-based
compensation in accordance with the Financial Accounting Standards Board’s
(“FASB”) Statement of Financial Accounting Standards No. 123 — revised 2004
(“SFAS 123R”), “Share-Based Payment” which replaced Statement of Financial
Accounting Standards No. 123 (“SFAS 123”), “Accounting for Stock-Based
Compensation” and supersedes APB Opinion No. 25, “Accounting for Stock Issued to
Employees.” Under the fair value recognition provisions of this
statement, stock-based compensation cost is measured at the grant date based on
the fair value of the award and is recognized as expense on a straight-line
basis over the requisite service period, which is the vesting
period. The Company elected the modified-prospective method, under
which prior periods are not revised for comparative purposes. The
valuation provisions of SFAS 123R apply to new grants and to grants that were
outstanding as of the effective date and are subsequently
modified. Estimated compensation for grants that were outstanding as
of the effective date will be recognized over the remaining service period using
the compensation cost estimated for the SFAS 123 pro forma disclosures, as
adjusted for estimated forfeitures.
During the
fiscal years ended December 31, 2007 and December 31, 2006, the Company issued
stock options to directors, officers, and employees under the Amended
and Restated Stock Option Plan of 2000 and the 2006 Incentive Plan as described
in Note 14 to our consolidated financial statements. The fair value
of the total options granted by the Company during fiscal 2007 and 2006 was
estimated at the date of grant using a Black-Scholes option-pricing model, using
a range of risk-free interest rates of 4.11% - 5.17%, weighted average option
term of 3.00 years, expected weighted average volatility of 62.3% and no
dividend.
Derivatives
We follow
the provisions of SFAS No. 133 “Accounting for Derivative Instruments and
Hedging Activities” (SFAS No. 133”) along with related interpretations EITF No.
00-19 “Accounting for Derivative Financial Instruments Indexed to, and
Potentially Settled in, a Company’s Own Stock” (“EITF 00-19”) and EITF No. 05-2
“The Meaning of ‘Conventional Convertible Debt Instrument’ in Issue No. 00-19”
(“EITF 05-2”). SFAS No. 133 requires every derivative instrument
(including certain derivative instruments embedded in other contracts) to be
recorded in the balance sheet as either an asset or liability measured at its
fair value, with changes in the derivative’s fair value recognized currently in
earnings unless specific hedge accounting criteria are met. We value
these derivative securities under the fair value method at the end of each
reporting period, and their value is marked to market with the gain or loss
recognition recorded against earnings. We use the Black-Scholes
option-pricing model to determine fair value. Key assumptions of the
Black-Scholes option-pricing model include applicable volatility rates,
risk-free interest rates and the instruments expected remaining
life. These assumptions require significant management
judgment. At December 31, 2007, there were no derivative instruments
reported on the Company’s balance sheet.
Results
of Operations
Our
business is in its early stages and consequently our financial results are
difficult to compare from one period to the next. We expect such
period-to-period differences to continue to be significant over the next several
quarters, until we have a number of full years of operations.
Comparison of Fiscal
Years Ended December 31, 2007 and 2006
For the
fiscal year ended December 31, 2007, we had a comprehensive loss of $5,677,823
compared to a comprehensive loss of $8,441,097 for the fiscal year ended
December 31, 2006. The decrease of $2,763,274 in comprehensive loss
between fiscal years 2007 and 2006 is primarily due to the decrease of
$2,175,271 in selling and marketing expenses caused by our change in sales focus
to a channel and partner based selling model, as well as smaller decreases in
most other expense categories except development expenses and
depreciation. The following table compares our consolidated statement
of operations data for the fiscal years ended December 31, 2007 and
2006.
|
|
|
Year Ended December 31,
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
Net
Revenue
|
|
$ |
980,649 |
|
|
$ |
398,134 |
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
73,616 |
|
|
|
37,403 |
|
|
General
and administrative expenses
|
|
|
2,489,777 |
|
|
|
2,770,251 |
|
|
Professional
fees
|
|
|
1,042,887 |
|
|
|
1,075,011 |
|
|
Development
expenses
|
|
|
2,075,870 |
|
|
|
2,002,121 |
|
|
Selling
and marketing expenses
|
|
|
1,004,130 |
|
|
|
3,179,401 |
|
|
Total
operating expenses
|
|
|
6,686,280 |
|
|
|
9,064,187 |
|
|
|
|
|
|
|
|
|
|
|
|
Operating
loss
|
|
|
(5,705,631 |
) |
|
|
(8,666,053 |
) |
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
131,790 |
|
|
|
215,234 |
|
|
Interest
expense
|
|
|
(43,424 |
) |
|
|
(3,192 |
) |
|
Other
income and expense
|
|
|
(47,310 |
) |
|
|
(31,883 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
(5,664,575 |
) |
|
|
(8,485,894 |
) |
|
Foreign
currency translation adjustment
|
|
|
(13,248 |
) |
|
|
(44,797 |
) |
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
loss
|
|
$ |
(5,677,823 |
) |
|
$ |
(8,441,097 |
) |
Net
Revenue
Net revenue for fiscal year ended
December 31, 2007 was $980,649 compared to net revenue of $398,134 for fiscal
year ended December 31, 2006, an increase of 146%. The net revenue of
$980,649 for fiscal year ended December 31, 2007 included $913,911 of software
licensing and development revenue and $66,738 of maintenance and service
contract revenue. Approximately 88% of the revenue for the fiscal
year ended December 31, 2007, relates to development fees for project work and
approximately 12% is attributable to continuing license subscriptions or other
forms of recurring revenue. In the fiscal year ended December
31, 2007, approximately 80% of our revenue was derived from applications sold to
the financial services and enterprise products, while the remaining revenue was
derived from the gaming and horse racing products. In the prior
fiscal year, all of our revenue was derived from the financial services and
enterprise products.
Operating
expenses
Total operating expenses for the fiscal
year ended December 31, 2007 were $6,686,280 compared to $9,064,187 for the
fiscal year ended December 31, 2006, a decrease of 26%. There were
substantial changes in the type of expenses incurred during fiscal 2007 as
compared to those during fiscal 2006. Selling and marketing expenses
decreased by $2,175,271 or 68%, as we moved from a direct sales model to a
partner and channel-based selling model which requires less headcount resources,
contributing to 91% of the year to date $2,377,907 decrease versus the
comparable prior year period.
Depreciation
and amortization
Depreciation
and amortization expenses during the fiscal year ended December 31, 2007 were
$73,616 compared to $37,403 incurred during fiscal year ended December 31,
2006. The increase in depreciation and amortization expense is
primarily due to purchases in 2007 of capital equipment for development
purposes. The depreciation and amortization expense for fiscal 2007
included $9,005 relating to amortization of debt issuance costs, while the
fiscal 2006 amount in this category was composed entirely of depreciation
expense relating to property, plant and equipment.
General
and Administrative expenses
General
and administrative expenses during the fiscal year ended December 31, 2007 were
$2,489,777 compared to $2,770,251 incurred during the fiscal year ended December
31, 2006, a 10% decrease. Related rent, stock based compensation and
printing costs decreased in total by 17% during fiscal year 2007 compared to
fiscal year 2006. These decreases were partially off-set by increases
in travel and entertainment, insurance, payroll, conferences, equipment repair,
and other general expenses relating to our increased efforts and expenditures by
our executive management to sell and market our gaming software products which
we believe reached the point of being ready for commercial deployment in the
last quarter of 2007.
Professional
fees
Professional
fees during fiscal year ended December 31, 2007 were $1,042,887, compared to
$1,075,011 incurred during fiscal year ended December 31, 2006, a 3%
decrease. Legal fees increased from $584,572 during fiscal 2006 to
$766,493 during fiscal 2007, due to costs associated with the renegotiation of
the Shuffle Master agreement, as well as legal expenses related to patent filing
and intellectual property matters. The increase in legal fees during
fiscal 2007 was offset by decreases related to licensing investigation fees
associated with the Nevada gaming control board which were $200,000 in fiscal
2006. These licensing fees were not incurred during fiscal
2007. In addition, the accounting fees and fees paid to consultants
decreased by $12,379 and $36,289, respectively, in fiscal 2007, as compared to
the fiscal 2006, which also contributed to the slight decrease in this category
year over year. The decreases in these two categories related to less
non-audit related work such as reviews relating to registration statements by
our auditors and a reduction in our use of consultants in the current
year.
Development
expenses
Development
expenses during fiscal year ended December 31, 2007, were $2,075,870 compared to
$2,002,121 incurred during fiscal 2006, a 4% increase. Gross payroll
and related expenses increased by 39% from $1,494,462 during fiscal 2006 to
$2,075,726 incurred during fiscal 2007 which was primarily due to increased
headcount. During fiscal 2007, $471,988 of total payroll related
expenses was capitalized as software development costs, in accordance with SFAS
86, reducing development expense by the same amount capitalized. The
capitalization of software development costs resulted in total payroll costs
expenses in this category to increase slightly from $1,494,462 during the fiscal
year 2006 compared to $1,603,738 during fiscal year 2007. The
remaining differences related to the increase in this category were primarily
caused by lease costs associated with laboratory and test equipment
($62,998).
Selling
and marketing expenses
Selling
and marketing expenses during fiscal year ended December 31, 2007 were
$1,004,130 compared to $3,179,401 incurred during fiscal year ended December 31,
2006, a 68% decrease. The decrease in expenses is attributable to the
significant effort undertaken in the second half of the 2006 fiscal year to
reduce the selling costs associated with our products by switching to a partner
and channel driven sales model, instead of the direct sales model we had
previously employed. Our personnel and sales contractor costs
decreased by 66%, from $2,308,739 incurred during fiscal year 2006 to $782,026
incurred during fiscal year 2007. Expenses related to communication,
marketing and general office expenses decreased from $333,516 incurred during
fiscal year 2006 to $121,007 incurred during fiscal year 2007, as we reduced our
direct marketing efforts. Travel expenses also decreased
substantially in this category from $400,233 incurred during fiscal year 2006 to
$99,544 incurred during fiscal year 2007, which also reflected our reduced level
of sales personnel.
Other
income and expense
For the
fiscal year ended December 31, 2007, other income and expense was a loss of
$47,310 consisting of a loss of $5,171 related to a write off of fixed assets
and an exchange loss of $42,139. Comparatively, during the fiscal
year ended December 31, 2006, other income and expense was a loss of $31,883,
which consisted of a gain of $614,981 relating to the reclassification of the
Series B Warrants from a liability to equity as of the registration statement
effective date in the second quarter of 2006, in accordance with the provisions
of EITF 00-19, a gain arising from the adjustment of other taxes in the amount
of $12,164 and a foreign exchange loss of $61,376. The gains in
fiscal 2006 were offset by an expense related to the write off of in-process
purchased technology in the amount of $597,652.
Interest
income
Interest
income is derived from investing unused cash balances in short-term liquid
investments. Average cash balances during fiscal year 2007 were lower
than during fiscal year 2006, resulting in the lower level of interest income of
$131,790 during fiscal year 2007 versus $215,234 earned during fiscal year
2006.
Interest
expense
Interest expense increased from $3,192
during fiscal year ended December 31, 2006, to $43,424 during fiscal year ended
December 31, 2007, an increase of $40,232. This increase is primarily
due to interest expense generated from the issuance of debt, amounting to
$42,959 during fiscal 2007. The remaining difference of $465 incurred
during fiscal 2007, and the $3,192 of interest expense incurred during fiscal
year 2006 relate to bank charges and wire fees.
Foreign
currency translation adjustment
Prior period retained earnings on
Innovations’ books are translated at historical exchange rates while the rest of
the financial statement line items are translated at current period
rates. The resulting difference is treated as gain or loss due to
foreign currency translation during the period. During fiscal year
2007 there was a gain of $17,862 and during 2006 there was a gain of
$44,797. These exchange translation amounts were directly related to
revaluation of the Innovation’s books to our U.S. dollar reporting
currency.
Liquidity
and Capital Resources
At December 31, 2007, we
had total cash and cash equivalents of $2,367,026 held in current and short-term
deposit accounts. We believe that based on our current level of
spending, this cash will only be sufficient to fund our current level of
operating expenses until May 2008. Based on our current business
plan, we will be obligated to seek additional financing before that time.
We cannot
assure you that we will be able to successfully implement our plans to raise
additional capital or to increase revenue. We may not be able to
obtain additional capital or generate new revenue opportunities on a timely
basis, on favorable terms, or at all. If we cannot successfully
implement our plans, our liquidity, financial condition and business prospects
will be materially and adversely affected and we may have to cease
operations.
Because
of our limited revenue and cash flow from operations, we have depended primarily
on financing transactions to support our working capital and capital expenditure
requirements. Through December 31, 2007, we had accumulated losses of
approximately $21.6 million, which were financed primarily through sales of
equity securities. Since our inception in November 2003 through
December 31, 2007, we have raised approximately $21 million in equity financing
and $3 million in debt financing.
In
January 2006, we sold 2,307,693 shares of our common stock and warrants to
purchase 1,200,000 shares of our common stock to Shuffle Master for $3.0
million. The Shuffle Master warrants had an exercise price of $2.025
per share and expired on July 12, 2007 without being exercised. The
sale of these shares and the issuance of the warrants were in connection with
the original strategic alliance distribution and licensing agreement between us
and Shuffle Master.
In
addition, on July 7, 2006, we closed a private placement to accredited investors
whereby we sold 16,943,323 shares of common stock and warrants to purchase
8,471,657 shares of common stock at an exercise price of $0.83 per share,
subject to downward adjustment if the Company does not meet specified annual
revenue targets, for gross proceeds of approximately $9.3 million after payment
of commissions and expenses. As of December 31, 2007, as a result of
the Company not meeting the specified annual revenue targets, the exercise price
of the warrants was adjusted downwards to $0.40 per share.
On
November 28, 2007, the Company completed a private placement of 8.0% convertible
notes with 3,333,333 accompanying warrants which had gross proceeds of $3.0
million. The 2007 Notes have a face value of $3 million, are due on
November 28, 2010 and are convertible into 6,666,667 shares of common stock at a
conversion price of $0.45 per share (assuming interest is paid in
cash). The 2007 Warrants are to purchase 3,333,333 shares of common
stock and have an exercise price of $0.50 per share and expire five years from
the issue date.
The 2007
Notes bear interest at a rate of 8.0% per annum, payable quarterly on the first
of January, April, July, and October with such interest payable in cash, shares
of common stock or a combination thereof. Payment of interest in
shares of common stock is subject to certain conditions being met including the
existence of a registration statement which has been declared effective by the
SEC and which covers the required number of interest shares.
Our
working capital at December 31, 2007, was $1,753,124 and our current ratio at
December 31, 2007, was approximately 3 to 1. The current ratio is
derived by dividing current assets by current liabilities and is a measure used
by lending sources to assess our ability to repay short-term
liabilities.
Overall,
for the fiscal year ended December 31, 2007, we had a net cash decrease of
$3,315,136, attributable primarily to net cash used in operating activities of
approximately $5.4 million offset by our debt financing of approximately $2.7
million, net, in November 2007. The primary components of our
operating cash flows are net loss adjusted for non-cash expenses, such as
depreciation and amortization, stock-based compensation, and the changes in
accounts receivable, accrued liabilities and payroll, deferred revenue, and
accounts payable. Cash used in operating activities was $5,356,977
during fiscal year 2007 versus $7,620,771 during fiscal year 2006, a $2,230,299
improvement. This improvement was primarily caused by the decrease in
net loss on a year over year basis due to the reduction of expenses and slight
increase in revenue.
There
were net capital expenditures of $144,125 during fiscal 2007 and software
development costs of $471,988 were capitalized during fiscal 2007.
As of
December 31, 2007, our balance statement shows long term indebtedness of
$2,335,034 which is the value, net of the unamortized debt discount, of the 2007
Notes which have a face value of $3.0 million.
Contractual
Obligations and Long-Term Liability
We lease
office space in Toronto, Ontario and Boulder, Colorado which run to February
2012 and September 2010 respectively. We are currently leasing space
in New York, New York on a short-term basis under a lease which runs to June
2008, for its corporate headquarters and sales and support
functions. We intend to renew its New York lease on substantially the
same terms on a short-term basis when the current lease agreement
expires. In addition, in 2007 we leased approximately 1,000 square
feet in Las Vegas, Nevada, for our corporate apartment which was leased on an
annual basis until February 2008, at a monthly rent of approximately $2,300. Our
frequent trips to Las Vegas made this lease a cost effective way to house our
employees during business trips for meetings with our partner Shuffle Master and
in connection with GLI certification of our wireless gaming
solution. This lease was not renewed when it expired at the end of
February 2008. Office lease expenses for the fiscal years ended
December 31, 2007 and 2006 were $423,771 and $602,633,
respectively.
We also
lease office equipment. These leases have been classified as
operating leases. Office equipment lease expenses for the fiscal
years ended December 31, 2007 and 2006 were $154,360 and $85,317,
respectively.
During
the fourth quarter of fiscal 2007, we completed a private placement of 8.0%
convertible notes (the “2007 Notes”) with 3,333,333 accompanying warrants which
had gross proceeds of $3.0 million. The 2007 Notes have a face value
of $3 million, are due on November 28, 2010, and are convertible into 6,666,667
shares of common stock at a conversion price of $0.45 per share (assuming
interest is paid in cash). The 2007 Notes bear interest at a rate of
8.0% per annum, payable quarterly on the first of January, April, July, and
October with such interest payable in cash, shares of common stock or a
combination thereof. Payment of interest in shares of common stock is
subject to certain conditions being met including the existence of a
registration statement which has been declared effective by the SEC and which
covers the required number of interest shares.
Contractual
obligations and payments relating to our long-term liability in future years are
as follows:
|
Contractual
Obligations and Long-Term Liability
(US$)
|
|
|
|
|
Total
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
|
2012
|
+ |
|
Office
Space Leases:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United
States
|
|
$ |
563,554 |
|
|
$ |
239,652 |
|
|
$ |
183,100 |
|
|
$ |
140,802 |
|
|
$ |
− |
|
|
$ |
− |
|
|
Canada
|
|
|
517,570 |
|
|
|
115,988 |
|
|
|
119,570 |
|
|
|
123,212 |
|
|
|
126,916 |
|
|
|
31,884 |
|
|
Total
Office Space
|
|
|
1,081,124 |
|
|
|
355,640 |
|
|
|
302,670 |
|
|
|
264,014 |
|
|
|
126,916 |
|
|
|
31,884 |
|
|
Office
Equipment
|
|
|
208,418 |
|
|
|
146,298 |
|
|
|
61,426 |
|
|
|
694 |
|
|
|
− |
|
|
|
− |
|
|
Convertible
Debt
|
|
|
3,000,000 |
|
|
|
− |
|
|
|
− |
|
|
|
3,000,000 |
|
|
|
− |
|
|
|
− |
|
|
Interest
on Convertible Debt
|
|
|
700,000 |
|
|
|
240,000 |
|
|
|
240,000 |
|
|
|
220,000 |
|
|
|
− |
|
|
|
− |
|
|
Total
|
|
$ |
4,989,542 |
|
|
$ |
741,938 |
|
|
$ |
604,097 |
|
|
$ |
3,484,708 |
|
|
$ |
126,916 |
|
|
$ |
31,884 |
|
Purchase
commitments. On September 1, 2006, the Company entered into a
Private Label Partner Agreement (the “Agreement”) with Motorola, Inc.
(“Motorola”), formerly Symbol Technologies, Inc., pursuant to which the Company
has the exclusive right to purchase certain private label wireless solution
products from Motorola to support the Company’s development of a secure wireless
handheld gaming system. The Agreement requires that the Company
purchase a specified minimum number of units over the three-year term of the
Agreement. In the event such minimum purchase requirement is not met,
Motorola has the right to adjust the unit purchase price to a level commensurate
with the Company’s volume and the private label exclusivity under the Agreement
will be void. The Company believes that in the event of either the
loss of private label exclusivity or the renegotiation of the unit purchase
price, its consolidated financial statements would not be materially
affected.
Off-Balance
Sheet Arrangements
As of
December 31, 2007, there were no off-balance sheet arrangements.
Item
7. Financial
Statements
|
Financial
Statements
|
|
Page
|
|
Report
of Independent Registered Public Accounting Firm
|
|
36
|
|
Consolidated
Balance Sheets
|
|
37
|
|
Consolidated
Statements of Operations and Comprehensive Loss
|
|
38
|
|
Consolidated
Statement of Stockholders’ Equity
|
|
39
|
|
Consolidated
Statements of Cash Flows
|
|
40
|
|
Notes
to Consolidated Financial Statements
|
|
41
|
|
|
|
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and Stockholders of
Sona
Mobile Holdings Corp. and Subsidiaries
We have
audited the accompanying consolidated balance sheets of Sona Mobile Holdings
Corp. and Subsidiaries (the “Company”) as at December 31, 2007 and 2006, and the
related consolidated statements of operations and comprehensive loss,
stockholders’ equity, and cash flows for each of the years in the two-year
period ended December 31, 2007. These consolidated financial
statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Accounting
Oversight Board (United States). Those standards require that we plan
and perform an audit to obtain reasonable assurance whether the consolidated
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Sona Mobile Holdings Corp.
and Subsidiaries as of December 31, 2007 and 2006 and the results of their
operations and their cash flows for each of the two years in the period ended
December 31, 2007, in conformity with accounting principles generally accepted
in the United State of America.
The
accompanying consolidated financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Note 1
to the consolidated financial statements, the Company has suffered recurring
losses from operations that raise substantial doubt about its ability to
continue as a going concern. Management’s plans in regard to these
matters are also described in Note 1. The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
Toronto
Canada /s/ Horwath Orenstein
LLP
March 28,
2008 Chartered
Accountants
Licensed Public
Accountants
SONA
MOBILE HOLDINGS CORP. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
|
|
|
At
December 31, 2007
|
|
|
At
December 31, 2006
|
|
|
Assets
|
|
|
|
|
|
|
|
Current:
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
2,367,026 |
|
|
$ |
5,682,162 |
|
|
Accounts
receivable (net of allowance for doubtful accounts of $52,175 and
$25,531)
|
|
|
119,652 |
|
|
|
204,379 |
|
|
Tax
credits receivable
|
|
|
51,220 |
|
|
|
43,568 |
|
|
Prepaid
expenses & deposits
|
|
|
98,415 |
|
|
|
95,967 |
|
|
Total
current assets
|
|
|
2,636,313 |
|
|
|
6,026,076 |
|
|
|
|
|
|
|
|
|
|
|
|
Property
and equipment:
|
|
|
|
|
|
|
|
|
|
Computer
equipment
|
|
|
192,248 |
|
|
|
101,168 |
|
|
Furniture
and equipment
|
|
|
85,603 |
|
|
|
37,211 |
|
|
Less:
accumulated depreciation
|
|
|
(116,094 |
) |
|
|
(55,581 |
) |
|
Total
property and equipment
|
|
|
161,757 |
|
|
|
82,798 |
|
|
|
|
|
|
|
|
|
|
|
|
Software
development costs (Note 3(i))
|
|
|
471,988 |
|
|
|
− |
|
|
Debt
issuance costs, net (Note 11)
|
|
|
315,179 |
|
|
|
− |
|
|
|
|
|
|
|
|
|
|
|
|
Total
Assets
|
|
$ |
3,585,237 |
|
|
$ |
6,108,874 |
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and Stockholders' Equity
|
|
|
|
|
|
|
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$ |
316,473 |
|
|
$ |
350,375 |
|
|
Accrued
liabilities & payroll (Note 9)
|
|
|
510,921 |
|
|
|
412,796 |
|
|
Deferred
revenue (Note 10)
|
|
|
55,795 |
|
|
|
389,562 |
|
|
Total
current liabilities
|
|
|
883,189 |
|
|
|
1,152,733 |
|
|
|
|
|
|
|
|
|
|
|
|
Long
term convertible debt, net (Note 11)
|
|
|
2,335,034 |
|
|
|
− |
|
|
|
|
|
|
|
|
|
|
|
|
Total
Liabilities
|
|
|
3,218,223 |
|
|
|
1,152,733 |
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
equity:
|
|
|
|
|
|
|
|
|
|
Preferred
Stock – 2,000,000 shares authorized, par value $.01 per share – no shares
issued and outstanding
|
|
|
− |
|
|
|
− |
|
|
Common
Stock – 120,000,000 shares authorized, par value $.01 per share
– 57,832,857 and 57,809,523 shares issued and outstanding
respectively
|
|
|
578,328 |
|
|
|
578,095 |
|
|
Additional
paid-in capital
|
|
|
17,570,902 |
|
|
|
15,706,398 |
|
|
Common
Stock purchase warrants
|
|
|
3,925,661 |
|
|
|
4,734,965 |
|
|
Unamortized
stock based compensation
|
|
|
(5,833 |
) |
|
|
(39,096 |
) |
|
Accumulated
other comprehensive (loss)
|
|
|
(64,110 |
) |
|
|
(50,862 |
) |
|
Accumulated
deficit
|
|
|
(21,637,934 |
) |
|
|
(15,973,359 |
) |
|
Total
stockholders’ equity
|
|
|
367,014 |
|
|
|
4,956,141 |
|
|
|
|
|
|
|
|
|
|
|
|
Total
Liabilities and Stockholders’ Equity
|
|
$ |
3,585,237 |
|
|
$ |
6,108,874 |
|
See
accompanying notes to consolidated financial statements.
SONA
MOBILE HOLDINGS CORP. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
|
|
|
Year
ended
December
31,
2007
|
|
|
Year ended
December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
Net
Revenue
|
|
$ |
980,649 |
|
|
$ |
398,134 |
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
73,616 |
|
|
|
37,403 |
|
|
General
and administrative expenses
|
|
|
2,489,777 |
|
|
|
2,770,251 |
|
|
Professional
fees
|
|
|
1,042,887 |
|
|
|
1,075,011 |
|
|
Development
expenses
|
|
|
2,075,870 |
|
|
|
2,002,121 |
|
|
Selling
and marketing expenses
|
|
|
1,004,130 |
|
|
|
3,179,401 |
|
|
Total
operating expenses
|
|
|
6,686,280 |
|
|
|
9,064,187 |
|
|
|
|
|
|
|
|
|
|
|
|
Operating
loss
|
|
|
(5,705,631 |
) |
|
|
(8,666,053 |
) |
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
131,790 |
|
|
|
215,234 |
|
|
Interest
expense
|
|
|
(43,424 |
) |
|
|
(3,192 |
) |
|
Other
income and expense (Note 16)
|
|
|
(47,310 |
) |
|
|
(31,883 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$ |
(5,664,575 |
) |
|
$ |
(8,485,894 |
) |
|
Foreign
currency translation adjustment
|
|
|
(13,248 |
) |
|
|
44,797 |
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
loss
|
|
$ |
(5,677,823 |
) |
|
$ |
(8,441,097 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net
loss per share of common stock
–
basic and diluted
|
|
$ |
(0.10 |
) |
|
$ |
(0.17 |
) |
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of shares of common stock outstanding
–
basic and diluted (Note 6)
|
|
|
57,813,250 |
|
|
|
48,841,115 |
|
See
accompanying notes to consolidated financial statements.
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY
|
|
|
Common
Stock
|
|
|
Series
A & Series B Convertible Preferred Stock
|
|
|
Warrants
on Common Stock
|
|
|
Additional
paid-in
Capital
|
|
|
Unamortized
Stock Based Compensation
|
|
|
Accumulated
Comprehensive
Income
Amount
|
|
|
Accumulated
Deficit
|
|
|
Total
Shareholder’s Equity
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2005
|
|
|
37,907,395
|
|
|
$
|
379,074
|
|
|
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
7,064,433
|
|
|
$
|
(53,000
|
)
|
|
$
|
(95,659
|
)
|
|
$
|
(7,487,465
|
)
|
|
$
|
(192,617
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
option expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
332,988
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
332,988
|
|
|
Stock
issued for acquired intangibles
|
|
|
800,000
|
|
|
|
8,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
590,400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
598,400
|
|
|
Stock-based
compensation
|
|
|
457,778
|
|
|
|
4,578
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
333,538
|
|
|
|
13,904
|
|
|
|
|
|
|
|
|
|
|
|
352,020
|
|
|
Exercise
of employee stock options
|
|
|
43,334
|
|
|
|
434
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
68,902
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
69,336
|
|
|
Common
stock and warrants issued to Shuffle Master upon exercise of
options
|
|
|
2,307,693
|
|
|
|
23,076
|
|
|
|
|
|
|
|
|
|
|
|
1,335,600
|
|
|
|
1,641,324
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,000,000
|
|
|
Reclassify
warrants from liability to equity as of registration statement effective
date
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
281,777
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
281,777
|
|
|
Issuance
of penalty warrants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,993
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,993
|
|
|
Common
stock and warrants issued under private placement, net of issuance
costs
|
|
|
16,943,323
|
|
|
|
169,433
|
|
|
|
|
|
|
|
|
|
|
|
3,114,595
|
|
|
|
5,968,313
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,252,341
|
|
|
Repurchase
of treasury stock
|
|
|
(650,000
|
)
|
|
|
(6,500
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(293,500
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(300,000
|
)
|
|
Other
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
44,797
|
|
|
|
|
|
|
|
44,797
|
|
|
Net
loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,485,894
|
)
|
|
|
(8,485,894
|
)
|
|
Balance
at December 31, 2006
|
|
|
57,809,523
|
|
|
$
|
578,095
|
|
|
|
-
|
|
|
$
|
-
|
|
|
$
|
4,734,965
|
|
|
$
|
15,706,398
|
|
|
$
|
(39,095
|
)
|
|
$
|
(50,862
|
)
|
|
$
|
(15,973,359
|
)
|
|
$
|
4,956,143
|
|
|
Stock
option expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
356,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
356,500
|
|
|
Stock-based
compensation
|
|
|
23,334
|
|
|
|
233
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,774
|
|
|
|
33,262
|
|
|
|
|
|
|
|
|
|
|
|
46,269
|
|
|
Expiration
of warrants issued to Shuffle Master
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,335,600
|
)
|
|
|
1,335,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
−
|
|
|
Issuance
of warrants with convertible debenture
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
526,296
|
|
|
|
159,629
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
685,925
|
|
|
Other
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(13,248
|
)
|
|
|
|
|
|
|
(13,248
|
)
|
|
Net
loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,664,575
|
)
|
|
|
(5,664,575
|
)
|
|
Balance
at December 31, 2007
|
|
|
57,832,857
|
|
|
$
|
578,328
|
|
|
|
-
|
|
|
$
|
-
|
|
|
$ |
3,925,661
|
|
|
$ |
17,570,902
|
|
|
$ |
(5,833
|
)
|
|
$
|
(64,110
|
)
|
|
$ |
(21,637,934
|
)
|
|
$ |
367,014
|
|
See accompanying notes to consolidated financial
statements.
SONA
MOBILE HOLDINGS CORP. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
|
Year
ended December 31,
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Cash
provided by (used in):
|
|
|
|
|
|
|
|
Operating
activities
|
|
|
|
|
|
|
|
Net
loss
|
|
$ |
(5,664,575 |
) |
|
$ |
(8,485,894 |
) |
|
|
|
|
|
|
|
|
|
|
|
Adjustments
for:
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
73,616 |
|
|
|
37,403 |
|
|
Amortization
of debt discount
|
|
|
20,959 |
|
|
|
− |
|
|
Loss
on write off of fixed assets
|
|
|
5,171 |
|
|
|
− |
|
|
Write-off
of in-process purchased technology
|
|
|
− |
|
|
|
597,652 |
|
|
Amortization
of restricted stock-based compensation
|
|
|
46,269 |
|
|
|
352,020 |
|
|
Stock-based
compensation
|
|
|
356,500 |
|
|
|
332,988 |
|
|
Gain
on revaluation of common stock purchase warrants
|
|
|
− |
|
|
|
(468,326 |
) |
|
Issuance
of penalty warrants
|
|
|
− |
|
|
|
2,993 |
|
|
Changes
in non-cash working capital assets and liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts
receivable, net
|
|
|
84,727 |
|
|
|
208,743 |
|
|
Tax
credits receivable
|
|
|
(7,652 |
) |
|
|
(12,639 |
) |
|
Prepaid
expenses & deposits
|
|
|
(2,448 |
) |
|
|
18,723 |
|
|
Accounts
payable
|
|
|
(33,902 |
) |
|
|
(175,299 |
) |
|
Accrued
liabilities & payroll
|
|
|
98,125 |
|
|
|
(288,410 |
) |
|
Deferred
revenue
|
|
|
(333,767 |
) |
|
|
259,275 |
|
|
Net
cash used in operating activities
|
|
|
(5,356,977 |
) |
|
|
(7,620,771 |
) |
|
|
|
|
|
|
|
|
|
|
|
Investing
activities
|
|
|
|
|
|
|
|
|
|
Software
development costs
|
|
|
(471,988 |
) |
|
|
− |
|
|
Acquisition
of property & equipment
|
|
|
(144,125 |
) |
|
|
(50,209 |
) |
|
Net
cash used in investing activities
|
|
|
(616,113 |
) |
|
|
(50,209 |
) |
|
|
|
|
|
|
|
|
|
|
|
Financing
activities
|
|
|
|
|
|
|
|
|
|
Proceeds
from the issuance of convertible debt, net of debt issuance costs of
$324,184
|
|
|
2,675,816 |
|
|
|
− |
|
|
Proceeds
from the sale of common stock
|
|
|
− |
|
|
|
7,802,148 |
|
|
Proceeds
from exercise of stock options
|
|
|
− |
|
|
|
69,334 |
|
|
Proceeds
from the issuance of common stock purchase warrants
|
|
|
− |
|
|
|
4,450,195 |
|
|
Repurchase
of common stock from shareholder
|
|
|
− |
|
|
|
(300,000 |
) |
|
Net
cash provided by financing activities
|
|
|
2,675,816 |
|
|
|
12,021,677 |
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of exchange rate changes on cash & cash equivalents
|
|
|
(17,862 |
) |
|
|
44,553 |
|
|
|
|
|
|
|
|
|
|
|
|
Change
in cash & cash equivalents during the
period
|
|
|
(3,315,136 |
) |
|
|
4,395,250 |
|
|
Cash
& cash equivalents, beginning of period
|
|
|
5,682,162 |
|
|
|
1,286,912 |
|
|
Cash
& cash equivalents, end of period
|
|
$ |
2,367,026 |
|
|
$ |
5,682,162 |
|
There
were no amounts paid in cash for taxes in 2007. There was $22,000
paid in interest during fiscal 2007. During fiscal 2006 there were no
amounts paid in cash for taxes or interest.
In the
second quarter of 2006, warrants with a balance sheet value of $896,758 were
reclassified from liability to equity in accordance with the provisions of EITF
00-19.
See
accompanying notes to consolidated financial statements.
SONA
MOBILE HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (AUDITED)
Note
1. Going Concern and Management’s Plans
The
accompanying consolidated financial statements of Sona Mobile Holdings Corp.
(the “Company”) have been prepared assuming that the Company will continue as a
going concern. However, since its inception in November 2003, the
Company has generated minimal revenue, has incurred substantial losses and has
not generated any positive cash flow from operations. The Company has
relied upon the sale of shares of equity securities and convertible debt to fund
its operations. These conditions raise substantial doubt as to the
Company’s ability to continue as a going concern.
The
consolidated financial statements do not include any adjustments to reflect the
possible future effects on the recoverability and classification of assets or
the amounts or classification of liabilities that may result from the possible
inability of the Company to continue as a going concern.
At
December 31, 2007, the Company had total cash and cash equivalents of $2.4
million held in current and short-term deposit accounts. Management
believes that based on the current level of spending, this cash will only be
sufficient to fund the Company’s operations until May 2008. Based on
the current business plan, the Company will be obligated to seek additional
financing before that time. There can be no assurance that the
Company will be able to successfully implement its plans to raise additional
capital or to increase revenue. The Company may not be able to obtain
additional capital or generate new revenue opportunities on a timely basis, on
favorable terms, or at all. If the Company cannot successfully implement
its plans, the Company’s liquidity, financial condition and business prospects
will be materially and adversely affected and the Company may have to cease
operations.
Note
2. Company Background and Description of Business
Sona
Mobile, Inc. (“Sona Mobile”) was formed under the laws of the State of
Washington in November 2003 for the purpose of acquiring Sona Innovations, Inc.
(“Innovations”), which it did in December 2003. On April 19, 2005,
Sona Mobile merged (the "Merger") with and into PerfectData Acquisition
Corporation, a Delaware corporation (“PAC”) and a wholly-owned subsidiary of
PerfectData Corporation, also a Delaware corporation
(“PerfectData”). Under the terms of that certain Agreement and Plan
of Merger dated as of March 7, 2005, (i) PAC was the surviving company but
changed its name to Sona Mobile, Inc.; (ii) the pre-merger shareholders of Sona
Mobile received stock in PerfectData representing 80% of the voting power in PAC
post-merger; (iii) all of PerfectData’s officers resigned and Sona Mobile’s
pre-merger officers were appointed as the new officers of PerfectData; and (iv)
four of the five persons serving as directors of PerfectData resigned and the
remaining director appointed the three pre-merger directors of Sona Mobile to
the PerfectData Board of Directors. In November 2005, PerfectData
changed its name to “Sona Mobile Holdings Corp.”
At the
time of the Merger, PerfectData was essentially a shell company that was not
engaged in an active business. Upon completion of the Merger,
PerfectData’s only business was the historical business of Sona Mobile and the
pre-merger shareholders of Sona Mobile controlled
PerfectData. Accordingly, Sona Mobile was deemed the accounting
acquirer and the Merger was accounted for as a reverse acquisition of a public
shell and a recapitalization of Sona Mobile. No goodwill was recorded
in connection with the Merger and the costs were accounted for as a reduction of
additional paid-in-capital. The pre-merger financial statements of
Sona Mobile are treated as the historical financial statements of the combined
companies and its historical stockholders’ equity was adjusted to reflect the
new capital structure.
The
Company is a software and service provider specializing in value-added services
to data-intensive vertical and horizontal market segments including the gaming
industry. The Company develops, markets and sells data application
software for gaming and mobile devices which enables secure execution of real
time transactions on a flexible platform over wired, cellular or Wi-Fi networks.
Our target customer base includes casinos, horse racing tracks and operators,
cruise ship operators and casino game manufacturers and suppliers on the gaming
side, and corporations that require secure transmissions of large amounts of
data in the enterprise and financial services verticals. Our revenues
consist of project, licensing and support fees generated by our flagship
products the Sona Gaming System™ (“SGS”) and the Sona Wireless Platform™
(‘‘SWP’’) and related vertical gaming and wireless application software
products. The Company operates as one business segment focused on the
development, sale and marketing of client-server application
software.
Note 2.
Company Background and Description of Business
(cont'd)
The
Company markets its software principally to two large vertical
markets.
|
|
•
|
Gaming and
entertainment. We propose to
(i) deliver casino games via our SGS, both wired and wirelessly in
designated areas on casino properties; (ii) offer real-time, multiplayer
games that accommodate an unlimited number of players; (iii) deliver games
on a play-for-free or wagering basis (where permitted by law) on mobile
telephone handsets over any carrier network; and (iv) deliver horse and
sports wagering applications, where legal, for race and sports books, as
well as on-track and off-track wagering, including live streaming video of
horse races and other sports events. We also propose to deliver
content via channel partners and content partners, including live
streaming television, digital radio, specific theme downloads for mobile
phones, media downloads and gaming
applications.
|
|
|
•
|
Financial services and
enterprise software. The Company’s products and services extend
enterprise applications to the wireless arena, such as customer
relationship management systems, sales force automation systems,
information technology (IT) service desk and business continuity
protocols. One of the Company’s primary focuses in this sales
vertical is to develop software for the data-intensive investment banking
community and client-facing applications for the retail banking
industry.
|
The
Company’s revenues consist primarily of project, licensing and support fees
relating to our two platforms the Sona Gaming System (“SGS”) and the Sona
Wireless Platform (“SWP”).
In 2006,
in conjunction with the Company’s strategic alliance with Shuffle Master and
because of the perceived opportunities for wireless and server-based
applications in the gaming industry, the primary sales and development focus of
the Company was switched towards the gaming industry. The Company
continues to focus on the financial services and enterprise market sectors for
products, customers and verticals where success has previously been experienced
or where significant opportunities are perceived to exist.
Note
3. Summary of Significant Accounting Policies
Basis
of Presentation
The
accompanying audited consolidated financial statements of Sona Mobile Holdings
Corp. and its subsidiaries, included herein have been prepared by the Company in
accordance with accounting principally generally acceptable in the United States
of America (“GAAP”). The audited consolidated financial statements
herein include the accounts of the Company and its wholly-owned subsidiary, Sona
Mobile, Inc. and Sona Mobile’s wholly-owned subsidiary, Sona Innovations Inc., a
Canadian company. All material inter-company accounts and
transactions have been eliminated in consolidation.
Recently
issued accounting pronouncements
In
September 2006, the Financial Accounting Standards Board (FASB) issued SFAS No.
157, Fair Value Measurements, which defines fair value, establishes a framework
for measuring fair value in generally accepted accounting principles and expands
disclosures about fair value measurements. SFAS No. 157 is effective for fiscal
years beginning after November 15, 2007, and interim periods within those fiscal
years. We do not expect the adoption of SFAS No. 157 to have a material impact
on our consolidated financial statements. The FASB may delay a portion of this
standard.
In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities. SFAS No. 159 permits companies to choose to
measure many financial instruments and certain other items at fair value. SFAS
No. 159 is effective for financial statements issued for fiscal years beginning
after November 15, 2007. We do not expect the adoption of SFAS No. 159 to have a
material impact on our consolidated financial statements.
In
December 2007, the FASB issued SFAS No. 141 (R), Business Combinations, and SFAS
No. 160, Noncontrolling Interests in Consolidated Financial Statements. SFAS No.
141 (R) requires an acquirer to measure the identifiable assets acquired, the
liabilities assumed and any noncontrolling interest in the
Note 3.
Summary of Significant Accounting Policies
(cont'd)
acquiree
at their fair values on the acquisition date, with goodwill being the excess
value over the net identifiable assets acquired. SFAS No. 160 clarifies that a
noncontrolling interest in a subsidiary should be reported as equity in the
consolidated financial statements. The calculation of earnings per share will
continue to be based on income amounts attributable to the parent. SFAS No. 141
(R) and SFAS No. 160 are effective for financial statements issued for fiscal
years beginning after December 15, 2008. Early adoption is prohibited. We have
not yet determined the effect on our consolidated financial statements, if any,
upon adoption of SFAS No. 141 (R) or SFAS No. 160.
(a) Principles of
consolidation
The
consolidated financial statements include the accounts of the Company, its
wholly-owned subsidiary, Sona Mobile and Sona Mobile’s wholly-owned subsidiary,
Innovations. All inter-company accounts and transactions have been
eliminated in consolidation.
(b) Cash
and cash equivalents
Cash and
cash equivalents are comprised of cash and term deposits with original maturity
dates of less than 90 days. Cash and cash equivalents are stated at
cost, which approximates market value, and are concentrated in three major
financial institutions.
(c) Foreign
currency translation
The
functional currency is the U.S. dollar as that is the currency in which the
Company primarily generates revenue and expends cash. In accordance
with the provisions of Statement of Financial Accounting Standards (“SFAS”) No.
52, "Foreign Currency Translation," assets and liabilities denominated in a
foreign currency have been translated at the period end rate of
exchange. Revenue and expense items have been translated at the
transaction date rate. For Innovations, which uses its local currency
(Canadian dollar) as the functional currency, the resulting translation
adjustments are included in other comprehensive income, as the company is a
foreign self-sustaining operation. Other gains or losses resulting
from foreign exchange transactions are reflected in earnings.
(d) Property
and equipment
Property
and equipment are stated at cost. Depreciation is provided on a
straight-line basis over the estimated useful lives of three to five
years.
(e) Use
of estimates
The
preparation of consolidated financial statements in conformity with GAAP
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities, at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting periods. Actual results
could differ from these estimates. These estimates are reviewed
periodically and, as adjustments become necessary, they are reported in earnings
in the period in which they become known.
(f) Software
rights
In April
2006, the Company completed the acquisition of certain software from Digital
Wasabi, LLC, a Colorado limited liability company (“Digital
Wasabi”). The software, which has not been fully developed, is
intended to facilitate the playing of certain games of chance, such as bingo and
poker, on mobile wireless communication devices. The in-process
purchased software does not meet the criteria for capitalization as prescribed
in SFAS No. 86 “Accounting for the Costs of Computer Software to Be Sold,
Leased, or Otherwise Marketed” (“SFAS 86”) and as such was expensed in the
quarter of acquisition.
(g) Income
taxes
The
Company accounts for income taxes in accordance with SFAS No. 109, “Accounting
for Income Taxes,” which requires an asset and liability approach to financial
accounting and reporting for income taxes. Deferred income tax assets
and liabilities are computed periodically for differences between the financial
statement and tax basis of assets and liabilities that will result in taxable or
deductible amounts in
Note 3.
Summary of Significant Accounting Policies
(cont'd)
the
future based on enacted tax laws and rates applicable to the periods in which
the differences are expected to affect taxable income. Valuation
allowances are established when necessary to reduce deferred tax assets to the
amount expected to be realized. The income tax provision is the tax
payable or refundable for the period plus or minus the change during the period
in deferred tax assets and liabilities.
On
January 1, 2007, the Company adopted the provisions
of FASB Interpretation 48, “Accounting for Uncertainty in Income Taxes
- an interpretation of FASB Statement No. 109,” (“FIN 48”). FIN 48
prescribes a more-likely-than-not threshold for financial statement recognition
and measurement of a tax position taken, or expected to be taken, in a tax
return. FIN 48 also provides guidance related to, among other things,
classification, accounting for interest and penalties associated with tax
positions, and disclosure requirements.
The
Company currently has a full valuation allowance against its net deferred tax
asset and has not recognized any benefits from tax positions in
earnings. Accordingly, the adoption of FIN 48 did not have an impact
on the financial statements for the fiscal year ended December 31, 2007.
The
Company's policy is to recognize interest and penalties accrued on any
unrecognized tax benefits as a component of the provision for income taxes on
the financial statements of future periods in which the Company must record an
income tax liability. Since the Company did not record a liability at
December 31, 2007, there was no impact to the effective tax rate. The
Company files income tax returns in the U.S. federal jurisdiction and several
state jurisdictions, as well as in Canada and the Ontario provincial tax
jurisdiction. The Company does not believe there will be any material
changes in our unrecognized tax positions over the next 12 months.
The
Company has applied for Scientific Research and Development Tax credits, as part
of the annual Canadian federal and provincial income tax filings. The
federal tax credits are non-refundable and as the company has a full provision
against any future benefits from its historical tax losses, a tax receivable
amount for federal research tax credits is not recognized on the balance
sheet. Ontario provincial tax credits for valid research and development
expenditures, if granted, are refundable to the Company. The amount of tax
credit that will be awarded to the company upon assessment of the returns by
this tax jurisdiction is not always certain at the time the tax returns are
filed. As such, it is the company’s policy to book a receivable for
these amounts on the balance sheet only when the final tax assessment is
received by the company after the filing of such returns. As of December
31, 2007 and 2006, the balances for tax credits receivable on the balance sheet
were $51,220 and $43,568, respectively, which related to Ontario research and
development tax credits assessed, but not received, as of the financial
statement date.
(h) Revenue
recognition
The
Company follows specific and detailed guidance in measuring revenue, although
certain judgments affect the application of our revenue recognition
policy. These judgments include, for example, the determination of a
customer’s creditworthiness, whether two separate transactions with a customer
should be accounted for as a single transaction, or whether included services
are essential to the functionality of a product thereby requiring percentage of
completion accounting rather than software accounting.
The
Company derives revenue from license and service fees related to customization
and implementation of the software being licensed. License fees are
recognized in accordance with Statement of Position (“SOP”) 97-2, “Software
Revenue Recognition,” as amended by SOP 98-4 and SOP 98-9, and in certain
instances in accordance with SOP 81-1, “Accounting for Performance of
Construction-Type and Certain Production-Type Contracts.” The Company
licenses software under non-cancelable license agreements. License
fee revenues are recognized when (a) a non-cancelable license agreement is in
force, (b) the product has been delivered, (c) the license fee is fixed or
determinable and (d) collection is reasonably assured. If the fee is
not fixed or determinable, revenue is recognized as payments become due from the
customer.
Residual
Method Accounting. In software arrangements that include
multiple elements (e.g., license rights and technical support services), total
fees are allocated among each of the elements using the “residual” method of
accounting. Under this method, revenue allocated to undelivered
elements is based on vendor-specific objective evidence of fair value of such
undelivered elements, and the residual revenue is allocated to the delivered
elements. Vendor specific objective evidence of fair value for such
undelivered elements is based upon the price charged for such product or service
when it is sold separately. The Company’s
Note 3.
Summary of Significant Accounting Policies
(cont'd)
pricing
practices may be modified in the future, which would result in changes to our
vendor specific objective evidence. As a result, future
revenue associated with multiple element arrangements could differ significantly
from our historical results.
Percentage
of Completion Accounting. Fees from licenses sold together
with consulting services are generally recognized upon shipment of the licenses,
provided (i) the criteria described in subparagraphs (a) through (d) in the
second paragraph under “Revenue Recognition” above are met; (ii) payment of the
license fee is not dependent upon performance of the consulting services; and
(iii) the consulting services are not essential to the functionality of the
licensed software. If the services are essential to the functionality
of the software, or performance of services is a condition to payment of license
fees, both the software license and consulting fees are recognized under the
“percentage of completion” method of contract accounting. Under this
method, management is required to estimate the number of total hours needed to
complete a project, and revenues and profits are recognized based on the
percentage of total contract hours as they are completed. Due to the
complexity involved in the estimating process, revenues and profits recognized
under the percentage of completion method of accounting are subject to revision
as contract phases are actually completed. Historically, these
revisions have not been material.
Sublicense
Revenues. Sublicense fees
are recognized as reported by our licensees. License fees for certain
application development and data access tools are recognized upon direct
shipment from the Company to the end user or upon direct shipment to the
reseller for resale to the end user. If collection is not reasonably
assured in advance, revenue is recognized only when sublicense fees are actually
collected.
Service
Revenues. Technical support revenues are recognized ratably
over the term of the related support agreement, which in most cases is one
year. Revenues from consulting services subjected to time and
materials contracts, including training, are recognized as services are
performed. Revenues from other contract services are generally
recognized based on the proportional performance of the project, with
performance measured based on hours of work performed.
|
|
(i)
|
Research
and software development costs
|
The
Company incurs costs on activities that relate to research and the development
of new software products. Research costs are expensed as they are
incurred. Costs are reduced by tax credits where
applicable. Software development costs to establish the technological
feasibility of software applications developed by the Company are charged to
expense as incurred. In accordance with SFAS 86, certain costs
incurred subsequent to achieving technological feasibility are
capitalized. Accordingly, a portion of the internal labor costs and
external consulting costs associated with essential wireless software
development and enhancement activities are capitalized. Costs
associated with conceptual design and feasibility assessments as well as
maintenance and routine changes are expensed as incurred. Capitalized
costs are amortized based on current or future revenue for each product with an
annual minimum equal to the straight-line basis of amortization over the
estimated economic lives of the applications, not to exceed five
years. Capitalized software development costs are periodically
evaluated for impairment. Gross software development costs for the
fiscal years ended December 31, 2007, and 2006 were $2,075,870 and $2,002,121,
respectively. During the fiscal year ended December 31, 2007,
$471,988 of the gross software development costs related to the development of
the Company’s server based casino gaming products, the Sona Gaming System, met
the criteria of SFAS 86 for capitalization of software development
costs. Commercial feasibility was determined to be established on
August 31, 2007 with our first field trial in Lima, Peru at which point we
ceased capitalization of any additional costs related to the development of this
product. Three additional games were certified for use with the SGS
in November 2007 and shortly after this time, the Company made the determination
that the software was available for general release to
customers. The Company intends to commence amortization of
these capitalized costs on a straight-line basis as of January 1, 2008 over an
estimated useful life of three years. The Company has estimated that
there are significant revenue opportunities for its server based casino gaming
product and as such, has determined that there are no impairment charges
required as of December 31, 2007, to the value of the capitalized development
costs. Capitalized software development costs were $471,988 as of December 31,
2007.
Note 3.
Summary of Significant Accounting Policies
(cont'd)
|
|
(j)
|
Stock-based
compensation
|
As of
January 1, 2006, the Company adopted the provisions of, and accounts for
stock-based compensation in accordance with, FASB Statement of Financial
Accounting Standards No. 123 — revised 2004 (“SFAS 123R”), “Share-Based Payment”
which replaced Statement of Financial Accounting Standards No. 123 (“SFAS 123”),
“Accounting for Stock-Based Compensation” and supersedes APB Opinion No. 25,
“Accounting for Stock Issued to Employees.” Under the fair value
recognition provisions of this statement, stock-based compensation cost is
measured at the grant date based on the fair value of the award and is
recognized as expense on a straight-line basis over the requisite service
period, which is the vesting period. The Company elected the
modified-prospective method, under which prior periods are not revised for
comparative purposes. The valuation provisions of SFAS 123R apply to
new grants and to grants that were outstanding as of the effective date and are
subsequently modified. Estimated compensation for grants that were
outstanding as of the effective date will be recognized over the remaining
service period using the compensation cost estimated for the SFAS 123 pro forma
disclosures, as adjusted for estimated forfeitures.
During
fiscal 2007, the Company issued stock options to directors, officers, and
employees under the 2006
Incentive Plan (the “2006 Plan”) as described in Note 14 to our consolidated
financial statements. During fiscal 2006, the Company issued stock
options to directors, officers, and employees under the Amended
and Restated Stock Option Plan of 2000 which is also described in Note 14 to our
consolidated financial statements. The fair value of these options
was estimated at the date of grant using the Black-Scholes option-pricing
model.
Certain
reclassifications of previously reported amounts have been made to conform to
the current year’s presentation.
The
Company follows the provisions of SFAS No. 133 “Accounting for Derivative
Instruments and Hedging Activities” (“SFAS No. 133”) along with related
interpretations EITF No. 00-19 “Accounting for Derivative Financial Instruments
Indexed to, and Potentially Settled in, a Company’s Own Stock” (“EITF 00-19”)
and EITF No. 05-2 “The Meaning of ‘Conventional Convertible Debt Instrument’ in
Issue No. 00-19” (EITF 05-2). SFAS No. 133 requires every derivative
instrument (including certain derivative instruments embedded in other
contracts) to be recorded in the balance sheet as either an asset or liability
measured at its fair value, with changes in the derivative’s fair value
recognized currently in earnings unless specific hedge accounting criteria are
met. The Company values these derivative securities under the fair
value method at the end of each reporting period, and their value is marked to
market with the gain or loss recognition recorded against
earnings. The Company uses the Black-Scholes option-pricing model to
determine fair value. Key assumptions of the Black-Scholes
option-pricing model include applicable volatility rates, risk-free interest
rates and the instrument’s expected remaining life. These assumptions
require significant management judgment. At December 31, 2007 and
2006, there were no derivative instruments reported on the Company’s balance
sheet.
Note
4. Concentration of Credit Risk
Financial
instruments that potentially subject the Company to concentrations of credit
risk consist primarily of trade accounts receivable. Receivables
arising from sales to customers are not collateralized and, as a result,
management continually monitors the financial condition of its customers to
reduce the risk of loss. Customer account balances with invoices dated over 90
days are considered delinquent. The Company maintains reserves for
potential credit losses based upon its loss history, its aging analysis and
specific account review. After all attempts to collect a receivable
have failed, the receivable is written off against the
allowance. Such losses have been within management's
expectations. The Company has some exposure to a concentration of
credit risk as it relates to specific industry segments, as historically its
customers have been primarily concentrated in the financial services
industry. Since revenues are derived in large part from single
projects, the Company bears some credit risk due to a high concentration of
revenues from individual customers. During the fiscal year ended
December 31, 2007, 62.1% of total revenues were generated from two customers
that individually represented over 10% of total revenue each (Customer A –
47.4%, Customer B – 14.7%). During the fiscal year ended December 31,
2006, 60.0% of
Note 4.
Concentration of Credit Risk (cont'd)
total
revenues were generated from three customers individually representing over 10%
of total revenue each (Customer C – 24.2%, Customer D – 21.5%, Customer E –
14.3%).
We had a
balance of $52,175 in our Allowance for Doubtful Accounts provision as of
December 31, 2007. This balance consists of provisions made in
previous and current quarters. There has been a total of $15,000 of
bad debt write-offs against the provision during fiscal year end December 31,
2007. There was a total of $22,792 of bad debt write offs against the
provision in 2006 and a balance of $25,531 in the allowance for doubtful
accounts provision as of December 31, 2006.
Note
5. Stockholders’ Equity
In
January 2006, the Company sold 2,307,693 shares of common stock and a warrant to
purchase 1,200,000 shares of our common stock to Shuffle Master, Inc. (“Shuffle
Master”) for $3.0 million. This warrant had an exercise price of
$2.025 per share which expired on July 12, 2007 without being
exercised. Using the Black-Scholes option-pricing model, the warrant
was valued at $1,335,600 using a volatility of 65%, a term of 18 months, an
expected dividend yield of 0% and a risk-free interest rate of
4.4%. This amount was reclassified from Common Stock purchase
warrants to Additional paid-in capital upon expiration of the warrants in the
third quarter of 2007. In addition, during the fourth quarter of
fiscal 2007, convertible debt was issued with accompanying warrants and was
accounted for as equity. See Note 11.
Note
6. Earnings per Share
Basic
earnings (loss) per share are computed by dividing income available to common
shareholders by the weighted-average number of common shares outstanding for the
period. Diluted earnings (loss) per share considers the potential dilution that
could occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in the issuance of common
stock that shared in the earnings of the entity.
The
calculation of diluted earnings (loss) per share for the fiscal years ended
December 31, 2007 and 2006 did not include shares of the Company’s common stock
issuable upon the exercise of options, shares issuable upon exercise of common
stock warrants, nor the conversion of the long term convertible notes, as their
inclusion in the calculation would be anti-dilutive. The number of options and
warrants outstanding as of December 31, 2007 and 2006 are illustrated in the
table below, as well as the number of shares underlying the 2007
Notes. Each stock option and warrant is exercisable in to one share
of common stock:
|
Outstanding
at December 31,
|
|
2007
|
|
|
2006
|
|
|
Stock
options
|
|
|
6,997,000 |
|
|
|
5,869,277 |
|
|
Common
stock warrants
|
|
|
12,775,718 |
|
|
|
10,642,385 |
|
|
Common
shares underlining convertible notes
|
|
|
6,666,667 |
|
|
|
− |
|
|
Total
options, warrants, and convertible notes
|
|
|
26,439,385 |
|
|
|
16,511,662 |
|
Note
7. Contractual Obligations, Long-Term Liability and
Commitments
Contractual
Obligations and Long-Term Liability
The
Company leases office space in Toronto, Ontario and Boulder, Colorado which run
to February 2012 and September 2010 respectively. The Company is
currently leasing space in New York, New York on a short-term basis under a
lease which runs to June 2008, for its corporate headquarters and sales and
support functions. The Company intends to renew its New York lease on
substantially the same terms on a short-term basis when the current lease
agreement expires. In addition, in 2007 we leased approximately 1,000
square feet in Las Vegas, Nevada, for our corporate apartment which was leased
on an annual basis until February 2008, at a monthly rent of approximately
$2,300. Our frequent trips to Las Vegas made this lease a cost effective way to
house our employees during business trips for meetings with our partner Shuffle
Master and in connection with GLI certification of our wireless gaming
solution. This lease was not renewed when it expired at the end of
February 2008. Office lease expenses for the fiscal years ended
December 31, 2007 and 2006 were $423,771 and $602,633,
respectively.
Note 7.
Contractual Obligations, Long-Term Liability and Commitments
(cont'd)
The
Company also leases office equipment. These leases have been
classified as operating leases. Office equipment lease expenses for
the fiscal years ended December 31, 2007 and 2006 were $154,360 and $85,317,
respectively.
During
the fourth quarter of fiscal 2007, the Company completed a private placement of
8.0% convertible notes (the “2007 Notes”) with 3,333,333 accompanying warrants
which had gross proceeds of $3.0 million. The 2007 Notes have a face
value of $3 million, are due on November 28, 2010, and are convertible into
6,666,667 shares of common stock at a conversion price of $0.45 per share
(assuming interest is paid in cash). The 2007 Notes bear interest at a rate of
8.0% per annum, payable quarterly on the first of January, April, July, and
October with such interest payable in cash, shares of common stock or a
combination thereof. Payment of interest in shares of common stock is
subject to certain conditions being met including the existence of a
registration statement which has been declared effective by the SEC and which
covers the required number of interest shares.
Contractual
obligations and payments relating to the Company’s long-term liability in future
years are as follows:
|
Contractual
Obligations and Long-Term Liability
(US$)
|
|
|
|
|
Total
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
|
2012
|
+ |
|
Office
Space Leases:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United
States
|
|
$ |
563,554 |
|
|
$ |
239,652 |
|
|
$ |
183,100 |
|
|
$ |
140,802 |
|
|
$ |
− |
|
|
$ |
− |
|
|
Canada
|
|
|
517,570 |
|
|
|
115,988 |
|
|
|
119,570 |
|
|
|
123,212 |
|
|
|
126,916 |
|
|
|
31,884 |
|
|
Total
Office Space
|
|
|
1,081,124 |
|
|
|
355,640 |
|
|
|
302,670 |
|
|
|
264,014 |
|
|
|
126,916 |
|
|
|
31,884 |
|
|
Office
Equipment
|
|
|
208,418 |
|
|
|
146,298 |
|
|
|
61,426 |
|
|
|
694 |
|
|
|
− |
|
|
|
− |
|
|
Convertible
Debt
|
|
|
3,000,000 |
|
|
|
− |
|
|
|
− |
|
|
|
3,000,000 |
|
|
|
− |
|
|
|
− |
|
|
Interest
on Convertible Debt
|
|
|
700,000 |
|
|
|
240,000 |
|
|
|
240,000 |
|
|
|
220,000 |
|
|
|
− |
|
|
|
− |
|
|
Total
|
|
$ |
4,989,542 |
|
|
$ |
741,938 |
|
|
$ |
604,097 |
|
|
$ |
3,484,708 |
|
|
$ |
126,916 |
|
|
$ |
31,884 |
|
Purchase
commitments. On September 1, 2006, the Company entered into a
Private Label Partner Agreement (the “Agreement”) with Motorola, Inc., pursuant
to which the Company has the exclusive right to purchase certain private label
wireless solution products from Motorola to support the Company’s development of
a secure wireless handheld gaming system. The Agreement requires that
the Company purchase a specified minimum number of units over the three-year
term of the Agreement. In the event such minimum purchase requirement
is not met, Motorola has the right to adjust the unit purchase price to a level
commensurate with the Company’s volume and the private label exclusivity under
the Agreement will be void. The Company believes that in the event of
either the loss of private label exclusivity or the renegotiation of the unit
purchase price, its consolidated financial statements would not be materially
affected.
Note
8. Financial Instruments
The
Company's financial instruments include cash and cash equivalents, accounts
receivable, accounts payable and convertible notes. The reported book
value of all current asset and current liability financial instruments
approximates fair values, due to their short term nature. The
convertible notes were recorded at the time of issuance at their estimated fair
market value and difference between the estimated fair market value at the time
of issuance and the face value of $3 million (i.e. the debt discount) is being
amortized over the three year term to maturity of the notes. See Note
11.
The
Company is subject to credit risk with respect to its accounts receivable to the
extent that debtors do not meet their obligations. The Company
monitors the age of its accounts receivable and may delay development or
terminate information fees if debtors do not meet payment terms.
The
Company is subject to foreign currency risk with respect to financial
instruments denominated in a foreign currency. As of December 31,
2007, approximately 7.7% of the Company’s assets and 13.3% of its liabilities
were denominated in Canadian dollars and Euros and exposed to foreign currency
fluctuations.
Note
9. Accrued Liabilities and Payroll
Accrued
Liabilities and Payroll consist of, as at December 31:
|
|
|
2007
|
|
|
|
|
|
Accrued
payroll and related expenses
|
|
$ |
233,557 |
|
|
$ |
211,020 |
|
|
Accrued
professional fees
|
|
|
148,638 |
|
|
|
157,943 |
|
|
Accrued
vendor obligations
|
|
|
88,863 |
|
|
|
32,334 |
|
|
Accrued
interest payable
|
|
|
22,000 |
|
|
|
− |
|
|
Other
taxes payable
|
|
|
17,863 |
|
|
|
11,499 |
|
|
Total
|
|
$ |
510,921 |
|
|
$ |
412,796 |
|
Note
10. Deferred Revenues
Deferred
revenue occurs where the Company invoices customers for project work that has
not been completed at the balance sheet date. The Company’s deferred
revenue balance as of December 31, 2007 and 2006 was $55,795 and $389,562,
respectively.
Note
11. Long Term Debt
On
November 28, 2007 (the “Issue Date”), the Company completed a private placement
of 8.0% convertible notes (the “2007 Notes”) with 3,333,333 accompanying
warrants (the “2007 Warrants”) which had gross proceeds of $3.0
million. The 2007 Notes have a face value of $3 million, are due on
November 28, 2010, and are convertible into 6,666,667 shares of common stock at
a conversion price of $0.45 per share (assuming interest is paid in
cash). The 2007 Warrants have an exercise price of $0.50 per share
and expire five years from the Issue Date.
The 2007
Notes bear interest at a rate of 8.0% per annum, payable quarterly on the first
of January, April, July, and October with such interest payable in cash, shares
of common stock or a combination thereof. Payment of interest in
shares of common stock is subject to certain conditions being met including the
existence of a registration statement which has been declared effective by the
SEC and which covers the required number of interest shares. A total
of 2,133,333 shares have been included on the registration statement relating to
the payment of interest in shares instead of cash. As per the
purchase agreement which governs the November 2007 private placement, this is
the required minimum to be registered for interest shares and is calculated as
the total interest payable over the three year term of the notes divided by 75%
of the current conversion price of $0.45 per share as follows:
($3,000,000
x 8% x 3 years) / (75% x $0.45/share) = 2,133,333 registrable
shares
In
addition to the interest shares, 6,666,667 shares relating to the common stock
underlying the 2007 Notes and 3,333,333 shares relating to the common stock
underlying the 2007 Warrants have also been registered, for a total of
12,133,333 registrable shares.
The 2007
Notes are convertible under any of the following circumstances, subject to the
provision that the stockholders’ beneficial ownership percentage cannot exceed
4.99% after such conversion:
|
|
·
|
during
any period after the Issue Date, (i) the daily volume weighted average
price per share of common stock of the Company for at least 20 out of any
30 consecutive trading days, which period shall have commenced only after
the Issue Date (the “Threshold Period”), exceeds $0.90 (subject to
adjustment for reverse and forward stock splits, stock dividends, stock
combinations and other similar transactions of the common stock of the
Company that occurs after the Issue Date), (ii) for at least 20 trading
days during the applicable Threshold Period, the daily trading volume for
the common stock of the Company on the trading market of the Company
exceeds $100,000 per trading day and (iii) all of the Equity Conditions
(as defined in the 2007 Notes) are met (unless waived by a holder) for the
applicable time period set forth in the 2007 Notes
;
|
|
|
·
|
any
time after the Issue Date in whole or part, at the option of the holder,
at any time and from time to time until such 2007 Note is no longer
outstanding.
|
Note
11. Long Term Debt (cont'd)
The
conversion price of the 2007 Notes is $0.45 per share and is subject to downward
adjustment in the event of the issuance by the Company of any common stock or
Common Stock Equivalents (as defined in the 2007 Notes agreement) at a price per
share less than the then applicable conversion price of the 2007
Notes. In addition, the conversion price is subject to adjustment
upon the occurrence of certain enumerated events.
The 2007
Warrants were exercisable immediately as of the Issue Date and for a period of
five years from the Issue Date at an exercise price of $0.50 per
share. The Black-Scholes valuation model was use to estimate the fair
value of these warrants using the following assumptions: volatility
of 55%, term and expected life of five years, risk free interest rate of 3.40%,
market value of underlying common stock of $0.395, and a zero dividend rate. The
Company determined the estimated fair value of the warrants to be
$582,664.
The 2007
Notes have been accounted for as long term debt, net of a debt discount
consisting of the allocated value of the warrants and a beneficial conversion
feature. The embedded conversion feature has been deemed to be a
beneficial conversion feature pursuant to EITF 98-5, Accounting for Convertible
Securities with beneficial Conversion feature or Contingently Adjustable
Conversion Ratio, and EITF 00-27, Application of Issue No. 98-5 to
Certain Convertible Instruments. These standards require that
the fair value of the conversion feature of the instrument be treated as a debt
discount against the liability portion of the note. This beneficial
conversion feature is calculated by computing the intrinsic value between the
effective conversion price and fair value of common stock on the Issue Date. The
effective conversion price is based on the allocation of the relative values of
the 2007 Notes and the 2007 Warrants on a relative fair value
basis. The debt discount resulting from the beneficial conversion
feature was determined to be $159,629. The allocated fair value of
the warrants was determined to be $526,296, which was also recorded as a debt
discount. The Company is amortizing the combined debt discount of
$685,925 over the term of the 2007 Notes on a straight-line basis, which
approximates the effective interest method. The amortization of the
debt discount is being recorded as additional interest expense.
Total
interest expense related to the 2007 Notes, including amortization of debt
discount, for fiscal year ended December 31, 2007, is $42,959 which consisted of
$22,000 in interest paid and $20,959 relating to the amortization of the debt
discount.
There was
$324,184 of debt issuance costs including placement agent fees and legal
expenses. These costs have been capitalized as an asset and are being
amortized over the three year term of the 2007 Notes. In the fourth
quarter of 2007, amortization of these costs in the amount of $9,005 resulted in
net reported debt issuance costs of $315,179 as of December 31,
2007.
As of
December 31, 2007, the amount on the Company’s balance sheet for the long term
convertible debt was $2,335,034.
Note
12. Income Taxes
The
Company accounts for income taxes under SFAS No. 109, Accounting for Income Taxes,
which requires an asset and liability approach to financial accounting and
reporting for income taxes. Under the liability method, deferred
income tax assets and liabilities are computed annually for temporary
differences between the financial statement and tax basis of assets and
liabilities that will result in taxable or deductible amounts in the future
based on enacted tax laws and rates applicable to the periods in which the
differences are expected to affect taxable income. Valuation
allowances are established when necessary to reduce deferred tax assets to the
amount expected to be realized. Income tax expense is the tax payable
or refundable for the period plus or minus the change during the period in
deferred tax assets and liabilities.
A
reconciliation of the federal statutory income tax rate to the effective income
tax rate on loss from continuing operations is as follows:
Note 12.
Income Taxes (cont'd)
|
|
|
2007
|
|
|
2006
|
|
|
Estimated
tax rate (U.S, State, and foreign)
|
|
|
38
|
% |
|
|
37 |
% |
|
Adjustments:
|
|
|
|
|
|
|
|
|
|
Non-deductible
expenses
|
|
|
(0 |
)% |
|
|
(3 |
)% |
|
Change
in valuation allowance
|
|
|
(38 |
)% |
|
|
(34 |
)% |
|
Total
benefit (provision)
|
|
|
0 |
% |
|
|
0 |
% |
Changes
in the deferred tax balances and the deferred tax valuation allowances for the
years ended December 31, 2007, and 2006 were as follows:
|
|
|
2007
|
|
|
2006
|
|
|
Deferred
tax assets
|
|
|
5,352,770 |
|
|
|
2,449,693 |
|
|
Change
in net operating loss carryforward
|
|
|
2,449,723 |
|
|
|
3,132,323 |
|
|
Impact
of non-deductable expenses
|
|
|
- |
|
|
|
(229,246 |
) |
|
Total
Deferred tax assets
|
|
|
7,802,493 |
|
|
|
5,352,770 |
|
|
Less
valuation allowance
|
|
|
(7,802,493 |
) |
|
|
(5,352,770 |
) |
|
Net
deferred tax asset
|
|
|
- |
|
|
|
- |
|
Deferred
tax benefits arising from net operating loss carry forwards were determined
using the applicable statutory rates in the various tax jurisdictions in which
we operate. At December 31, 2007, the Company had net deferred tax
assets of approximately $7,802,493 arising from net operating loss (“NOL”) carry
forwards. Of the $7,802,493 NOL, $4,619,410 relates to tax losses
incurred in the U.S and $3,183,083 relates to Canadian tax
losses. The NOL carry forwards, which are available to offset future
profits of the Company begin to expire in 2010 if not utilized and expire in
varying amounts through 2027. These deferred taxes benefits are fully
offset by valuation allowances as there can be no assurance that the Company
will earn sufficient future profits to utilize the loss carry
forwards.
The
Company adopted the provisions of FASB Interpretation 48, “Accounting
for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109,”
(“FIN 48”) on January 1, 2007. As the Company has a valuation allowance
against the full amount of its net deferred tax asset, the adoption of FIN 48
did not have an impact on the financial statements for the fiscal year ended
December 31, 2007. The Company does not expect FIN 48 to have an impact on
the financial statements during fiscal year 2008.
At the
adoption date, the Company applied FIN 48 to all tax positions for which the
statue of limitations remained open. As a result of the
implementation of FIN 48 there were no unrecognized tax benefits and,
accordingly, there has been no effect on the Company’s financial condition or
result of operations.
The
Company files income tax returns in the U.S. federal jurisdiction and various
state and foreign jurisdictions. Tax regulations within each
jurisdiction are subject to the interpretation of the related taxes laws and
regulations and require significant judgment to apply. The Company is
no longer subject to U.S. federal and state examinations for years before 2004,
and Canadian federal and provincial tax examination for years before 2004.
Management does not believe there will be any material changes in the Company’s
unrecognized tax position over the next 12 months.
The
Company recognizes interest accrued related to unrecognized tax benefits in
interest expense and penalties in operating expenses for all periods
presented. There was no accrued interest or penalties associated with
any unrecognized tax benefits, nor was any interest expense recognized during
the fiscal period ended December 31, 2007.
Note
13. Related Party Transactions
There
were no related party transactions during the fiscal year ended December 31,
2007.
In July
2006, a balance of $58,285 relating to compensation earned but not paid in 2004
to the former CEO was fully repaid. Also, during fiscal 2006 the
Company paid consulting fees of $202,500 to former directors and officers of the
Company. Total consultant fees paid included $95,000 to Mr. Glinsman, a
former officer and director, $20,000 to Bryan Maizlish, a former director,
$52,500 to John Bush, a former officer and director, and $35,000 to Frank
Fanzilli, a former director.
During
fiscal 2006, payments of $57,736 were made to Shuffle Master (a 10% beneficial
shareholder at that time, whose President was a member of our board of directors
from March 2006 until June 2007). These payments were entirely for the
reimbursement of expenses paid by Shuffle Master on behalf of the Company,
relating to the development and certification of the wireless gaming
platform.
Note
14. Stock-Based Compensation
The
Company’s 2006 Incentive Plan (the “2006 Plan”), which is stockholder approved,
permits the grant of options, restricted stock, and other stock awards, to its
directors, officers, and employees for up to 7 million shares of common stock,
in addition to the options already issued under the Amended and Restated Stock
Option Plan of 2000. The Company believes such awards align the
interest of its directors, officers, and employees with those of its
shareholders and encourage directors, officers, and employees to act as equity
owners of the Company. Prior to the adoption of the 2006 Plan, the
Company had an Amended and Restated Stock Option Plan of 2000, which was
terminated with respect to future grants effective upon the stockholder’s
approval of the 2006 Plan in September 2006.
Stock
Options
Options
awards are granted with exercise price equal to, or in excess of, market value
at the date of grant. Accordingly, in accordance with SFAS 123R and
related interpretations, compensation expense is recognized for the stock option
grants. The options become exercisable on a prorated basis over a one
to four year vesting period, and expire within 10 year after the grant
date.
SFAS 123R
requires the cash flow from tax benefits for deductions in excess of the
compensation costs recognized for share-base payments awards to be classified as
financing cash flows. Due to the Company’s loss position, there was
no such tax benefit during fiscal years ending December 31, 2007, and
2006.
The
Company estimates the fair value of stock options using a Black-Scholes
valuation model, consistent with the provision of SFAS 123R. Key
inputs and assumptions used to estimate the fair value of stock options include
the grant price of the award, the expected option term, volatility of the
Company’s stock, the risk-free interest rate as of the date of the grant and the
Company’s divided yield. Estimates of fair value are not intended to
predict actual future events or the value ultimately realized by employees who
receive equity awards, and subsequent events are not indicative of the
reasonableness of the original estimate of fair value made by the
Company. The fair value of each stock option grant was estimated at
the date of grant using a Black-Scholes option pricing model. The
following table presents the weighted-average assumptions used for options
granted:
|
|
|
2007
|
|
|
2006
|
|
|
Expected
term (years)
|
|
2.9
years
|
|
|
3.1
years
|
|
|
Risk-free
interest rate
|
|
|
4.84 |
% |
|
|
4.73 |
% |
|
Volatility
|
|
|
55.0 |
% |
|
|
65.0 |
% |
|
Expected
forfeiture
|
|
|
33.3 |
% |
|
|
33.3 |
% |
|
Dividend
yield
|
|
|
0.0 |
% |
|
|
0.0 |
% |
As of
December 31, 2007, the number of outstanding stock options as a percentage of
the number of outstanding shares was approximately 12.1%. There were
1,840,000 stock options granted and 712,277 stock options cancelled during
fiscal year ended December 31, 2007. The following table summarizes
option transactions under the Company’s stock option plans since January 1,
2007:
Note
14. Stock-Based Compensation
(cont'd)
|
|
|
Number
of Options
|
|
|
Weighted
Average Exercise
Price
|
|
|
Weighted
average Remaining Contractual
Term
|
|
|
Outstanding,
January 1, 2007
|
|
|
5,869,277 |
|
|
|
0.807 |
|
|
|
8.459 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
1,840,000 |
|
|
|
0.446 |
|
|
|
8.658 |
|
|
Exercised
|
|
|
− |
|
|
|
− |
|
|
|
− |
|
|
Cancelled
|
|
|
(712,277 |
) |
|
|
1.001 |
|
|
|
7.336 |
|
|
Outstanding,
December 31, 2007
|
|
|
6,997,000 |
|
|
|
0.706 |
|
|
|
8.006 |
|
|
Vested
and expected to vest at December 31, 2007
|
|
|
5,301,499 |
|
|
|
0.729 |
|
|
|
8.080 |
|
|
Exercisable
at December 31, 2007
|
|
|
2,644,376 |
|
|
|
0.926 |
|
|
|
6.398 |
|
The total
fair value of stock options that vested during the years December 31, 2007 and
2006 was $402,770 and $685,008, respectively. The aggregate intrinsic
value of options outstanding, options vested and expected to vest, and options
exercisable as of December 31, 2007 was nil, nil, and nil
respectively. All of the options outstanding had exercise prices
greater than the market price on December 31, 2007. The
intrinsic value is calculated as the difference between the market price on
exercise date and the exercise price of the shares. The closing
market price as of December 31, 2007 was $0.40 as reported on the OTC Bulletin
Board.
A summary
of the status of the Company’s non-vested options as of December 31, 2007, is as
follows:
|
Non-vested
Options
|
|
Number
of Options
|
|
|
Weighted
average Grant-Date Fair Value
|
|
|
Non-vested
at January 1, 2007
|
|
|
4,918,909 |
|
|
|
0.2993 |
|
|
Granted
|
|
|
1,840,000 |
|
|
|
0.2036 |
|
|
Vested
|
|
|
(1,802,453 |
) |
|
|
0.2987 |
|
|
Cancelled
|
|
|
(603,832 |
) |
|
|
0.3270 |
|
|
Non-vested
at December 31, 2007
|
|
|
4,352,624 |
|
|
|
0.2322 |
|
As of
December 31, 2007, there was $604,010 of total unrecognized compensation costs
related to non-vested share-based compensation arrangements granted under the
2006 Plan and the Amended and Restated Stock Option Plan of 2000. The
unrecognized compensation cost is expected to be realized over a weighted
average period of 1.8 years.
Restricted
Stock Awards
In the
second quarter of fiscal 2007, the Company granted 40,000 shares of restricted
common stock to a newly appointed non-employee director in accordance with the
Company’s compensation plan for
directors. These 40,000 restricted shares of common stock
were valued at the estimated fair market value (closing market price less an
estimated 30% lack of marketability discount) on the date of grant and are
charged as stock compensation expense over the vesting period of one
year. The marketability discount was based upon our consultation with
an independent valuation expert.
Compensation
expense recognized for the amortization of stock-based compensation related to
restricted stock was $46,269 and $352,020, respectively for the fiscal years
ended December 31, 2007, and 2006.
Note
15. Geographic Information
As
described above in Note 2, the Company primarily markets its products and
services to two different sales verticals. However, management has
determined that the Company operates as one business segment which focuses on
the development, sale and marketing of wireless application
software. The Company currently maintains development, sales and
marketing operations in the United States and Canada. The following
table shows revenues by geographic segment for the fiscal years ended December
31, 2007 and 2006:
|
|
|
Twelve months ended December
31,
|
|
|
Revenue
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
North
America
|
|
$ |
926,622 |
|
|
$ |
310,958 |
|
|
South
America
|
|
|
− |
|
|
|
8,783 |
|
|
Europe
|
|
|
54,027 |
|
|
|
78,393 |
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
980,649 |
|
|
$ |
398,134 |
|
Revenue
by geographic segment is determined based on the location of our
customers. For the fiscal years ended December 31, 2007 and
2006, sales to customers in North America accounted for 94% and 78% of total
revenues respectively; while sales outside North America accounted for 6% and
22% of total revenue respectively.
|
Property and Equipment
|
|
2007
|
|
|
2006
|
|
|
United
States
|
|
$ |
101,247 |
|
|
$ |
49,804 |
|
|
Canada
|
|
|
60,510 |
|
|
|
32,994 |
|
|
Total
|
|
$ |
161,757 |
|
|
$ |
82,798 |
|
Property
and equipment includes only assets held for use, and is reported by geographic
segment based on the physical location of the assets as at December 31,
2007.
Note
16. Other Income and Expense
Other
income and expenses include miscellaneous items such as foreign exchange gains
or losses and nonrecurring transactions such as gains or losses from the
revaluation of derivatives and related instruments. For the fiscal
year ended December 31, 2007, other income and expense was a loss of $47,310
consisting of a loss of $5,171 related to a write off of fixed assets and an
exchange loss of $42,139. Comparatively, during the fiscal year ended
December 31, 2006, other income and expense was a loss of $31,883, which
consisted of a gain of $614,981 relating to the reclassification of the Series B
Warrants, which were issued in June 2005 private placement financing, from a
liability to equity as of the registration statement effective date in the
second quarter of 2006, in accordance with the provisions of EITF 00-19, a gain
arising from the adjustment of other taxes in the amount of $12,164, a foreign
exchange loss of $61,376 and a loss related to the write off of in-process
purchased technology in the amount of $597,652.
Item
8. Changes in
and Disagreements with Accountants on Accounting and Financial
Disclosure
None.
Item
8A(T). Controls and Procedures
Evaluation of Disclosure Controls and
Procedures. The Company's management, with the participation
of the chief executive officer and the chief financial officer, carried out an
evaluation of the effectiveness of the Company's “disclosure controls and
procedures” (as defined in Rule 13a-15(e) and 15d-15(e) of the Securities
Exchange Act of 1934, as amended (the “Exchange Act”) of the end of the fiscal
year covered by this annual report (the “Evaluation Date”). Based
upon that evaluation, the chief executive officer and the chief financial
officer concluded that the Company's disclosure controls and procedures were
effective, as of the Evaluation Date to ensure that (i) information required to
be disclosed in the reports that the Company files or submits under the Exchange
Act, is recorded, processed, summarized and reported within the time limits
specified in the Commission's rules and forms, and (ii) information required to
be disclosed in the reports that the Company files or submits under the Exchange
Act is accumulated and communicated to the Company's management, including the
Company's chief executive officer and the chief financial officer, as
appropriate, to allow timely decisions regarding required
disclosure.
Management’s Annual Report on
Internal Control over Financial Reporting. Our management is
responsible for establishing and maintaining adequate internal control over
financial reporting as defined in Rules 13a-15(f) under the Exchange
Act. Our internal control over financial reporting is designed to
ensure that material information regarding our operations is made available to
management and the board of directors to provide them reasonable assurance that
the published financial statements are fairly presented. There are
limitations inherent in any internal control, such as the possibility of human
error and the circumvention or overriding of controls. As a result,
even effective internal controls can provide only reasonable assurance with
respect to financial statement preparation. As conditions change over
time so too may the effectiveness of internal controls.
Our
management, with the participation of our chief executive officer and chief
financial officer, has evaluated our internal control over financial reporting
as of December 31, 2007 based on the framework in Internal Control – Integrated
Framework issued by the Committee of Sponsoring Organizations (COSO) of the
Treadway Commission. Based on this assessment, our management
concluded that our internal control over financial reporting was effective as of
December 31, 2007.
This
annual report does not include an attestation report of the Company’s registered
public accounting firm regarding internal control over financial
reporting. Management’s report was not subject to attestation by the
Company’s registered public accounting firm pursuant to temporary rules of the
Securities and Exchange Commission that permit the Company to provide only
management’s report in this annual report.
Changes in Internal Control over
Financial Reporting. There were no changes in the Company’s
internal control over financial reporting that occurred during the period
covered by this report that have materially affected, or are reasonably likely
to materially affect, the Company's internal control over financial
reporting.
Item
8B. Other
Information
None
Part
III
Item
9. Directors,
Executive Officers, Promoters and Control Persons;
Compliance with
Section 16(a) of the Exchange Act
Executive
Officers and Directors
The
following table sets forth the names, ages and principal position of our
executive officers and directors:
|
|
|
|
|
|
|
Shawn
Kreloff
|
|
|
45
|
|
Chief
Executive Officer, Chairman of the Board and Director
|
|
Stephen
Fellows
|
|
|
42
|
|
Chief
Financial Officer and Corporate Secretary
|
|
Lance
Yu
|
|
|
38
|
|
Senior
Vice President and Chief Technology Officer
|
|
Robert
P. Levy
|
|
|
76
|
|
Director
|
|
M.
Jeffrey Branman
|
|
|
52
|
|
Director
|
Shawn Kreloff, 45, was
appointed Chief Executive Officer on May 5, 2006. Mr. Kreloff has been Chairman
of the Board and a Director since September 2004. From 2003 to September 2004,
and from 2001 to September 2002, he served as a managing director of, and
investor in, Jumpstart Capital Partners. From September 2002 to June 2003, Mr.
Kreloff was executive vice president of sales, marketing and business
development of Predictive Systems, Corp. (Nasdaq: PRDS), a network
infrastructure and security consulting company. Mr. Kreloff was a founding
investor of Insight First, a company that provides web analytics software, which
was sold to 24/7 Media (Nasdaq: TFSM) in 2003. From 1999 to 2002, he served as
executive vice president of business development of Opus360 Corporation (Nasdaq:
OPUS), as well a founding investor. Opus360 was acquired by Artemis
International Solutions (OTC: AMSI) in 2002. From September 2004 to January
2006, Mr. Kreloff served on the board of directors of Secured Services, Inc. Mr.
Kreloff also served on the board of directors of Hudson Williams, a computer
consulting firm, from 1999 through 2004, when it was acquired by Keynote Systems
(Nasdaq: KEYN). From 1996 through 1998 Mr. Kreloff served as founder, Chairman
and CEO of Gray Peak Technologies, Inc. Gray Peak was sold to USWEB (Nasdaq:
USWB) in 1998 for over $100 Million. Mr. Kreloff holds a BS degree in Operations
Management from Syracuse University, 1984.
Stephen Fellows, 42, was
appointed Chief Financial Officer on May 16, 2006. Mr. Fellows joined Sona
Mobile in August 2005 as VP Finance & Corporate Controller. Mr.
Fellows joined Sona Mobile from 3Com Corporation where he was Director of
Finance of the corporate accounting group in Marlborough, MA. Prior to that, Mr.
Fellows spent 5 years as the Director of Finance & Operations of 3Com’s
Canadian subsidiary. Mr. Fellows joined 3Com from Pennzoil Corporation where he
spent time in the international mergers and acquisitions group in Houston,
Texas, as well as four years as controller for Pennzoil Canada. Mr. Fellows
holds a Bachelor of Business Administration degree from Wilfrid Laurier
University in Waterloo, ON, Canada and earned his Chartered Accountants
designation while articling with Arthur Andersen & Company in
Toronto.
Lance Yu, 38, has been our
Senior Vice President and Chief Technology Officer since our inception in
November 2003. From January 2002 through November 2004, he was the Vice
President Technology of Sona Innovations, Inc. which was purchased by Sona
Mobile, Inc. from Baldhead Systems, a professional services, web design and
business consulting organization based in Toronto, Canada, where he served first
as a Senior Project Manager and then as Vice President —
Technology.
Robert P. Levy, 76, was
appointed to the Board on May 29, 2007. He is the past Chairman of the Board of
the Atlantic City Racing Association and served a two-year term from 1989
through 1990 as President of the Thoroughbred Racing Association. Mr. Levy
has served as the Chairman of the Board of DRT Industries, Inc., a
diversified business based in the Philadelphia metropolitan area, since 1960.
Mr. Levy has been a director of Penn National Gaming since 1995. Mr. Levy
is also a director of Fasig-Tipton Company, an equine auction
company.
M. Jeffrey Branman, 52, is a Managing Director of
Hilco Consumer Capital LLC, a private equity firm focused on North American
consumer products companies and brands. Prior to joining Hilco in March 2007,
Mr. Branman was the President and owner of Interactive Commerce Partners LLC, a
provider of financial advisory services to companies in the interactive commerce
technology and content,
merchandising,
and direct marketing businesses. Mr. Branman founded Interactive Commerce
Partners in March 2005. From April 2000 through March 2005, Mr. Branman served
as President and founder of Interactive Technology Services, a subsidiary of
Comcast Corporation, a developer, manager and operator of broadband cable
networks. Interactive Technology Services served as financial advisor to
Interactive Technology Holdings, LLC, a joint venture of Comcast Corporation and
QVC, Inc. which made venture capital investments in interactive commerce
technology and content companies. Portfolio companies, where Mr. Branman served
on the board of directors, included GSI Commerce, Inc. [Nasdaq: GSIC], Commerce
Technologies, Inc. and Scene7, Inc. From March 1996 to February 2000, Mr.
Branman was Senior Vice President Corporate Development of Foot Locker, Inc., a
retailer of athletic footwear and apparel, and additionally was Chief Executive
Officer of FootLocker.com, the internet and direct marketing subsidiary of Foot
Locker from October 1988 to February 2000. Mr. Branman currently serves on the
board of directors of GSI Commerce, Inc.
There are
no family relationships among our directors or among our executive
officers.
Committees
of the Board of Directors
Our Board
has established two standing committees to assist it in discharging its
responsibilities: the Audit Committee and the Compensation and Nominating
Committee.
The Audit
Committee reviews our accounting functions, operations and management, our
financial reporting process and the adequacy and effectiveness of our internal
controls and internal auditing methods and procedures. The Audit Committee
represents the Board in overseeing our financial reporting processes, and, as
part of this responsibility, consults with our independent public accountants
and with personnel from our internal audit and financial staffs with respect to
corporate accounting, reporting, and internal control practices. The Audit
Committee recommends to the board the appointment of our independent public
accountants and is responsible for oversight of our independent public
accountants. The current members of the Audit Committee are M. Jeffrey
Branman (Chairman) and Robert P. Levy. The Audit Committee held six
meetings during fiscal 2007.
Audit
Committee Financial Expert
The Board
has determined that M. Jeffrey Branman qualifies as an ‘‘audit committee
financial expert,’’ as defined in Item 401(e)(1) of Regulation S-B, and is
independent for purposes of Item 401(e)(1) (ii) of Regulation S-B.
Compensation
and Nominating Committee
The
function of the Compensation and Nominating Committee is to review and recommend
the compensation and benefits, payable to our officers, review general policy
matters relating to employee compensation and benefits and administer our
various stock option plans and other incentive compensation
arrangements. The Committee will also seek to identify individuals
qualified to become members of the Board and make recommendations to the Board
of nominees to be elected by stockholders or to be appointed to fill vacancies
on the Board. The current members of the Compensation and Nominating
Committee are Robert P. Levy (Chairman) and M. Jeffrey Branman. The
Compensation and Nominating Committee held six meetings during fiscal
2007.
Code
of Ethics
We have a
Code of Ethics that applies to all of our employees and certain provisions of
the Code are particularly directed to our Chief Executive Officer, our Chief
Financial Officer and financial managers. The Code provides written
standards that we believe are reasonably designed to deter wrongdoing and
promote: (1) honest and ethical conduct, including the ethical handling of
actual or apparent conflicts of interests between personal and professional
relationships; (2) full, fair, accurate, timely and understandable disclosure in
reports and documents that we file with or submit to the SEC or in other
public
communications
we make; (3) compliance with applicable laws, rules and regulations; (4) prompt
reporting of internal violations of the code; and (5) accountability for the
adherence to the Code. A copy of the Code of Ethics is available in
print to any stockholder who requests it, by writing to the Company’s Secretary,
Sona Mobile Holdings Corp., 245 Park Avenue, New York, NY 10167.
Section
16(a) Beneficial Ownership Reporting Compliance
Section
16(a) of the Exchange Act, requires our executive officers and directors and
persons who beneficially own more than 10% of our common stock to file initial
reports of ownership and changes in ownership of our common stock with the
SEC. Such executive officers, directors and greater than 10%
stockholders are also required by SEC rules to furnish us with copies of all
Section 16(a) reports they file. Based solely upon our review of copies of such
forms we have received, and other information available to us, to the best of
our knowledge all transactions were reported on a timely basis.
Item
10. Executive
Compensation
The
following table provides certain summary information concerning the compensation
earned for services rendered to us in all capacities during each of the fiscal
years indicated by our “named executive officers” during the fiscal year ended
December 31, 2007.
Summary
Compensation Table
Name
and Principal Position
|
|
|
|
|
|
|
|
|
|
|
|
All
Other
Compensation
($)
|
|
|
|
|
|
Shawn
Kreloff
|
|
2007
|
|
|
170,000 |
|
|
50,000 |
|
|
— |
|
|
290,833 |
|
|
— |
|
|
|
510,833 |
|
|
President
and Chief Executive Officer(1),(2)
|
|
2006
|
|
|
159,769 |
|
|
— |
|
|
— |
|
|
83,304 |
|
|
— |
|
|
|
243,073 |
|
|
Stephen
Fellows
|
|
2007
|
|
|
163,678 |
|
|
28,059 |
|
|
— |
|
|
31,067 |
|
|
— |
|
|
|
222,803 |
|
|
Chief
Financial Officer(3)
|
|
2006
|
|
|
138,948 |
|
|
— |
|
|
37,333 |
|
|
12,235 |
|
|
— |
|
|
|
188,516 |
|
|
Lance
Yu
|
|
2007
|
|
|
187,060 |
|
|
— |
|
|
— |
|
|
— |
|
|
9,540 |
(5) |
|
|
196,600 |
|
|
Senior
Vice President – Chief Technology Officer(4)
|
|
2006
|
|
|
176,420 |
|
|
— |
|
|
— |
|
|
— |
|
|
8,997 |
(5) |
|
|
185,417 |
|
|
(1)
|
On August 28, 2006, the Company
entered into an Employment Agreement with Shawn Kreloff for his services
as President and Chief Executive Officer of the Company, which agreement
expires on December 31, 2009. The Employment Agreement provides
for an annual salary of $170,000, or such higher amount as the Board may
determine, and an annual bonus based upon the achievement of targets
established by the Board. Pursuant to the Employment Agreement,
following the Company’s 2006 Annual Meeting of Stockholders, Mr. Kreloff
was granted an option to purchase 3,000,000 shares of Common
Stock. In the event his employment terminates involuntarily
without Cause (as defined in the Employment Agreement), Mr. Kreloff will
receive a severance payment equal to one year’s salary and
benefits. In addition, the Employment Agreement includes a
one-year post-employment, non-competition
provision.
|
|
(2)
|
Mr. Kreloff was appointed
Chairman in September 2004, and President and Chief Executive Officer in
May 2006.
|
|
(3)
|
Mr. Fellows served as our Vice
President-Finance & Corporate Controller from August 2005, until May
2006, when he was appointed as our Chief Financial
Officer.
|
|
(4)
|
Mr. Yu has served as our Senior
Vice President and Chief Technology Officer since our inception in
November 2003.
|
|
(5)
|
Represents payment of a vehicle
expense allowance.
|
|
(6)
|
The amount of the restricted
stock awards is calculated based on the closing market price on the date
the restricted stock was
granted.
|
|
(7)
|
The option awards amount is
calculated using the Black-Scholes valuation method using the variables
used by the Company to determine the gross option value for financial
statement reporting purposes pursuant to FAS 123(R). The
executive compensation for options is recognized over the service period
which has been determined to be the vesting period of the option
grants. In 2007, 200,000 options were granted to Mr. Fellows on
June 22, 2007 at an exercise price of $0.44 per share, with vesting over
four years which expire ten years after the grant date. In
2006, 500,000 and 250,000 options were granted to Mr. Kreloff and Mr.
Fellows on July 13, 2006 at an exercise price of $0.70 per share, with
vesting over three years which expire ten years after the grant
date. Also in 2006, 3,000,000 options were granted to Mr.
Kreloff on October 2, 2006 at an exercise price of $0.63 per share, with
vesting over three years which expire ten years after the grant
date.
|
Outstanding
Equity Awards at 2007 Fiscal Year-End
|
|
|
Option
Awards
|
|
Stock
Awards
|
|
|
Name
|
|
Number
of Securities Underlying Unexercised Options (#)
Exercisable
|
|
|
Number
of Securities Underlying Unexercised Options (#)
Unexercisable
|
|
|
Equity
Incentive Plan Awards: Number of Securities Underlying Unexercised
Unearned Options (#)
|
|
|
Option
Exercise Price ($)
|
|
Option
Expiration Date
|
|
Number
of Shares or Units of Stock That Have Not Vested (#)
|
|
|
Market
Value of Shares or Units of Stock That Have Not Vested ($)
|
|
|
Equity
Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights
That Have Not Vested (#)
|
|
|
Equity
Incentive Plan Awards: Market or Payout value of Unearned Shares, Units or
Other Rights That Have Not Vested ($)
|
|
|
Shawn
Kreloff
|
|
|
250,000 |
|
|
|
- |
(1) |
|
|
n/a
|
|
|
|
1.60 |
|
10/12/2010
|
|
|
n/a
|
|
|
|
n/a
|
|
|
|
n/a
|
|
|
|
n/a
|
|
|
Stephen
Fellows
|
|
|
50,000 |
|
|
|
- |
(1) |
|
|
n/a
|
|
|
|
1.60 |
|
10/12/2010
|
|
|
n/a
|
|
|
|
n/a
|
|
|
|
n/a
|
|
|
|
n/a
|
|
|
Lance
Yu
|
|
|
150,000 |
|
|
|
- |
(1) |
|
|
n/a
|
|
|
|
1.60 |
|
10/12/2010
|
|
|
n/a
|
|
|
|
n/a
|
|
|
|
n/a
|
|
|
|
n/a
|
|
|
Shawn
Kreloff
|
|
|
166,667 |
|
|
|
333,333 |
(2) |
|
|
n/a
|
|
|
|
0.70 |
|
7/13/2016
|
|
|
n/a
|
|
|
|
n/a
|
|
|
|
n/a
|
|
|
|
n/a
|
|
|
Shawn
Kreloff
|
|
|
1,000,000 |
|
|
|
2,000,000 |
(3) |
|
|
n/a
|
|
|
|
0.63 |
|
10/2/2016
|
|
|
n/a
|
|
|
|
n/a
|
|
|
|
n/a
|
|
|
|
n/a
|
|
|
Stephen
Fellows
|
|
|
166,667 |
|
|
|
83,333 |
(4) |
|
|
n/a
|
|
|
|
0.70 |
|
7/13/2016
|
|
|
n/a
|
|
|
|
n/a
|
|
|
|
n/a
|
|
|
|
n/a
|
|
|
Stephen
Fellows
|
|
|
- |
|
|
|
200,000 |
(5) |
|
|
n/a
|
|
|
|
0.44 |
|
6/22/2017
|
|
|
n/a
|
|
|
|
n/a
|
|
|
|
n/a
|
|
|
|
n/a
|
|
|
(1)
|
Options
granted on October 13, 2005. One-third of these options vested
immediately on the date of grant, one third vested on September 30, 2006,
and the remaining one third of these options vested on September 30,
2007.
|
|
(2)
|
Options
granted on July 13, 2006. These options vest in three equal
annual installments over a three year period on each anniversary date of
the grant with vesting commencing July 13, 2007 and ending on July 13,
2009.
|
|
(3)
|
Options
granted on October 2, 2006. These options vest in three equal
annual installments over a three year period on each anniversary date of
the grant with vesting commencing on July 13, 2007 and ending on July 13,
2009.
|
|
(4)
|
Options
granted on July 13, 2006. One-third of these options vested on
the date of grant. Two-third of these options vest in two equal
annual installments over a two year period on the anniversary date
commencing July 13, 2007 and ending July 13,
2008.
|
|
(5)
|
Options
granted on June 22, 2007. These options will vest in four equal
annual installments over a four year period on each anniversary date of
the grant with vesting commencing on June 22, 2008, and ending on June 22,
2011.
|
Compensation
of Directors
On July
19, 2005, our Board adopted a compensation plan for directors, which was amended
on August 3, 2006 and again on September 29, 2006. Under the plan,
each of our independent directors receives an annual amount of $5,000, payable
in quarterly installments, and $250, plus reimbursement for actual out-of-pocket
expenses for each Board meeting attended in person, and $125 for each Board
meeting attended telephonically. Each independent director also receives a
grant of 40,000 restricted stocks, under the new plan, immediately upon his or
her initial election or appointment to the Board. Further, each
non-employee director receives an annual option to purchase such number of
shares of common stock having a value equal to approximately $40,000, with the
number of shares determined based upon the trading price of the Company's common
stock on the date of grant (i.e. market price at grant date X number of options
granted = approximately $40,000), which option will vest in equal quarterly
installments.
The
Chairmen of the Audit Committee and the Compensation and Nominating Committee
each receive an annual fee of $1,000, respectively, as well as
$250 plus reimbursement for actual out-of-pocket expenses for each
committee meeting attended in person and $125 for each committee meeting
attended telephonically, unless the committee meeting immediately precedes or
follows a Board meeting, in which event the committee members will receive $150
for attending the committee meeting in person and $75 if they attend the
committee meeting telephonically. In addition, any Chairman of the
Audit Committee who is also designated as an audit committee “financial expert”
will receive a grant of non-qualified stock
options
and/or restricted stock, under the new plan, immediately upon his or her
election or appointment to the Board.
The
following table provides certain summary information concerning the compensation
earned by all persons who served as our directors during 2007 (other than Mr.
Kreloff, who earned no compensation for his service as a director) for services
rendered to us during the fiscal year ended December 31, 2007.
Director
Compensation
|
Name
|
|
Fees
Earned or paid in
Cash(1)
($)
|
|
|
Stock
Awards(2)
($)
|
|
|
Options Awards(3)
($)
|
|
|
All
Other Compensation
($)
|
|
|
Total
($)
|
|
|
M.
Jeffrey Branman
|
|
|
8,900
|
|
|
|
-
|
|
|
|
14,530
|
|
|
|
-
|
|
|
|
23,430
|
|
|
Robert
P. Levy
|
|
|
5,028
|
|
|
|
20,000
|
|
|
|
15,008
|
|
|
|
-
|
|
|
|
40,036
|
|
|
Michael
Fields(4)
|
|
|
3,650
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,650
|
|
|
Paul
C. Meyer(4)
|
|
|
3,778
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,778
|
|
|
(1)
|
Consists
of fees earned as director fees, including annual board member and
committee chairmen fees plus fees paid for board meetings and committee
meeting attendance as per the compensation plan for
directors.
|
|
(2)
|
Restricted
shares granted to director vest 50% on the date of grant and 50% on the
first anniversary of his or her appointment to the Board and are valued
above or at the market price on the date of the
grant.
|
|
(3)
|
M.
Jeffery Branman and Robert P. Levy were granted stock options, during
fiscal 2007, 100,000 and 75,000, respectively under the Compensation
Plan for Directors for an aggregate of 175,000 stock options of which all
where outstanding as at the end of fiscal 2007. The option
awards amount above is calculated using the Black-Scholes valuation method
using the variables used by the Company to determine the gross option
value for financial statement reporting purposes pursuant to FAS
123(R). These options will vest in equal quarterly installments
over a one year period on the three, six, nine and twelve month
anniversaries of the grant date.
|
|
(4)
|
Michael
Fields and Paul C. Meyer resigned as directors on August 8, 2007 and June
12, 2007, respectively.
|
Item
11. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
The
following table sets forth, as of February 29, 2008, certain information
regarding the beneficial ownership of our Common Stock by the
following:
|
|
•
|
each
person, or group of affiliated persons, known by us to be the beneficial
owner of more than 5% of our outstanding Common
Stock;
|
|
|
•
|
each
executive officer named in the Summary Compensation Table above;
and
|
|
|
•
|
all
of our current directors and executive officers as a
group.
|
Except as
otherwise indicated, the persons listed below have sole voting and investment
power with respect to all of the Common Stock owned by them. All information
concerning the individual shareholders’ respective beneficial ownership has been
furnished to us by them.
Name
and Address of Beneficial Owner
|
|
Number
of Shares
of
Common Stock
Beneficially
Owned(1)(2)
|
|
|
Percentage
of
Common
Stock
Beneficially
Owned(2)
|
|
|
Shawn
Kreloff
c/o
Sona Mobile Holdings Corp.
245
Park Avenue, 39th
Floor
New
York, NY
10167....................................................................................................................................................
|
|
|
4,221,577
|
(3) |
|
|
7.1 |
% |
|
Robert
P. Levy
200
W. Montgomery Avenue
Ardmore,
PA
19003.......................................................................................................................................................
|
|
|
121,250 |
(4)(5) |
|
|
* |
|
|
M.
Jeffrey Branman
935
First Avenue
King
of Prussia, PA
19406...........................................................................................................................................
|
|
|
375,000 |
(5)(6) |
|
|
* |
|
|
Lance
Yu
c/o
Sona Mobile Holdings Corp.
366
Bay Street, Suite 600
Toronto,
Ontario M5H
4B2.........................................................................................................................................
|
|
|
1,328,734 |
(7) |
|
|
2.3 |
% |
|
Stephen
Fellows
c/o
Sona Mobile Holdings Corp.
366
Bay Street, Suite 600
Toronto,
Ontario M5H
4B2........................................................................................................................................
|
|
|
274,999 |
(8) |
|
|
* |
|
|
All
directors and officers as a group
(Five)..............................................................................................................................................................................
|
|
|
6,321,560 |
(9) |
|
|
10.5 |
% |
|
Shuffle Master,
Inc.
1106
Palms Airport Drive
Las
Vegas, NV
89119....................................................................................................................................................
|
|
|
4,807,692 |
(10) |
|
|
8.2 |
% |
|
Steven
L. Martin
c/o
Slater Asset Management, LLC
825
Third Avenue, 33rd
Floor
New
York, NY
10022.....................................................................................................................................................
|
|
|
4,879,675 |
(11) |
|
|
8.3 |
% |
|
John
Bush
19
Farmcrest Court
Nobleton,
ON
L0G
1N0,
Canada...........................................................................................................................................................
|
|
|
5,583,577 |
(12) |
|
|
9.7 |
% |
|
(1)
|
Shares of Common Stock that an
individual or group has a right to acquire within 60 days after February
29, 2008 pursuant to the exercise of options, warrants or other rights are
deemed to be outstanding for the purpose of computing the percentage
ownership of such individual or group, but are not deemed to be
outstanding for computing the percentage ownership of any other person or
group shown in the table.
|
|
(2)
|
As of February 29, 2008, there
were 57,832,857 shares of our Common Stock
outstanding.
|
|
(3)
|
Includes 1,416,666 shares
issuable upon the exercise of stock options and 41,666 shares issuable
upon the exercise of five-year
warrants.
|
|
(4)
|
Includes 40,000 shares issued to
Mr. Levy upon his appointment to the Board on May 29, 2007, of which
20,000 shares vested immediately and 20,000 shares will vest one year from
the date of grant.
|
|
(5)
|
Includes 81,250 and 155,000
shares issuable upon the exercise of stock options to Mr. Levy and Mr.
Branman, respectively.
|
|
(6)
|
Includes 100,000 shares issued to
Mr. Branman on July 6, 2006 upon his appointments to the Board and as
chairman of the Audit Committee, of which 50,000 shares vested immediately
and 50,000 shares which vested one year from the date of grant, as well as
30,000 shares issuable upon the exercise of five-year
warrants.
|
|
(7)
|
Includes 150,000 shares issuable
upon the exercise of stock
options.
|
|
(8)
|
Includes
216,666 shares issuable upon the exercise of stock options and 53,333
shares of restricted stock, all of which are
vested.
|
|
(9)
|
Includes 2,019,582 shares
issuable upon the exercise of stock options granted to these directors and
officers and 71,666 shares issuable upon the exercise of five-year
warrants.
|
|
(10)
|
Based on information contained in
a Schedule 13G filed by Shuffle Master Inc. on February 5, 2008.
Includes 833,333
shares issuable upon the exercise of warrants. Dr. Mark L. Yoseloff and
Messrs. Garry W. Saunders, Louis Castle and Phillip Peckman are all
members of Shuffle Master, Inc.’s Board of Directors and, as such, have
shared voting and investment control over these securities. The named
individuals disclaim beneficial ownership of these
securities.
|
|
(11)
|
Based on information contained in
a Schedule 13G/A filed by Slater Capital management LLC on February 15,
2008. Includes shares owned directly by
Mr. Martin (333,333) as well as shares he is deemed to beneficially own
through his wife (8,000), through his two sons (278,085), through his IRA
(152,400) and through his wife’s IRA (76,200). The total also
includes 1,051,057 shares underlying warrants held by Mr. Martin, certain
of the entities mentioned in this footnote and his wife’s
IRA. Mr. Martin also has voting and investment control over
shares owned by Slater Equity Partners, L.P. (1,495,700), Slater Equity
Partner’s Offshore Fund Ltd. (832,500) and Slater Capital Partners LP
(652,400) by virtue of the fact that he is the Manager and controlling
owner of Slater Asset Management, L.L.C. (SAM) and Slater Capital
Management, L.L.C. (SCM). SAM is the general partner of
investment limited partnerships of which SCM is the investment advisor,
including Slater Equity Partners, L.P. SCM is also the
investment advisor to Slater Equity Partners Offshore Fund
Ltd.
|
(12)
Includes 80,202 shares Mr. Bush is deemed to beneficially own through his
wife.
Item
12. Certain Relationships
and Related Transactions and Director Independence
In
January 2006, we entered into a strategic alliance licensing and distribution
agreement with Shuffle Master, Inc. (‘‘Shuffle Master’’), under which we agreed
to develop certain wireless gaming technology for Shuffle Master. Pursuant to
this agreement, Shuffle Master’s game content was to be offered exclusively for
mobile gaming on the Company’s Wireless Gaming System. We were entitled to
receive 40% of the gross revenue received by Shuffle Master from worldwide sales
of wireless ‘‘casino’’ gaming applications to customers of, or sourced by,
Shuffle Master and 45% of the gross revenues received by Shuffle Master from
worldwide sales of wireless ‘‘casino’’ gaming applications to customers sourced
by us. In addition, all capital outlay for infrastructure and support, including
the installation, integration, mobilization and servicing of the Wireless Gaming
System was to be incurred by the Company. Shuffle Master beneficially owns 8.2%
of our Common Stock and Paul Meyer, the president of Shuffle Master, served on
the Board from March 28, 2006 until June 12, 2007.
The
licensing agreement was amended and restated in its entirety, as was a Master
Services Agreement, effective February 28, 2007. Under the terms of the amended
agreements both the Company and Shuffle Master are permitted to distribute,
market and sell the Casino On Demand Wireless Gaming System to gaming venues
worldwide. Additionally, the Company has been granted a non-exclusive worldwide
license to offer Shuffle Master's proprietary table game content on the
platform, and the Company has granted Shuffle Master a non-exclusive worldwide
license to certain Company-developed wireless platform software and enhancements
that support the integration and mobilization of casino gaming applications into
in-casino wireless gaming delivery systems. Under the amended agreements,
revenue is split on a net revenue basis and shared at a 70%-30% split, with the
larger percentage going to the party having received the revenues. Also, in
connection with certain transactions with non-casino third parties, the Company
and Shuffle Master will share initial up-front payments 60%-40%, and future
consideration received 40%-60%.
On July
17, 2006, the Company entered into a Mutual Separation Agreement and a
Consulting Agreement with John Bush in connection with his resignation as Chief
Executive Officer of the Company. Pursuant to the terms of the Mutual Separation
Agreement, Mr. Bush was entitled to receive $150,000 as severance pay and
CAN$65,057.87 subject to all applicable withholding taxes, representing
previously earned but unpaid compensation. Mr. Bush was also entitled to
reimbursement for accrued but unused vacation days with respect to calendar year
2005 and would receive medical insurance through May 31, 2007. The Mutual
Separation Agreement contained a non-competition and non-solicitation provision
for the term of the agreement. In consideration for the foregoing, Mr.
Bush provided the Company with a general release of claims. The Mutual
Separation Agreement contained certain termination rights for both the Company
and Mr. Bush, and further provided that any termination under the Mutual
Separation Agreement would automatically terminate the Consulting
Agreement.
Pursuant
to the terms of the Consulting Agreement, Mr. Bush, among other things, was
engaged to develop and service the financial services and corporate enterprise
solutions markets for the Company’s products and services. The term of the
agreement was for a period of one year commencing on June 1, 2006, subject to
extension and early termination provisions after December 31, 2006. The
Consulting Agreement contained representations and warranties and a
non-competition and non-solicitation provision during the term of the agreement.
In consideration for the services provided by Mr. Bush, he was entitled to
receive a consulting fee equal to $7,500 per month. In addition to the monthly
consulting fee, Mr. Bush was entitled to commissions on the sales of the
Company’s products and services to customers. The Consulting
Agreement
contained certain termination rights for both the Company and Mr. Bush, and
further provided that any termination under the Consulting Agreement would
automatically terminate the Mutual Separation Agreement. The Consulting
Agreement was terminated effective December 31, 2006. Under the Consulting
Agreement, a total of $52,500 was paid to Mr. Bush for the period from June 1,
2006, through December 31, 2006.
Each of M. Jeffrey Branman and Robert
P. Levy are independent directors under the independence standards of the
Nasdaq Stock Market (Rule
4200(a)(15)).
Item
13.
Exhibits
|
Exhibit
Number
|
|
Description
|
| |
2.1
|
|
Agreement
and Plan of Merger, dated as of March 7, 2005 among Sona Mobile Holdings
Corp., PerfectData Acquisition Corporation and Sona Mobile, Inc.
(incorporated by reference to Exhibit 10.1 of the Company’s Current Report
on Form 8-K, filed March 11, 2005).
|
| |
3.1
|
|
Certificate
of Incorporation, as amended (incorporated by reference to the following
documents (i) the Company’s Consent Solicitation dated October 26, 2004 as
filed on November 1, 2004; (ii) Certificate of Designations for Series A
Preferred Stock filed as Exhibit 4.2 to the Company’s Annual Report on
Form 10-KSB for its fiscal year ended March 31, 2005; (iii) Certificate of
Designations for Series B Preferred Stock filed as Exhibit 3.1 to the
Company’s Current Report on Form 8-K filed on June 22,
2005; (iv) Appendix IV to the Company’s Definitive Proxy
Statement dated October 27, 2005 and filed on the same date; and (v)
Appendix I to the Company’s Definitive Proxy Statement dated August 22,
2007 and filed on the same date).
|
| |
3.2
|
|
By-laws
of the Company, as amended July 20, 2007 (incorporated by reference to
Exhibit 3.2 of the Company’s Quarterly Report on Form 10-QSB, filed August
14, 2007).
|
| |
4.1
|
|
Form
of Common Stock Certificate (incorporated by reference to Exhibit 4.1 of
Amendment No. 1 to the Company’s Form SB-2 (file number 333-130461), filed
February 2, 2006).
|
| |
4.2
|
|
Form
of 8% Senior Unsecured Convertible Debenture due November 28, 2010
(incorporated by reference to Exhibit 4.1 of the Company’s Form 8-K, filed
November 27, 2007).
|
| |
10.1
|
|
Amended
and Restated Stock Option Plan of 2000 (incorporated by reference to
Appendix III of the Company’s Definitive Proxy Statement, filed October
27, 2005).
|
| |
10.2
|
|
Licensing
and Distribution Agreement, dated January 13, 2006, between the Company
and Shuffle Master, Inc. (incorporated by reference to Exhibit 10.2 of the
Company’s Form SB-2 (file number 333-130461), filed April 7,
2006).
|
| |
10.3
|
|
Form
of Securities Purchase Agreement, dated June 30, 2006 (incorporated by
reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K,
filed July 7, 2006).
|
| |
10.4
|
|
Form
of Registration Rights Agreement, dated June 30, 2006 (incorporated by
reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K,
filed July 7, 2006).
|
| |
10.5
|
|
Form
of Warrant, dated July 7, 2006 (incorporated by reference to Exhibit 10.1
of the Company’s Current Report on Form 8-K, filed July 7,
2006).
|
| |
10.6
|
|
Letter
Agreement, dated June 30, 2006, between the Company and Shuffle Master,
Inc. (incorporated by reference to Exhibit 10.1 of the Company’s Current
Report on Form 8-K, filed July 7, 2006).
|
| |
10.7
|
|
Mutual
Separation Agreement, dated as of July 17, 2006, between the Company and
John Bush (incorporated by reference to Exhibit 10.1 of the Company’s
Current Report on Form 8-K, filed July 21, 2006).
|
| |
10.8
|
|
Consulting
Agreement, dated as of July 17, 2006, between the Company and John Bush
(incorporated by reference to Exhibit 10.2 of the Company’s Current Report
on Form 8-K, filed July 21, 2006).
|
| |
10.9
|
|
Compensation
Plan for Directors, as amended (incorporated by reference to Exhibit 10.1
to the Company’s Quarterly Report on Form 10-QSB, filed November 14,
2006).
|
| |
10.10
|
|
Form
of Non-Employee Stock Option Agreement (incorporated by reference to
Exhibit 10.2 to the Company’s Quarterly Report on Form 10-QSB, filed
August 14, 2006).
|
| |
10.11
|
|
Form
of Non-Employee Restricted Stock Agreement (incorporated by reference to
Exhibit 10.3 to the Company’s Quarterly Report on Form 10-QSB, filed
August 14, 2006).
|
| |
10.12
|
|
Form
of Indemnity Agreement (incorporated by reference to Exhibit 10.4 to the
Company’s Quarterly Report on Form 10-QSB, filed August 14,
2006).
|
| |
10.13
|
|
Private
Label Partner Agreement, dated as of September 1, 2006, between the
Company and Motorola, Inc., formerly Symbol Technologies, Inc.
(incorporated by reference to Exhibit 10.1 of the Company’s Current Report
on Form 8-K/A, filed November 1, 2006).+
|
| |
10.14
|
|
2006
Incentive Plan (incorporated by reference to Appendix A of the Company's
Definitive Proxy Statement, filed August 30, 2006).
|
| |
10.15
|
|
Employment
Agreement, dated as of August 28, 2006 between the Company and Shawn
Kreloff (incorporated by reference to Exhibit 10.2 to the Company
Quarterly Report on 10-QSB, filed August 14, 2006).
|
| |
10.16
|
|
Amended
and Restated Licensing And Distribution Agreement, effective as of
February 28, 2007, among the Company, Sona Mobile, Inc. and Shuffle
Master, Inc. (incorporated by reference to Exhibit 10.1 of the Company’s
Current Report on Form 8-K, filed March 2, 2007).
|
| |
10.17
|
|
Amended
and Restated Master Services Agreement, effective as of February 28, 2007,
between the Company and Shuffle Master, Inc. (incorporated by reference to
Exhibit 10.1 of the Company’s Current Report on Form 8-K, filed March 2,
2007).+
|
| |
10.18
|
|
Form
of Securities Purchase Agreement dated November 26, 2007 (incorporated by
reference to Exhibit 10.1 of the Company’s Form 8-K, filed November 27,
2007).
|
| |
10.19
|
|
Form
of Registration Rights Agreement dated November 26, 2007 (incorporated by
reference to Exhibit 10.2 of the Company’s Form 8-K, filed November 27,
2007).
|
| |
10.20
|
|
Form
of Common Stock Purchase Warrant dated November 28, 2007 (incorporated by
reference to Exhibit 10.3 of the Company’s Form 8-K, filed November 27,
2007).
|
| |
14.1
|
|
Code
of Ethics (incorporated by reference to Exhibit 14.1 of the Company’s
Annual Report on Form 10-KSB, filed March 31, 2006).
|
| |
21.1
|
|
Subsidiaries
of the Company (incorporated by reference to Exhibit 21.1 of the Company’s
Registration Statement on Form SB-2 (file no. 333-148254), filed on
December 21, 2007).
|
| |
31.1
|
|
Certification
of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.*
|
| |
31.2
|
|
Certification
of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.*
|
| |
32.1
|
|
Certification
of Chief Executive Officer and Chief Financial Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.*
|
* Filed
herewith.
+ Confidential
treatment of certain portions of these exhibits has been granted.
Item
14. Principal Accountant
Fees and Services
For the
Fiscal Year Ended December 31, 2007
Audit
Fees: The aggregate fees, including expenses, billed by the Company’s
principal accountant in connection with the audit of our consolidated financial
statements for the most recent fiscal year and for the review of our financial
information included in our Annual Report on Form 10-KSB; and our quarterly
reports on Form 10-QSB during the fiscal year ending December 31, 2007 were
$83,816.
Audit-Related
Fees: The aggregate fees, including expenses, billed by the Company’s principal
accountant for services reasonably related to the audit for the year ended
December 31, 2007, were $7,069. Fees in this category related to
reviews and consents relating to share registration statement filed by the
Company and attendance at the Company’s annual shareholder meeting.
Tax Fees:
The aggregate fees, including expenses, billed by the Company’s principal
accountant for services reasonably related to tax services during the year
fiscal ended December 31, 2007 were $18,238.
All Other
Fees: The aggregate fees, including expenses, billed for all other
services rendered to the Company by its principal accountant during year fiscal
ended December 31, 2007, were nil.
For the
Fiscal Year Ended December 31, 2006
Audit
Fees: The aggregate fees, including expenses, billed by the Company’s
principal accountant in connection with the audit of our consolidated financial
statements for the most recent fiscal year and for the review of our financial
information included in our Annual Report on Form 10-KSB and our quarterly
reports on Form 10-QSB during the fiscal year ending December 31, 2006, were
$78,003.
Audit-Related
Fees: The aggregate fees, including expenses, billed by the Company’s principal
accountant for services reasonably related to the audit for the year ended
December 31, 2006, were $28,442. Fees in this category related to reviews
and consents relating to share registration statement filed by the Company and
attendance at the Company’s annual shareholder meeting.
Tax Fees:
The aggregate fees, including expenses, billed by the Company’s principal
accountant for services reasonably related to tax services during the year
fiscal ended December 31, 2006, were $16,733.
All Other
Fees: The aggregate fees, including expenses, billed for all other
services rendered to the Company by its principal accountant during year fiscal
ended December 31, 2006, were nil.
The audit
committee approves by way of a signed engagement letter on an annual basis,
estimated fees for all audit and tax services to be provided by our audit
firm. These services include the annual audit, the quarterly views of
Form 10Q-SB, other services and advice related to regular SEC filings (not
including registration statements) and the filing of tax returns. All
tax and audit services provided to the Company in 2007 and 2006 were approved by
the audit committee in signed engagement letters for the respective fiscal
years. All Audit-Related Fees above relate to fees charged by our
audit firm which were incurred for reviews and consents relating to share
registration statements filed by the Company and attendance at the Company's
annual shareholder meeting. Such fees and expenses could not be
reasonably anticipated in advance and were not included in the respective annual
audit engagement letters.
SIGNATURES
In
accordance with the Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
|
|
Sona Mobile Holdings
Corp.
(Registrant)
|
|
|
|
|
Date: March
31, 2008
|
/s/ SHAWN KRELOFF
|
|
|
Name:
Shawn Kreloff
|
|
|
Title:
Chief Executive Officer
|
|
|
|
|
Date: March
31, 2008
|
/s/ STEPHEN FELLOWS
|
|
|
Name:
Stephen Fellows
|
|
|
Title:
Chief Financial Officer
(Principal
Financial Officer)
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
|
Signature
|
|
Title
|
|
Date
|
|
/s/ SHAWN
KRELOFF
|
|
President
and Chief Executive Officer, and Director (principal executive
officer)
|
|
March
31, 2008
|
|
Shawn
Kreloff
|
|
|
|
|
|
/s/ STEPHEN
FELLOWS
|
|
Chief
Financial Officer (principal financial officer and principal accounting
officer)
|
|
March
31, 2008
|
|
Stephen
Fellows
|
|
|
|
|
|
/s/ ROBERT P.
LEVY
|
|
Director
|
|
March
31, 2008
|
|
Robert
P. Levy
|
|
|
|
|
|
/s/ M. JEFFREY
BRANMAN
|
|
Director
|
|
March
31, 2008
|
|
M.
Jeffrey Branman
|
|
|
|
|
CERTIFICATION
I, Shawn
Kreloff, certify that:
|
1.
|
I
have reviewed this annual report on Form 10-KSB of Sona Mobile Holdings
Corp;
|
|
2.
|
Based
on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
|
|
3.
|
Based
on my knowledge, the financial statements, and other financial information
included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the small
business issuer as of, and for, the periods presented in this
report;
|
|
4.
|
The
small business issuer's other certifying officer(s) and I are responsible
for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal
control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the small business issuer and
have:
|
|
|
a)
|
Designed
such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure
that material information relating to the small business issuer, including
its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being
prepared;
|
|
|
|
Designed
such internal control over financial reporting, or caused such internal
control over financial reporting to be designed under our supervision, to
provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting
principles;
|
|
|
|
Evaluated
the effectiveness of the small business issuer's disclosure controls and
procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of
the period covered by this report based on such evaluation;
and
|
|
|
|
Disclosed
in this report any change in the small business issuer's internal control
over financial reporting that occurred during the small business issuer's
most recent fiscal quarter (the small business issuer's fourth fiscal
quarter in the case of an annual report) that has materially affected, or
is reasonably likely to materially affect, the small business issuer's
internal control over financial reporting;
and
|
|
5.
|
The
small business issuer's other certifying officer(s) and I have disclosed,
based on our most recent evaluation of internal control over financial
reporting, to the small business issuer's auditors and the audit committee
of the small business issuer's board of directors (or persons performing
the equivalent functions):
|
|
|
|
All significant deficiencies and
material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the
small business issuer's ability to record, process, summarize and report
financial information; and
|
|
|
b)
|
Any fraud, whether or not
material, that involves management or other employees who have a
significant role in the small business issuer's internal control over
financial reporting.
|
Date: March
31, 2008
/s/ SHAWN
KRELOFF
Shawn
Kreloff
Chief
Executive Officer
CERTIFICATION
I,
Stephen Fellows, certify that:
|
1.
|
I
have reviewed this annual report on Form 10-KSB of Sona Mobile Holdings
Corp;
|
|
2.
|
Based
on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
|
|
3.
|
Based
on my knowledge, the financial statements, and other financial information
included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the small
business issuer as of, and for, the periods presented in this
report;
|
|
4.
|
The
small business issuer's other certifying officer(s) and I are responsible
for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal
control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the small business issuer and
have:
|
|
|
a)
|
Designed
such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure
that material information relating to the small business issuer, including
its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being
prepared;
|
|
|
|
Designed
such internal control over financial reporting, or caused such internal
control over financial reporting to be designed under our supervision, to
provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting
principles;
|
|
|
|
Evaluated
the effectiveness of the small business issuer's disclosure controls and
procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of
the period covered by this report based on such evaluation;
and
|
|
|
|
Disclosed
in this report any change in the small business issuer's internal control
over financial reporting that occurred during the small business issuer's
most recent fiscal quarter (the small business issuer's fourth fiscal
quarter in the case of an annual report) that has materially affected, or
is reasonably likely to materially affect, the small business issuer's
internal control over financial reporting;
and
|
|
5.
|
The
small business issuer's other certifying officer(s) and I have disclosed,
based on our most recent evaluation of internal control over financial
reporting, to the small business issuer's auditors and the audit committee
of the small business issuer's board of directors (or persons performing
the equivalent functions):
|
|
|
|
All significant deficiencies and
material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the
small business issuer's ability to record, process, summarize and report
financial information; and
|
|
|
b)
|
Any fraud, whether or not
material, that involves management or other employees who have a
significant role in the small business issuer's internal control over
financial
reporting.
|
Date: March
31, 2008
/s/ STEPHEN
FELLOWS
Stephen Fellows
Chief Financial Officer
CERTIFICATION
PURSUANT TO
18
U.S.C. SECTION 1350,
AS
ADOPTED PURSUANT TO
SECTION
906 OF THE SARBANES-OXLEY ACT OF 2002
In
connection with the Annual Report of Sona Mobile Holdings Corp. (the “Company”)
on Form 10-KSB for the period ended December 31, 2007 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), we, Shawn
Kreloff, Chief Executive Officer of the Company, and Stephen Fellows, Chief
Financial Officer of the Company, certify to the best of my knowledge, pursuant
to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of
2002, that:
(1) The
Report fully complies with the requirements of section 13(a) or 15(d) of the
Securities Exchange Act of 1934; and
(2) The
information contained in the Report fairly presents, in all material respects,
the financial condition and results of operations of the
Company.
Date:
March 31,
2008
/s/ SHAWN
KRELOFF
Shawn
Kreloff
Chief
Executive Officer
/s/ STEPHEN
FELLOWS
Stephen
Fellows
Chief
Financial Officer