The
following discussion should be read in conjunction with the Financial Statements
and related notes thereto included elsewhere in this report.
INTRODUCTION
UpSNAP,
Inc. and its subsidiaries are collectively referred to as UpSNAP. The following
Management Discussion and Analysis of Financial Condition and Results of
Operations was prepared by management and discusses material changes in UpSNAP’s
financial condition and results of operations and cash flows for the quarters
ended December 31, 2007 and 2006. Such discussion and comments on the liquidity
and capital resources should be read in conjunction with the information
contained in the accompanying audited consolidated financial statements prepared
in accordance with U.S. GAAP.
The
discussion and comments contained hereunder include both historical information
and forward-looking information. The forward-looking information, which
generally is information stated to be anticipated, expected, or projected by
management, involves known and unknown risks, uncertainties and other factors
that may cause the actual results and performance to be materially different
from any future results and performance expressed or implied by such
forward-looking information. Potential risks and uncertainties include risks and
uncertainties set forth under the heading “Risk Factors” and elsewhere in this
Form 10-QSB.
OVERVIEW
UpSNAP
provides a mobile search and entertainment platform that enables media companies
to deliver their content to all mobile phones in the United States, and
generates revenue primarily from subscriptions and increasingly from mobile
advertising. UpSNAP has searchable mobile content from over 1,000
content channels and over 150 content partners. In April 2007, UpSNAP also
launched a multi-media search engine that allows consumers to search for mobile
content, such as ringtones, and mobile videos, from their PC
desktop.
Mobile
consumers are now buying more and more powerful phones with Internet features
capable of sending email, running applications and browsing the Internet.
According to the Pew Wireless Internet Access study in February 2007, as many as
25% of Internet users now have a cell-phone able to access the
Internet. In the key youth demographic of 18-34, consumers are using
their cell-phones as their primary method of communication and entertainment–
effectively replacing their PC.
The
market in general for mobile services is continuing to show very high growth
rates. In the U.S, according to the Cellular Telecommunications &
Internet Association (CTIA), as reported in its Wireless Quick Facts December
2006, wireless subscribers reached 233 million by December 2006, reaching more
than 76% of the total U.S. population.
Now that
the number of subscribers has almost reached saturation point – particularly in
the 18-35 demographic – we believe mobile operators are seeking to increase
their revenues by offering mobile entertainment services. According to the CTIA,
Mobile Entertainment Revenues in the US grew particularly sharply, showing
growth of 82% from $4.8 billion in the first half of 2005, to $8.7 billion for
the latter nine months of 2006.
In the
past, the typical revenue model for mobile entertainment services has been a
paid subscription model. Consumers have proved willing to spend several dollars
on a 20 second ring-tone from a mobile carriers store, even when they can
purchase the whole song on Apple’s iTunes for a mere 0.99 cents on their
computer, an example of the current large discrepancies between the mobile and
Internet content pricing models. As the features of the Internet and PCs
converge into powerful handsets with wireless Internet access, the Company
predicts that these discrepancies cannot last for long.
The
global market for mobile-phone premium content is expected to expand to more
than $43 billion by 2010, rising at a compound annual growth rate of 42.5
percent from $5.2 billion in 2004, according to iSuppli Corp.
UpSNAP
management believes that this paid content subscription model will start to
migrate to a search and advertising driven model over time. Most mass media
business models have started as subscription only, and then migrated with the
increasing reach of consumers into advertising driven services. As John
Templeton said: “History never repeats itself, but it often
rhymes.”
In the
United States, most mobile content is sold from ‘virtual’ shops on the mobile
handsets. However, this trend is set to change. In Europe, the mobile operators
are leaving content choice and selection to media and distribution companies who
sell mobile content. Consumers in the US are now being increasingly exposed to
direct marketing for mobile products.
UpSNAP
has built a search and advertising driven business model, which enables UpSNAP
and its media and carrier partners to make money from advertising, rather than
from the content subscription. UpSNAP believes that it is very well positioned
to take advantage of the enormous consumer demand for mobile content and
entertainment. A 2006 study from Shosteck Group showed that revenues from Mobile
advertising could reach $9.6 billion by 2010. Consumers will also increasing
need quick and convenient ways to search for all the latest content they can
consume on their mobile phone.
UpSNAP
currently has one major distribution arrangement, and in order to increase
sales, UpSNAP must increase its media partnerships that can actively promote
offers direct to consumers, as well as continue to partner with as many of the
mobile operators as possible.
In 2007
UpSNAP signed a contract with Lincoln Financial which enables consumers to
listen and search for popular shows such as the Bob and Sheri Show on demand
from their mobile phones. UpSNAP has also recently signed new distribution
partnerships with Cablevision, Go2 Media, and Interop Technologies.
In
January 2006 UpSNAP derived 99% of its revenues from subscription revenue from
one major US mobile operator. In our fiscal quarter October – December 2007, our
dependency on this carrier has been reduced to approximately 82% of our
revenues, as we move towards the more lucrative and higher margin search and
advertising related revenues.
Media
companies and Advertising Agencies are hopeful that mobile advertising can
obtain the massive reach numbers of a TV campaign, combined with the direct
response and tracking potential of the Internet. However, mobile
marketing is still in its infancy as they struggle with the right forms of
direct marketing, privacy issues, and how to structure mobile advertising deals.
The pace of our deal making activities with the media companies has been much
slower than we would have liked.
UpSNAP is
looking at acquisitions to push this process quicker. We have now entered
into a Merger Agreement with Mobile Greetings Inc. that could allow us to
increase our average revenue per subscriber as well as our distribution
channels.
If the
MGI merger is consummated, we believe that the merged company would combine
UpSNAP’s voice and advertising platforms with MGI's data platform to provide one
scalable platform integrating content and advertising delivery to all mobile
phones in the US. We believe that together the companies would be
well positioned to take advantage of a large growth opportunity for mobile
content and advertising based services, would add advertising inventory into our
portfolio, and would allow us to publish comprehensive mobile solutions for our
partners maximizing every mobile revenue earning opportunity. The
combination of two scalable, automated audio and data platforms that work across
all mobile handsets would give the Company a powerful set of applications
and revenue streams. Our media partners would be able
to advertise direct to consumer mobile services and products that will work
on any mobile handset in the US. Media companies have been reluctant to
advertise mobile products that only work on a small portion of their target
audience’s mobile handsets. UpSNAP will be well positioned through our
pay-per-call and premium voice platform integrated into our suite of digital
applications. Meanwhile, on-deck branded apps will continue to be very important
to the Tier 1 mobile operators, (AT&T, Verizon, Sprint/Nextel) especially as
they increasingly view themselves as media companies.
We
believe that the combined companies will address several of the weaknesses in
the Company’s present business and operations, as well as playing to the
strengths of our existing advertising platform. The merged company would have
the following benefits:
·
Reduce our reliance on
Sprint/Nextel, and expand our distribution into all US network operators,
particularly with Verizon. Our reliance on Sprint/Nextel should be reduced
from 89% of revenues in fiscal Q4 2007, to less than 30% after the MGI
Merger.
·
Offer mobile
products to any phone in the US using both voice and data services which will
allow our media partners to advertise service direct to the consumer, increasing
our overall sales and distribution to the consumer.
·
Increase revenues and
improve margins from advertising using MGI’s existing inventory and our extended
media relationships direct to the consumer
·
Improve the ability of the
joint company to market our services to the mobile operators and large media
operators which are demanding to deal with larger players who can handle all the
mobile needs.
We
believe that there is an excellent opportunity for a roll-up of wireless
content providers. Mobile operators and media players are demanding to deal
with larger players and both UpSNAP and Mobile Greetings have built platform
that scale very well across all carriers and networks - allowing us to aggregate
and partner with a wide cross-section of wireless services. Potential wireless
acquisition targets would include mobile marketing, loyalty schemes,
advertising, mobile promotions & mobile social networking
We
continue to look for acquisition targets although it will be challenging
consummating an acquisition due to the timing and availability of appropriate
acquisition opportunities and our ability to find capital to acquire the same
and provide working capital.
Principal Products and
Services
UpSNAP
has two principal products and services:
|
|
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Mobile
Entertainment Services – responsible for 87% of first quarter fiscal 2008
revenues
|
|
|
|
Mobile
Search Engine and Advertising Platform – responsible for 3% of fiscal 2007
revenues
|
MOBILE
ENTERTAINMENT SERVICES
The
UpSNAP SWinG (Streaming Wireless Internet Gateway) platform enables mobile
access to virtually any type of live and on-demand streaming audio content, such
as radio, podcasts and live sports events. The software translates
data from almost any type of common audio format, for example MP3 files, to
allow it to be streamed to cell-phones capable of supporting audio streaming. If
the cell-phone does not have any data services, the platform broadcasts the
audio via the voice channel on the cell-phone. The SWinG platform runs on any
mobile phone in the US, regardless of handset, data package or software. The
SWinG platform was built over the course of 2002-2004 and is fully
operational.
Our
catalog of free and premium streaming audio content delivers compelling content
from some of the world’s premier brands including Sporting News Radio, Lincoln
Financial’s Bob and Sheri show, Troy Aikman show, Tony Bruno show, Inside Track
Show (NASCAR), & Batanga (Hispanic Music). The catalogue of content includes
over 1,000 content providers, with a wide selection of content ranging from
Radio Stations, to sports coverage and Podcasts. UpSNAP also developed a
prototype mobile dating service with Hot-or-Not and recently signed distribution
agreements include, Go2 and Cablevision.
The
company generates subscription revenues from the SWinG platform by providing the
technology platform to major companies that already have a relationship with the
carriers. In addition, the Company generates revenues acting as the principal in
the relationship with the carriers, providing content from over 1,000 content
providers.
The
subscription revenues are primarily generated from recurring Subscribers,
Consumers subscribe to a service on a monthly basis. For example, in the case of
the Sporting News Radio content, consumers pay $4.99 per month. The cost of the
paid service is added to the consumer’s phone-bill, and the carriers pay UpSNAP
after deducting their margin and associated costs.
MOBILE
SEARCH ENGINE AND ADVERTISING PLATFORM
UpSNAP
has expanded its search engine suite to enable consumers to search for a wide
variety of mobile content, services and data. In April 2007 UpSNAP launched a
mobile Meta search tool that finds mobile data stored on the Internet. Mobile
consumers can search for ringtones, mobile video content, mobile games, and
other images, wallpapers and multi-media content from their PC. This service is
accessible at http://www.upsnap.com/
The suite
of mobile search products allows consumers to find and access mobile content and
service from any mobile phone in the US. The UpSNAP mobile search engine
platform allows consumers to search via text message, WAP, or
through
Interactive
Voice Response (IVR) by simply texting a keyword to a “short-code” or 5 digit
telephone number, which in our case is 2SNAP (27627). Current
services include yellow pages directory assistance, sport shows and content,
horoscopes, comedy, weather, calorie counter, spelling, and airline travel
information. Consumers type in search requests e.g. “Leo” for a text
horoscope. The consumer will then be offered a free horoscope, along with an
advertisement to speak with an astrologer direct or hear an extended audio
horoscope. While the service is free, sponsored by advertising, carrier charges
may apply, depending on the consumer's contract.
Similarly,
consumers looking for sports content, for example, will receive a text message
advertising UpSNAP premium sports services. The short-code can also be used for
Premium Text Messaging Services (PSMS) which are subscription based services
directly billed by the carriers, and included on the consumer’s phone bill.
UpSNAP has PSMS services provisioned for billing with most of the major US
carriers including, AT&T, Sprint/Nextel, T-Mobile and Alltel. These
short-codes at present will only work on US handsets, limiting the geographic
coverage of the service to those areas in the United States with cell-phone
coverage. Our mobile search engine was launched live to consumers in November
2005.
These
searches are free to use by the consumer – save for any communications cost
incurred by their cellular phone usage according to their carrier
contract.
UpSNAP
generates revenues from advertisers who value the direct response pay-per-click
model of the Internet, and now want the same model to work on mobile
devices.
Once a
consumer makes a search for a specific search category or uses a “key-word’
identified and purchased by an UpSNAP partner as indicative of buying behavior,
the UpSNAP advertising platform inserts a “paid’ advertising listing into the
search reply.
UpSNAP
has a Voice Over Internet Protocol (VoIP) switch which seamlessly bridges the
merchant telephone number with the consumer via a call connect. Our Pay Per Call
advertising platform can then record the number of calls received by a merchant
and produce an audit trail for a billing engine. UpSNAP partners with
specialized “Pay-Per-Call” companies, that sign-up advertisers nationwide
throughout the US for this type of advertising.
Our
Pay-Per-Call advertising platform technology was built in 2005, and our first
pay-per-call-partnership was announced with Ingenio, who provides pay-per-call
advertisers nationwide on May 4, 2006. We rely on third party
operators for our advertising. For example if a national pizza chain
were to only want to target select US cities, our third party partners would
only pass us the advertising for a specific geographical locale. Since then,
UpSNAP has signed up a several more advertising partners, including AdValient,
Third Screen Media, and Millennial Media.
Pay-Per-Call
advertising is receiving a much higher margin than pay-per-click on the
Internet. The average price of a pay-per-click on Google according to the Wall
Street Journal was .50 cents. Pay-Per-Call, which directly bridges a consumer
who is looking to buy on his cell-phone with a merchant, starts at $2 dollars a
call, and goes up considerably depending on the nature of the sale.
DISTRIBUTION
AGREEMENTS
UpSNAP’s
revenues are directly affected by its distribution agreements. The distribution
of our content occurs in one of two ways:
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|
1.
|
Carrier
or “on deck” promotion – where the carrier actually promotes the service
from the menu’s on the carrier handset, bills the consumer on his mobile
phone bill, and takes its cuts, and then remits the balance to UpSNAP.
UpSNAP has ‘on deck’ agreements with Sprint/Nextel. Recently,
UpSNAP signed an “on deck” distribution agreement with Go2, one of the
largest pure play mobile internet traffic sites in the
USA. go2Media
TM
,
a company focused on the growing user demand for more localized,
personalized mobile content. The goal is to further integrate
UpSNAP’s vast audio services into the go2 mobile portal for the benefit of
go2’s base audience of millions of U.S. mobile consumers. The
initial offering utilizes go2’s one-touch calling feature to provide
mobile users with quick access to audio recordings of current sports
stories, scores and news. The recordings are updated several
times a day.
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2.
|
Off
Deck Promotion – where the consumer signs up for services through media
partner promotions, internet advertising, affiliate marketing
relationships, or other media channels directly, and payment is made via a
short-code or Premium SMS (PSMS) to the consumer’s mobile phone bill.
UpSNAP has billing relationships in place with most major US carriers
including, AT&T, T-Mobile, Sprint/Nextel and Alltel. Current Off deck
partners include, Lincoln Financial and Sporting News, as well as recently
added: Cablevision’ News12 service and Interop
Technologies. Interop Technologies is a leading provider of
advanced wireless technology solutions. The goal is to
incorporate UpSNAP’s extensive audio services that will reach more than
one million customers. Cablevision’s, News 12 Networks goal is
to enable Cablevision customers to receive real time news on demand,
traffic and weather for the seven coverage areas surrounding New York City
via their cell phones.
|
Margins
The
revenue stream from the consumer is shared across several parties:
The
wireless carrier, who operates the cellular infrastructure and billing interface
to add micro-payments from wireless services onto the customer phone bill. The
carrier will typically demand 30-50% of the gross revenues. UpSNAP reports
revenues net of the carrier gross margin. For example, if UpSNAP sells an
application for $10.00 to the consumer, UpSNAP would only report $5-$7 of net
revenue.
An
aggregator or mobile delivery and clearing house for the receipt and delivery of
mobile messages will take 5-10% of the gross sale value
The
content owner who has the rights to the mobile content.
The
mobile supplier, in this case UpSNAP reports net revenue after the carrier and
aggregator have taken their cut of 30 -60%. In turn, UpSNAP’s average pay-out to
content providers is 30% of the net revenue.
UpSNAP’s
margin improves considerably on advertising related services such as banner ads,
audio ads, and Pay-per-call advertising. For these services, UpSNAP receives net
revenue from an advertising partner. When UpSNAP deals directly with the media
companies, the wireless carriers do not share in this revenue.
SELECTED
FINANCIAL INFORMATION
In
thousands (000’s) except for per share amounts
|
|
|
Quarter Ended December
31,
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Net
revenue
|
|
$
|
212
|
|
|
$
|
251
|
|
|
Net
income (loss) for the quarter
|
|
$
|
(80
|
)
|
|
$
|
(416
|
)
|
|
Net
income (loss) applicable to common shareholders
|
|
$
|
(80
|
)
|
|
$
|
(416
|
)
|
|
Basic
and diluted income (loss) per share
|
|
$
|
(0.00
|
)
|
|
$
|
(0.02
|
)
|
|
Total
assets
|
|
$
|
5,934
|
|
|
$
|
6,111
|
|
|
Shareholders’
equity
|
|
$
|
5,649
|
|
|
$
|
5,880
|
|
RESULTS
OF OPERATIONS FOR THE QUARTER ENDED DECEMBER 31, 2007 COMPARED WITH THE QUARTER
ENDED DECEMBER 31, 2006
In
thousands (000’s)
|
|
Quarter Ended December
31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Sales
|
$
|
212
|
|
|
$
|
251
|
|
|
Cost
of Sales
|
|
98
|
|
|
|
127
|
|
|
Gross
Profit
|
|
114
|
|
|
|
124
|
|
|
Product
development
|
|
23
|
|
|
|
86
|
|
|
Sales
and marketing expenses
|
|
19
|
|
|
|
29
|
|
|
Stock
based compensation
|
|
14
|
|
|
|
23
|
|
|
General
and administrative
|
|
168
|
|
|
|
251
|
|
|
Amortization
expense
|
|
84
|
|
|
|
151
|
|
|
Total
Expense
|
|
308
|
|
|
|
540
|
|
|
Net
operating loss
|
|
(194
|
)
|
|
|
(416
|
)
|
|
Net
Other Income
|
|
114
|
|
|
|
0
|
|
|
NET
LOSS
|
$
|
(80
|
)
|
|
$
|
(416
|
)
|
Revenue
.
The sale of mobile entertainment services accounts for 87.3% of UpSNAP’s first
quarter 2008 revenues.
The
composition of revenue in thousands ($000’s), except for units, is as
follows:
|
|
|
Quarter Ended December
31,
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Wireless
data services
|
|
$
|
185
|
|
|
$
|
246
|
|
|
Advertising
and other
|
|
|
27
|
|
|
|
5
|
|
|
Revenue
|
|
$
|
212
|
|
|
$
|
251
|
|
Net
revenue for the quarter ended December 31, 2007, decreased by $39,000, or 15.6%,
compared with 2006. Advertising revenues increased $22,000 or 227.3% as the
Company continues its efforts to shift its product mix to higher margin
advertising revenues. Wireless data services decreased $61,000 or 24.8% as the
Company’s largest carrier customer continues to lose customers due to a merger.
In addition, the Company made changes to its streaming audio programs in order
to enhance margins.
Cost of goods
sold
. Cost of revenues for the quarter ended December 31,
2007 were $98,000, resulting in a gross profit of $114,000 (53.8%) compared to
cost of revenues for the quarter ended December 31, 2006 of $127,000 and a gross
profit of $124,000 (49.4%). Costs of revenues were primarily fees paid to the
Company’s content providers; royalty payments for the music content, server
farm, and call connect charges.
Product
development expenses.
Product development costs consist primarily
of salaries and related expenses for product development personnel as well as
the cost of independent contractors. Product development expenses for the
quarter ended December 31, 2007 decreased by $63,000, or 73.3%, compared with
the same period in 2006. Product development expenses decreased primarily due to
the elimination of product development headcount. Product development
expenses are expected to remain at current levels for the next several
quarters.
Sales and
marketing expenses.
Sales and marketing expenses consist primarily
of salaries and related expenses for marketing personnel as well as the cost of
public relations efforts. Sales and marketing expenses for the quarter ended
December 31, 2007 decreased by $10,000 or 34.5%, compared with the same period
in 2006. Sales and marketing expenses decreased primarily due to the elimination
of marketing headcount and reduced public relations spending. Sales and
marketing expenses are expected to remain at current levels for the next several
quarters.
Stock based
compensation expenses.
Stock based compensation expenses consist of
expenses related to the Company’s granting of stock options and restricted
shares. Stock based compensation expenses are expected to remain at current
levels for the next several quarters.
General and
administrative expenses.
General and administrative expenses
consist primarily of salaries and related costs for personnel as well as
professional fees for legal, audit, and tax services. General and administrative
expenses for the quarter ended December 31, 2007 decreased by $83,000, or 33.1%,
compared with the same period in 2006. General and administrative expenses
decreased primarily due to the elimination of headcount and reduced spending for
audit fees and travel. The Company deferred half of the salary of its executive
officers for January 2008 and has been accruing the service fee for the
Company
’
s CFO
since October 1, 2007.
Amortization of
intangibles.
Amortization of intangibles for the quarter
ended December 31, 2007 was $84,000 compared with $151,000 in 2006. Amortization
expense is related to the value assigned to the intangible assets resultant from
the XSVoice acquisition. During fiscal 2007 the intangible asset value assigned
to employment agreements, supplier agreements, and customer relationships became
fully amortized.
Other Income and
expense.
For the quarter ended December 31, 2007 the Company recognized
$114,000 in income related to the extinguishment of debt.
LIQUIDITY
AND CAPITAL RESOURCES
We have
funded our cash needs from inception through December 31, 2007 with the
$2,146,200 in funds acquired as part of the September – October 2005 Private
Placement. In addition, the Company raised $254,750 in February 2007
from the sale of 619,000 Series A warrants and 400,000 Series B warrants at
$0.25 each.
Liquidity.
At December 31, 2007, UpSNAP had cash and cash equivalents of $16,000, compared
with $19,000 at September 30, 2007, a decrease of $3,000.
During
the quarter ended December 31, 2007, cash used to fund operating activities
was $65,000, consisting primarily of the net loss for the period
of $80,000 offset by non-cash charges related to:
|
·
|
amortization
and depreciation charges of $84,000 and $7,000,
respectively;
|
|
·
|
write-off
of debt of $113,000
|
|
·
|
stock
based compensation of $14,000; and
|
|
·
|
working
capital changes of $153,000, consisting primarily of a decrease
of $117,000 in accounts receivable, and an increase of $20,000 in
accounts payable.
|
Investing
activities for the quarter ended December 31, 2007 used cash of $69,000 in costs
related to the pending MGI merger.
The
Company has entered into placement agency agreements with placement
agents for a placement of at least $3,000,000 in gross proceeds of the Company’s
securities. The terms of the private financing are subject to
negotiation among the Company, the placement agents and the prospective
investors. The closing of the merger agreement with MGI is dependent
on the successful completion of this private financing.
As of
February 12, 2008, the Company had non-binding commitments for up to
$1,500,000 in the private financing, and is working to raise the remaining
$1,500,000 to close the MGT merger for a total of $3,000,000 in gross
proceeds.
This
private financing has not been consummated as of the date hereof and the Company
offers no assurances that the private placement will close. The inability to
close the private placement will cause the termination of the MGI Merger.
Even if completed, the placement terms may be highly dilutive to current
stockholders, and may impose debt service obligations on the Company. We
anticipate that the private financing and the merger will be consummated, if at
all, during the second quarter of fiscal 2008. Either UpSNAP or
MGI may currently terminate the merger agreement upon providing notice to the
other party.
Without
the completion of the private financing, the Company will not have sufficient
cash to fund future operations. At the date of this report we are
continuing to incur losses. We are using capital of approximately $25,000 per
month to fund
operations.
At this rate we would require $300,000 of capital over the next twelve months to
fund current operations. We had cash in the bank of $72,000 as of February 8,
2008 and a working capital deficit. If the private financing is not closed
during the second quarter of fiscal 2008, the Company will need to sharply
reduce operations and may no longer be able to continue as a going
concern.
We are
continuing to explore various financing alternatives, including equity financing
transactions. Equity financings would likely include, but are not limited to,
private investments in public equity (PIPE) transactions or strategic equity
investment by interested companies. Corporate collaborations could include
licensing of one or more of our products for upfront and milestone payments, or
co-development and co-funding of our products.
Our
long-term working capital and capital requirements will depend upon numerous
factors, including the following: our ability to close and successfully
integrate the Mobile Greetings Merger; and our general efforts to improve
operational efficiency, conserve cash and implement other cost conservation
programs.
CRITICAL
ACCOUNTING ESTIMATES AND POLICIES
UpSNAP’s
management makes certain assumptions and estimates that impact the reported
amounts of assets, liabilities and stockholders’ equity, and revenues and
expenses. These assumptions and estimates are inherently uncertain. Management
judgments that are currently the most critical are related to revenue
recognition, valuation of goodwill and stock based compensation. Below we
describe these policies as well as the estimates involved. For a more detailed
discussion on accounting policies, see the notes to the audited consolidated
financial statements.
Revenue
recognition
The
Company recognizes revenue under the guidance provided by the SEC Staff
Accounting Bulletin (“SAB”) No. 104, “Revenue Recognition” and the Emerging
Issues Task Force (“EITF”) Abstract No. 99-19 “Reporting Revenue Gross as a
Principal versus Net as an Agent” (“EITF 99-19”).
The
Company receives revenue from the wireless carriers by providing streaming audio
content that the carriers make available to their mobile handset customers.
UpSNAP generates revenues from this line of business in two distinct
ways:
Provider
of Technology Platform: UpSNAP provides technology to brands that have their own
mobile distribution and revenue arrangements with the carriers. In this case,
UpSNAP does not act as the principal in the transaction. The brands have their
own relationships with the carriers and look to UpSNAP to provide the technology
platform and service, while they retain the relationship with the consumer and
set the pricing. In these cases, UpSNAP typically reports net revenues received
from the carrier which are revenues after both carrier charges and content
provider charges.
The
Company negotiated a new contract with its largest carrier customer effective
February 12, 2007 in which the carrier is no longer deducting content provider
charges before submitting revenue to the Company. Under this arrangement, the
content provider charges are the responsibility of the Company. The net effect
of this new contract is that revenues and cost of revenues are increased by an
identical amount to reflect the content provider charges.
UpSNAP is
Principal Party: UpSNAP acts as the principal party in the content
relationships. Specifically, UpSNAP has the relationship with the carriers, sets
the re-sale price at which consumers buy the product, pays the content provider
for the content, and builds the mobile application or service. In
these relationships, the Company recognizes revenue based on the gross fees
remitted by the carrier to the company. The Company’s payments to the third
party content providers are treated as cost of sales.
The
Company also receives advertising revenues from third parties. These revenues
are resultant from audio ads played on the Company’s SWInG platform, banner ads
on the WAP deck, and pay per call revenues when the consumer proactively
responds to a text message. These advertising revenues are recognized in the
period the transactions are recorded by the third party provider. UpSNAP reports
net advertising revenues received from third parties.
Valuation
of goodwill
In
accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of
Long-Lived Assets,” UpSNAP reviews the carrying value of long-lived assets
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. Such events or circumstances might include a
significant decline in market share, a significant decline in revenue and/or
profits, changes in technology, significant litigation or other
items.
UpSNAP
performs an impairment test of goodwill, at least annually. At December 31,
2007, in evaluating whether there was an impairment of goodwill, management
compared the carrying amounts of such assets with the related enterprise value.
Enterprise value was used to measure the value of the goodwill. Estimates of the
enterprise value at December 31, 2007 were determined by calculating the
weighted average closing price of the stock for the quarter. This calculated
enterprise value was then compared to the carrying value of the net assets of
the Company. Upon completion of its goodwill impairment test, UpSNAP
determined that the amount of the XSVoice goodwill was not
impaired.
Stock
Based Compensation
The fair value of each time-based award is estimated on the date of
grant using the Black-Scholes option valuation model, which uses the assumptions
described below. Our weighted-average assumptions used in the Black-Scholes
valuation model for equity awards with time-based vesting provisions granted
during the quarter ended December 31, 2007 are shown in the following
table:
|
Expected
volatility
|
70.0%
|
|
Expected
dividends
|
0%
|
|
Expected
terms
|
6.0
-6.25 years
|
|
Pre-vesting
forfeiture rate
|
50%
|
|
Risk-free
interest rate
|
4.45%
– 4.76%
|
The
expected volatility rate was estimated based on historical volatility of the
Company’s common stock over approximately the fourteen month period since the
reverse merger and comparison to the volatility of similar size companies in the
similar industry. The expected term was estimated based on a simplified method,
as allowed under SEC Staff Accounting Bulletin No. 107, averaging the
vesting term and original contractual term. The risk-free interest rate for
periods within the contractual life of the option is based on U.S. Treasury
securities. The pre-vesting forfeiture rate was based upon plan to date
experience. As required under SFAS No. 123(R), we will adjust the estimated
forfeiture rate to our actual experience. Management will continue to assess the
assumptions and methodologies used to calculate estimated fair value of
share-based compensation. Circumstances may change and additional data may
become available over time, which could result in changes to these assumptions
and methodologies, and thereby materially impact our fair value
determination.
OUTSTANDING
SHARE DATA
The
outstanding share data as at December 31, 2007 and 2006 is as
follows:
|
|
|
Number of shares
outstanding
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Common
shares
|
|
|
22,720,324
|
|
|
|
21,151,324
|
|
|
Options
to purchase common shares
|
|
|
870,000
|
|
|
|
700,000
|
|
|
Warrants
to purchase common shares
|
|
|
2,360,000
|
|
|
|
5,144,668
|
|
|
Debentures
convertible to common shares
|
|
|
-
|
|
|
|
-
|
|
|
Accrued
interest convertible to common shares
|
|
|
-
|
|
|
|
-
|
|
The 2007
reduction in warrants was primarily due to 1,019,000 warrants exercised during
February 2007 and 1,765,668 warrants expiring March 31, 2007.
Risk
Factors That May Affect Future Operating Results
You
should carefully consider the risks described below, which constitute the
principal material risks facing us. If any of the following risks
actually occur, our business could be harmed. You should also refer
to the other information about us contained in this report, including our
financial statements and related notes.
Financial
Risks
Our
business has posted net operating losses, faces an uncertain path to
profitability, and we have limited cash resources. For the investor, potential
adverse effects of this include failure of the company to continue as a going
concern. Our auditors have expressed substantial doubt about our ability to
continue as a going concern.
From the
inception of our operating subsidiary, UpSNAP USA, until December 31, 2007,
UpSNAP USA has had accumulated net losses of $3,156,766. Our auditors have
raised substantial doubt about our ability to continue as a going concern due to
recurring losses from operations. In the 2007 fiscal year, we posted sales of
$950,020 net of carrier charges from the sale of premium subscription services
for mobile content. However, we expect to continue to have net operating losses
until we can expand our sales channel and implement our marketing efforts. These
continued net operating losses together with our limited working capital and the
uncertainties of operating in a new industry make investing in our company a
high-risk proposal.
We
have limited cash resources and working capital. The private financing activity
related to the merger with Mobile Greetings, Inc. may not be successful, leaving
us with extremely limited resources.
We
currently have monthly cash burn rate from operations of approximately
$25,000 and have only approximately $16,000 in cash and a working capital
deficit as of December 31, 2007. If the private financing is not successful, we
will need to severely restrict its activities in order to conserve cash and may
need to cease operations. We currently anticipate that the private
financing will be consummated, if at all, during the second quarter of fiscal
2008. However, we can provide no assurances that the private financing will be
consummated on terms favorable to us, if at all. Successful
completion of the private financing depends on many factors, some of which are
outside of our control, such as potential investors’ perception of the Company
and our business and financial prospects, the proposed merger with MGI and the
business and financial prospects of MGI and the combined company. In
addition, MGI may terminate the merger agreement at any time.
Our
business is difficult to evaluate because we have a limited operating history in
a new industry. The adverse effects of a limited operating history include
reduced management visibility into forward sales, marketing costs, customer
acquisition and retention which could lead to missing targets for achievement of
profitability.
UpSNAP is
operating with a brand new business based around mobile entertainment
services.
We expect
to incur expenses associated with the planned expansion of our sales and
marketing efforts and from promotional arrangements with our strategic partners.
We expect that our future agreements and promotional arrangements with our
strategic partners may require us to pay consideration in various
forms, including the payment of royalties, license fees and other
significant guaranteed amounts based upon revenue sharing agreements and the
issuance of stock in certain cases. In addition, our promotional arrangements
and revenue sharing agreements may require us to incur significant expenses, and
we cannot guarantee that we will generate sufficient revenues to offset these
expenses. To date, we have entered into revenue share relationships with
carriers and content providers at industry standard margins, or enter into
promotional arrangements to include guaranteed minimum payments. Based on
management experience, future contractual arrangements will be based upon
standard revenue share relationships at industry-standard margins. We cannot
guarantee that we will be able to achieve sufficient revenues in relation to our
expenses to become profitable. Even if we do attain profitability, we may not be
able to sustain ourselves as a profitable company in the future.
We
have limited resources to execute our business plan. The risk for investors is
that the share price may suffer as better financed competition takes market
share, or the company is forced to raise additional funds on unfavorable terms
to the existing stockholders.
In
September and October 2005, we raised $2,146,200 in a private placement
transaction. As of the date of this annual report, we had approximately $11,000
in cash and cash equivalents. The Company’s current financial models indicate
that the
Company’s
cash balances have fallen to levels that will not sustain operations. Therefore,
the Company is dependent on raising additional capital. We have no commitments
for such capital.
Our
closing share price at December 31, 2007 was $0.17 per share, so any additional
capital raise will be highly dilutive.
Current
funding limits our operating plan to a conservative one and our auditors have
expressed substantial doubt about our ability to continue as a going concern. We
will need additional funding to ensure that we are able to continue operating
and compete in a dynamic and high growth mobile sector. Our financial resources
are limited and the amount of funding that we will need to develop and
commercialize our products and services is highly uncertain. Adequate funds to
sustain operations and grow the business may not be available when needed or on
terms satisfactory to us. A lack of funds may cause us to cease operations, or
delay, reduce and/or abandon certain or all aspects of our product development
programs. If additional funds are raised through the issuance of equity or
convertible debt securities, your percentage ownership in us will be reduced,
existing stockholders may suffer dilution. The securities that we issue to raise
money may also have rights, preferences and privileges that are senior to those
of our existing stockholders.
We
anticipate that our results of operations may fluctuate significantly from
period to period due to factors that are outside of our control, which may lead
to reduced revenues or increased expenditures.
Our
operating results may fluctuate significantly as a result of a variety of
factors, many of which are outside of our control. Some of the factors that may
affect our quarterly and annual operating results include:
|
·
|
our
ability to establish and strengthen brand
awareness;
|
|
·
|
our
success, and the success of our potential strategic partners, in promoting
our products and services;
|
|
·
|
the
overall market demand for mobile services and applications of the type
offered by us;
|
|
·
|
the
amount and timing of the costs relating to our marketing efforts or other
initiatives;
|
|
·
|
the
timing of contracts with strategic partners and other
parties;
|
|
·
|
fees
that we may pay for distribution and promotional arrangements or other
costs that we may incur as we expand our
operations;
|
As a
result of our limited operating history and the emerging nature of the markets
in which we compete, it is difficult for us to forecast our revenues or earnings
accurately.
Business
Risks
We
are dependent on strategic partners for content and sales distribution to
consumers. If these partnerships were to cease, this could lead to loss of
revenues and customers.
UpSNAP
relies on the US mobile carriers Verizon, Sprint/Nextel, T-Mobile, and AT&T
to sell its products and collect revenues which are then passed onto UpSNAP.
Although management has no reason to believe that these arrangements are going
to be adversely affected in the future, it is management experience that carrier
contracts are prone to change and re-negotiation. UpSNAP also relies on the
content developers to enter into commercially reasonable relationship with the
company to allow for the re-selling of the content to consumers. UpSNAP has over
150 content partners and is not dependent on any one content
supplier.
We
are dependent upon our executive officers, managers and other key personnel,
without whose services our prospects would be severely limited leading to loss
of revenue and customer acquisition.
Our
success depends to a significant extent upon efforts and abilities of our key
personnel, in particular our Chief Executive Officer Tony Philipp. The loss of
Tony Philipp could have a material adverse effect upon us, resulting in loss of
current
business
relationships, strategy and planning. Competition for highly qualified personnel
is intense and we may have difficulty replacing such key personnel. UpSNAP
has no key man insurance in place to help alleviate the loss.
The
mobile entertainment services market in which we operate is subject to intense
competition and we may not be able to compete effectively resulting in loss of
revenues or customers.
We
compete in the mobile entertainment services market. This market is becoming
increasingly more competitive. We face competition from the existing mobile
entertainment players, such as Google and Yahoo!, and newcomers to the mobile
entertainment services markets. There are relatively low barriers to entry into
the mobile entertainment services market. Many of our competitors or potential
competitors have longer operating histories, longer customer relationships and
significantly greater financial, managerial, sales and marketing and other
resources than we do. We are particularly vulnerable to efforts by well funded
competitors and will lose market share unless we can attain a critical mass of
consumers, strategic partners, and affiliates, as well as strong brand
identity.
UpSNAP
is largely dependent on one strategic relationship. We need to significantly
expand our distribution channels. Failure to expand our distribution channels
will result in reduced customer acquisition, and reduced revenues.
In Fiscal
2007 substantially all of our revenues were generated from the Sprint/Nextel
Distribution relationship. In order to decrease our dependence on one major US
carrier, we need to enhance our ability to find new strategic partners in order
to create additional distribution channels for our products and to generate
increased revenues. We expect that we will need to invest on an ongoing basis to
expand our partner sales force. The creation of strategic partnerships requires
a sophisticated sales effort targeted at the senior management of prospective
partners. Given our limited budget dedicated to this effort, we can only focus
on a very limited number of distribution opportunities.
We
plan to build our business through merger with or acquisition of existing
technology companies but may not be successful in finding merger or acquisition
partners. In addition we may need to seek additional finance to support the
acquisitions. The financing and acquisitions will most likely involve the
issuance of common stock, which may result in dilution of the current
stockholders.
We plan
to build our business through the merger with or acquisition of existing
technology companies that will benefit our application service business. It is
reasonable to expect that such activity will be an ongoing part of our business
development efforts. At any given time, we could be in process of analyzing or
making an offer for such a transaction. However, any discussion or speculation
on specific transactions is only conjecture until such time that a definite
agreement is signed and announced in an SEC filing. It is possible that no
transactions will take place at all.
Acquisitions
are difficult to find, close, and take a significant amount of management
time.
Our
intellectual property and other proprietary rights are valuable, and any
inability to protect them could adversely affect our business and results of
operations; in addition, we may be subject to infringement claims by third
parties which we may be unable to settle.
Our
ability to compete effectively is dependent upon our ability to protect and
preserve the intellectual property and other proprietary rights and materials
owned, licensed or otherwise used by us. We currently have a patent-pending
technology. We cannot assure you that the patent application will result in an
issued patent, and failure to secure rights under the patent application may
limit our ability to protect the intellectual property rights that the
application was intended to cover. Although we have attempted to protect our
intellectual property and other proprietary rights both in the United States and
in foreign countries through a combination of patent, trademark, copyright and
trade secret protection, these steps may be insufficient to prevent unauthorized
use of our intellectual property and other proprietary rights, particularly in
foreign countries where the protection available for such intellectual property
and other proprietary rights may be limited. To date, we are not currently
engaged in and have not had any material infringement or other claims pertaining
to our intellectual property brought by us or against us in recent years. We
cannot assure you that any of our intellectual property rights will not be
infringed upon or that our trade secrets will not be misappropriated or
otherwise become known to or independently developed by competitors. We may not
have adequate remedies available for any such infringement or other unauthorized
use. We cannot assure you that any infringement claims asserted by us will not
result in our intellectual property being challenged or invalidated, that our
intellectual property will be held to be of adequate scope to protect our
business or that we will be able to deter current and former employees,
contractors or other parties from breaching confidentiality obligations
and
misappropriating
trade secrets. In addition, we may become subject to claims against us which
could require us to pay damages or limit our ability to use certain
intellectual property and other proprietary rights found to be in violation of a
third party’s rights, and, in the event such litigation is successful, we may be
unable to use such intellectual property and other proprietary rights at all or
on reasonable terms. Regardless of its outcome, any litigation, whether
commenced by us or third parties, could be protracted and costly and could
result in increased litigation related expenses, the loss of intellectual
property rights or payment of money or other damages, which may result in lost
sales and reduced cash flow and decrease our net income.
In
order to be successful and profitable, we must grow rapidly. We expect that
rapid growth will put a large strain on our management team and our other
resources. We may not have sufficient resources to manage this growth
effectively leading to potential loss of customers through poor service and
support.
We
anticipate that a period of significant expansion will be required to address
potential growth in our customer base, market opportunities and personnel. This
expansion will place a significant strain on our management, operational and
financial resources. To manage the expected growth of our operations and
personnel, we will be required to implement new operational and financial
systems, procedures and controls, and to expand, train and manage our growing
employee base. We also will be required to expand our finance, administrative
and operations staff. Further, we anticipate that we will be entering into
relationships with various strategic partners and third parties necessary to our
business. Our current and planned personnel, systems, procedures and controls
may not be adequate to support our future operations. Management may not able to
hire, train, retain, motivate and manage required personnel for our planned
operations.
Our
business is subject to frequent technology changes, multiple standards, rapid
roll-out of new mobile handsets, and changes in the method of Internet
broadcasting delivery, that could lead to us being unable to provide our
services to some our existing and new users, leading to loss of revenues, poor
performance or both.
We are
presently able to sell and deliver information to our product carriers
throughout the world, but any changes in the method of delivery of Internet
broadcasting or mobile communications standards, could result in our not being
able to deliver our services to some or all of our customers. We will continue
to develop our technology to address emerging mobile platforms and standards to
avoid this problem, but no assurance can be given that this will be accomplished
in a timely manner.
Some
of our existing stockholders can exert control over us and may not make
decisions that are in the best interests of all stockholders which could lead to
a reduced stock price.
As of the
date of this quarterly report, officers, directors, and stockholders holding
more than 5% of our outstanding shares collectively controlled approximately
47.2% of our outstanding common stock. As a result, these stockholders, if they
act together, would be able to exert a significant degree of influence over our
management and affairs and over matters requiring stockholder approval,
including the election of directors and approval of significant corporate
transactions. Accordingly, this concentration of ownership may harm the market
price of our common stock by delaying or preventing a change in control of us,
even if a change is in the best interests of our other
stockholders.
In
addition, the interests of this concentration of ownership may not always
coincide with the interests of other stockholders, and accordingly, they could
cause us to enter into transactions or agreements that we would not otherwise
consider. No officers or directors of UpSNAP are currently or have
ever been affiliated with any of the other greater than 5% beneficial
owners.
Market
Risks
A
limited public market exists for the trading of our securities, which may result
in shareholders being unable to sell their shares, or forced to sell them at a
loss.
Our
common stock is quoted on the NASD Over-the-Counter Bulletin Board. Our common
stock is thinly traded and has little to no liquidity. The stock has a limited
number of market makers, and a limited number of round lot holders. As a result,
investors may find it difficult to dispose of our securities. This lack of
liquidity of our common stock will likely have an adverse effect on the market
price of our common stock and on our ability to raise additional
capital.
If an
active trading market does develop, the market price of our common stock is
likely to be highly volatile due to, among other things, the low revenue nature
of our business and because we are a new public company with a relatively
limited operating history. Further, even if a public market develops, the volume
of trading in our common stock will presumably be limited and likely be
dominated by a few individual stockholders. The limited volume, if any, will
make the price of our common stock subject to manipulation by one or more
stockholders and will significantly limit the number of shares that one can
purchase or sell in a short period of time.
The
equity markets have, on occasion, experienced significant price and volume
fluctuations that have affected the market prices for many companies’ securities
that have often been unrelated to the operating performance of these companies.
Any such fluctuations may adversely affect the market price of our common stock,
regardless of our actual operating performance. As a result, stockholders
may be unable to sell their shares, or may be forced to sell them at a
loss.
We
do not intend to pay dividends to our stockholders, so you will not receive any
return on your investment in our company prior to selling your interest in
us.
We have
never paid any dividends to our stockholders. We currently intend to retain any
future earnings for funding growth and, therefore, do not expect to pay any
dividends in the foreseeable future. If we determine that we will pay dividends
to the holders of our common stock, we cannot assure that such dividends will be
paid on a timely basis. As a result, you will not receive any return on your
investment prior to selling your shares in our company and, for the other
reasons discussed in this “Risk Factors” section, you may not receive any return
on your investment even when you sell your shares in our company and your shares
may become worthless.
A
significant number of our shares will be eligible for sale and their sale or
potential sale may depress the market price of our common stock.
Sales of
a significant number of shares of our common stock in the public market could
harm the market price of our common stock. We have authorized 97,500,000 shares
of common stock. As of December 31, 2007, we had outstanding 22,720,324shares of
common stock. Accordingly, we have 74,779,676 shares of common stock available
for future sale.
On August
9, 2007, we entered into an Agreement and Plan of Merger with Mobile Greetings,
Inc., a California corporation, or MGI. Under the terms of the Merger
Agreement, at the effective date of the Merger (the “Effective Date”), each
issued and outstanding share of MGI common stock (other than any shares held in
treasury and any shares as to which the holder has properly demanded appraisal
of his shares under California law) will be converted into and exchanged for
9.68 shares (the “Exchange Ratio”) of the Company’s common stock, $.001 par
value (“Company Common Stock”). Options, warrants and other rights to
purchase MGI common stock as of the Effective Date will be assumed by the
Company with an adjustment in the number of underlying shares and the exercise
price thereof based upon the Exchange Ratio. The exchange concept is
that the shares of Company Common Stock to be exchanged for MGI common stock on
a fully diluted basis would equal 50% of the number of outstanding shares of
Company Common Stock on a fully-diluted basis immediately after the Merger, and
without giving effect to the private financing mentioned below. As of December
31, 2007, the number of shares that would be issued under this Merger Agreement
would be 21,550,324 shares. On January 14, 2008, the Merger Agreement was
amended to extend the termination date to February 28, 2008. Either party may
terminate the Merger Agreement at any time.
In
addition to the share consideration, the Company is to issue an Non-Negotiable
Convertible Note (the “Note”) in the principal amount of up to $2,200,000 to a
representative for the holders of the outstanding MGI common stock, options,
warrants and other rights to purchase MGI common stock as of the Effective Date,
repayable in 12 months subject to a six month extension should the Company then
be working on a public offering, together with interest at the rate of federal
funds payable at maturity or waived upon conversion. Commencing after
six months, the Note would be convertible at a base conversion price of $.50 per
share into shares of Company Common Stock, or an aggregate of 4,400,000 shares,
subject to customary anti-dilution provisions.
In order
to provide working capital for the combined company after the MGI merger,
we are negotiating to raise up to $3 million in a private financing of
convertible debt securities. The shares of Company Common Stock issuable
upon conversion of such debt together with other Company securities issuable
in connection with the private financing could be highly dilutive to
current shareholders.
Under our
2006 Omnibus Stock and Incentive Plan, (the “Plan”) up to 7,500,000 shares of
Company Common Stock, either unissued or reacquired by the Company, are
available for awards of either options, stock appreciation rights, restricted
stocks,
other
stock grants, or any combination thereof. Eligible recipients include employees,
officers, consultants, advisors and directors.
As
additional shares of our common stock become available for resale in the public
market, the supply of our common stock will increase, which could decrease its
price. Some or all of the shares of common stock may be offered from time to
time in the open market under Rule 144, and these sales may have a depressive
effect on the market for our shares of common stock. In general, a person who
has held restricted shares for a period of one year may, on filing with the SEC
a notification on Form 144, sell into the market common stock in an amount equal
to 1% of the outstanding shares for Bulletin Board Companies. Such sales may be
repeated once each three months, and any of the restricted shares may be sold by
a non-affiliate after they have been held for one year (after February 15,
2008).
Because
our stock is considered a penny stock, any investment in our stock is considered
to be a high-risk investment and is subject to restrictions on
marketability.
Our
common stock is a “penny stock” within the meaning of Rule 15g-9to the
Securities Exchange Act of 1934, which is generally an equity security with a
price of less than $5.00. Our common stock is subject to rules that impose sales
practice and disclosure requirements on certain broker-dealers who engage in
certain transactions involving a penny stock. Under the penny stock regulations,
a broker-dealer selling penny stock to anyone other than an established customer
or “accredited investor” must make a special suitability determination for the
purchaser and must receive the purchaser’s written consent to the
transaction prior to the sale, unless the broker-dealer is otherwise exempt.
Generally, an individual with a net worth in excess of $1,000,000 or annual
income exceeding $200,000 individually or $300,000 together with his or her
spouse is considered an accredited investor.
In
addition, the penny stock regulations require the broker-dealer to:
·
deliver,
prior to any transaction involving a penny stock, a disclosure schedule prepared
by the Securities and Exchange Commission relating to the penny stock market,
unless the broker-dealer or the transaction is otherwise exempt;
·
disclose
commissions payable to the broker-dealer and the Registered Representative and
current bid and offer quotations for the securities; and
·
send
monthly statements disclosing recent price information with respect to the penny
stock held in a customer’s account, the account’s value and information
regarding the limited market in penny stocks.
Because
of these regulations, broker-dealers may encounter difficulties in their attempt
to sell shares of our common stock, which may affect the ability of selling
stockholders or other holders to sell their shares in the secondary market and
have the effect of reducing the level of trading activity in the secondary
market. These additional sales practice and disclosure requirements could impede
the sale of our securities. In addition, the liquidity of our securities may be
decreased, with a corresponding decrease in the price of our securities.
Our common stock in all probability will be subject to such penny stock rules
and our stockholders will, in all likelihood, find it difficult to sell their
securities.
ITEM
3. CONTROLS AND PROCEDURES
Quarterly Evaluation of
Controls
. As of the end of the period covered by this
quarterly report on Form 10-QSB, we evaluated the effectiveness of the design
and operation of our disclosure controls and procedures ("Disclosure Controls").
This evaluation (“Evaluation”) was performed by our Chairman and Chief Executive
Officer, Tony Philipp, and our Chief Financial Officer, Paul C. Schmidt
(“CFO”). In addition, we have discussed these matters with our
securities counsel and board. In this section, we present the
conclusions of our CEO and CFO as of the date of the Evaluation with respect to
the effectiveness of our Disclosure Controls.
CEO and CFO
Certifications
. Attached to this quarterly report, as Exhibits
31.1 through 31.4, are certain certifications of the CEO and CFO, which are
required in accordance with the Exchange Act and the Commission's rules
implementing such section (the "Rule 13a-14(a)/15d–14(a) Certifications"). This
section of the quarterly report contains the information
concerning
the Evaluation referred to in the Rule 13a-14(a)/15d–14(a) Certifications. This
information should be read in conjunction with the Rule 13a-14(a)/15d–14(a)
Certifications for a more complete understanding of the topic
presented.
Disclosure Controls
.
Disclosure Controls are procedures designed with the objective of ensuring that
information required to be disclosed in our reports filed with the Commission
under the Exchange Act, such as this quarterly report, is recorded, processed,
summarized and reported within the time period specified in the Commission's
rules and forms. Disclosure Controls are also designed with the objective of
ensuring that material information relating to us is made known to the CEO and
the CFO by others, particularly during the period in which the applicable report
is being prepared.
Scope of the Evaluation
. The
CEO and CFO's evaluation of our Disclosure Controls included a review of the
controls' (i) objectives, (ii) design, (iii) implementation, and (iv) the effect
of the controls on the information generated for use in this quarterly report.
This type of evaluation is done on a quarterly basis so that the conclusions
concerning the effectiveness of our controls can be reported in our quarterly
reports on Form 10-QSB and annual reports on Form 10-KSB. The overall goals of
these various evaluation activities are to monitor our Disclosure Controls, and
to make modifications if and as necessary. Our intent in this regard
is that the Disclosure Controls will be maintained as dynamic systems that
change (including improvements and corrections) as conditions
warrant.
Conclusions.
Based
upon the Evaluation, our Disclosure Controls and procedures are designed to
provide reasonable assurance of achieving our objectives. Our CEO and CFO have
concluded that our Disclosure Controls and procedures are effective at that
reasonable assurance level to ensure that material information relating to the
Company is made known to management, including the CEO and CFO, particularly
during the period when our periodic reports are being prepared.. Additionally,
there has been no change in our internal controls over financial reporting that
occurred during our most recent fiscal quarter that has materially affected, or
is reasonably likely to affect, our Internal Controls over financial
reporting.
PART
II – OTHER INFORMATION
The
exhibits to this form are listed in the attached Exhibit Index.
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
|
|
UPSNAP,
INC.
(Registrant)
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|
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Date: February
14, 2008
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/s/ Tony Philipp
|
|
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Tony
Philipp
Chairman
of the Board and Chief Executive Officer
(Principal
Executive Officer)
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Date: February
14, 2008
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/s/ Paul C. Schmidt
|
|
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Paul
C. Schmidt
Chief
Financial Officer
(Principal
Financial Officer)
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INDEX
TO EXHIBITS
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Exhibit
No.
|
Description
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31.1
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31.2
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32
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* filed
herein